There’s a huge revenue gap between black small businesses and everyone else. According to research by JP Morgan Chase, black-owned small businesses earn a median annual revenue of $58,000 in Year 5 of operations. However, the typical business line of credit requires at least $100,000 in annual revenue. The median annual revenue for a white-owned small business reaches the $100,000 threshold in Year 2. We can hypothesize why the gap exists, but the gap itself leads to a very tangible capital access problem for black small businesses.
Claire, the founder of a web development business, could use a business line of credit to fund payroll for a large contract that will likely pay her out in 90 days or more. If Claire doesn’t have access to the right capital at the right time, her road to fulfill her contractual obligations becomes that much harder. Claire needs financial access.
Having a minimum revenue requirement for financial institutions comes down to two things: risk mitigation and unit economics. Institutions want to make sure that businesses have the ability to repay their debt. Having more revenue is used as a proxy to judge how likely a business is to have the cash flow necessary to meet its financial obligations. More revenue, less risk. That’s reasonable enough.
The other part of the equation is unit economics. For those unfamiliar, unit economics is a phrase used to describe the revenue and costs of providing one unit of a product or service. Simply put, an institution wants to make sure that the costs to offer a business line of credit don’t exceed the revenue they generate from one.
Institutions have to put money into salaries, technology, risk management, compliance and regulation, marketing and business development, and general business overhead. Having a higher revenue requirement helps streamline these expenses, so creating a business line of credit isn’t costly relative to its payoff. These financial institutions essentially make the argument that offering business lines of credit to lower-revenue businesses is too risky and costly.
Thurman’s hypothesis is that we can lower the costs of offering a business line of credit by making it community-governed and crowdsourced. We use collateral, tech, and the collective brainpower of our community to lower the administrative costs of providing business lines of credit. As a byproduct, we create more financial access.