Small black-owned businesses are significantly more likely to face financial challenges than white-owned firms and have a harder time obtaining credit even when compared to white business owners with similar performance profiles and credit risks, according to a new Federal Reserve Bank report.
The disparities in businesses’ ability to get credit persist even among firms with revenues topping $1 million. Black-owned businesses apply for credit at a rate that is 10 percentage points higher than white-owned firms, but their approval rates are 19 percentage points lower, the report said.
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That remains the case even though black-owned businesses generally seek lower amounts of financing than white-owned firms, the report said. Their lower likelihood of receiving financing tends to steer black business owners away from even applying.
Forty percent of black entrepreneurs who did not apply said they were discouraged by their chances, compared to 14 percent of whites and 21 percent of Hispanic and Asian business owners.
Of those approved for financing, only 40 percent of minority-owned firms received the full amount sought compared to 68 percent of white-owned firms — even among firms with comparably good credit scores.
The officials who worked on the report said they did not seek to identify the causes for the racial disparities in accessing credit, nor does the report make any policy recommendations.
Other research points to a mix of factors, from the credit risk of borrowers to racial bias on the part of lenders.
Large banks remain the most common lender regardless of race. But black- and Hispanic-owned businesses are more likely than their white counterparts to turn to Community Development Financial Institutions (CDFIs) and online lenders for financing, the report said.
President Trump, who recently proclaimed one week in October as “National Minority Enterprise Development Week,” has vowed to “create a business climate in which minority business enterprises can thrive and expand.”
But his budget would largely eliminate funding for the $258 million community banking program, a move critics say would be catastrophic for minority-owned and rural businesses. The CDFI Fund, managed by the Department of Treasury, provides government grants to private financial institutions that promote affordable lending for disadvantaged small businesses.
Small-business associations also oppose the GOP tax plan, which the president previously touted as a substantial tax cut for small businesses. Big business actually stand to gain the most from the tax plan.
Federal Reserve Bank officials declined to comment on how Trump’s tax plan would impact small minority-owned firms. The report’s intent, the officials said, is to provide an avenue for minority business owners to describe their experiences so policymakers and the wider public could understand the challenges and trends in credit access. They said the Federal Reserve Bank would be conducting additional analyses of minority-owned businesses in coming months.
Among the report’s other findings:
More white-owned firms reported being profitable than minority-owned firms, with the gap widest between white- and black-owned firms. While 57 percent of white-owned businesses were profitable in 2016, only 42 percent of black businesses posted profits. Minority-owned firms tend to be newer and smaller in revenue size.
Minority businesses also tend to be concentrated in specific types of industries, whereas white-owned businesses are more evenly distributed across several sectors. Black businesses are concentrated in health care and education. Asians focus in the professional services and real estate. And Hispanics are in nonmanufacturing goods production and associated services such as building trades and construction.