Small Business Lending for Minorities and Women

The issue of small business lending for minorities and women isn’t really so small. In the not-too-distant past, minorities and women were not even afforded the right to own property, and yet today, these groups today represent a large percentage of all business owners in the U.S.—and their numbers continue to climb at a much faster pace than the rate for all businesses combined. Recent statistics show that minorities (non-whites) own over 11 million of the country’s businesses, while women of all races and ethnicities own nearly 12 million. Women- and minority-owned businesses play an essential role in our nation’s economy, serving as critical sources of employment for millions of Americans. Yet, despite these promising figures, minorities and women of all races and ethnicities continue to experience small-business lending challenges, which ultimately prevents them from contributing meaningfully to our economy.

Small-Business Lending Challenges

It’s hard enough for any small or young organization to obtain financing, but for minority- and women-owned businesses, the challenges are often much greater. To understand the small-business lending challenges faced by minorities and women, one must first understand what lenders look for when evaluating potential borrowers. Banks don’t just look at how well the business is doing (if it has already been launched). They also assess borrowers’ personal credit histories and credit scores, the value of their personal assets, and their net worth to determine their credit-worthiness. Lenders also consider whether applicants own their own homes and whether they’ve used too much of the credit available to them. Other factors that impact whether borrowers will obtain the financing they request can even include their current relationships with potential lenders, the location of their businesses, and the industries in which they work.

With all that in mind, let’s explore the reasons why women and minorities are underserved in the small-business lending arena.

1. Personal Credit Issues: Borrowing money for the purposes of starting, running, or growing a business is often more difficult than borrowing for other reasons, such as buying a home. Qualifying for a small-business loan requires you to have a strong credit, so issues such as past bankruptcies, foreclosures, or other personal delinquencies are red flags for all lenders, but especially banks and other sources of conventional loans. Statistically speaking, women and minorities are more likely to carry more debt and more past delinquencies, respectively. Minorities also tend to use credit less, which can lower their scores. Researchers don’t know—or at least can’t seem to agree on—why this is the case, but it nonetheless remains a fact that causes women and minority business owners to be denied loans.

Lower Net Worth

Banks generally favor applicants with more personal wealth, since individuals with fewer financial resources are not able to offer high-value collateral, such as a home or expensive car. Collateral becomes important in the event a borrower defaults on his or her loan, in which case the banks will seize and sell the borrower’s tangible assets to offset the loss. Because banks such high importance on collateral, individuals with lower net worth are often turned away. And again, statistically, women and minorities often have less money and fewer assets than their white male counterparts, often because of these groups have less access to generational wealth, fewer income and job opportunities.

Also, studies women and minorities are paid less than men at every education level and even for the same kind of work. This wage inequality means women and non-whites enter into entrepreneurship with less personal wealth than white males. White males are, consequentially, able to start their businesses not only with more personal wealth that they can invest in their businesses, but more access to capital from loans and lines of credit. Indeed, according to a recent article in Forbes, “Data recorded in 2016 found that white business owners start their businesses with an average of $106,720 in working capital compared to African-American-owned businesses, which are started with an average of just $35,205.”

Business Location and Type

Often the issue of small business lending for minorities and women is strictly geographical. Because minorities are statistically more likely to launch businesses in poor, urban areas, their organizations present less attractive value propositions to potential lenders. Banks generally prefer to lend money to organizations located in more affluent areas, since the potential customers living there have more access to liquid wealth, and research shows business location plays a critical role in loan approval.

Further, minorities and women are more likely to request funding for businesses in less profitable industry sectors than white males. Why? White males have more access to high-revenue, high-growth industries like construction, engineering, while minorities and women tend to choose to start businesses with narrower profit margins, such as retail and personal services.

Relationship Lending

There’s a reason many people turn to their own banks first when they want to apply for a business loan, and that’s because banks generally tend to respond to applicants with whom longstanding banking relationships more favorably. According to the SBA, “Black and Hispanic business owners report relatively shorter relationships with their primary financial institutions relative to non-minority owners.” This leaves minorities with fewer overall loan prospects than whites.
Bias and Its Role in Small-Business Lending Decisions for Minorities and Women

Unfortunately, racial and gender bias play a significant role in impacting small business lending for minorities and women as it does other small-business lending decisions. According to a 2014 article in the The Washington Post, “New academic research reveals that minority entrepreneurs are treated significantly differently (see: worse) than their white counterparts when seeking financing for a small business, even when all other variables — their credentials, their companies, even their clothes — are identical.”

The study goes on to describe how black and Hispanic business owners were treated differently than white business owners by the banks they visited. The minority business owners were provided much less information about loan terms, were offered less application help, were less frequently given a business card, and asked more probing questions about their personal finances.”

This issue underscores the small-business lending challenges minorities and women face, challenges that, taken together make many business owners in these groups feel as if they’re Sisyphus, pushing their proverbial rocks uphill in their too-often-fruitless attempts to obtain financing.

Overcoming Funding Barriers

Fortunately, there are many strategies minorities and women with small-business lending needs can employ to overcome these barriers. There are also alternative financing opportunities that can offer all small businesses, but minority- and women-owned businesses in particular, better access to capital at more favorable terms. Next week, we’ll explore these in the second installment of Small-Business Lending for Minorities and Women: Challenges and Opportunities. In the meantime, if you have questions about obtaining a small-business loan, or you’re ready to apply for financing, give us a call! As brokers, we have access to a wide array of flexible financing options that can be customized to meet the needs all kinds of small businesses—and all kinds of business owners!