It is clear from years of data that conventional approaches to small business lending limit the prospects for many entrepreneurs of color. As a result, those owners aren’t able to access the capital they need to build, hire and grow.

What has been less obvious is what to do about it. Even as many financial institutions work to remedy historical discrimination, unconscious bias has remained a persistent drag on progress. It is a systemic thread in many aspects of marketing and underwriting, running through policies that may not be overtly tied to race or ethnicity but that nonetheless end up disadvantaging Black and Brown business owners.

To take on those challenges, lenders should take a lesson from programs and organizations that have successfully addressed these gaps. Particularly now, as economic conditions push the cost of capital beyond what many small business owners can afford, it is important for lenders to think creatively about what really constitutes risk and how it connects to diverse owners, enterprises and communities.

At LISC, we recently took a step back to evaluate some of the learnings from our Entrepreneurs of Color Fund, a program launched by JPMorgan Chase in 2015 that now includes partnerships with 24 community development financial institutions (CDFIs) and several technical assistance providers working in 10 cities. With them, we have helped direct capital to more than 4,000 businesses led by people of color, offering products and approaches that are specifically designed to break down racial barriers—especially for borrowers operating in low- and moderate-income communities.

Key takeaways from EOCF’s experience:

  • Flexible, high-touch underwriting advances small business aims: Many of the conventional metrics related to underwriting work against inclusive finance goals. And experience demonstrates that those standards do not really relate to financial risk in the first place.
  • Commercial real estate should be a priority: For small business owners, there is no substitute for property ownership. If a business can secure a real estate asset for its operations, it can avoid the risk of displacement that comes with renting—especially in gentrifying communities—while also positioning itself to access conventional debt in the future to promote long-term growth.
  • M&A financing can address the “silver tsunami”: There are 11 million businesses whose owners are 55 and older. They need exit options that protect their employees and the communities where they operate, particularly in communities that are already facing economic headwinds.
  • Technical assistance is critical to “bankability”: In many communities of color, especially those that have long been working to recover from disinvestment, there is skepticism when dealing with lenders—even mission-driven CDFIs.

Read the full article about entrepreneurs of color by Steve Hall at LISC.