Do small businesses in Gateway Cities have adequate access to credit?

By Benjamin Forman and Lynn Sanders

Small business development is a central strategy for growth and renewal in the Commonwealth’s former mill cities, but there are real reasons to be concerned that young companies have trouble obtaining the financing they need to grow. Even before the current financial crisis led to unprecedented credit-tightening, a decade of bank consolidation left these markets with fewer local banks. In cities with increasingly diverse populations, discrimination and cultural barriers may also be an issue for residents looking to access credit.

Developing small businesses is critical for Gateway Cities for two reasons: First, Gateway Cities have lots to offer upstarts, including relatively cheap office and light industrial space; entrepreneurial, business-friendly environments; excellent location and transportation infrastructure; and access to government incentives and programs to assist companies in low-income areas. Small business development is also an important anti-poverty program. Often the best chances for Gateway City residents without New Economy credentials are found through economic opportunities they pursue on their own. Given the primary role of small business in Gateway City economic development strategies, it is essential to have a better understanding of whether small businesses have access to the credit they need to grow.

Unfortunately, basic metrics to evaluate the extent to which small businesses are using various types of loan products, versus their need and suitability for these financial instruments, is difficult to find (for more on this topic, see this SBA white paper).

However, we have found some limited information on gross lending that suggests small businesses in Gateway Cities may be underserved. One important source is data from CRA reports. The Massachusetts Community and Bankers Council (MCBC) tabulates these numbers annually for communities across the state.

In 2007, commercial banks lent more than $600 million (or approximately 28,000 loans) to small businesses in Gateway Cities. While these 11 communities are home to 15 percent of the state’s population and 13 percent of Massachusetts business establishments, these loans represent just 9.7 percent of small business lending statewide by dollar volume (see Table 1 – click to enlarge). Gateway Cities received less than three-quarters of their establishment share, and less than two-thirds their population share. These figures are discouraging, given the concentration of small business activity we would hope to find in these key regional cities.

Table 1

While these limited data do have several shortcomings (they include a large number of credit card lines, not the actual loan amount; they represent only large banks covered by the CRA; and they define small businesses by loan size), data from another major source of small business lending paints a similar portrait. The SBA 7a loan guarantee is the federal government’s largest small business lending tool. In 2003, Gateway City loans made up just 10.7 percent of the state’s SBA 7a take (Table 2). These data do real somewhat more variation between cities with fairly strong performance in Pittsfield and New Bedford, and lower levels of SBA 7a activity in Springfield and Holyoke.

Table 2

Lending to Gateway City Residents

Unfortunately, it is not possible to disaggregate lending to Gateway City residents from loans to businesses located in these communities and owned by residents who reside elsewhere. One helpful way to get a better picture of access to credit for residents is to look more specifically at micro-lending, very small loans aimed at helping low-income families build wealth. While data on these micro-loans is also difficult to assemble, there are some ways to develop at least a basic sketch.

A large number of micro-loans are made by private organizations such as ACCION USA, a national nonprofit that provides loans up to $50,000. Since 2000, Accion has lent $1.7 million to borrowers in the 11 Gateway Cities – about a quarter of Accion’s total Massachusetts lending over the period (Table 3).

Table 3

A number of local organizations are also actively involved micro-lending in Gateway Cities. The Western Massachusetts Enterprise Fund provided nearly $1.1 million in loans under $50,000 to small businesses in the cities of Holyoke, Pittsfield, and Springfield between January of 2008 and June 2009. At a smaller scale, Jobs for Fall River, the North Central Massachusetts Development Corporation in Fitchburg, the New Bedford Economic Development Council, and Acre Family Child Care in Lowell also provide micro-loans. Many of these programs have been supported by the US Treasury’s CDFI Fund, which has awarded grants to micro-lenders in eight Gateway Cities since its inception in 1994 (Table 4).

Table 4

Another important federal source of support for micro-lending is the Community Development Block Grant. A recent report by the Corporation for Enterprise Development suggested Massachusetts devotes less than 1 percent of federal CDBG funds toward micro-lending, but no information is available on Gateway City CDBG allocations. As entitlement communities, each of these cities gets a direct federal CDBG grant that could support micro-lending.

Meet the Author

Ben Forman

Research Director, MassINC

About Ben Forman

Benjamin Forman is MassINC’s research director. He coordinates the development of the organization’s research agenda and oversees production of research reports. Ben has authored a number of MassINC publications and he speaks frequently to organizations and media across Massachusetts.

About Ben Forman

Benjamin Forman is MassINC’s research director. He coordinates the development of the organization’s research agenda and oversees production of research reports. Ben has authored a number of MassINC publications and he speaks frequently to organizations and media across Massachusetts.

Meet the Author
While these numbers help real variations in access to capital across cities (e.g., Accion loans in Fall River are double those in New Bedford), as with lending to small businesses in Gateway Cities more generally, it is still difficult to determine whether access to credit in these communities is sufficient to support the grow potential of small businesses.

Lynn Sanders, a graduate student at the Heller School of Social Policy at Brandeis University, interned with MassINC this summer.