The Big Idea
In what might be termed the “mainstream” market of the early 2000s, a number of financial services firms were in competition for the business of small-and medium-size enterprises. Clients tended to belong to the same local civic, business or social groups as their loan officers. In a concept known by scholars as racial and ethnic matching, the loan officers and clients were generally white, middle-aged and male. This “traditional” market had relatively few asymmetries, as all parties shared similar educational and professional backgrounds and overlapping social networks.
In what I will term the “developing” portion of the market — immigrants, ethnic minorities and women — there was greater uncertainty. While these groups were clearly engaging in entrepreneurial pursuits, uncertainty about their market potential arose from the circumscribed, confined networks of loan officers. They knew fewer of this burgeoning class of entrepreneurs personally, and knew little about the markets they served.
At issue was the fact that, if left unaddressed, the cultural and ethnic mismatch between the lending professionals and the potential lending clients in highly diverse communities like Los Angeles would contribute to a loss of prospective revenue for Wells Fargo, which had an interest in lending among the city’s growing and highly diverse immigrant and ethnic enclaves.
In the summer of 2000, Albert Gomez was preparing to recommend approval of a $4.25 million construction loan to potential clients, Raphael and Minerva Salinas, to build a new, state-of-the-art tostada- and tortilla-processing facility, which would upgrade their business manufacturing capabilities in response to a sizable unmet demand for their products. Gomez had gone to great lengths to cultivate a trusting relationship with the Salinases over the previous years, and he now had to overcome a number of issues to make them “loan ready” in the view of his bank’s loan review committee.
Unlike others within Wells Fargo, Gomez had no doubts about the family’s ability to build the business and service the debt. Gomez spoke about the specifics of the Salinases’ loan request: “The amount of the request, $4.25 million, was not extravagant given the business’ recent annual revenues of approximately $5.1 million.” But he did share concerns about some of the loan’s irregularities.
Hesitance stemmed from a number of factors, beginning with cultural differences. He explained that “many [Latino] applicants might have limited experience with traditional banks. In their countries of origin, many carried a legacy of mistrust toward government institutions and even large financial institutions controlled by the government.
“It would follow,” Gomez continued, “that when these families immigrated to the States, they were extremely reluctant to open bank accounts. It is an ingrained issue of mistrust that clouds the value a banking relationship could provide. The end result is that many recent immigrants build up very little positive credit history.”
Still another issue was in the Salinases’ accounting. The practice of tax minimization was very common among small business owners, Latino or otherwise, and it was heightened to some degree by suspicions of the government. Over time, reporting limited or no income to the IRS meant that these businesses would not be deemed creditworthy when they pursued loans from financial institutions. Like many, the Salinases had not realized that implication. The Salinases’ business had funded a lux lifestyle that was dramatically different from their hardscrabble beginnings. Gomez knew that their visible wealth was evidence of the business’s actual, rather than reported, cash flow — and an indicator of possible tax evasion, raising the risk of potential legal action by the IRS.
Gomez also touched on the Salinases’ penchant for cosigning for relatives. “This, again,” he argued, “is a cultural trait, a form of personal authenticity. Over the years,” Gomez sadly admitted, “I’ve seen multiple examples of tarnished, even wrecked credit histories from individuals practicing loyalty to family and community.”
As we talked with Gomez, we learned about the process of “building” the Salinases into a more palatable loan applicant. Gomez’s first priority had been to help them straighten out their accounting practices, retrospectively and going forward.
The Salinas family, with little awareness of credit and net income, tax issues, or audited financial statements, required approximately one year of intense consultation with Gomez before he was able to help qualify them for a commercial line of credit.
The Salinases agreed to hire professional accountants, who helped establish a strong financial foundation in the books of the business, and also agreed to hire corporate attorneys to create a more sophisticated corporate structure that would limit the family’s liabilities and risks should the company go bankrupt or be sued for past tax indiscretions.
After a second year of close collaboration, the Salinases were able to apply and qualify for a line of credit, which they used to meet working capital requirements, fund a small capital expansion of their existing plant, and purchase almost all the real estate on the block where they were located. Given the growing demand for their products and their progress in rationalizing their business accounting practices, Raphael began scouting for real estate to enable the company to expand operations from five to 17 production lines and, in turn, more than triple revenues. Beyond that, the expansion would help secure additional clients, such as mainstream supermarket chains whose recent demands exceeded the business’s operating capacity.
A third year passed before Raphael found a suitable property. Now, with a specific location in mind, he asked about a construction loan. Without delinquencies or other issues, Gomez was prepared to support the loan request and submit it to his superiors.
Wells Fargo ultimately granted the loan, and from all indications, the Salinas family had no problem servicing their debt. They have continued to build their business as well as their range of the bank’s financial services products.
The Wells Fargo lending story is one of a financial institution attempting to expand its market, recognizing the reality of ethnically and racially bound social networks. It is also the story of the Salinases confronting the financing challenges of immigrant entrepreneurs.
Gomez possessed the underlying cultural knowledge that allowed him to see what others would miss and to recognize economic value where others could not. He had what a business scholar would term “tacit knowledge” that allowed him to assess the relevant liabilities and effectively turn uncertainty into calculated and even prudent risk. He also perfectly exemplified what is known as “character-based lending,” in which lenders make decisions using information gleaned from their personal relationships with potential clients, rather than from purely algorithmic, arms-length, quantitative assessments.
The story of Wells Fargo’s efforts in South Los Angeles offers a lesson on the promise of enterprising units. The endeavors of smaller, entrepreneurial players have a David-versus-Goliath appeal. However, what if Goliath was also working to innovate in community development? New approaches to immigrant markets among national firms like Wells Fargo have the potential of diffusing to a momentous scale.
Excerpted from Emerging Domestic Markets by Gregory Fairchild Copyright (c) 2020 Columbia University Press. Used by arrangement with the Publisher. All rights reserved.