Why Minorities Have So Much Trouble Accessing Small Business Loans
By Jared Weitz
One of the many long-standing frustrations for minorities is that their vital role in the U.S. economy hasn't made it much easier for them to obtain the means for success. Between 2007 and 2017, minority-owned small businesses grew by 79%, about 10 times faster than the overall growth rate for U.S. small businesses during the same time frame. This puts the number of minority-owned businesses at approximately 11.1 million, which isn’t much of a surprise, considering the U.S. is expected to become a minority-majority country sometime between 2040 and 2050.
But, despite leading a significant portion of the nation's businesses, minority-owned firms are still having a much harder time accessing small business loans than their white counterparts. Minority-owned firms are much less likely to be approved for small business loans than white-owned firms. And, even if they do get approved, minority-owned firms are more likely to receive lower amounts and higher interest rates. According to findings from the U.S. Department of Commerce Minority Business Development Agency, these discrepancies have made minority business owners more likely to not apply for small business loans, usually out of fear of rejection.
Here are a few reasons why it’s particularly difficult for minority business owners to obtain small business funding:
1. Lower Net Worth
It seems that the most common reason minority-owned firms are rejected for small business loans is a lower net worth and/or lack of assets. Wealth levels for Latinos and African-Americans are reportedly 11 to 16 times lower than for whites. 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.
Banks are traditionally biased against applicants with less money to spare, partially because such applicants probably cannot offer collateral. The lower net worth of minority business owners suggests that they are less likely to own homes or other expensive assets the bank can sell if the applicant cannot pay off the debt. A lack of collateral or higher net worth often makes the bank so worried about being paid back that it is only willing to distribute small business loans that must be paid back as quickly as possible and are therefore insufficient for fostering significant growth.
2. Not The Most Optimal Location
Another major factor in the approval rating of small business loans for minorities is the location of the business in question. A great deal of minority-owned businesses are located in poorer, urbanized communities. Research from the Small Business Administration suggests that the location of a business plays a bigger role in the approval of a loan than the ethnicity of the business owner. Poorer communities need small businesses to bolster their economies, but big banks do not typically craft their business funding programs with long-term goals in mind.
3. Poor Or Little Credit History
The average minority small business owner has a credit score of about 707 -- 15 points lower than the average small business owner in the U.S. A nearly perfect credit score is basically mandatory for the most advantageous bank loans, even though there are numerous plausible explanations as to why an otherwise responsible and dedicated business owner would have poor or very little credit history. Still, credit score is arguably just as important as the business’s performance record when it comes to securing a bank loan.
Thankfully in times like this, private funding companies have gained traction by mining data and looking not only at credit but also looking at time in business, industry, location, cash flow, both daily and monthly ending bank balances in the business accounts, number of staff, time left on lease, etc. By looking at more than just credit, these models have allowed minority business owners to access capital.
It’s clear that banks might not be the best option for minority-owned businesses looking for substantial funding. Fortunately, the business lending industry has evolved dramatically over the past decade or so, and small business loans are no longer strictly limited to wealthy white men with flawless credit.
Several alternative business financing companies, for example, do not discriminate based on credit history, net worth or the business’s size. Most of their loans are 100% unsecured, meaning they do not require collateral or a personal guarantee. They lend to virtually every industry, including those that are stereotyped as risky, like retail or hospitality or smaller businesses like laundromats or convenience stores.
Some alternative lenders even offer programs that are tailored for businesses with less cash on hand and lack the stringent, non-negotiable guidelines of traditional bank loans. These funding companies have allowed business owners to build up their track record and help to fix their perceived problems so that they may one day qualify for the traditional financing they desire.
Two Businesses, One Goal
While almost all alternative business lenders can boast speedy approvals and loose qualifications, only a few can offer what is arguably the biggest advantage of working with these companies: small business loans that put the borrower, not the lender, first.
Bank loans appear to have been designed with the intent to draw a profit, whereas certain alternative business lenders are more focused on creating loans that are easy to pay off and capable of covering crucial investments. They are aware that their success depends on the success of their clients, so they focus on providing the tools to help them grow over time. Minority business owners would be wise to explore this option if they’ve been rejected by banks and don’t feel like endangering the health of their businesses with loans that might do more harm than good.
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