Next week I intend to move what should be a final amendment to Invoice No. 210956which would establish the Philadelphia Public Financial Authority (“PPFA”) if passed by the city council, hopefully at its session the following Thursday.
This effort would mark the culmination of a multi-stakeholder collaboration that began when I was first sworn in six years ago, and builds on the work many of us have done since long before that to promote access to capital.
The creation of the PPFA would be another contribution to the supports finally offered to minority-owned businesses in Philadelphia. Currently, among businesses with employees in Philadelphia, only 6% are owned by African Americans and 4% by Latinx Philadelphians, even though they make up 44% and 15% of the city’s population, respectively. Among the many reasons for these disparities is the lack of access to credit.
“The creation of the PPFA would be another contribution to the supports finally available to minority-owned businesses in Philadelphia,” Green said.
Because of shocking racial wealth differentials, Black and brown business owners generally have a much more limited ability to raise start-up capital from friends and family. Cooperative enterprises, which have a broad ownership structure, face associated capital shortfalls. Limited resources limit options for growth and appear riskier to lenders than another company with the same fundamentals.
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Recently, public, private, and nonprofit entities have provided more resources to Philadelphians trying to access credit. In addition to their own varied financial and technical services, the Philadelphia Industrial Development Corporation (“PIDC”) and community development financial institutions (“CDFIs”), such as the Enterprise Center and the late Jerry Nowak’s Reinvestment Fund, are among entities that participated in the City competition Business Lending Networkthat I launched with the Trade Department in 2016.
While all of this effort to increase available lending dollars is worth it, real limitations in the lending ecosystem remain for businesses to access. To maintain a balanced portfolio, even the most philanthropic lender must split the extra dollars between smaller, less established, and therefore ostensibly riskier, businesses and larger, more established, less risky businesses. Even more money to lend does not change the lack of collateral from companies to obtain it.
What could change that is changing how risky these companies appear on paper. The City has limited resources to replace the missing wealth of black and brown family members and friends, but it can replace its effect by guaranteeing loans and providing other credit-enhancing products. Simply put, these products are not the bread and butter of existing small business lenders. Because no entity should be overly invested in a business, it would be counterproductive to have one fulfilling this role, and inefficient to distribute this function among many.
While the new Green Energy Capital Corporation invests in green projects, the much-needed GRIT fund provides resources to CDFIs, and the Accelerator funds (whose founder, Greg Heller, supports the PPFA) focuses on development, the need of other companies struggling to obtain guarantees has not been met. Hence the PPFA.
As written, the PPFA is structured with enough independence from the city to qualify as a CDFI, making it eligible to receive Community Reinvestment Act contributions from non-government sources. Obtaining loan loss insurance and reserves can manage the possibility of defaults, but the City needs to invest in our businesses so that we are no longer a place with too few loans, not enough growing businesses and extremely high poverty.
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While focusing on credit enhancements and partnering loans with existing lenders, PPFA staff will be tasked with continuing to explore a true FDIC-insured depository institution for the city and other government entities. . The Bank of North Dakota has served as an inspiration for recent efforts to Porto Rico, American Samoa, Californiaand New Jerseyas well as other US states and cities, including Philadelphia. The coalition I worked with remains keen on developing a public bank in Philadelphia, which would have no retail clients, much like the Bank of North Dakota.
While I appreciate his kind words, I disagree with Larry Platt on the desirability, feasibility and necessity of creating this new institution. Not only can we chew gum and walk at the same time, it is the civic responsibility of elected officials to do so. I look forward to the passage of the amended bill and to taking the next step to support underserved businesses in Philadelphia.
Derek Green is serving a second term on the board in Philadelphia.
MORE SOLUTIONS FOR GROWTH OF BLACK-OWNED BUSINESSES
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Develop the prison-to-business pipeline
The virus and the city: what we know about black businesses
“Equity to end inequalities”
Header photo by Jared Piper/Philadelphia City Council