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East Los Angeles

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Access to credit and the right zip code are often gateways to success for small businesses.

The COVID-19 pandemic exposed a slew of inequities, but for small businesses in Los Angeles and across the country, one of the most consequential involved access to credit. When the lockdown began and cash flows slowed, East Los Angeles cabinet maker Juan Arreola found himself on the wrong side of the divide — without a line of credit or a banker to bail him out.

“If I’d had a loan, I would have more cash flow,” Arreola said. “I wouldn’t have been worrying about where my workers’ pay is coming from.”

Capital moves freely to the city of Los Angeles — it ranks in the top 20% for investment and lending among the largest U.S. cities, according to an Urban Institute study. But the money slows to a trickle in lower income areas and places where people of color live.

End of Forbearance

Even the government’s COVID-relief Paycheck Protection Program (PPP), which offered more than $814 billion in emergency aid to pay rent and worker salaries for pandemic-affected businesses, laid bare those fissures. Some larger businesses with established banking relationships got quick and easy aid whether they needed it or not, while smaller operations that were hanging by a thread often did not. Kanye West’s clothing company, Yeezy, and the well-funded Church of Scientology received loans, but businesses like Juan Arreola’s were left out.

At the L.A. branch of the Self-Help Federal Credit Union on Crenshaw Boulevard in South Los Angeles, Senior Vice President Sarah Brennan said, “If you look at the data nationally, there is no question low income communities weren’t able to access PPP loans as easily as higher income communities and white communities.”

Arreola makes custom cabinets for kitchens and bathrooms, entertainment centers, and tables and chairs in a cavernous shop that occupies nearly a city block in an area where residential streets give way to blocks full of small manufacturing plants.

Arreola is slim and graying and exudes calm even after two pandemic years in which he struggled to make the rent and keep his crew, two carpenters and two painters, on the job. An immigrant from Puebla, Mexico, Arreola came to the United States 19 years ago for love, not work — his wife was already in Los Angeles. With a degree in economics, he had taught at the high school and college levels, but in the U.S., he began at the bottom doing odd jobs in a carpentry shop

The difficulty of getting pandemic aid to business owners who needed it most underscored disparities between those who have credit and those who don’t.

Thirteen years ago, he struck out on his own, and because he couldn’t get a bank loan, he built his business on relationships and cash deals. Arreola says he’s been denied credit because he doesn’t have a Social Security number and instead uses an Individual Taxpayer Identification Number to pay the IRS. Banks aren’t barred from lending to ITIN holders, but immigrant advocates say few do so.

Arreola’s lack of access to credit was a source of frustration, but the pandemic made it an existential issue. “My workers have to eat,” Arreola said. Cash was scarce for reasons out of his control: He had to honor price estimates based on pre-pandemic material costs that could have doubled by the time he was hired to do a job. In December, a single piece of hardware — a slide for drawers — stood between him and a payday because he needed it to finish a job and it was likely stowed on a ship in the harbor. At one private home, only two workers at a time were allowed in for COVID safety, like a Noah’s Ark of construction workers — pairs of plumbers, drywall installers and painters, which considerably slowed the work and Arreola’s ability to get paid.

On paper, the Small Business Administration’s Paycheck Protection Program offered a level playing field, because it didn’t require borrowers to have established credit. It also looked like an easy win for both banks and borrowers large and small. The government fully guaranteed each loan, and it paid lenders a per-loan fee. Program guidelines appeared to leave almost no legitimate business out, not barring ITIN holders like Arreola. PPP loans were forgiven altogether for businesses that spent at least 60% of their loan proceeds on employee paychecks.

But banks were responsible for distributing the funds. And some very small entrepreneurs don’t have relationships with financial institutions, said Ricardo Flores, executive director of the San Diego office of the Local Initiatives Support Corporation. “The challenge is a lot of folks weren’t banking,” Flores said. LISC works in low income communities to make investments in housing and economic development and also made PPP loans, reaching some businesses that had not been able to obtain them. Overall, though, Flores said, “It was a hodgepodge. We don’t know how some folks made it. Maybe some landlords forgave rent. It really is somewhat baffling.”

Access to capital — or the lack of it — has been an issue in Eastside communities for nearly a hundred years, ever since it was starved of credit in the late 1930s as a matter of federal policy.


The difficulty of getting pandemic aid to business owners who needed it most underscored disparities between those who have credit and those who don’t. But such issues are longstanding, advocates note. Self-Help Federal Credit Union’s Brennan pointed out that some L.A. neighborhoods have a single bank branch or none at all. At Boyle Heights-based Inclusive Action for the City, technical assistance coordinator Karina Guzman said banks regularly turn away creditworthy entrepreneurs like Arreola if they lack a Social Security number. “It puts people in a situation where they’re cornered to secure more expensive alternative means,” Guzman said, like high-cost payday lenders that often plunge borrowers deeply into debt.

The PPP program did little to break the cycle. Its loans went disproportionately to larger businesses with greater access to financial institutions, especially in the program’s first weeks, with 42% of loans extended to businesses with 10-499 workers, according to a report by the Government Accountability Office.

Ninety-six percent of U.S. small businesses have fewer than 10 employees, and the government worked to correct the imbalance. It allowed community development financial institutions (CDFIs) with ties to underserved communities like LISC to make PPP loans.

In a statement, a Small Business Association spokeswoman responded that “the SBA’s focus on reaching our underserved business is aligned with the Biden-Harris Administration’s dedication to equity.” She cited a September 2021 Government Accountability Office report that found that the SBA has worked to address inequities in the program, increasing lending to the smallest businesses. But at the program’s end, the GAO found PPP loans still disproportionately benefited larger enterprises, with the smallest businesses receiving 84% of the loans. The GAO report tallied the number of loans extended in counties with high minority populations, and in areas with a large number of women-owned concerns, but it didn’t report on borrowers’ race or gender or whether their businesses were located in lower income communities.

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In the neighborhoods east of downtown Los Angeles, Arreola wasn’t alone in not getting pandemic aid. An analysis by Reveal found a far lower rate of PPP loans in communities of color than in predominantly white areas in 2020. For instance, in all but one Boyle Heights census tract, in which some 78% of businesses got PPP loans, the percentage of PPP loans approved ranged from about 3% to 30%. In contrast, between 34% and 77% of businesses in the city of Santa Monica benefited from Paycheck Protection Program loans. “It’s still a tale of two L.A.’s,” the Self-Help Federal Credit Union’s Brennan said.

Several major banks have branches in East L.A. and Boyle Heights, but there are more than twice as many payday lenders and check cashers.

Access to capital — or the lack of it — has been an issue in Eastside communities for nearly a hundred years, ever since it was starved of credit in the late 1930s as a matter of federal policy.

In the ’30s the government’s Home Owners’ Loan Corporation (HOLC) created its infamous redlining maps, racially biased risk assessment tools for mortgage lenders and investors. Neighborhoods colored blue or green on the maps were considered low risk. Yellow meant use caution, and communities doused in red ink like Boyle Heights and East L.A. were no-go zones for lenders and investors. In documents collected by PolicyMap, a company that compiles data on racial and ethnic disparities, HOLC officials cautioned against lending in Boyle Heights and the unincorporated areas east of the community because of “subversive racial elements” like “Russian, Polish, Armenians, Jews, Slavs, Greeks, American Mexicans, Japanese and Italians.” “It is seriously doubted whether there is a single block that doesn’t include detrimental racial elements,” the map description read.

Today, loan discrimination is illegal, and neither Boyle Heights nor East L.A. is closed to investment. But both still get less than their fair share of capital, with major banks offering a lower percentage of home loans per capita in those areas than in the city of Los Angeles as a whole, according to Home Mortgage Disclosure Act data. Immigrants still make up a large share of the population — 43% of residents are foreign born in Boyle Heights compared to 35% in L.A. County as a whole. Of those, it’s unclear how many are ITIN holders and whether the large immigrant population contributes to underinvestment.

Several major banks have branches in East L.A. and Boyle Heights, but there are more than twice as many payday lenders and check cashers among the community’s storefronts and strip malls.

One consequence is that people on the Eastside and in other lower income communities of color sometimes fall prey to high-cost credit, says Inclusive Action for the City’s Guzman. “The effect is never being able to repay.” It’s a cycle, Guzman said, in which “lack of opportunity and lack of capital has people looking for more costly opportunities to support their livelihood.”

As a community development financial institution, IAC both makes small loans at fair rates and advocates for street vendors and other small-scale entrepreneurs.

Fernando Guadarrama Pérez made his way to IAC on the advice of a client. He came to the U.S. from Mexico at 17, learning his craft under exacting chefs in fine-dining establishments and then starting his own catering business, OC Tacos. Guadarrama Pérez parked a rented truck in an industrial area of East L.A., and customers — including construction workers and film crews — lined up for his food. He said he often catered for the crew of the latest Fast & Furious film. “The director loved my tacos.”

He wanted his own truck, but couldn’t get credit, so he agreed to pay 10% monthly interest on a $20,000 loan from a friend, a deal that would have kept him perpetually indebted if IAC hadn’t loaned him the money to pay it off.

Now Guadarrama Pérez says he has a chance to make a go of his business even though he’s struggling with rising food prices. “I love cooking,” said Guadarrama Pérez. “It’s my passion.” His next step, however, is to gain more business savvy. “I need to take management classes,” he said.

Juan Arreola also became an IAC borrower after weathering most of the worst of the pandemic. “We’re surviving,” Arreola said, adding that his new $20,000 loan at 8% interest will help him catch up on back rent and utilities. “It feels like a weight has been lifted.”

Karina Guzman said Arreola’s carpentry business stood out for its pre-pandemic success — even with no help from the banking system.

“I’ve been making my payments,” Arreola said. “I hope they extend more credit.”

Guzman said IAC loans often establish their borrowers’ creditworthiness for more mainstream lenders, too.

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In the bigger picture, however, IAC director Rudy Espinoza said the community needs better protections against predatory lending practices, as well as bank underwriters who will lend to people like Juan Arreola. Espinoza noted that he would gladly pass on his organization’s loan business if reasonably priced credit were available in the community.

“We always talk about working ourselves out of a job,” Espinoza said.

Robin Urevich
Capital & Main