(This post originally appeared on The Guardian)
Want to improve your relationship with your banker? The answer’s easy: just move your business to a nicer part of town. Unfortunately, that’s the very real problem faced by many small businesses around the country who are located in lower-income or minority areas.
This conclusion was reached in a recent study by the Woodstock Institute, a not-for-profit research and policy organization that specializes in fair lending, wealth creation and financial systems reform. Researchers there studied small businesses in lower-income areas and communities of color in various parts of Illinois and compared them to their counterparts in higher-income and predominantly white areas.
So guess what they found? Businesses in the lower and moderate income areas received – surprise – a smaller share of bank loans than businesses in the higher-income areas. The same went for small businesses in areas with majority non-white residents.
The impact on these small businesses is significant. Many are forced to become their own banks or forced to go to online or “payday” lenders that charge outrageously high interest rates because they are unable to obtain the capital they need from traditional banks to grow their businesses.
“I’m not really able to go full throttle like I would like to with my business because of the fact that I can’t get capital,” Jemiyah Beard, a small business owner in Champaign, Illinois told the Woodstock Institute. Beard cannot obtain a traditional bank loan so her new business, Mary’s Master Cleaning Service, can bid on contracts and hire formerly incarcerated people who need jobs. She’s certainly not alone. “I’ve been my own bank. No one should have to do that,” another business owner complained.
Is this straight-up racism? Simple economics? Ignorance? I’m sure all of these are factors. But the more important thing is to discuss how to fix this. And moving to a nicer part of town isn’t – and shouldn’t be – the answer.
There are some things that can be done. The institute’s recommendations include government investigations to identify the extent of potential racial discrimination and the role it’s playing in bank lending, as well as better training of loan officers.
“The fight for fair lending is far from over,” Dory Rand, the Woodstock Institute’s president, said in a press release. “Banks and policymakers should be proactive in reversing these trends so that it’s no longer the norm that whiter and wealthier neighborhoods receive a disproportionate share of small business loans.”
Agreed. But this problem isn’t going to be solved overnight. It’s an unfair playing field and that means that business owners will need to fight harder. Given the facts from the institute’s study it’s important for those looking for financing to be ready to confront potential prejudices. And the best way to do this is to keep solid books, build cash, prove without a doubt that debt obligations can be met, surround yourself with reputable advisers and have a great business plan. This is no guarantee of getting a loan, but will help improve the odds. And these business owners need any help they can get.