According to a report by the US Federal Reserve, less than 47% of loan applications filed by African American business owners are approved. It was also found that more than 50% of companies owned by African Americans were actually rejected for business loans.
Although “black-owned firms” were more likely to seek financial help from banks, less than 47% of these applications were “fully funded”. Even more surprising, when black business owners did get approved for a business loan, the “rate of failure” to obtain financing in its full amount was the highest in all categories, exceeding 10%.
The rejection of bank business loans is only the beginning. Another dismal finding was that black-owned firms were most likely to apply for a credit card and experience the highest rejection rate.
Is Discrimination To Blame?
According to St. Louis-based, senior loan counselor, Galen Gandolfi, it is. And states why:
“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.”
Dell Gines, who is a senior community development adviser with the Federal Reserve bank in Kansas City, says that there is “insufficient knowledge” about how the banking system works.
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.
Then, when you layer on the levels of discrimination that research has shown… when you combine those two, that’s why you see these kind of disparate outcomes.“
A lack of confidence seems to be playing a major role in black-owned business owners seeking banks for financial assistance. The report conducted by the Federal Reserve revealed that one in four black-owned businesses indicated that they avoided applying for credit. Fifty-six percent of those businesses said they did not want to accumulate debt. About 60% believed that they would be rejected if they were to apply.
How This Disparity Is Being Addressed
Over the past decade, black-owned businesses have been rising. However, the growing prevalence has had little effect on getting the financing they desperately need. More education and more assistance is essential.
It is through educational programs and counseling that firms, such as The Center For Acceleration of African American Business, are helping small businesses in these minority groups make great strides. In fact, it has helped more than 700 businesses since 2006.
Local communities have stepped in and have created non-profit groups to educate black business owners about finances and applying for loans. The Small Business Administration also offers a wealth of resources for minority business owners. There are also national groups that offer assistance such as Minority Business Development Agency, Accion, and the National Minority Supplier Development Council Business Consortium Fund. NerdWallet and Fundera also provide a listing of lenders that specialize in lending to minority-owned businesses.
The Facts Are Clear
Although it is a difficult truth to swallow, the data simply does not lie. Obtaining a loan as a minority business owner is more difficult. It is especially so if you happen to be a black business owner.
The root causes seem to point to two things: discrimination and racism. The only way to counteract these issues is for these minority businesses to educate themselves as much as possible about acquiring loans and more importantly, seek those financial institutions and organizations that do champion the cause for the minority business owner.