As small business program reboots, owners blast initial rollout

James Garrett Jr. runs an eight-person architectural firm with offices in St. Paul and New York. His firm has designed award-winning transit stations and public plazas, and the minority-owned business has turned a profit every year since the last recession.

But Garrett and his black partners at 4RM+ULA couldn't find a bank willing to loan them $80,000 through a $349 billion emergency loan program aimed at helping small businesses like theirs survive the downturn caused by the coronavirus.

"It felt like the bigger companies elbowed everybody else out of the way," Garrett said. "They got what they needed, and the money didn't really trickle down to the actual mom-and-pop businesses that don't have extensive banking relationships."

The U.S. House of Representatives on Thursday is expected to approve legislation that will steer at least $30 billion in new funding to community lenders that specialize in putting money in the hands of minority- and women-owned businesses. The money is part of a $484 billion coronavirus relief package expected to add $310 billion to the hugely popular Paycheck Protection Program, plus provide $75 billion for hospitals and $25 billion for national testing efforts.

The new funds will be welcomed by thousands of small-business owners like Garrett whose applications stalled when the emergency loan program ran out of money last week, 13 days after it launched April 3. This time, however, business owners should see more options when it comes to finding a lender to help them.

Besides applying at a big bank, as most companies did in the first round, small-business owners also will be able to obtain a forgivable loan of up to $10 million from more than 1,000 so-called Community Development Financial Institutions in the U.S. There are dozens of CDFIs in Minnesota, including the Community Reinvestment Fund, WomenVenture and the Metropolitan Economic Development Association (MEDA).

Though more than 5,000 financial institutions are expected to participate in the second round of funding, political leaders said the pool needed expanding.

"I believe every member of our caucus heard from businesses in their states who couldn't access [the program] because they didn't have a prior relationship with a big bank," Senate Democratic leader Chuck Schumer said Tuesday during debate on the measure, which passed unanimously.

"We have a responsibility to make sure the money is getting to the right places," added Sen. Ben Cardin of Maryland, who pointed to news reports indicating large restaurant chains including Ruth's Chris and Shake Shack qualified for millions of dollars in aid. Shake Shack said earlier this week it would return the $10 million it received. "Underserved communities have not been able to get in," Cardin said.

Patrick Pariseau, director of financial solutions at MEDA, said big banks prioritized applications for existing customers with outstanding loans, in part because it helped protect the banks from writing off additional losses for delinquent accounts.

"I'm sure the biggest clients got taken care of first," said Pariseau, former president of an $80 million bank in Woodbury. "A lot of people just got hung out to dry."

The big banks were not shy about announcing their intentions. At Bank of America, prospective PPP applicants were warned that they had to have both a "Small Business lending and Small Business checking relationship" with the bank as of Feb. 15. The bank also declared it would not do business with companies that had a " borrowing relationship with another bank."

Most of the nation's other large banks also required applicants to have a business checking account, according to a Star Tribune survey of eligibility requirements. The newspaper asked officials at B of A, U.S. Bank and Wells Fargo for the percentage of PPP loans they handled that were tied to firms with outstanding loans, but the companies declined to provide that data.

In an interview, B of A spokeswoman Carla Molina said more than half the PPP loans approved by the bank involved firms with fewer than 10 employees. "We did not prioritize bigger clients over smaller clients," Molina said.

Garrett said he and his partners approached several banks to see if they would be willing to help them obtain relief earlier this month. They wound up filing applications at a big bank and a community bank, but neither delivered. Garrett said lenders routinely write off his company as "high risk," despite the company's successful track record. He said MEDA is the only financial institution that has been willing to lend the firm money.

"The big banks are happy to take our money and charge us fees," Garrett said. "We have put millions of dollars on deposit with them over the last few years. But they won't extend us anything, no matter how much revenue we generate."

Although he has slashed hours for all of his employees by about 50%, Garrett said his firm is poised for a quick recovery, with a pipeline of projects still scheduled to begin later this year. To get there, however, the firm needs an emergency loan.

"We just need to keep our team together," Garrett said. "We may even do more hiring."

Hector Ruiz, who owns four Latin-themed restaurants in Minneapolis, said he applied for an emergency loan just two days after the banks started taking applications. He said he went to a Wisconsin-based bank that handles his business and personal accounts, as well as a large Minnesota bank.

"I spent three days filling out the paperwork," Ruiz said.

Ruiz figures he needs $30,000 to $65,000 to survive the next three months, which is not a lot of money for a business that generated more than $2.5 million in sales last year. But Ruiz said he couldn't get his loan request approved. He closed his restaurants and laid off most of his 60 employees five weeks ago. He recently reopened for takeout service at his flagship restaurant, Cafe Ena on S. Grand Avenue. Ruiz said he cut his prices 30% and overhauled his menu to entice customers back.

"I am doing more comfort food now," he said.

Ruiz said he borrowed money just twice since opening his first restaurant 17 years ago. The first loan was arranged by the city of Minneapolis, which helped him open Cafe Ena. His second loan, arranged by MEDA, allowed him to open Costa Blanca in northeast Minneapolis.

"I come from a third-world country — we don't believe in banks," said Ruiz, who emigrated from Mexico in 1992 to open his first restaurant in the Twin Cities. "But in the United States, it is different. Everything is about having credit. … You have to have connections."

Jeffrey Meitrodt • 612-673-4132