Pending federal reforms promise support for justice-affected entrepreneurs

March 9, 2023 CCRC Staff

Word is getting around about pending reforms that would make federal support for small businesses more widely available to entrepreneurs with a criminal history. Notably, the U.S. Small Business Administration has recently taken steps to reduce or remove entirely criminal record-related restrictions in its loan and contracting programs. These are steps that CCRC has been urging ever since the SBA’s restrictive policies first came to public attention during the pandemic.

An article by Michael Friedrich published today by Arnold Ventures (AV) describes a number of reforms recently proposed or adopted by the SBA that will eliminate arbitrary program barriers based on criminal history that are unrelated to any established risk. These reforms should encourage more justice-affected business owners to seek SBA support for their entrepreneurial ventures in the form of federally guaranteed loans or federal contract set-asides for “socially and economically disadvantaged” businesses.

The AV article points out that the near-exclusion from these programs based on criminal history “frustrate[s] federal efforts to contribute to economic development in disadvantaged communities, often the same low-income communities of color that have suffered the most during the era of mass incarceration and tough-on-crime policies.”

The AV article showcases the situation of Sekwan Merritt, whose electrical contracting company has become established in Baltimore since his release from prison five years ago, through small loans from a local community development organization, but which now needs the more substantial financial support provided by SBA loans to expand.

“Entrepreneurs like Merritt, who have previously been involved with the justice system, often start small businesses as a response to discrimination and exclusion by traditional employers; around 4% of all small businesses have an owner with a criminal conviction. But they face dire challenges when trying to access capital through the SBA, the federal agency that connects small businesses with lenders to help them launch and develop.

Merritt describes coming home from prison with a desire to start his own business and “make things easier for people who have been through the same thing I have” by hiring others reentering the community after a prison term.

His business, Lightning Electric, has grown steadily since that time, surpassing $600,000 in revenue last year. But when Merritt tries to take out small business loans, he hits a brick wall because of his criminal record. The Small Business Administration (SBA) and other institutional lenders have routinely denied him, making it difficult to hire and take on larger contracts.”

Merritt believes that a change in the SBA’s policy “would create a seismic shift for his business, and for many others, making it possible to grow larger, take on more business, and contribute to their communities.”

Carson Whitelemons, director of criminal justice at AV, points out that “t]he SBA guaranteed more than $44.7 billion in loans in 2021 and serves as a particularly important lender for disadvantaged communities.” CCRC’s Margaret Love notes that the capital controlled by the SBA “is critically important to helping people with a criminal record establish themselves in the community and to closing the racial wealth gap.” Shawn Bushway, who has done extensive research on criminal records and employment, argues that “Places that have high crime, poverty, and other issues have fewer businesses than they could, and one reason may be that the people who want to develop businesses can’t get a loan.” Awesta Sarkash of the Small Business Majority adds that “entrepreneurship is a proven pathway to decrease recidivism,” and justice-affected business owners “should not be further marginalized or perceived as a credit risk simply because of their past.”

Research is underway that promises to support and encourage the reforms contemplated by the SBA, reforms that in turn should influence the policies of banks and other lending institutions.

A group of researchers at the University of Michigan Law School is currently studying the effects of SBA laws, rules, and regulations on access to capital and entrepreneurship more broadly. They are particularly interested in the willingness of people with criminal records to apply for loans. J.J. Prescott, Henry King Ransom professor of law at the university, notes that such rules are likely to deter people with criminal records from starting businesses and submitting loan applications in the first place. The rules also sway other institutional lenders to employ similar restrictions.

“The SBA influences the norms of the industry and gives the broader private market a justification for also looking at criminal records as a way to judge creditworthiness,” Prescott says. “Once you have a policy like this in place, there is a bit of a domino effect.” Prescott further notes that people’s criminal records have no clear impact on whether they repay loans, according to research.

We will report in this space on further developments in the various SBA reforms proposed or foreshadowed. We hope that the spirit of reform that is seemingly moving the SBA in connection with its 7(a) loan program will in time be extended to its 8(a) business development and disaster assistance programs, which contain essentially the same criminal history-related restrictions.