Harder for black businesses to obtain credit, Fed finds

Posted: November 9, 2017 at 2:07 a.m.

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 with white business owners with similar performance profiles and credit risks, according to a new Federal Reserve Bank report.

The report, released Wednesday by Fed banks in Atlanta and Cleveland, is the first to focus on minority-owned firms, using results from the 2016 Small Business Credit Survey.

The disparities in the ability of businesses to get credit persist even among firms with revenue 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.

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 with 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 with 68 percent of white-owned firms -- even among firms with comparably good credit scores.

Black business owners who don't get financing are the most likely to tap into their personal funds to make up the gap, even though they tend to have lower personal wealth than white business owners.

Federal Reserve Bank 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 Donald 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 Treasury Department, 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 businesses actually stand to gain the most from the tax plan.

Federal Reserve Bank officials declined to comment on how Trump's tax plan would affect small minority-owned firms. The report's intent, the officials said, is to provide an avenue for minority-group business owners to describe their experiences so policymakers and the wider public could understand the challenges and trends in credit access.

The report also found that 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.

Business on 11/09/2017