Business ownership in Minneapolis is uneven by race. The City of Minneapolis has a total population of 411,500, of which 19% percent are Black, 10% Latinx, 6% Pan Asian, and 1% Native American. While Whites comprise 63.9% of the population, they own ~80% of the businesses. This implies that entrepreneurship amongst people of color is disproportionally lower.
In collaboration with the Minneapolis Innovation Team, a group of city employees that serves as in-house public sector innovation consultants to the City of Minneapolis, the City has uncovered key challenges facing entrepreneurs of color, including lack of intergenerational wealth, absence of affordable commercial space, confusing city processes, and poor access to advisor and investor networks. In addition, their exploration has laid bare that the Minneapolis’ capital ecosystem does not always work for entrepreneurs of color.
Research shows that entrepreneurs of color have lower levels of access to “friends and family money”, which can help to capitalize businesses, particularly at the early stages. Similarly, the underwriting criteria for debt products used by both traditional and alternative lenders does not meet the needs of entrepreneurs of color who lack wealth and have few fixed assets. Lastly, entrepreneurs of color do not have access to the informal sources of financial, knowledge, and social capital that are crucial in the start-up and early-stages of the business lifecycle.
“Supporting small businesses owned by people of color is a critical part of any strategy to meaningfully address racial disparities in any community.”
To address the city’s long-standing racial wealth disparities and with the goal of shifting how the local capital ecosystem works, the City of Minneapolis and Living Cities’ Blended Catalyst Fund (BCF) made an inaugural investment in Fortis Capital and its Participation Loan Program. As a non-profit organization, with 501c(3) status, Fortis Capital aims to increase access to debt on reasonable terms for small and growing businesses owned by entrepreneurs of color.
“Living Cities has worked in Minneapolis/Saint Paul for over a decade through projects like The Integration Initiative and the Catalyst Fund, and we are excited to build on our existing partnerships and investments by working with the City of Minneapolis and Fortis Capital on their efforts to close the racial income and wealth gaps.”, said Demetric Duckett, Managing Director for Living Cities. “Supporting small businesses owned by people of color is a critical part of any strategy to meaningfully address racial disparities in any community.”
“Increasing access to financial, knowledge and social capital is and has been a driving force in the creation of Fortis Capital.”, said Jim Terrell, President and COO of Fortis. “We are positioned to use a proven lending model as well as key partnerships to reach borrowers and to serve communities that otherwise are not being adequately helped.”
By incorporating lending criteria that does not rely on strict credit/collateral guidelines but includes a review of business readiness; prioritizing borrowers who are unlikely to qualify for traditional bank financing, and offering terms and loan amounts that meet the needs of entrepreneurs of color, Fortis Capital leverages lessons from past local loan programs to bridge gaps in access to capital and increase jobs created or retained by people of color.
For the years 2014, 2015, and 2017, small business loan programs provided an average of $1.92MM of capital from the City and leveraged an average of $11.24MM from private lending partners. Borrowers estimated that these loans helped create an average of 256 jobs and retain an average of 340 jobs in the years 2014, 2015, and 2017. The Fortis Capital Participation Loan Program was designed to fill a number of gaps in the Minneapolis capital ecosystem. The program offers loan amounts and loan terms that address borrowers’ capital needs and, most importantly, it deliberately targets entrepreneurs of color.
Racial Equity Focus
Fortis Capital’s vision to provide flexible capital to entrepreneurs of color, innovate existing local loan structures to better meet the needs of disproportionally undercapitalized communities, and increase jobs and business ownership for Black and brown people, is not only appropriate for the current context, but aligned with BCF’s impact focus.
This alignment is manifested in the efforts that the City is doing to work with banks and nonprofits providing technical assistance to incentivize transformations within the local financial ecosystem. The aspiration is that as bank underwriters gain experience understanding the specific barriers faced by entrepreneurs of color, they will provide credit reference points to expand the bank’s underwriting approach.
The BCF’s inaugural investment in Fortis Capital is the result of Living Cities’ intentional focus on increasing investments in founders and capital decision-makers of color to achieve better outcomes in a country undergoing a rapid demographic shift. This investment is also an opportunity for the impact investing field to gain clarity around the structures and underwriting processes necessary to scale efforts to close racial wealth gaps.
To learn more about Fortis Capital contact Jim Terrell, from the Community Planning & Economic Development department, and Brian K. Smith, from the City of Minneapolis Innovation Team at firstname.lastname@example.org. For more information on Living Cities’ Capital for the New Majority Strategy, contact Thaddeus Fair, the Senior Investment Associate for this transaction, and Demetric Duckett, Managing Director at Living Cities at email@example.com.