Report: Black firms face credit bias

Disparities revealed in findings by Federal Reserve Bank.

Small black-owned businesses are significantly more likely to face financial challenges than whiteowned 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 report, released Wednesday by the Atlanta and Cleveland feds, is the first to focus on minority-owned firms, using results from the 2016 Small Business Credit Survey.

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.

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.

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 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 provides government grants to private financial institutions that promote affordable lending for disadvantaged small businesses.