Small Business

Growing Inner-City Startups, One Loan at a Time

By Elise Craig

Updated on: March 17, 2011 / 9:00 PM EDT / MoneyWatch

As Executive VP for Retail Banking at Sovereign Bank in Boston, Ronald Walker noticed that a lot of loan seekers were inner-city business owners who really needed solid business advice. But traditional banks like Sovereign weren't set up to provide that kind of service.

So in 2005, Walker partnered with investment banker Tim Ferguson to co-found Next Street, a merchant bank that serves inner-city small businesses with revenues between $5 and $50 million. Next Street provides business strategy and advice along with financing in areas they believe have long been underserved by traditional banks.

I talked with Walker about the inspiration behind Next Street, the credit crunch, and how to get dollars flowing to more of the country's urban startups.

BNET: Why focus on inner-city businesses?
Walker: What I found in my previous banking life was very good, focused, successful entrepreneurs who didn't have an equivalent management team around them. They would go to the banks, but the banks were not equipped to give that kind of advice. I thought we could modernize the merchant bank model to provide high quality advisory services to this market, which we think has significant gaps in access to services and capital. And under all of that, I believe strongly that if we can grow these businesses that are located in urban areas, they can in turn retain and grow jobs.

BNET: How does Next Street differ from traditional lenders?
Walker: We will not lend unless we are providing advisory work to the company. Also, when banks and traditional lenders finance a company, they usually look at the previous three years of performance and really lend on past cash flow -- not on a company's ability to perform on the loan amount. We look at the past three years, too, but we also look forward and factor in how a company plans to grow with the loan they're asking for. We look at what kind of contracts they're getting, and we know the capital requirements for those contracts. Because of that understanding, we're able to deploy capital more quickly.

BNET: What are your criteria for the companies you work with?
Walker: Our companies have to show that there are opportunities for growth. They must be willing to embrace us as a partner with the organization. And lastly, all our companies have to be in what is defined as an [inner-city] area. It's more of a geographic channel than [a demographic one], but by dent of what it is we do, over 75 percent of the businesses are minority- or women-owned and operated. On the financing side, after we do our strategic planning and analysis, we have to see that they have the ability to execute on the plan that we've done together.

BNET: Is the recession-induced credit crunch the biggest impediment to small business growth?
Walker: I think it's been really highlighted in the last couple years, but credit has been an issue for small businesses for the last decade. It's directly related to the roll-ups and the mergers and acquisitions of the large banks. As a result, the lending criteria has become more automated. Most of your front-facing bankers are out there for the relationship, but the underwriting is actually done somewhere else and not really held with the commercial lender.

The biggest issue in the last couple years has been the lack of lenders willing to take any additional risk outside of the box. If the bank criteria is $1.25M cash flow, with 80 percent loan to value, well, if you're at $1.15M cash flow, you would not get a loan. It has been very, very tough in the last two years for small businesses to get loans. Every deal had to be an exceptional deal for it to get financed.

BNET: What's the best way to ease the credit crunch, especially for underserved businesses?
Walker: I'd like to see the Community Reinvestment Act regulatory requirements expanded in depth and detail for small business reporting to banks as it is for home mortgage reporting. That in turn will require the banks to really look more deeply and focus resources on growing the small business market in the way that they've grown the mortgage market.

BNET: How so?
Walker: If you go to a bank with a home mortgage loan application, the bank has to take it. If you go to a bank with a small business loan, a banker may have some discussion with you and determine that you may not get approved, and therefore he won't take that application. I would argue for more data requirements so people can track denial rates, and the reasons for why applications are accepted or denied so we can develop best practices moving forward. However, I would also stress there would have to be stringent requirements so that we don't relax any of the loan criteria.

BNET: What else would you change?
Walker: I would like the SBA to expand its offerings to businesses to support growth. Right now a bank can give a loan with an SBA guarantee, but it's still underwritten by the bank in a traditional way based on past performance, so it's not really growth capital. Yes, there's some equity in the SBA lending, but most of the time small businesses in our view, do not want or need equity for growth. What they need is different forms of debt that allow them to have growth capital. So, secured loans, lines of credit, and the debt models for growth work best in this marketplace.

BNET: What kind of advice would you give owners in need of capital?
Walker: Develop a 3-5 year strategic plan for the business that's focused on all of the criteria for growth. If you don't have the expertise to do it in house, retain an organization that can. Now banks now want to see more than just numbers. Banks want to see a plan you can own and execute, in addition to numbers that support the need for growth capital.

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