(This post originally appeared on The Guardian)
According to data recently made available from the US Federal Reserve, more than half of companies that have black owners were turned down for loans, a rate twice as high as white business owners. The report found that while black-owned firms were the most likely to have applied for bank financing, less than 47% of these applications were fully funded. Even when black business owners get approved, their rate of failure to receive full financing is the highest among all categories by more than 10%.
The bad news doesn’t end there. The report also found that black-owned firms were the most likely group to have applied for a credit card and experienced the highest turn-down rate. For those that applied for bank financing, a smaller share of black-owned and Hispanic-owned businesses received loans of $100,000 or more as compared to other ethnic groups.
Is this discrimination?
Absolutely. Galen Gondolfi, a senior loan counselor at a not-for-profit that helps small-business owners build credit, recently told NPR’s St Louis Public Radio: “St Louis’s seemingly provincial lending struggles not only with entrepreneurs that don’t historically ‘look like them’, but [also] the types of businesses that are unique to these populations.”
But discrimination isn’t the only reason. There are other factors that give bankers pause when considering a loan to a black business owner.
Dell Gines, a senior community development adviser with the Federal Reserve Bank of Kansas City believes that the lack of intergenerational wealth and “insufficient knowledge” about the banking system are also significant obstacles. “Let’s say, hypothetically, there’s no discrimination in the banking industry, we would still probably have disparate outcomes because the system itself hasn’t prepared us to utilize the banking system effectively,” said Gines, who is black. “Then, when you layer on the levels of discrimination that research has showed … when you combine those two, that’s why you see these kind of disparate outcomes.”
Confidence, or the lack of, is playing a role, too. The Federal Reserve report found that one in four black-owned firms reported forgoing applying for credit, with 56% of those firms stating that they did not want to accrue debt and 60% indicating they felt like they would be turned down if they applied.
There’s no question that, even as the share of black-owned businesses has risen over the past decade, it’s still more challenging for those businesses to get financing. So what’s the answer? There’s no sure-fire solution. But more education and assistance would certainly help a lot.
Firms such as the Center for Acceleration of African American Business – which has assisted more than 700 businesses since 2006 – are among the groups helping black entrepreneurs make gains through educational programs and counselling. Many local communities have not-for-profit groups that help black business owners better understand finances and apply for loans. The Small Business Administration provides resources for minority entrepreneurs as do national groups such as the Minority Business Development Agency, Accion and the National Minority Supplier Development Council Business Consortium Fund. Both NerdWallet and Fundera provide excellent lists of lenders that provide financing for minority business owners.
But the data doesn’t lie. It’s harder to get a loan if you’re a minority, particularly if you’re a black-owned business. Racism and discrimination are a fact, even if some people don’t want to admit it and unfortunately attitudes aren’t going to change overnight. The best way to overcome these challenges is through education and the good news is that there are resources available to help these business owners get that education … and much-needed money for their companies.