The state of California is set to deploy $475 million in Covid relief funding for small businesses, extending what could be a lifeline for many business owners.

More than half of the applicants already selected for the program are minority-owned and nearly half are woman-owned. Through this equity-focused funding, California could help stave off further widening of the racial wealth gap.

And one local Black-owned lender is helping make it all possible.

B.S.D. Capital Inc., which does business as Lendistry, is a hybrid between a financial technology company and a traditional small business lender. It is also a Community Development Financial Institution that provides loans and other capital to underserved small businesses such as minority-owned businesses and those in low-income areas.
The downtown-based company was built, according to founder and Chief Executive Everett Sands, to address the fallout from a pernicious issue in the American financial system — the decline of community banking.

Sands began his career at a small Baltimore-based Black community bank. Ironically, it was only after moving to banking giant Wells Fargo & Co. that he began to appreciate how serious the issue of community bank decline could be.

Large banks like Wells Fargo provide capital for loans at smaller banks that might not have the cash on hand to otherwise execute the deals. The process is mutually beneficial because it helps large banks put their massive deposit volumes to work while enabling smaller banks to serve customers they would otherwise have to turn away.

“We were probably financing a billion dollars a week (for those smaller institutions),” Sands said. “If 10% to 20% of (those community banks go) away, that is a huge vacuum created.”

Over time, a 10% to 20% decline in community banks would prove overly optimistic. Spurred on by factors such as increasing technological demands and a shifting regulatory landscape, community bank numbers have been dwindling for decades.
 
In 1990, there were more than 15,000 commercial banks and savings institutions in the United States, according to the Federal Deposit Insurance Corp. Today, that number is just over 5,000. Most of the banks lost over this period have been smaller community institutions.

“One of the things that I remembered from econ class was supply and demand,” Sands said. “If you ever ask why small businesses aren’t being funded or aren’t able to get capital, that’s why.”

Beyond fintech

Sands’ initial plan to address these issues centered on building a fintech company. But the Lendistry founder said he soon realized that pieces of the typical fintech model didn’t suit the task at hand.

“The cost of acquisition was really high for a fintech company,” Sands said, referring to the cost a business pays to recruit new customers.
 
“Also, the cost of funding was really high,” he added, referring to the costs associated with getting capital from financial institutions to make new loans. These high capital costs result in high lending costs for borrowers, according to Sands, which can become onerous for some small businesses.

Sands also said the risk management process for many fintech companies didn’t align with the type of underserved small business lending he wanted to focus on with his new company.

“The small business customer is more like an individual than a commercial customer,” he said. “With small businesses, they just don’t have the assets (to back up a loan). You can’t foreclose on groceries.”

What the fintech model did have, according to Sands, was a strong ability to channel customers to the financial products that were best for them.

“Sometimes it’s as simple as ‘What do you want to spend the money on?’” he said. “Sometimes it is a lot more complicated. There is a lot that you can do with data.”

Fintechs also had what Sands described as a “more scalable experience,” meaning a more systematized ability to grow their platforms and customer bases across a broader audience.

Sands ultimately decided to try and carve a path somewhere between a fintech and a traditional community lender. He hired a mixed team of former community bankers — recently displaced by mergers and acquisitions in their sector — and technologists.
“We had to literally take years and sit down and think about every point of this,” he said.

The result was what Sands described as a “hybrid institution,” taking many of the traditional focuses of a community lender, paired with the data-crunching technology of a fintech.

The value of this novel approach was recently highlighted during the Covid-19 pandemic.

Initiatives like the federal Paycheck Protection Program, alongside other state and local measures, have been rolled out over the last year to prevent small businesses from going under amid shutdowns and other restrictions.
 
Despite the good intentions, these programs faced issues ensuring that funding reached the groups most in need. Large banks with the ability to distribute capital on behalf of governments did not have relationships with many small businesses in desperate need of funds or effective ways to identify and engage those businesses.

Filling the gap

Lendistry’s niche in technology-driven small business lending lined up with this gap. Over the last year, Sands said, the company has worked with 12 different state governments to issue PPP funds, as well as administering eight different grant programs for county and state governments.
 
Lendistry has deployed hundreds of millions of dollars to small businesses through these programs to date, according to Sands.

As part of these initiatives, the downtown-based lender was commissioned by the California Office of the Small Business Advocate to be the official administrator of the state’s $475 million Small Business Covid-19 Relief Grant Program.
 
The program is designed to target many of the underserved businesses that slipped through the cracks with the PPP. It was divided into two rounds, the first of which opened on Dec. 30.

“We processed 344,000 applications in 15 days,” Sands said. “We were like ‘Oh boy. It works, but it’s scary.’”

Some 21,000 businesses were selected in the first round of the grant program. Of these, 77% were underserved and disadvantaged small businesses such as those owned by minority groups or in low-income areas, according to CalOSBA.

The second round, which opened on Feb. 2, will select a similar number of recipients with similar equity targets in mind.

While the situation remains precarious for many of California’s small businesses, Sands said he is optimistic that funding like this will help many make it through the tough months ahead.

“The bad is that we are in a pandemic. There is suffering, and there is deep, deep need,” Sands said. “The good is that the small businesses never took a break. They are the most resilient people in California by far.”

Keep reading the Black Entrepreneurs Month Special Report.