Black Business Owners Face An Uphill Battle Securing Bank Loans
Freddie Lee James Jr. has long been a sauce man.
His home-whisked Ghetto Sauce made him the king of cookouts. Family and coworkers would clamor for the zesty, sweet and spicy barbecue sauce. After years of their encouragement and five years before he was to retire from his construction job, he decided to take it to the next level.
He founded Freddie Lee’s Gourmet Sauces with his wife, Deborah, in 2010. After ironing out the branding and labels, the couple struck deals for spots on the shelves at Schnucks, Dierbergs, Straub’s, Hy-Vee and Home Goods. Their sauce is now sold in over 1,000 stores in the U.S. and Jamaica.
Despite those retail successes, the couple still can’t secure a business loan from a bank, even though their enterprise brought in about $200,000 in annual profits for years, they said.
“We have 750-760 credit score,” Freddie Lee James said. “We pay all our debts. We don't have no problems with that. But they were saying that the sauce business is not generating enough capital to their standards.”
Banks deny loan applications from black business owners more often than any other racial group, according to U.S. Federal Reserve data. More than half of the applications of black-owned businesses were denied in 2014, the most recent nationwide data available. Only about 25% of loan applications by white business owners were turned down during that same period.
Deborah James said that without financial backing from a bank, it’s difficult to expand their business and meet the bank’s expectations for volume. She said it’s unrealistic to meet the sales quota that big-name brands have while working off a shoestring, small-business budget.
Freddie Lee James Jr. works on a batch of his sauce.
Most of the money that the couple has poured into the business has come from their own pockets, including $100,000 from Freddie Lee James’ 401(k) account. But once the money started dwindling, the couple turned to St. Louis microlender Justine Petersen for help. The nonprofit helps small-business owners build up their credit, while giving them access to safe and affordable loans.
Galen Gondolfi, a senior loan counselor and spokesman at the nonprofit, said the Jameses' frustrations are not unwarranted.
“St. Louis’ seemingly provincial lending struggles not only with entrepreneurs that don’t historically ‘look like them,’ but [also] the types of businesses that are unique to these populations,” Gondolfi said in an email.
He added that the current bank lending culture in St. Louis is risk averse and never fully bounced back after the Great Recession. As a result, banks’ tightened reins have never loosened here.
“More businesses continue to be told no instead of yes,” Gondolfi said.
Banks are heavily regulated and often have good reason to avoid risk, said Dell Gines, senior community development advisor with the Federal Reserve Bank of Kansas City.
“They have to be very careful about the businesses that they lend to, because having bad business loans is one of the leading causes of banks actually going out of business,” Gines said.
Black entrepreneurs can face significant obstacles. Among them are a lack of intergenerational wealth and insufficient knowledge about how the banking system works. Gines said racial discrimination only widens that gap.
“Let's say, hypothetically, there's no discrimination in the banking industry, we would still probably have disparate outcomes because the system itself hasn't prepared us to utilize the banking system effectively,” said Gines, who is black. “Then, when you layer on the levels of discrimination that research has showed … when you combine those two, that's why you see these kind of disparate outcomes.”
Freddie Lee and Deborah James have sold more than 200,000 jars of sauce.
Gines said there has been some growth among black entrepreneurs. Business ownership by black women increased by 179% between 2002 and 2012, a faster rate than any other group in the U.S., according to a report Gines authored.
The Center for Acceleration of African American Business is among the groups helping black entrepreneurs make such gains in St. Louis. The nonprofit has worked with roughly 700 businesses since the center opened its doors in 2006 — including Freddie Lee’s Gourmet Sauces. Nearly 60% of the businesses are still operating, said Eddie G. Davis, the center’s president and executive director.
The nonprofit helps clients create a plan before they walk into banks and entrepreneurship.
“I tell them failing to plan is like planning to fail,” Davis said. “It's like driving blind. ... We work with them to develop their business plan, develop, for example, their target market and identify who their customers will be.”
One way Davis helps his clients obtain loans is by making sure they meet the banks’ industry standards for debt service ratio — the company's ability to repay a loan.
“Banks look for a business to have 1.25 times more profit necessary to pay the loan,” Davis said. “Some of our companies have had those standards met but still gone into the bank and been rejected.”
After nearly a decade of hearing no, Freddie Lee and Deborah James have sold more than 200,000 jars of sauce in the past five years but are still seeking that bank loan.
Davis and the lenders at Justine Petersen "took a chance on us,” she said. “I'm happy for that. I'm blessed."
When they do finally get the loan, the couple said they plan to hire employees and buy more kitchen equipment so they can make more sauce.
For now, they’re in the process of contracting with other businesses to become a third-party manufacturer for other sauce companies out of their commercial kitchen near downtown St. Louis.