Dreams on the line: Many business owners of color were already operating with little room for error. And then the pandemic hit. | Neighborhoods

There’s a lot on the line: For many entrepreneurs of color, a small business can offer a ticket out of low wages, hostile workplaces and fluctuating job markets, toward stability and generational wealth. What will it take for Madison’s business owners of color to see their dreams through the pandemic and sustain them through the next crisis?

Ever since the Paycheck Protection Program was created through federal legislation in March 2020, Melissa Scholz of Scholz Nonprofit Law has kept a close eye on the massive loan program.

She watched as the initial $349 billion allocation ran out in just two weeks and as reports indicated that large chunks of the fund were going to big businesses, while business owners of color found themselves at the back of the line. According to a CNN analysis, nearly 75{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of the $521 billion in PPP funds distributed so far has gone to companies receiving $150,000 or more, in part because large banks prioritized existing, wealthy clients.

But as Scholz watched, she also spotted a problem she could address herself: a flaw in the way she and others had been advising business owners.

“We first started out saying, ‘Talk to your lender,’” Scholz said. But around 4 in 10 businesses have never sought loans even from family or friends, according to a survey by Small Business Majority.

When they do seek loans, business owners of color face more setbacks than their white peers. A 2014 survey of small businesses by the Federal Reserve found that more than half of Black business owners who had applied for business credit that year had been turned down, compared to just a quarter of white applicants. Nearly 40{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Hispanic applicants had been rejected, as had 35{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Asian or Asian American applicants and 32{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of American Indian or Alaska Native applicants.

The reasons for that discrepancy are multiple, ranging from wealth gaps to racial discrimination to citizenship status.

A 2019 survey by the Federal Reserve found that the median white family in the U.S. has eight times the wealth of the median Black family and five times that of the median Hispanic family, while the Institute for Policy Studies found starker disparities. With $147,000, the median white family has a net worth 41 times that of the median Black family ($3,600) and 22 times that of the median Latino family ($6,600), the Institute reported.

That wealth difference reduces the chance that applicants of color will have the credit history or collateral needed to convince lenders they’re a safe bet. In 2016, just 44{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Black families and 45{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Latino families owned their homes, compared with 72{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of white families, according to the Institute for Policy Studies.

And lenders like to see a business plan, complete with financial projections, something many entrepreneurs don’t know how to create on their own, even if they’re already running a profitable business.

While some of the lending discrepancies can be chalked up to applicants’ finances and plans, some appears to be due to discrimination. In 2018, when the National Community Reinvestment Coalition sent “mystery shoppers” with nearly identical business profiles and strong credit histories to seek business loans, Black and Hispanic applicants received worse customer service and faced more questions about their businesses than white applicants did. A follow-up experiment tracking differences by gender found that “women in general faced a tougher loan application process than men – and Black women faced the toughest of all.”

The Coalition also documented unequal treatment for Black PPP applicants: Black mystery shoppers received less encouragement and information and faced more questions than comparable white counterparts, and women were offered less information about the PPP program than men were. More than 40{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of the test cases revealed violations of fair lending laws, the study’s authors wrote.

These funding gaps are the reason the Hmong Wisconsin Chamber of Commerce was founded, said Maysee Herr, the organization’s executive director.

“Our very existence is for those who have had a hard time — or haven’t had any luck — getting funds from traditional banks,” Herr said. She estimates at least half of the entrepreneurs her organization works with have struggled to get traditional funding, due to factors like low collateral or low credit.

“Either they’ve never had credit, or they’ve had too much and things have gone sour,” Herr said. Even if their credit has improved, it might not have been long enough to convince a lender.

To fill the gap, the organization operates a revolving loan fund, allowing members to access up to $75,000.

“We look at a much broader picture and help them understand their projections,” Herr said of the fund, which in 2020 provided nearly $400,000 in loans. When the Chamber fund turns down an applicant, staff help the person troubleshoot their financial projections.

Another challenge: immigration status. Jessica Cavazos, president and CEO of the Wisconsin Latino Chamber of Commerce, said around half of the businesses her organization supports use an individual taxpayer ID number, or ITIN, which the IRS issues to allow those who can’t get a Social Security number to pay income taxes. Banks and credit unions often won’t give a business loan to a person who can’t provide a Social Security number, and Cavazos said it’s common for loan officers to ask if an applicant is “legal” when they apply — a practice that can discourage applicants no matter their immigration status.

Cavazos recalled one applicant, a military veteran who owned a restaurant outside Dane County. “He felt very ashamed that they would ask that,” Cavazos said, adding that Chamber staff met with bank staff to explain more appropriate ways to ask such questions.

“Banks need to understand culture. They need to be more well-versed on how to talk to different populations,” she said.

But it’s not just legal status that can make many of the businesses Cavazos supports less likely to qualify for loans. While some people start the business process by writing a business plan and making a crowdfunding pitch, many show up at the Wisconsin Latino Chamber with nothing but their own savings, ready to register their businesses.

“They’ve already decided they’re going to do a business with or without us,” Cavazos said.

“Immigrant communities are great risk takers. They will start a business on the mere fact that they know how to do the job.”

Her Chamber aims to help those entrepreneurs develop the financial literacy they’ll need to launch and sustain those ventures. Pointing to Summit Credit Union as an example, she said she’s grateful for the financial institutions that do the same.

“We want to help each member to borrow in ways that don’t overpower them financially,” said Jane Olson, a Summit branch manager, explaining that some applicants don’t recognize how high the payments will be for the amounts they’re seeking. When Summit lenders turn down an applicant, Olson said, they try to provide the training and community referrals needed to help the person reapply successfully.

“The goal of Summit Credit Union is always to try to help members to get into a better financial position,” Olson said. “So when there isn’t a ‘yes’ at the moment, we discuss how to prepare for getting a ‘yes’ in the future.”

Loan-free, like it or not

For many entrepreneurs without loans, the pandemic is just the latest in a series of challenges they’ve faced since launching, as Reyna Gonzalez Torres can attest. When she set out seven years ago to open Tamaleria El Poblano, a tamale business that now supplies around 5,000 tamales a week to grocery stores and restaurants, she was turned down by numerous lenders. So she and her husband launched the business with $10,000 they’d saved from restaurant wages and scrimping.

To pay the rent on a small commercial kitchen nestled at the back of an American Legion post, she put off personal expenses, including rent on her home, for four months. Her landlord threatened eviction, and the power company shut off the lights. Unable to hire employees, she and her family spent one day a week preparing tamales for two years, sometimes working 18 hours in a single day. To pay the bills, Gonzalez took a second job cleaning at Macy’s, so she’d start the tamale prep around 3 a.m., finishing with just enough time to nap for an hour or two on the kitchen’s floor before hurrying off to the day-shift.

“It cost us a lot. We started from the bottom,” Gonzalez said.

Laila Borokhim, owner of Layla’s restaurant, knows very few women in the food industry who’ve gotten loans to start their businesses. “I’m not gonna speak as a person of color,” Borokhim said, noting that she’s half Persian and Jewish.

“As a woman, though, there is no door open for you if you want to start a business. Loans don’t exist.”

You have to have so many different things lined up that it’s quite impossible,” she said. “And it’s such a risk … Even if you do qualify for some of these things, taking them out is maybe not the best idea because then you’re just going to be saddled with a ton of debt.”

She’s applied for a loan just once, for about $20,000, and was turned down. To get by, she’s used her own savings and tried to keep the overhead low. Her restaurant sits in a basement on Butler Street where she serves her Persian fare on second-hand dishware, and she once drove to “the middle of nowhere Wisconsin” to buy a $300 used stove to avoid spending thousands on a new one.

“I’ve done some strange things to get my business off the ground and to maintain my business,” she said.

Others opt not to apply for loans at all. For Josey Chu, who sells Southeast Asian condiments under the name Madame Chu, loans just weren’t the way she’d seen her family members in Singapore start their businesses. So when she started bottling sauces inspired by her grandmother’s recipes, she kept her full-time job as a school nurse for the Sun Prairie School District, often devoting another eight hours to the business after wrapping up her workday.

And Shalicia Johnson of ArrowStar Photography, who’d paid off her student loans decades before, knew she didn’t want to take on debt when she launched her business in 2017.

“I would avoid a loan like the plague,” Johnson said.

For business owners like these, lawyer Melissa Scholz figured, advice to talk to a personal fleet of professional helpers would fall on deaf ears? flat. Her colleague Jeffrey Femrite agreed.

“You start throwing challenges around like that and, oftentimes, the reaction from entrepreneurs is, ‘Well, I don’t have any of that. I’m just a small operation. I don’t have lawyers, I don’t have accountants. I’m working all of this by myself on my checkbook.’”

Now, Scholz said, she tells business owners to “talk to a banker where you have a bank account.” But even that can prove complicated, as she learned when she applied for a PPP loan last spring for her firm: She’d banked at UW Credit Union for three decades, but they don’t do business loans, so she had to open an account elsewhere before she could apply.

Another barrier, many small business advocates told the Cap Times, is confusion. In addition to the federal loan program, the Wisconsin Economic Development Corporation offered “We’re All In” grants, Dane County teamed up with the local Buy Local chapter to offer grants and the city of Madison offered its own. Each program has its own requirements and deadlines, and there’s no guarantee that a business owner will see — much less understand — all of the options.

Madison has a plethora of organizations designed to support businesses, from chambers of commerce to the Small Business Development Center to business incubators, each of which attempted to explain the offerings in emails and social media posts. But many businesses don’t belong to any of those organizations, and the city doesn’t require a license for businesses unless they sell alcohol, so there’s no citywide registry.

It’s a hurdle Madison Economic Development Director Matt Mikolajewski encountered as his team publicized the city’s Small Business Equity & Recovery grants, which invited businesses owned by people from historically underrepresented groups to apply for reimbursement for up to $10,000 in revenue losses and safety equipment costs.

“We don’t necessarily have a good track of how many businesses are currently operating in the city … and we certainly don’t have their contact info,” Mikolajewski said, noting that compiling such a registry would be “a large effort.”

“Did we likely miss people? Probably, yeah,” he said, but he added that the nearly 600 applications received so far were proof that many local entrepreneurs of color got the message.

Even when a business owner learns about a funding opportunity, applying can feel daunting. Those who’ve never hired an accountant may be unsure how to compile the necessary tax records, profit and loss statements or invoices.

“PPP is great if you have all the pieces in place,” said Herr of the Hmong Wisconsin Chamber, noting that record-keeping is a skill, and digital record-keeping — easier to submit when applying for funding — is yet another, neither of which is necessarily tied to the abilities  that would drive a seamstress, beautician or grocer to set up shop.

During the pandemic, Sabrina Madison’s Progress Center for Black Women has helped Black women, many of them entrepreneurs, find the help they need to keep their families and businesses afloat. Among those she’s supported are business owners who do all their transactions through Paypal and buy supplies at local stores, leaving them without a paper trail of invoices or income.

Madison credits much of what she knows about formal business practices to Upstart, a free 10-week entrepreneurship program designed to help women and people of color learn about all the planning and behind-the-scenes work that’s needed to sustain a business for the long term. Participants write business plans, calculate financial projections, and learn the basics of marketing and accounting.

Such lessons can change an entrepreneur’s plans, said Upstart Director Katie Rice. “Sometimes success is if someone just takes the class and decides that they’re not ready to start their business or not ready to take the plunge to have it be full-time and quit their day job.

“To us that’s like, ‘Alright, you know what it really takes, and you can enter this with all the tools, prepared and know exactly what you’re getting into, and you can do it on your terms.’”

But the twice-annual program can accommodate less than half of the entrepreneurs who apply each time, leaving many to decide on their own whether to make that leap.

Even after years of running her own business, Madison said it’s still easy for her to feel lost in the bureaucracy. “I try to sit on as many webinars as I can, understand as much as I can, to be able to answer questions, and I don’t know half of what the hell they’re talking about,” she said, explaining that she keeps asking and searching until she finds the answers.

Madison also chairs the city’s Economic Development Committee, and as the committee oversaw the launch of the Small Business Equity & Recovery grant program, the outspoken advocate was full of questions.

“What about the folks who don’t even know this website exists, how do you reach them?” she said. “And then once those folks have the information, who the hell do they call for help? You need to make that clearly accessible. You need to say, ‘You call Ruth at this phone number.’”

The city committed to working with applicants to fill gaps in their documentation, but it wasn’t easy. At the committee’s January meeting, Business Development Specialist Ruth Rohlich explained that staff were wading through a backlog of hundreds of applications after the follow-up process proved more extensive than anticipated.

“One of the things that’s important to us is to not deny people because they didn’t check every box perfectly in the application,” Rohlich told the committee. “That has slowed the process down a lot, but I think it also is allowing us to really work with folks, knowing that most business owners have never applied for a grant before, and hopefully after this year won’t have to again.”

In January, the Madison Community Foundation set out to try a similar approach to level the PPP playing field. With new federal legislation set to make another $284 billion in loans available, the local philanthropic organization hired Scholz’ firm to target Black and brown business owners ahead of the March 31 deadline.

Its mission: Convince business owners that this loan process would be easier than they expected and free of requirements like collateral and credit checks. “It’s easy to get to the answer ‘yes,’” Femrite of Scholz’ team said. “They want to get the money into the hands of these entrepreneurs.”

But while the loans will be forgiven if the borrower proves they spent 60{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of the funds on payroll, the very word “loan” may stop debt-averse entrepreneurs in their tracks. A second hurdle: false or outdated information. The program has often been referred to as a plan to keep employees working, but sole proprietors often don’t think of themselves as employees, leading to the widespread misconception that sole proprietors don’t qualify for PPP.

Yet another deterrent: When the program was launched last spring, its application was a cumbersome 17 pages. But thanks to political pressure, the rules have since been revised multiple times. Today, applicants seeking loans of up to $150,000 need to fill out just two pages, along with another two pages when they apply to have the loans forgiven.

On Feb. 22, President Joe Biden’s administration announced rules changes that could aid minority-owned businesses. The new rules create a two-week window in which only businesses with fewer than 20 employees may be considered, and allow self-employed individuals and sole proprietors to receive more funding. The rules also extend PPP eligibility to business owners who were previously excluded, including those who have felony records not related to fraud, are delinquent on federal student loans or belong to certain classes of non-citizens, including those with visas or green cards.

Additional funds could be on the way if Congress approves the $1.9 trillion stimulus package backed by Democrats. The plan would add $7 billion to the PPP fund, create a new $25 billion fund for bars and restaurants and supply $175 million for outreach and promotion to target eligible businesses.

Still, some will remain locked out, including undocumented business owners. Xochilth Garcia, outreach and member services director at the Wisconsin Latino Chamber, spends hours on the phone talking business owners through applications for pandemic grants or loans, and often has to break that news to entrepreneurs who’ve heard about a possible lifeline.

“It is hard when people reach out and you don’t have the resources,” Garcia said. “You have to bring their feet back to the earth and tell them, ‘I’m sorry you don’t qualify.’”

The Cap Times spoke to several business owners who had not yet received PPP funds — whether because they hadn’t applied or had been denied — but had received pandemic relief funds through state or local governments.

And it’s not just governments offering help. The Progress Center has given about $8,000 to entrepreneurs to cover costs like rent. The Latino Consortium for Action gave nearly $1.2 million to undocumented individuals and businesses and announced in January that it was fundraising to reopen the fund. And the Hmong Wisconsin Chamber provided $110,000 in 0{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}-interest rate emergency loans.

Chu of Madame Chu, who has so far avoided applying for loans, received a total of $12,000 through two state grants and a Dane County grant. “To big businesses, $12,000 is just small change. But to small businesses, $12,000 is a lifeline of survival for us,” Chu said.

Now that she knows the PPP loans can be forgiven, she’s considering applying to that program too.

Syovata Edari, owner of chocolate shop CocoVaa Chocolatier, was initially ineligible for a PPP loan because she had a net operating loss in 2019, but she received $4,500 through the Dane County grant program and hopes to receive funds from the city as well.

The city’s grant made the most sense to her, she said, because it reimburses a set amount (up to $10,000 total) instead of requiring business owners to prove they’ve lost a certain percentage of revenues. Some business owners can’t shoulder a major loss and will do whatever it takes to try to avoid it, she said. In her case, that meant working 12-hour days most weeks and 20-hour days in the rush leading up to Valentine’s Day this year.

“I can’t afford to lose that much revenue, so that’s not even an option,” said Edari, who used her retirement savings to start her business when she left a career in law. “I don’t have a fallback plan.”

Meanwhile, business owners who have a safety net — perhaps from other businesses or family wealth — might be able to ride out the loss. “You have a lot of businesses that look bad on paper, look like they’re really suffering, but those people might have other streams of income,” Edari said.

Some small business advocates say what happens now could shape the future of Madison’s entrepreneurial scene.

While some indicators suggest Madison could be among the U.S. cities best-positioned to recover from the pandemic’s economic effects, Zach Brandon, president of the Greater Madison Chamber of Commerce, argues that such forecasts don’t tell the whole story.

All businesses are not equal, he said, pointing to The Anointed One, a Black-owned soul food restaurant that quietly shut its doors last year. Next door, a national chain moved in.

“I’m happy that the national chain sees Madison as an opportunity and invests, but that’s not one-for-one,” Brandon said, noting that businesses owned by people of color are more likely to employ people of color, causing a positive ripple effect.

Economists say the country is already seeing a “K-shaped” recovery, one in which some businesses have quickly bounced back while others continue to decline. And Madison faces a “double risk” when it comes to equity, Brandon said, as the pandemic combines with the area’s growing tech sector.

“There’s a tremendous amount of data that shows that tech-forward economies accelerate inequality, and no one’s quite sure why,” Brandon said, citing Austin, Seattle and Silicon Valley as examples.

He thinks now is the time for the community to use relief funds strategically to “create the economy we aspire to be,” one owned equitably by people of color.

“If I say I have equity in a company, it means I own a piece of the company,” Brandon said. “I firmly believe that equity as an economic tool has that same connotation: When you think about the economy, you want to own a seat at the economic table.”

Creating a more equitable post-pandemic economy would require not only targeting funds to help businesses owned by people of color get through the pandemic, but also treating the pre-existing economic conditions that left so many of those businesses vulnerable — or prevented others from ever getting started.

To level the playing field, he’d like to see more banks owned by people of color, more venture capitalists investing in diverse businesses, more consumers spending money in Black-owned businesses, and a government-created “loan loss reserve fund” to reimburse banks if business owners of color default.

“When we say we want to change economic behavior in this country, we move mountains,” Brandon said, citing tax incentives to encourage people to get married, buy a home or save for retirement. “We know we can do it. It’s just the will, the intentionality to say, ‘We’re going to use those same types of mechanisms in support of the creation of an entire generation of entrepreneurs of color.’”

Jeffrey Glazer agrees, calling for the FDIC and SBA to back loans to diverse entrepreneurs who might look like riskier investments. A University of Wisconsin law professor running the school’s Law & Entrepreneurship Clinic, he’s been helping entrepreneurs navigate a rocky terrain for decades.

“Anything that we’re seeing right now is really just a magnification of a problem that’s existed that we’ve been ignoring,” Glazer said.

But he’s hopeful that the racial reckoning brought on by the police killing of George Floyd and the ensuing Black Lives Matter protests might change that landscape. “I think companies, banks, governments, municipalities in particular are starting to hear that maybe they’ve been neglecting a large portion of their citizenry.

“And I hope out of this we can take this idea that maybe treating everybody equally is not what we mean by equity, and that sometimes we need to look into the background of somebody a little bit harder to realize that maybe there are some good reasons (for funding) that may not be economically justified, but may increase social capital in a way that transcends the economic issue.”

Jasmine Banks, owner of natural body care company Perfect Imperfections, sees signs that the racial reckoning that began last summer may be changing local prospects. More people are seeking out or publicizing Black businesses, she said, and one white business owner recently inquired about selling Banks’ line at her downtown shop.

“If there’s anything beautiful that came out of that tragedy, it’s that people are starting to recognize that Black folks are here in this community … and they contribute to this community,” Banks said. “I think people have been open to say, “You know what, enough is enough. I have a platform, and I’m going to use it.’”

Could help be on the way?

Across the city and state, there are glimmers of hope for entrepreneurs of color. After seeing a more than 90{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} drop in bookings in 2020, China Moon Crowell of cocktail catering company Bartender 608 now has so many events scheduled for late 2021 and 2022 that she’s looking to hire additional staff. She’s even hoping to return to her pre-pandemic plans of getting a bartending rig — a bit like a food cart but with multiple windows — so that she can roll her bar right up to her events across Wisconsin, Illinois and Iowa.

Meanwhile Urban Triage, a nonprofit promoting Black families’ self-sufficiency, has launched a series of free online workshops for Black entrepreneurs, including Q&A sessions with business attorneys discussing everything from how to register an LLC to how to apply for PPP. The organization is also raising money for a fund that would help would-be entrepreneurs buy business cards, register their businesses and even rent commercial space — whatever they need to turn an idea into a side hustle or a side hustle into a full-time business.

Urban League of Greater Madison announced last week that it would start a revolving loan fund, which it hopes to grow to at least $1 million by the end of June. And the Wisconsin Latino Chamber is raising money to launch its own fund, which it will operate in partnership with the Wisconsin Economic Development Corporation. If the fundraising efforts prove successful, Latino business owners will be able to apply for loans of $15,000 to $25,000 beginning in June.

In March, gener8tor, a startup accelerator with locations in Madison, Milwaukee and Minnesota, will hold a pitch event matching Black and brown startup founders with potential investors. Nationally, just 1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of business founders who receive venture capital funding are Black, and just 2{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of venture capital dollars go to Latino founders, the company said. And in January, the Milwaukee Bucks NBA team announced it had partnered with three Wisconsin organizations, including the Madison Region Economic Partnership, to provide free support and education to Black businesses and entrepreneurs through The Lonely Entrepreneur, a business training website.

And two forthcoming projects promise to serve as incubators for Black enterprise. Dane County’s 2021 budget allocates $2 million to help the Urban League of Greater Madison build a hub for minority-owned businesses on the Park Street corridor, and the city of Madison has put $250,000 toward upfront costs for the proposed Center for Black Excellence and Culture, also slated for Madison’s south side. Billed as a transformational space that would boost Black business, culture, leadership, the center promises to develop and launch “business ventures that will benefit our community.”

Time will tell whether these initiatives fix the dearth of Black businesses in Madison, the cause of Sabrina Madison’s “forever gripe” that, unlike in her hometown of Milwaukee, she can’t do all her business at Black-owned establishments. She’d like to see business incubators on all sides of the city, entrepreneurial training for court-involved youth, and a city hub that’s a first stop for anyone looking to start a business. But mostly, she’d like to see an evidence-based approach.

“Oftentimes, from what I’ve seen in the many seats that I’ve gotten to sit in in this city over the years, there’s almost this blanket, check mark sort of way of dealing with folks of color. There may be an initiative and it’s like, ‘OK, that’s for Latino folks — check mark. Here’s for Black folks — check mark. Here’s for Asian folks — check mark,” Madison said.

“And that’s it. That’s the end of it. There’s no sort of like digging in to see, is this thing working? What can we do differently, so it can work better?