WASHINGTON – It’s not easy these days to get a small-business loan — and it’s even harder depending on your race, according to new academic research. An article by J.D. Harrison in the Washington Post describes the new study revealing that minority entrepreneurs are treated significantly differently than their white counterparts when seeking financing for a small business, even when all other are identical.
Conducted by business school professors at Utah State University, Brigham Young University and Rutgers University, the study featured nine businessmen — three white, three black and three Hispanic. Similar in size and stature, donning the same outfits, and armed with similar education levels and financial profiles, they visited numerous banks seeking a roughly $60,000 loan to expand the very same business.
The Hispanic and black business owners were provided far less information about loan terms, offered less application help by loan officers, less frequently handed a business card, and asked more questions about their personal finances.
“If you are white and set out to get financing for an entrepreneurial venture, it might be a tough journey,” Glenn Christensen, a marketing professor at BYU and one of the study’s authors, stated in a report released by the university. “But, generally speaking, you would experience fewer obstacles and find more help along the way than if you came from an African-American or Hispanic background.”
In a subsequent part of the study, researchers interviewed several dozen small business owners of different races to glean their perceptions of the loan process. Most owners considered it an odyssey. However, white owners framed their journey as being “on level ground,” while black and Hispanic owners were more likely to describe it as “uphill.
The study builds on existing evidence that minority business owners have a more difficult time securing funding for a business venture than white entrepreneurs. A report last year by the Small Business Administration’s Office of Advocacy, found that Hispanic and black entrepreneurs tend to start their companies with less money than white entrepreneurs, and they rely more heavily on their personal wealth than on outside lenders or investors.
Meanwhile, when they do seek bank financing, they are less likely to be approved than whites, even when controlling for factors like credit history and business type, the study found.
If they are approved, the differences don’t end there. The Federal Reserve two years ago released data showing that minority business owners pay interest rates on average 32 percent higher than what their white counterparts pay. Discrimination in the small business lending arena bears consequences not merely for the entrepreneurs seeking capital, but for the broader economy, too.
Minority business ownership rates have been rising steadily over the past decade, with some predicting that minority business owners will no longer be in the minority a decade from now. Another recent report, this one by BizBuySell.com, showed that the make-up of buyers of small businesses is increasingly diverse, with rapidly more minority entrepreneurs buying small companies from retiring baby boomers.