LGBTQ small business owners struggle to find financing

It’s not an easy time to be a small business looking for funding. For LGBTQ owners, the fight has been even more difficult.

According to a 2022 report by the Movement Advancement Project and the Center for LGBTQ Economic Development and Research (CLEAR), a nonprofit think tank focused on equality and opportunity, LGBTQ-owned businesses received more rejections than non-LGBTQ businesses that applied for funding. .

As credit standards tighten, their risk of falling behind may increase, said Spencer Watson, president and CEO of CLEAR.

“Tougher economic conditions, higher interest rates, the collapse of these small community banks and the resulting restrictions on lending are more harmful to the LGBTQ community than the non-LGBTQ community,” Watson said.

Concerns about the economy and credit conditions aren’t just on the minds of LGBTQ entrepreneurs. Overall, small business owners are skeptical about future business conditions, said Holly Wade, executive director of the National Federation of Independent Business Research Center.

“The small business economy is being hampered by inflation, supply chain disruptions and labor shortages,” he said. “While financing is not a major issue for small businesses, owners have expressed concern about the health of the business banking system amid the banking turbulence that occurred in March.”

However, data shows that when it comes to financing, LGBTQ small business owners are being left behind. According to the MAP/CLEAR report, 46% of LGBTQ-owned businesses reported receiving none of the funding they applied for in 2021. In comparison, the report found that 35% of non-LGBTQ businesses that applied for funding were rejected. Much of the funding being sought is through proposed Covid aid programs, Watson said.

“These businesses were often smaller in size, and they were also often younger and had smaller revenues,” Watson said. “They were struggling with these added pressures because they were already in a weaker financial position to begin with.”

Similar themes emerged in the analysis of the Federal Reserve’s 2022 small business lending survey, which has not yet been fully released, Watson said.

Although LGBTQ small business owners are highly optimistic, they are more likely to report financial problems than non-LGBTQ businesses. According to Watson, who prefers a gender-neutral pronoun, six in 10 people reported having trouble paying their operating expenses in the past year. Most of the businesses are owned by people who identify as LGBTQ, but their businesses don’t necessarily target or serve the LGBTQ community, they said.

Gavin Escolar, owner of The Chaga Company in San Francisco, is one small business owner struggling to find financing. The 47-year-old gay man started his business in 2018, making products from chaga mushrooms using savings and credit cards. Although she wasn’t turned down for any loans she applied for, she said she was only offered high-interest bridge loans from lenders to hold her over until a low-interest small business loan was available.

“They say, ‘yeah, you’re approved for this particular SBA loan, but it’s going to take about six months to get it. it’s 29.75%, or whatever the exuberant cost is,” said Escolar.

He’s currently using loans from Square and PayPal and hopes to take the next step to pay off credit card debt, buy inventory, and do marketing. Escolar believes the community needs more education on how to get the right financing.

“I only get higher (interest loans) because I feel like I don’t have business credit,” Escolar said. “I’m torn between my business loan and my personal loan. I don’t even know how to build a business loan.”

For 43-year-old Sarah Scala, going into debt wasn’t an option when she started her business, Sarah Scala Consulting. The Massachusetts company is an LGBT certified business enterprise providing leadership development, public speaking and leadership coaching.

Scala wanted to stay debt-free, so he used his savings and looked for opportunities elsewhere. Aside from a Paycheck Protection Program loan during the Covid-19 pandemic, its only other sources of outside funding have been two grants from the Massachusetts Growth Capital Corporation. These grants helped him with digital marketing and capital expenditures.

“If people are looking for support around funding, there are a number of great associations that are really helpful,” said Scala, who runs her business out of her home.

One of these is SCORE, a network of volunteer business mentors, in which Scala is involved. It also has a strong partnership with the Massachusetts LGBT Chamber of Commerce, which can help open doors, he said.

Anti-LGBTQ bias and discrimination against LGBTQ small businesses can occur during the loan process in a number of places, Watson said.

“If a lender discovers an applicant’s LGBTQ identity, it may deny the loan or charge the applicant a higher cost for the loan they were approved for,” they explained. “This is especially true for highly visible members of the LGBTQ community — such as transgender or non-conforming gender presentations.”

This can manifest itself in other ways, Watson said, such as if the lender doesn’t understand the business’s market opportunity, such as not seeing the benefit or market need for an LGBTQ-serving business.

Businesses that openly target sexual minorities and create sex-positive spaces are also often exempt because Small Business Administration guidelines prohibit loans for businesses of a “sexually sensitive nature,” they said.

However, Watson welcomed the Consumer Financial Protection Bureau’s final rule, which increases transparency in small business lending and includes demographic information that allows small businesses to be identified as women-, minority- or LGBTQ-owned.

“The implementation of this data collection would be an incredible boon to combating discrimination in the private lending market for small businesses,” they said.

Watson said the success of these businesses is important not only to the owners, but to the community as a whole.

“More small businesses from all kinds of marginalized communities are needed so that those entrepreneurs can support themselves, their community members, and create more inclusive spaces that are authentically by and for these communities,” they said.