These small-business loans for Black entrepreneurs don’t require a credit score

A year ago, Daun Green was operating her wardrobe-styling business out of her home.

Now, she’s set up shop for Dusk ‘Til Daun in two office suites in downtown Detroit and owns a fashion trailer that she uses when styling for movies and shoots. A $50,000 loan made it possible — that, and the willingness of a team to take a chance on her regardless of her credit history.

After launching a successful pilot program in Detroit in April 2022, CDC Small Business Finance is bringing so-called “credit-blind” loans to Black entrepreneurs in South Los Angeles through the Activate loan program. The San Diego nonprofit is one of the nation’s leading small-business lenders.

In Detroit, more than $4.4 million was lent to 69 businesses in such industries as retail and food service. For Green, 36, the access to capital has brought her longtime business dream to life since she began her company five years ago.

“Ever since I started, I was looking for someone to invest into my business because I knew that inventory is essential as a wardrobe stylist,” Green said.

But after dropping out of college and working for a few years, she found her credit score was hindering her ability to obtain business loans.

“I see this business loan is available at my bank, and I’m gonna go ahead and apply with them. I’ve been banking here for 20 years. This shouldn’t be an issue. I know my banker, they know me, but then it’s a lot of yield signs,” Green said. “So therefore you become hesitant, and that could be a dream killer.”

The top approval criteria for traditional business loans is usually credit score and time in business, which can automatically exclude first-time entrepreneurs from accessing desperately needed capital to build businesses in their communities.

Activate instead uses a more holistic approach to evaluate creditworthiness, taking into account applicants’ life stories and business expertise. In lieu of a credit score, some of the required documentation includes three months of proven sales and six months of business or personal rent and utility payments. Applicants must also generate an 18-month business projection with the help of a CDC Small Business Finance advisor if needed and have access to business advising sessions during the application process as well as after the loan is funded.

The key point is working with the applicant and thinking outside the box to document income, said Susan Lamping, vice president of sales at CDC Small Business Finance, who oversaw the launch of Activate in Detroit.

If there’s no tax return from the previous year because the business just started, “We would collect bank statements,” Lamping said. “Sometimes they’re not even depositing their money into a bank, but maybe they’re getting paid through Venmo or Zelle or something like that. So we’ll collect those statements.”

When Green’s loan officer, Nimaj Driscoll, interviewed her, he was impressed with all the things she had already accomplished as well as the strengths she brought to the table with her prior experience as a model and freelance wardrobe stylist.

“I was able to identify the expertise that she has in the industry,” said Driscoll, who learned Green had done the wardrobe styling on a few independent films he had seen. “It intrigued me.”

UC Berkeley professor Adair Morse, who recently served as deputy assistant secretary of capital access at the U.S. Treasury, said she believes Activate is important to supporting the small-business ecosystem that leads to healthy communities.

“Credit scores have inherent biases against people of color,” Morse said.

Because credit is inherently a historical mechanism, factors such as generational wealth and long-term discrimination in housing and labor markets can have an understated effect on who gets to have good credit, Morse said. An example of this is parents who are able to financially support their kids and help them start off with good credit in their late teens and early 20s.

The loan criteria for Activate is “significant because no one has good metrics for gauging success probabilities on ideas that are forward looking,” Morse said.

A credit score doesn’t tell you how successful a business model launched today might be, she said.

“So this idea of what your projections are, what you’ve been able to do the first few months in your business, and how stable that income is and what that growth is going to look like become all new information that gives people a forward-looking chance rather than a backward-looking assessment,” Morse said.

After the loans were distributed, CDC Small Business Finance went back and looked at the credit scores of the people who received them to see if they were servicing the right population of people with low credit.

“The majority of these borrowers had very low credit scores and would never have gotten access to capital through traditional means,” Lamping said.

The focus on Black entrepreneurs is also an important aspect of the program and what led CDC Small Business Finance to start in Detroit and expand to South L.A., with several other regions already in the pipeline.

Black-owned businesses were half as likely as white-owned businesses to be fully approved for loans, lines of credit and cash advances, according to a 2021 report from the Small Business Credit Survey by the Federal Reserve. This applied even to Black business owners with high credit scores when compared with their counterparts with similar credit.

Marsel Watts, a senior business advisor with CDC Small Business Finance in Los Angeles, said she’s excited about bringing this opportunity to South L.A. after the success in Detroit.

“This program is … going to keep the Black businesses in that community. They’re not gonna be run out by, you know, gentrification,” Watts said. “I’ve had a couple of clients that have been declined due to that minimum requirement of a credit score. They didn’t get past Step One, and with this program we get to take a second look at those clients and give them an opportunity to actually continue to grow their business.”