For decades, many people of color were denied loans to finance businesses. In Auburn, Alabama, a new program aims to help atone for past transgressions.

 

By Daniel Schmidt

May 6, 2022

​

AUBURN, Alabama - Sonya Hildreth always knew her calling in life was to help others feel their best. It was why she served as an ICU nurse at the East Alabama Medical Center for over 14 years. Yet something was missing.

​

While caring for others during some of the worst moments of their lives, Hildreth explored how she could provide services that could complement the work she did as a nurse. She settled on selling beauty products that promoted wellness and enhanced existing quality of life.

 

Starting what would later become Create a Spa Naturale would not prove to be easy. “I didn’t have the credit line to start it,” Hildreth explained. She emailed her brother, who was serving in the U.S. military in Qatar at the time, about her idea, and he invested $15,000 to help the business off the ground.

​

For many entrepreneurs of color like Hildreth, difficulties securing funding from traditional banking institutions for new or existing businesses are common. It is one of the main reasons why business ownership in communities across the country is typically not representative of those living there.

​

In Auburn, a college town with more than 75,000 residents, nearly 32% of the population are minorities while only 20% of businesses are minority-owned. It is an inequity with historical roots that Sabre Capital, an Alabama-based community development financial institution (CDFI), intends to alleviate with loans designated for underserved entrepreneurs.

 

A Solution to the Problem

 

Operating out of Birmingham, Alabama, since 2014, Sabre Finance began writing Small Business Administration-backed (SBA) microloans in 2017. As the only Alabama-based financial institution providing such loans, it was uniquely positioned to fill the gap in funding for those underserved by traditional financial institutions.

​

Studies show that historically, minority-owned businesses are approved for funding at half the rate as their white counterparts, even when credit, collateral and other factors are taken into consideration.

​

While Sabre’s program does not focus solely on providing loans to entrepreneurs of color, reality dictates that they are among the most common recipients of SBA-backed microloans. “That’s a big reason why our industry exists,” Sam Kellett, chief operating officer of Sabre Finance, said. “That’s the premise of it: to allow for more equitable solutions to financing for small businesses.”

​

The program, initially funded through a $150,000 grant provided by the City of Auburn, will ultimately leverage $1.2 million in capital for high-risk loans. According to Kellett, the value of an average loan extended by Sabre Finance is around $33,000.

Around town, there has been hope that these loans will level the playing field and bring fresh innovation to a city that has experienced some of the most pronounced and prolonged population growth in Alabama since 2010.

​

“The presence of a CDFI in Auburn complements the city’s existing entrepreneurial efforts and brings a new funding opportunity to the area for businesses in all stages of life,” Leslie Chambers, the City of Auburn’s economic development financial manager, said. “Because of the high-risk nature of new businesses, a CDFI can help close the funding gap for many new and small businesses.”

​

However, there are reasons why there are gaps in funding to begin with, and why a program such as this is deemed necessary to level the playing field.

​

The Root of the Problem

​

When gliding back and forth across Create a Spa’s gleaming floors tending to clients from all walks of life, Hildreth takes nothing for granted. While her business has both survived and thrived in downtown Auburn due to 20-plus years of hard work and dedication, she recognizes that she is also one of the lucky ones.

​

“Some of those formative years, you’re just holding your breath to get from month to month to year to year,” Hildreth said. “Most people will give up, most people will fold in a lot of these cases.”

​

Data shows that entrepreneurs of color are 35% less likely to apply, 67% less likely to receive approval and 61% more likely to not apply for business loans out of fear of rejection compared to white entrepreneurs. The perception of discrimination in financial institutions, real or imagined, has a tangible impact on a business’ potential success.

​

In times of crisis, such as the closure of businesses in the Spring of 2020 due to the pandemic, this disparity in funding can have disastrous consequences. A survey conducted by the Federal Reserve found that in 2020, 38% of Black business owners received a personal loan from an acquaintance, 25% took a second job and 74% used preexisting wealth to make ends meet.

​

Considering how Hildreth received her initial funding from her brother, those business owners were not unlike her. “Credit is a big part of why people are shut out of these opportunities, but people are afraid to invest and make loans.”

​

According to historians, the root of this problem dates to the 1860s when the Freedmen's Bureau was established in lieu of reparations paid to freed slaves. Over time, that lack of land and capital caused an already impoverished group to fall further behind their white peers.

​

This trend continued well into the 20th century with the introduction of redlining or the process of denying loans in neighborhoods with high concentrations of non-white populations. At the same time, loans for minority-owned businesses came with similar discrimination, and the wealth gap between African Americans and whites grew.

​

Decades later, the ramifications of such policies are still being felt. Federal Reserve data shows that between 1983 and 2016, the median Black family’s wealth grew by $4,000 while the median white family’s wealth grew by more than $65,000 during the same time.

​

Over a longer period, the figures are more striking. Data shows that immediately following the Civil War, African Americans, who comprised 12.8% of the population at the time, owned 0.5% of all wealth in the United States. Today, African Americans, who comprise 12.4% of the population, own 1% of all wealth.

​

Skepticism of the Solution

 

While Sabre Capital’s initiative appears to be beneficial to entrepreneurs of color, not everyone is convinced that it will fundamentally change anything. Dr. Guy Emerson Mount, assistant professor of African American history at Auburn University, believes that the program will eventually do more harm than good.

 

“What it's doing is creating a bourgeois Black middle class, and it's going to create a handful of Black success stories that they'll put on the newspaper,” Mount said. “9 out of 10 people who lose all that money, we’ll forget about them, but the one person that manages to start a small business and it happens to succeed, we’ll celebrate that person and ignore the fact that it completely failed for the other 9 out of 10 people.”

           

Instead of funding for small businesses, he offered alternatives that money could go to, including community land trusts for housing and worker-owned collectives that allow for greater economic participation. According to Mount, more than just access to capital should be taken into consideration when discussing the financial security of historically marginalized groups.

 

“Let’s say Mr. Johnson started a business and owned a home after this, great,” Mount said. “Well, what happened to the rents in Mr. Johnson's neighborhood? What happened to Mr. Johnson's workers who were working under him?”

​

However, in an area where the annual gross domestic product (GDP) was almost $7 billion in 2020, the economic and political feasibility of using the $150,000 offered by the City of Auburn for community land trusts and worker-owned collectives is unknown.

​

The Bottom Line

​

As her last customer exits through the front door onto the bustling sidewalks of downtown Auburn, Sonya Hildreth meticulously combs through her books, examining how well she did that day.

 

Taking a brief moment to relax, she reclines back and sinks into her black leather chair positioned behind the desk that serves as her greeter’s stand, office and lunch table in one. She does not rest on her laurels for too long though as the sheets on the massage table need to be changed, floors need to be swept and the air needs to be replenished with her custom spray that features hints of jasmine and lavender.

 

Her dedication to her business is evident in the careful preparation and hard work she puts in before she closes for the day. “I feel like you need someone here who is responsible, especially when you’re dealing with other people’s bodies,” she said. “You just have to have someone here that they’re comfortable with.”

​

For entrepreneurs of color like her, this initiative, while imperfect and inadequate to some, represents the chance to start or improve the business they have dedicated their lives to building. And that is all they ask for.