Despite available funds, inner city sees few loans.

Small Business Loans

Distribution of loans by income level in Greater L.A. area in 1996.

                       No. of       No. of Small      No. of Small
Income Level       Census Tracts     Businesses      Business Loans

Low or moderate         522           108,388            19,793
                      (32.9%)         (31.4%)           (27.6%)

Middle or upper        1,047          235,793            51,680
                      (65.9%)         (68.3%)           (72.1%)

Undefined               19              844               213
                      (1.2%)           (0.2%)            (0.3%)

Total                  1,588          345,025            71,686
                      (100%)          (100%)             (100%)

Source: Comptroller of tile Currency

On paper, the small-business lending environment in inner-city Los Angeles has never looked better.

Major banks have committed to making $63 billion in loans to low-income customers in the city over the next 10 years, according to the Greenlining Institute, a public policy research center based in San Francisco. And about 40 percent of that ($25 billion) has been earmarked for small-business loans.

Furthermore, U.S. Small Business Administration loans to African Americans in Los Angeles increased 171 percent between 1992 and 1997, while loans to Hispanics shot up 526 percent, according to the SBA. In all, the SBA says it loaned a record $290 million to minority businesses in the Los Angeles district last year.

Beneath that rosy surface, however, remains an inner city where little of the available capital earmarked actually is being dispersed, bankers and community activists agreed.

Even the Los Angeles Community Development Bank, created to loan money to those who wouldn't qualify for a traditional bank loan, has loaned only about $25 million so far - even though its $430 million in federal funding, once leveraged, could generate more than $1 billion in loans.

And some of the encouraging statistics are downright misleading, some activists and federal officials said.

For example, a recent federal government analysis found that the number of small-business loans being issued in low- or moderate-income areas of greater Los Angeles is roughly proportionate to the number of small businesses and residents in those areas. But activists point out that the number of loans is less significant than the amount of loans being issued.

"You can't compare apples to oranges," said Cope Norecross, manager of the South Central Small Business Development Center, a federally funded advocacy group that helps needy firms secure funding. "A typical inner-city business will borrow a few thousand dollars to start a bakery and hire two people, while in middle-class neighborhoods they might start a manufacturing operation and hire 10 people."

Even Federal Reserve Chairman Alan Greenspan conceded in a speech during a visit to South Central last January that reality is less rosy than some statistics suggest.

Greenspan - who toured the area in response to concerns about inner-city lending - said that money appears to be tightest in the areas that need it most.

"Our review of small-business lending activities in the 1998 census tracts that comprise the 10-zip-code South Central area find that these neighborhoods received only 1.6 percent of the loan dollars," Greenspan said. "Since South Central neighborhoods contain roughly 2.5 percent of Los Angeles businesses, the pattern - at least on the surface - is less encouraging than either the nationwide or Los Angeles data (indicate)."

Despite the huge amount of capital available, little of it is getting into inner-city L.A. for three main reasons, according to local banking executives and community activists.

First, inner-city loan applicants lack sufficient collateral, in the form of equity; second, applicants either don't have the documentation or don't know how to assemble the documentation that lenders require; and third, there is a deep-seated pessimism among inner-city business owners that, due to racial or social bias, they would never be approved for debt or equity funding, anyway.

So the same inner-city advocacy groups that worked so hard to get banks to make their multibillion-dollar loan commitments have shifted their focus to educating entrepreneurs about how to qualify for loans, and to attracting equity investments to the inner city.

"There is more available debt, but almost no equity capital. Without equity, businesses can't qualify for the debt needed to meet expansion needs," said Linda Smith, director of the FAME Business Resource Center, part of the First African Methodist Episcopal Church in South Central that helps small businesses secure loans.

The SBA is attempting to meet that need for equity through its venture capital program. The program provides funding - at favorable rates and with SBA guarantees - to private-sector investment firms willing to make equity investments in small companies. However, there are no stipulations that those investments be made in inner-city businesses.

Another avenue for bringing equity investment into the inner city is through banks' investments in venture capital firms, which, in turn, take equity positions in inner-city businesses. Wells Fargo recently pledged $2.5 million to a venture capital fund being set up by the FAME Business Resource Center. The Los Angeles Community Development Bank is also planning a venture capital operation that would be partially funded by bank grants.

Besides working to attract equity investments, inner-city advocates are focusing on teaching people how to qualify for funding.

"We have to go through 15 to 20 applicants before we can find one that can pull together tax records going back three years (a typical prerequisite for a bank loan). Most inner-city small businesses don't even know what a business projection is," said Smith.

The situation has led to efforts by several agencies and individuals to find a solution. One of the highest-profile of these took place last January, when Greenspan toured South Central and called on both banks and other lenders to make more of a financial commitment to the inner city.

U.S. Rep. Maxine Waters, D-Los Angeles, arranged Greenspan's tour as part of a South Central L.A. forum she orchestrated to call attention to the inner city's lack of access to capital. Participating in the half-day event, besides Greenspan, were the nation's top banking regulators, California's leading banking executives and a host of community activists.

Still, little in the way of concrete solutions emerged. So inner-city advocates are wading in to teach people how to help themselves by learning the rules and doing what's required to obtain funding.

"There is more money available, but lenders are still lenders, so (the borrower) has to provide a good plan to show they can repay the loan," said Norecross of the South Central Small Business Development Center. "If a businessman has a great idea but no tax returns or a business projection, he is still not going to get the money."

But not all inner-city business owners suffer from spotty track records; in fact, some are downright spotless. So some banks have decided to start basing their business-loan decisions on the personal creditworthiness of the business owner rather than that of the company.

"In the last five years banks have realized that small businesses react very much like consumers." said Donald Mullane, chairman of Bank of America's Community Development Bank Group. 'Therefore we often use the same standard for lending as we do for consumers."

He said that a growing number of small business loans of under $100,000 are being based on credit checks and a review of the borrower's personal financial history rather than on his company's financial statements.

What's needed to facilitate the flow of capital - both debt and equity - into the inner city is an increase in banks' physical presence in those neighborhoods, say inner-city advocates.

"If you don't have a bank branch in your neighborhood, it is unlikely you will have a relationship with a bank manager," said John Bryant, founder of the non-profit investment banking organization Operation HOPE.

The lack of branches in lower-income neighborhoods has become even more acute following the wave of mergers and consolidation that has swept the L.A. banking community in recent years, he said.

There are also continuing claims that officials at mainstream banks are sometimes biased against lending to inner-city businesses due to lingering negative images generated during the 1992 riots.

"There is a negative perception of South Central," said Smith of the FAME Business Resource Center. "No doubt there are problems with poverty and crime, but there are also middle-class neighborhoods. People tend of overlook that."