Credit Disparities for Small Businesses

You’ve probably heard a thousand times that “small businesses are the backbone of the economy.” It’s become a stump speech staple for politicians courting the votes of small-town America and pro-business groups alike. Their point is certainly not without merit. In fact, 58.9 million employees, or 47.5% of all Americans work for small businesses. Those same companies comprise 99.9% of all U.S. businesses. These mom-and-pop shops and local favorites are vital to our community and economic health. And yet, we see massive credit disparities demanding our attention.

There’s almost no facet of small businesses without inequity. We’ve examined such trends on the blog before, ranging from pandemic-related financial assistance to ownership. We have yet to discuss lending habits, however.

Recent studies almost singularly focus on the Paycheck Protection Program, a lifeline for small businesses throughout COVID-19. We can’t necessarily blame researchers for doing so. After all, the pandemic dominated our lives for the last two years. But we’d prefer to highlight some more systemic, pre-pandemic trends in small business support practices.

According to a 2019 report by the Federal Reserve Bank of New York, 76% and 70% of Black and Hispanic-owned businesses reported financial challenges, respectively. For white small business owners, that figure was only 59%. To remedy such inequality (which is another discussion in and of itself), small businesses sought small business loans from various sources. Unfortunately, such sources use the business owner’s private credit rating and individual wealth as the main determinants of loan worthiness.

There are huge gaps in those metrics for white and nonwhite groups. In fact, as of 2016, the median Black family owns $3,500 in family wealth while the median white family owns $147,000. The median Hispanic family fares slightly better, holding $6,500 in wealth. Since 1983, white families’ wealth has skyrocketed from around $110,000. Black and Brown communities have not enjoyed the same benefits to our trickle-down economy.

So, when Black and Hispanic business owners approach lending institutions to fund their small businesses, they’re starting with a hand tied behind their back. Only 17% of businesses belonging to the former group reported sufficient business funding while 25% of the latter group did so. In total, 39% of small businesses reported sufficient funding in 2019, lending credence to the idea that white small businesses have an easier time securing private credit.

These trends hold true in the negative as well. When it comes to applying for financing, 36% of white-owned small business reported receiving none despite trying. Conversely, 54% of Black-owned business reported the same, and 45% of Hispanic-owned did so.

Across all means of securing funding for small business ventures, white owners have it easier. Of course, this goes back to clear disparities in wealth generation over the last four decades. It even goes back further than that to redlining, wherein Black families were denied fair home loans by large banks. I suppose when the deck is stacked against minority-owned small businesses this badly, we shouldn’t be surprised when they can’t secure sufficient funds to operate.

There are, however, useful solutions out there.

Despite its failures, the Paycheck Protection Program can serve as a blueprint for helping Black and Brown small businesses. Adding qualifiers and conditions based on previously discriminated against groups can help them secure funding not available to white small business owners. We’d rather see more systemic changes in how our government deals with its ugly past, but this is a good first step. Not to mention, this will help minority families create intergenerational wealth and better overall credit.

This Small Business Week let’s make sure these concerns aren’t lost in the weeds of pro-business campaigns. Then, let’s hold our elected officials accountable to their promise of helping all small businesses, not just some of them.

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