Mind the Gap: How Do Credit Market Experiences and Borrowing Patterns Differ for Minority-Owned Firms?
Mels de Zeeuw
Federal Reserve Bank of Atlanta
Community and Economic Development Department
Federal Reserve Bank of Cleveland
Supervision and Regulation Department
Discussion Paper 2018-3
Given the relationship between a small business’s access to financing and its outcomes, and given the growing share of minorities in the U.S. population, it is important that creditworthy firms and entrepreneurs, irrespective of race or ethnicity, are able to secure adequate financial resources to achieve growth and success. This paper employs data from the Federal Reserve System’s 2016 Small Business Credit Survey to explore under what conditions credit market experiences differ for various racial and ethnic ownership groups of small employer firms.
The authors find evidence for disparities in credit approval by the race or ethnicity of the business owner. Notably, black-owned firms are less likely to receive approval for financing. Additionally, black-owned firms report being discouraged from applying for financing at significantly higher rates when compared with otherwise similar white-owned firms. Also, Hispanic- and black-owned firms are more likely than white-owned firms to apply for financing at nonbank online lenders, though both groups do not appear to have a significantly different chance of being approved, compared with white-owned firms. Finally, the authors find minority-owned firms are more likely to state they are dissatisfied with their lender.
JEL classification: D22, G21, G23, J15
Key words: small business finance, minority-owned businesses, Small Business Credit Survey, small business, entrepreneurship
The authors would like to thank Ann Carpenter, Karen Leone de Nie, John Robertson, Mark Schweitzer, Ellie Terry, and Keith Wardrip for their diligent feedback and suggestions. Any remaining errors are the sole responsibility of the authors. The views and conclusions expressed herein are those of the authors, and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.