Briefs 1 and 2 in this series established the methodology behind the Nashville Summit and the seven structural barriers that cut across the housing, workforce and small business development ecosystems. This fourth brief has a narrower focus that will be of interest to those working in the small business development ecosystem. It documents the barriers raised by practitioners and funders during the small business support dialogues and the solutions participants raised that would work with limited federal government support.
Devin Thompson, Director, Place-Based Strategies
Key Takeaways
1
A broken market where traditional lenders are too slow for entrepreneurs’ needs is driving viable businesses to Merchant Cash Advance lenders that are systematically extracting wealth from entrepreneurs. CDFIs need specialized debt consolidation and training tools to help stabilize entrepreneurs caught in the debt trap.
2
Most technical assistance programs are built to help a business survive the first year rather than build long-term, sustainable community wealth. The model has to shift toward building something an owner can sell, pass on or leverage for future generations.
3
Procurement systems lock many smaller entrepreneurs out because they were designed by and for large businesses. Thus, bonding requirements, reimbursable payment schedules and bundled contract packages all function as barriers to small and minority-owned firms regardless of their track record or quality of work.
Small Business Development & Financing Specific Barriers
In addition to the cross-cutting systemic failures, the small business dialogues identified specific barriers that are suffocating the ability for entrepreneurs from underinvested communities to grow to scale and gain value from their business as an asset:
1. Gaps in Early-Stage Capital and Equity
The market has significant funding gaps in higher-risk areas essential for new business development. While bank capital exists for established firms, there is a lack of risk tolerance for new ventures. This typically surfaces through these specific organizational hurdles:
- The Pre-Seed Void: There is a critical shortage of pre-seed funding, character-based microloans and early-stage working capital avenues. Early-stage businesses often rely on CDFIs while lacking access to the broader traditional capital needed to survive the initial years. Small-dollar loans, typically under $100,000, are too costly to originate, with revenue failing to cover the costs of origination. This then leads CDFIs to seek subsidies to avoid rates that would be detrimental to the borrower’s business.
- The Equity Gap: There is a profound void in the equity capital system for minority-owned businesses. Multiple participants raised the issue of venture capital firms often looking for reasons to say no to diverse founders, leaving them without the capital for growth needed to scale. Black, Brown and women entrepreneurs are more likely to be denied by traditional lenders regardless of income level, indicating systemic exclusion.
- Unequal Cost of Capital: An inequitable structure exists where mission-driven lenders serving higher-risk, lower-wealth populations may pay a higher interest rate for their capital than traditional banks pay. This cost is then passed down, deterring further borrowing and limiting effective business scaling. In turn, many small business owners end up utilizing high-interest, personal credit cards rather than navigating the expensive and complex processes attached to loan products.
2. Harmful Merchant Loans and Debt Consolidation Needs
In the absence of accessible traditional financing, established small businesses are being driven toward failure by predatory financial products. The consequences of this market failure are felt most acutely in these critical areas:
- The Rise of MCAs: High-interest, Merchant Cash Advances (MCAs) have become a scourge, offering quick cash at usurious rates that trap businesses in a cycle of debt. Entrepreneurs turn to these products because they need cash for emergency priorities and cannot wait for the lengthy underwriting of traditional loans. Many business owners do not understand the true cost of these products (i.e., APR vs. interest rate, etc.). This has created an urgent need for specialized debt consolidation services from CDFIs to rescue viable businesses that are technically profitable but drowning in predatory debt service payments.
- A Symptom of Systemic Failure: The reliance on non-traditional financial products is not just a sign of a business’ shortcomings but of a broken lending market that is failing the entrepreneurs’ credit needs. Traditional lenders are often too slow for small businesses in distress, leaving predatory options as the only fast capital available. This reality is compounded by rising delinquency rates that mirror the Great Recession, forcing even mission-driven lenders to pull back, further widening the gap that MCAs fill.
3. Deficiencies in Business Fundamentals (TA Mismatch)
There is a mismatch between the technical assistance (TA) provided to small business owners and the actual needs of their business operations. This gap hinders growth and contributes to the loss of valuable community assets. This challenge exists as both a broad misalignment and specific missed opportunity:
- Survival vs. Strategy: Technical assistance often concentrates on foundational business startup and survival skills, thus delaying, or entirely preventing, entrepreneurs from developing the strategic capabilities necessary for sustainable growth and accessing traditional financing. Many business owners possess excellent technical skills related to their trade but lack the essential habits of business ownership. TA providers frequently dedicate resources to teaching these basic survival skills, a necessity that consumes time and prevents focusing on growth planning with the entrepreneur towards a stage where paying for services would become viable.
- The “Silver Tsunami’s” Particular Needs: The lack of specialized planning tools and succession models is contributing to the loss of established small businesses due to the aging of their owners, leading to a significant decline in community assets and stable jobs. A noteworthy number of long-term small businesses are closing because their owners are aging out and lack a formal succession plan. This indicates a systemic failure to facilitate the transition of these legacy businesses to new owners.
4. Exclusion from Market Access and Public Procurement
Small, diverse businesses are frequently locked out of the most lucrative opportunities in their own cities due to the dynamic of institutional procurement. This structural lockout is driven by several overlapping policy and administrative failures:
- Structural Barriers: Some of the barriers have included overly complicated bidding processes and a failure by governments to break down large procurement packages into smaller, accessible contracts. Engaging with these complex government systems forces small businesses to divert precious resources away from revenue-generating work, acting as an implicit tax on participation.
- Bonding as a Gatekeeper: Mandatory bonding requirements act as a strict gatekeeper, disqualifying smaller firms that lack the financial history to secure them regardless of their ability to do the work. Advocates argue that waiving bonding requirements for contracts under $1 million is essential to opening the market.
- Market Access: Many small businesses simply do not have access to financial markets that allow them to scale sustainably. The system needs to shift from merely funding businesses to actively helping them build their customer base and their market share. A particularly telling example raised by a participant is that tribal members who wish to build businesses often face severe difficulties in finding commercial properties on tribal lands, forcing capital and talent to leave the reservation for border towns. This concentrates poverty on tribal lands and stifles internal economic development.
- The Loss of Contracts: In the New Normal, MDIs and organizations serving targeted populations are losing contracts as programs supporting minority-serving institutions come under political attack. This shrinks the customer base for mission-driven lenders, creating a vicious cycle of disinvestment.
Small Business Development & Financing Specific Solutions
Focus TA on Asset Accumulation and Succession
The technical assistance (TA) model needs to be reformed in a way that focuses on feasibility and acquisition strategies. Too many owners treat their business as simply “buying a job” for themselves rather than building a sustainable and scalable entity. We must position the business as an asset that can be bought and sold to ensure generational wealth creation. The following strategic shifts could support generation of entrepreneurial wealth:
- Mandate Exit Strategy Planning: TA providers should require exit planning from the beginning. This shift requires moving beyond developing a pre-revenue business plan to help someone follow their dream by providing critical analyses of pricing strategies, market feasibility and wealth generating exit strategies. Practitioners must ensure the business is profitable enough to attract future buyers.
- Facilitate Entrepreneurship Through Acquisition: Address the “silver tsunami” of retiring owners by aligning technical assistance incentives and funding towards acquisition of existing sustainable businesses over seeding pre-revenue startups. Mature businesses with existent cashflow are derisked ventures when compared to start-ups, with significantly lower failure rates. Education on acquisitions and sourcing support are needed to connect emerging entrepreneurs with these opportunities. Models like New Majority Capital provide funds to cover equity, while Project Equity supports employee buyouts to transition workers into owners.
- Prioritize Real Estate and Commercial CLTs: Owning the building and sharing in the asset’s appreciation is essential for moving up the economic ladder. TA programs must emphasize real estate acquisition. Commercial community land trusts (CLTs) offer a specific mechanism for this. They allow retiring owners to sell their property while ensuring the land remains under community control, preserving the neighborhood’s economic fabric.
CASE STUDY: Collective Real Estate Ownership
Problem
In Miami-Dade County, the racial wealth gap is stark and driven by a lack of assets. For minority small business owners, this manifests as a cycle of perpetual renting, further transferring wealth from their businesses to their landlords. These entrepreneurs generate income, but have reduced opportunities to build their net worth. They remain vulnerable to displacement the moment a neighborhood gentrifies, unable to capture the value they helped create.
Solution
The Miami Foundation launched the Collective Real Estate Ownership (CREO) program to convert small business renters into property owners. The core financial tool is a $500,000 forgivable loan used as a commercial down payment. Unlike other programs, the Foundation required business owners to build joint ventures and operate as collectives to purchase a property together. This structure allows smaller operators to pool their purchasing power, unlocking larger, higher-quality commercial properties that would be out of reach for a single entity.
Implementation
Funded as part of a pandemic-era grant from Wells Fargo, the program functions as a subordinate lender. The $500,000 acts as equity towards securing a primary mortgage from a bank and is paired with additional supports and restrictions:
- Leveraged Forgivable Loan: The loan is forgiven at a rate of 20% per year over five years. If the owners occupy the property and maintain their partnership for the full term, the loan converts entirely to a grant.
- Collective Structure: Participants must navigate complex governance issues, such as operating agreements and equity splits. The Foundation found that purpose-built partnerships where businesses had existing relationships, such as a contractor and an architect buying an office together, were far more successful than attempting to match strangers.
- Technical Assistance: Capital proved insufficient on its own. The program had to provide extensive legal and technical support to help owners structure these joint ventures and navigate the closing process.
Impact
The program deployed approximately $4 million in loans, which leveraged $22 million in real estate assets. Eleven transactions resulted in property ownership for nearly 30 entrepreneurs, demonstrating the efficiency of shared equity models. Participants reported that ownership has fundamentally changed their relationship with local government and their stability in the market.
Lesson
Commercial lenders were hesitant to underwrite owner-occupied collective models, viewing them as riskier than traditional investment properties. This was mitigated over time by engaging senior lenders to negotiate underwriting criteria for participating projects.
Entrepreneurship support needed to be tailored to meet the changing needs of the partnerships, teaching business owners how to manage a physical asset through the structuring of an equity sharing formula, ensuring the strength of the partnership long after the deal closed.
Implement Capital Plus Approaches with Flexible TA
The Capital Plus model integrates mandatory technical assistance directly into the lending process. It stabilizes small businesses and improves overall loan quality by ensuring entrepreneurs have the skills to manage the money they borrow. Operationalizing this more staffing intensive model would have its greatest impact if the following shifts were made:
- Score Engagement as a Credit Enhancement: Write technical assistance into the loan contract with program participation becoming part of a “character score.” Consistent attendance and communication could serve as proxies for a borrower’s loan repayment reliability. Solution-oriented practitioners should deploy full-time officers to work with applicants for six weeks to three months before a loan is approved. This pre-loan work ensures the business model remains viable and significantly lowers delinquency rates.
- Deliver Flexibility for Real Schedules: Entrepreneurs are rarely 9-to-5 people and service delivery must match their reality. Some organizations record sessions and create webinars that allow owners to learn during times that are most convenient for their schedules. Online modules allow for the mastering of basic skills at their own pace before moving onto expensive one-on-one coaching. Furthering this with live support to clarify curriculum points with a coach becomes necessary to ensure learning uptake and use.
- Incentivize Training with Improved Loan Terms: Deep engagement requires more than a mandate: it requires a reward that compensates the entrepreneur for their time. Programs that offer a series of sessions on a variety of topics, such as cash flow planning and bookkeeping. Completing this bundle grants the borrower a tangible financial benefit, such as a meaningful reduction in their interest rate.
- Target Specific Needs: Capital Plus and similar high-touch models need to be tailored to specific interventions. For example, Baltimore Community Lending explicitly uses different strategic interventions during real estate and small business loan originations. Kiva Access Managers also use similar models to help businesses raise early-stage capital via crowdfunding platforms.
Provide Specialized Debt Consolidation Services
Predatory high-interest debt needs to be convertible into patient capital that supports the entrepreneur’s long-term goals. This solution would extricate established businesses from debt traps caused by products like Merchant Cash Advances (MCAs), thus repositioning them for sustainable recovery rather than liquidation. Supporting businesses escape the predatory lending cycle requires a focused effort on these specific refinancing and intervention measures:
- Refinance Predatory and High-Interest Debt: The goal is to move businesses from survival mode to financial stability. This involves refinancing predatory loans, which can carry interest rates as high as 80-90%, into sustainable loans with rates around 8-9%. Rather than using rigid traditional underwriting structures, practitioners must use cash flow-based loan structures to determine a business’s actual ability to pay, which creates the breathing room necessary for recovery.
- Adopt a Foreclosure Prevention Counseling Model: Crises require direct intervention, not gentle coaching. Advisors need to adopt a style similar to foreclosure prevention support programs. This means telling business owners explicitly where they stand financially and what must change immediately to avoid closure. Financial literacy education is also important as it teaches borrowers the critical difference between annual percentage rate (APR) and simple interest, preventing them from falling back into the same traps.
- Mobilize Patient and Equity-Like Capital: Funding loans for underrepresented entrepreneurs requires capital sources that can wait longer for their repayment. Organizations should utilize equity equivalent (EQ2) funding and other patient capital sources to provide the low-cost capital needed to buy down interest rates. Additionally, equity-like tools that offer deferred or convertible payments can help stabilize a business’s balance sheet by reducing immediate debt service obligations.
Develop High-Quality, Specialized TA
Entrepreneurs are often technically sound but lack the specific back-office capabilities required to navigate complex capital markets. We need professional-grade support in legal, financial and strategic domains. Participants raised a broad array of TA solutions that could be grouped into five paths outlined below:
- Bridge the Professional Services Gap: Small businesses cannot afford high-end consultants. To fill this void, organizations should leverage skills-based volunteer programs. For instance, Regions Bank provides a model where attorneys and web designers are loaned out to nonprofits for limited engagements to review lease agreements or redesign websites. This also includes specific legal support for setting up Delaware corporations or navigating patent processes for minimum viable products as well.
- Democratize Financial Language: Formal underwriting terms often alienate established owners. Practitioners must reform TA to use accessible language instead of industry jargon like “debt schedules.” The goal is to ensure a borrower’s verbal narrative supports their actual financials. This helps owners who have operated for years yet struggle to produce a formal balance sheet bridge the gap between their daily reality and banking standards.
- Focus on Market Expansion: TA should build the entrepreneur’s market access, not just their internal capacity. Programs like Cultivate Small Business teach food entrepreneurs the storytelling skills needed to make their unique business stand out. Providers should also coach businesses on scope expansion, such as helping a janitorial company move from residential cleaning to lucrative commercial contracts.
- Protect Vulnerable Entrepreneurs: In diverse business hubs like Detroit, TA has morphed into intensive “Know Your Rights” campaigns. These help business owners navigate the complex intersection of immigration status and the business space.
- Formalize Navigator Networks: Cook County, Illinois developed a navigator program where business service organizations mapped exactly where they fall on the continuum of resource provision. This creates a formal referral network that moves entrepreneurs to the most specialized expert for their current stage rather than trapping them in a generalist loop.
Require Streamlined Procurement Access
Advocate for comprehensive policy reforms to lower the barrier to entry for government and institutional contracts. Small and diverse businesses often struggle to grow not because of their capabilities but because of administrative and financial requirements designed for large corporations. Addressing this structural lockout requires an overhaul of current contracting through these specific policy and accountability reforms:
- Reform Legislative and Local Policy: Local governments must overhaul their current contracting structures to make them more accessible to a broader array of bidders. This includes waiving bonding requirements for contracts under $1 million and reimagining insurance requirements that exceed a small firm’s capacity. Cities should also move away from reimbursable contracts, which require deep cash reserves that small firms lack. Instead, local governments should directly partner with working capital lenders to provide loans, secured by the contract itself, to bridge the costs before the contractor can seek reimbursement. Large procurement packages should be broken down into smaller increments manageable for Minority and Women-Owned Business Enterprises (MWBEs). Furthermore, policies should require general contractors to demonstrate MWBE use on private projects as a condition for receiving city contracts and subsidies, ensuring that their funding is catalyzing systems change and not solely furthering contract-seeking behaviors.
- Adjust Selection and Accountability: Selection committees should include local citizens without a financial or social interest in the contract to reduce bias and broaden decision-making power. Specific minority and small business targets should be a mandatory part of the initial contract formation process rather than an afterthought. Business Inclusion Advisory Councils, like the City of Charlotte, North Carolina’s, provide a model for holding local governments accountable to these goals. In tribal communities, internal preference policies should require a community-based procurement preference process before seeking outside corporate services.
- Streamline Administration Processes: Operating a business isn’t easy, but many jurisdictions have found ways to make it simpler and less burdensome. States like Ohio offer 24-hour turnaround for business licensing. Cities can rezone for pop-up businesses and modular storefronts to provide physical footprints without long-term leases. For developers committed to community benefit agreements, cities should offer expedited review processes as long as businesses remain compliant with previous CBAs. City departments must adopt a business mentality, establishing firm timelines for reviews to reduce the uncertainty that kills momentum.
- Build Market Connectivity: Business support organizations need to intentionally bridge the gap between entrepreneurs and large-scale buyers of goods and services. Ecosystem-focused organizations, like The Coalition in DC, are building detailed databases for institutional buyers like universities and hospitals to be able to search for diverse suppliers by specific criteria, such as crew size and certifications. In order to effectively address cash flow concerns, these systems should include payment processors for tracking invoices and ensuring timely payments. Physical and digital incubators, such as the Nashville Business Information Center or the Melannaire Marketplace in Louisville, create spaces where small firms build the track record needed to bid on larger contracts.
Nashville Summit Series
Subscribe
Get NCRC news and
alerts by email.
