4 key takeaways: Overcoming barriers to credit for underrepresented business communities
By Equifax Canada
The COVID-19 pandemic pushed all small businesses to pivot and adapt, but some segments were already facing hurdles when it comes to accessing credit.
As part of our Q2 2021 Small Business Trends and Insights webinar, our panel of experts discussed credit risk management policies affecting underrepresented small business communities in Canada. Participating in our panel were Tiffany Callender, CEO, Federation of African Canadian Economics (FACE), Mark Dokis, Senior Advisor, National Aboriginal Capital Corporations Association (NACCA), Angela Armstrong, Founder and President, Prime Capital and Board Chair, Women Building Futures.
Moderated by Marcy Burchfield, Vice-President of the Economic Blueprint Institute (Toronto Region Board of Trade), the discussion delved into the solutions needed to address barriers to economic recovery and growth for small- and medium-sized businesses in Canada’s underrepresented communities.
4 key takeaways for Canadian small business lenders
A small business owner is more than their personal credit history
Behind every small business owner’s credit history is an untold story, according to Tiffany Callender. For example, if a young person uses credit to pay for school or while finding employment, it creates a credit history that follows them as they move into adulthood and start a small business. “That credit story only looks at the number that’s there. It doesn’t contextualize the resilience or the predictive future of this person or their potential to manage a small business,” she says.
These systemic barriers have created an environment in which Black small business owners and entrepreneurs are seen as “high risk and therefore are not able to access the necessary capital that they would need to start or grow their businesses,” notes Callender.
Make access to capital easier for Canadian small business owners
Consolidation of independent lenders into large institutional lenders has created a lending market that is “more protective, and I think more conservative, because the lenders can do a little bit more cherry picking,” says Angela Armstrong. “This is not to say lenders are doing a bad job. Lenders are in business and they’ve got stockholders and stakeholders that they need to respond to.”
However, “if we allow our lending market to contract and to consolidate the way it did following the 2008 liquidity crisis, it’s almost inevitable that that [type of] activity happens.” Armstrong notes FinTechs are an example of one community asking how to streamline the process and democratize access to capital for different kinds of communities.
Lenders need to establish relationships with entrepreneurs
“I think what Aboriginal Financial Institutions (AFIs) do well is they establish relationships with entrepreneurs,” says Mark Dokis. “By understanding who their entrepreneur is, they understand the character of that entrepreneur, their abilities, their weaknesses, and the capacity to bring their business forward.”
Developing new lending metrics will also give people a chance to try small things, notes Armstrong. “If you have a community who is new to entrepreneurship, they may not have the same kind of track record. They’re not going to have the density of the scorecard or a historical trail.
For a lender to do that predictive lending, there have to be different ways the metrics can be developed to give them that opportunity.”
Look beyond collateral security for small business loans
Dokis believes that mainstream financial institutions’ preoccupation with collateral security is a barrier for Indigenous communities, as many are in locations where assets may not have the same value or can be seized.
“The AFIs are there because the mainstream banks are risk averse, in general, and don’t have the appetite to find alternative ways of assessing credit risk or the character of the business person,” says Dokis.
Including other mechanisms such as assessing whether the business has the cash flow to make loan payments could ensure people have access to the capital they need, he adds.
For more valuable insights on how lenders can increase their reach with underrepresented small business owners, watch the full small business quarterly trends webinar and panel discussion.
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