It takes a lot to turn ideas into small businesses: A storefront or office space. Equipment, inventory, personnel, not to mention marketing, licensing, and insurance.

All that requires money. Without funds, these businesses cannot be launched or fail quickly. And without cash to smooth rough patches, an emergency can destroy a company. That is why it can be so devastating to be refused a business loan – which happens disproportionately to Black-owned businesses.

Such businesses face a number of obstacles.

Their relationship with banks can be hampered by their smaller size and discrimination. Business owners are often expected to know the complicated details of the loan process – and can be punished with rejection if they do not. And while the wealth gap is a major factor, research also shows that even in households with similar financial resources, home equity is not translated equally into initial capital for black and white homeowners.

Delores Brown often faces these questions about funding in her role as loan director at the Vermont Slauson Economic Development Corp, which offers small business loans and other financial products. About 80% of its clients, which include a number of Black-owned businesses, have been turned down for business loans or if their application is delayed.

Many of these businesses do not have the necessary documentation, such as payroll records in certain formats, to be approved. And that is an indicator of greater injustice for Black business owners.

“When you walk into a traditional bank environment … they hope you already understand the loan process,” Brown said. “Most small African-Americans, or even businesses of any color, basically have to use everything they have to believe in themselves to be able to say, ‘I will do business.’ They do not have the resources around them which would naturally be given to other persuasion businesses. “

Black-owned businesses have long faced challenges in getting financing. In 2018, only 31% of them received all the funds they submitted, compared to 49% of white-owned businesses, 39% of Asian-owned companies and 35% of Latin-owned businesses, according to the 2019 report from the Federal Reserve Bank of Atlanta.

In the same time period, 38% of Black’s small businesses did not receive the funding they proposed, compared to 33% of Latin-owned businesses, 24% of Asian-owned businesses and 20% of white-owned businesses, the report said.

Experts say part of the problem may be because the business is often small and may not command the kind of attention that chain companies will have, especially during the cacophony of applications for the Paycheck Protection Program loan. But another reason these businesses don’t have the relationship they think they have with their bank is “absolute racism,” said Teri Williams, president and chief operating officer of OneUnited Bank, Black’s largest state-owned bank in the country.

“They just don’t consider us successful,” he said. “Their first reaction is the hope that we are not, and then we must prove that we are right.”

The COVID-19 pandemic only worsened the situation.

Restrictions aimed at slowing the spread of the corona virus cause permanent closure 41% of Black’s businesses between February and April, according to a study from the National Bureau of Economic Research.

Black-owned businesses are more likely to be in industries hit by coronavirus-related restrictions, such as retail and hospitality, according to one study by the Economic Policy Institute, a labor-oriented think tank.

And when some assistance finally comes in the form of PPP loans to small businesses, Black business owners face obstacles in getting approval, according to the EPI study. The main obstacle is the lack of pre-existing relationships with the big banks that first manage loans, the study said.

Even before the pandemic, many small businesses owned by Black were struggling, said Juliet E.K. Walker, founder and director of the Center for Black Business, History, Entrepreneurship and Technology at the University of Texas, Austin. And now, he said, without funds to secure loans and with restrictions triggered by coronaviruses in business operations, “will they be able to survive?”

There are regulations that apply to try to prevent the low level of business financing owned by people of color, but they are not yet fully effective.

The federal Community Reinvestment Act was passed in 1977 to fight racial discrimination in borrowing. The law encourages financial institutions to serve low and middle income environments, and requires federal regulators to assess the records of each bank in meeting obligations to this society.

For example, Wells Fargo received an “outstanding” rating last year, with a high value in making community development loans, according to an evaluation of the bank’s public CRA performance. In 2018, Bank of America also received an “extraordinary” rating.

The Trump administration is imposed new rules implementing a CRA in May that expands the types of activities that get credit from banks, such as loans for sports stadiums in some cases, or offering credit cards to low-income customers. Advocates say the new rules will make banks easier to comply with the law, but community groups fear the revised rules weaken the legal ability to prevent banks from ignoring the responsibility of lending in poor colors.

Collecting data on lending practices for small businesses owned by people of color will help ensure the process is fair.

That is the purpose of the requirements in the 2010 Dodd-Frank action, which mandates that the Consumer Financial Protection Bureau collect this type of data. But the law does not include a deadline for starting collection – so, a decade later, it still hasn’t started.

After the lawsuit, the CFPB will begin the process of establishing rules for reporting this data in September. Most small business loan data based on race, ethnicity or gender come from surveys, according to the Federal Reserve.

“If we had data before this time … we might have understood the vulnerable position of many small businesses,” said Jesse Van Tol, chief executive of the National Community Reinvestment Coalition advocacy group.

His organization conducted a study in 2018 that sent blacks, whites and Latinos to banks in Los Angeles to inquire about small business loans under $ 100,000 to test whether there were differences in treatment based on race.

Despite having slightly better income, assets, and credit scores than their white counterparts, black and Latin testers were asked to provide more personal information about their eligibility than white testers, the study found – treatments that were , along with other types of poor customer service. accepted, can prevent business owners from seeking funding.

Even when black and white households have similar financial resources, there is still not the same level of access to commercial loans, said Rachel Atkins, a postdoctoral faculty associate in the management department and organization at the NYU Stern School of Business. For example, Atkins research shows that black home owners cannot use their home equity for start-up capital like white house owners.

“There is too much evidence that Black business owners cannot access commercial loans at the same rate,” Atkins said.

After Chanda Simon-Thomas was refused a loan by Bank of America to start a 7-Eleven franchise at Westmont because he was “too much in debt,” he switched to Navy Credit Union and First Commercial Bank, a subsidiary of a Taiwanese bank, where he was approved.

This is not the first time Simon-Thomas has been refused a business loan from a large bank. In 2014, he, his sister, and his brother-in-law decided to reopen a historic bar called The Living Room in Jefferson Park.

They work with business experts to compile a binder detailing their proposals to the point where they wish to profit. Their credit score is good and they have equity in the property.

But only one day after bringing the folder to Chase’s bank, they were refused. Then they were rejected by Wells Fargo. Finally they took a high-interest loan of around 30%. That was their only choice in the short time they had to make a decision about location.

“This is really an old dream,” said Simon-Thomas. “When you feel very passionate about something, and you really have dreamed about being in a certain type of business, you will take what you can get.”

They stopped the business in 2015, but loan repayments suck up any profits, especially after the unexpected plumbing problem put pressure on their finances.

Simon-Thomas and his family eventually sold the business.

“That finally really defeated us … can’t really see profits,” Simon-Thomas said. “We never managed to overcome the hump in the end.”

The 7-Eleven franchise that she now has with her husband was bought for the benefit of her 2-year-old son. One day, his son will inherit the business, and property he and her husband have, and his son “will be able to use these things to support whatever his goals are and hopefully pass them on to his children,” Simon- Said Thomas.

It is also important for him that his son has the choice to own his own business and work for himself.

“I don’t want him to deal with discrimination, stereotypes … the competitive weakness he will have,” Simon-Thomas said. “Hopefully it gets better as he gets older, but what I’ve seen and what has happened over the past 400 years, I haven’t seen it change. I prefer he controls his own destiny. “

Small business loans are based in part on the lender’s assessment that the owner has “got what he needs,” Van Tol said.

“That’s where bias can come in, implied or explicit,” he said. “That’s also your relationship with who and who you know.”

Lack of bank relations makes Jeanette Bolden reluctant to seek loans with large banks. Bolden is the third generation owner of 27th Street Bakery in Central-Alameda, which specializes in sweet potato cakes.

The corona virus has strained his business, and although he received a PPP loan through Citibank, he plans to see other loans through other cities or organizations.

“People at the bank, it is difficult to establish relationships with them because they are always changing,” Bolden said. “Often you call and talk to someone on the phone … they are not familiar with your business. They only see numbers on a piece of paper.”

As a community development financial institution, Vermont Slauson Economic Development Corp takes a deeper dive into client business to ensure their success, Brown said. This institution focuses on developing the people’s economy in a way that is not owned by traditional banks.

That is why the corporation invites small business owners through the loan process and ensures they have all the necessary documents, even if it takes several months.

The lack of knowledge about documentation or back-office work should not be confused with the lack of business acumen, said Williams of OneUnited, which is also a community development financial institution. Many successful business owners are proficient in their craft and provide good service but don’t know what the bank’s documentation wants.

“Just because you don’t show you and breaking documentation doesn’t make you a bad business person,” he said.

Underfinancing can put a business owner at a disadvantage from the start. New companies often need time to improve their products or services to suit customer tastes, Atkins NYU said.

“There is no business that can go straight out of the park,” he said. “You need enough capital to be involved in a number of trials and errors.”

Even old businesses need financing to face difficult times – be it the closure of a pandemic for months or just a supply chain hiccup.

“People who are in a better position to get credit lines from commercial lenders or financing from personal assets that they can put in their business will be better able to hold bumps on the road,” Atkins said.

The same applies to Black business owners who just want to expand.

In 1993, Percell Keeling bought 5,500 square feet of land moored by a historic building on the corner of West Slauson Avenue and Overhill Drive in the View Park-Windsor Hills neighborhood of Los Angeles, where he planned to move his health food store after the owner sharply raised money rent.

Keeling fought with Wells Fargo and the District District Community Development Commission for about a year to get a loan to rehabilitate the building, he said. He already has property, has a track record of success and has money in the bank – “everything they usually say you must have,” Keeling said.

Eventually the loans came, pushed forward not least by two black women who worked in banks and county commissions, respectively, he said. He still remembered their names.

Today, Just Wholesome Keeling’s health food stores and restaurants carry more than 6,000 products and do business with more than 100 small businesses owned by people of color, said Apryl Sims, general manager of the company.

“You just have to keep grinding,” Keeling said. “You try as much as possible again to try to set aside money, but because the power is not in your favor, it is only reality. We always, as far as African-Americans are concerned, always know this.”

Times staff writer Suhauna Hussain contributed to this report.