Bashir Egal said he emptied his 401(k) to raise more than $120,000 to open 5 Dollar Pizza on Franklin Avenue in Whittier. A Somali refugee arriving with his family at age 17, Egal studied business in college and previously worked as a banker. But right now, the halal pizza business is a better living.
“At the end of the day, it’s fulfilling. I feel like I’m doing what I was supposed to do,” he said. “It’s just more commitment here. Everything falls on your shoulder.”
One unexpected expense came early in the morning of Sept. 18, when a man shattered 5 Dollar Pizza’s storefront window, along with six other East African-owned businesses. Under a campaign that “hate has no business here,” Seward Co-op and other groups gave 5 Dollar Pizza $3,000 to help fix the damage.
Yet the expenses keep coming. Egal said his rent is about to increase by nearly $400 per month, he needs a larger oven and he’d like to buy his building at 137 E. Franklin Ave. But he didn’t try approaching a bank.
“As a former banker, I am aware that I do not have the collateral or the longevity to apply for a traditional bank loan,” Egal wrote in a recent letter to the city. “If the city’s 2% loan program was better designed to support businesses like mine that are growing and that are in need of capital for growth, it would help me and other small businesses like mine to grow and meet the demands that today’s market requires.”
In recent weeks, city officials approved a new $2.7 million fund to help more small businesses buy their buildings, dedicating money from the city’s Development and General Fund. And they’re scrutinizing how the city works with small businesses today, finding gaps in banking and public awareness that leave the impression of a “secret handshake” to receive city help.
Access to startup money is the biggest reason for racial disparities in business closure rates and profits, according to research by economists Robert W. Fairlie and Alicia M. Robb. Now that racial equity is a focus for all city operations, city staff’s fresh look at a 2% small business loan program that’s been around since the ’80s is yielding a few surprising findings.
The way it typically works today, businesses first approach a private lender for loan approval, most often Venture Bank, the Metropolitan Consortium of Community Developers or Sunrise Banks. If a business wants to borrow more money than a lender will approve, it can get a matching loan of $50,000-$75,000 from the city. The city portion has 2% interest, and the lender portion has market rate interest (about 5-8%), combining into a single loan with a blended interest rate.
Since 2014, about 40% of the program’s borrowers have been black, indigenous and people of color.
Zoe Thiel, manager of the city’s Small Business Team, said the program is good at financing renovations and equipment that don’t collateralize well but are necessary for a new business. “A bank doesn’t want your kitchen equipment,” she said.
City staff’s most “unnerving” discovery was that the private dollar match is on average 80% higher for white borrowers than people of color.
“This really calls for me to pause,” said Erik Hansen, the city’s director of economic policy and development, speaking to City Council members in January. “We don’t know how many people are not getting to the closing table.”
Larger banks like Wells Fargo and US Bank typically don’t touch this type of small business loan at all, Hansen said, because their underwriting criteria are too restrictive. But the default rate on the city loan program is very low, generally 1% or 2%.
“That feels like a pretty low-risk set of loans that we’re making. So I’m wondering if there’s evidence that we might be a little too conservative to achieve the goals of the program,” said Council Member Steve Fletcher (Ward 3). “We’re leveraging a lot more money for white business owners.”
City staff estimate that roughly half of the loan deals would still happen without a city contribution. The 2% loan match often gives borrowers a better rate, but is not make-or-break for the loan to happen.
Some small businesses are pressing for much more city assistance. The Main Street Alliance recently held a press conference at Sammy’s Avenue Eatery, and members testified before the city on Jan. 29.
“We can’t rely on banks to screen out who can open a small business in our community,” Common Roots owner Danny Schwartzman told the City Council.
Common Roots used the city’s 2% loan program to help buy HVAC equipment while purchasing its building at 26th & Lyndale, Schwartzman said in an interview. By lowering the interest rate on the city’s contribution to the loan, he estimated that he saved at least $6,000 over the course of 10 years. But it’s very difficult for many small businesses to get a bank loan at all, he said, and many face factors like seasonal business, competition or rising rents that leave them constantly operating at the edge of closing.
“All of these different things add up,” he said. “It’s a really important time for the city to go above and beyond all it can to support small businesses.”
Butter Bakery Cafe owner Dan Swenson-Klatt testified that the city’s Small Business Team is a start, but it must dramatically expand to be effective.
One Small Business Team member, Suado Abdi, is spending time at the busy Riverside Starbucks this month. As a bilingual Somali speaker, she’s hoping to reach more people through word of mouth. Last week she held her regular monthly office hours at the Cedar Riverside Opportunity Center, working alongside Jamie Schumacher from the West Bank Business Association. Aside from the 2% loan program, she can share information on facade improvement grants, coaching through the Business Technical Assistance Program and sharia-compliant loans without interest.
“The city wants to make sure all businesses are succeeding,” Abdi said.
The city interacts with a tiny slice of the 40,000 small businesses in Minneapolis. About 3% take advantage of small business programs, and about 12% need a business license. The city doesn’t know who banks are turning away, or how businesses that receive city assistance are doing long term.
Along with better data tracking, city officials may allow businesses to borrow money for a wider range of expenses, like payroll or a business vehicle. The city is looking at expanding loan amounts to help more small businesses buy their buildings. And officials want to better reach parts of the city that aren’t covered by business associations. A City Council resolution under consideration would create a working group that would find ways to expand access to capital.
“The idea around how we can better serve the small business community is to make sure that handshake is no longer a secret,” Hansen said.