Small Business Loans For Black Owned Businesses – Powering the Future of Women Entrepreneurs: A Conversation with Cherie Blair CBE KC and Cherie Blair Foundation for Women CEO Helen McEachern
Small business owners have had a difficult time navigating through the Covid-19 pandemic across the United States. Black-owned business owners, in particular, have been hit especially hard by the pandemic and lockdowns. To begin with, many of them were operating on thin margins and had no safety net before the pandemic began.
Small Business Loans For Black Owned Businesses
MIAMI GARDENS, FLORIDA – James Robinson and his wife, Perlina Robinson, pose for a portrait at The … [+] Formalwear store on Blackout Day (July 7, 2020). They have owned the business in Miami Gardens, Florida for the past 22 years. Blackout Day supporters have vowed to spend money only on black-owned businesses to show the economic power of the black community. (Photo by Joe Raedle/Getty Images)
Black Business Owners Are Up 38% In U.s. From Pre Covid Levels
Many places hardest hit by the pandemic are reeling at the same time from the health crisis, business closures and job losses. Often these have been urban areas, and the effects of the pandemic on small businesses amid forced closures, modified reopenings and weakened demand are disproportionately affecting communities of color, according to a new report from Claire Kramer Mills, Ph.D., and Jessica Battisto of the New York Federal Reserve.
The study found that the number of active business owners fell 22% from February to April 2020, the biggest drop on record. The differences in closure rates between racial and ethnic groups are even more striking. According to the researchers, Black-owned businesses experienced drops of 41%, Latino-owned businesses fell 32%, and Asian-owned businesses fell 26%. In contrast, the number of white business owners whose businesses were active fell by just 17%.
Using data on Covid-19 cases, census data, Paycheck Protection Program (PPP) reports, and data on the financial health of small businesses from the Fed’s Small Business Credit Survey, the report found :
Black-owned businesses are more likely to be located in Covid-19 hotspots, while white-owned businesses are less likely to be in the hardest-hit areas.
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Loans provided through the Small Business Government Paycheck Protection Program, administered by the Treasury Department and the SBA, reached only 20% of eligible businesses in areas with the highest densities of owned businesses of blacks.
·Because African American-owned businesses had shaky cash positions, weaker banking relationships, and pre-existing funding gaps, they had little protection going into the crisis.
A broader analysis of US counties showed a geographic correlation between the density of black-owned businesses and the spread of Covid-19. This information can be useful when targeting stimulus packages for companies that have been hit the hardest by the pandemic.
The PPP distributed $521 billion to 5 million businesses with an average loan of $107,000. The SBA estimates that the program saved 50 million jobs overall. However, in the 30 counties considered particularly vulnerable to black-owned business closures, most counties saw only 15-20% of their total businesses receive PPP loans.
The Covid 19 Crisis Has Wiped Out Nearly Half Of Black Small Businesses
When the PPP program came to a halt on August 8 with more than $130 billion in funds available, the question became why didn’t black-owned businesses try to access the loans? They may have been reluctant to apply for a PPP loan due to uncertainty about the future, and nervous about being able to repay the loan if it was not “forgiven.”
There is also the possibility that companies that have been turned down for funding in the past were skeptical that they would succeed with the PPP. The Federal Reserve found that when the pandemic hit, black-owned businesses were less likely to have been in a strong financial position than white-owned businesses, since smaller percentages of black-owned businesses were operating at a profit and therefore had lower credit scores. Another undeniable fact is that many black-owned businesses lacked strong banking relationships.
“There are not many black bankers. It can be intimidating to go to a bank and ask for a loan,” said Gauntlett Eldemire, owner of a chain of coin-operated laundromats in the Cleveland area. “It’s scary to walk in and talk about your credit scores with a guy in a suit sitting behind a desk, especially if you’ve never gotten a loan before. Fear of rejection plays a role.”
Gauntlett Eldemire owns a chain of coin-operated laundromats in the Cleveland area. He says securing… [+] the first loan is the hardest, and it gets easier once a payment history is established.
Loan Matching With Kiva
The Fed’s 2019 Report on Small Business Credit Survey of Employer Firms found that fewer than 1 in 4 Black-owned employer firms have a recent lending relationship with a bank. This number drops to 1 in 10 among black non-employer businesses, compared to 1 in 4 white-owned non-employer businesses. Survey evidence also indicated that black-owned businesses apply for financing at rates equal to or higher than white-owned businesses, but are denied at higher rates, according to the Fed report.
The result is that black entrepreneurs are more likely than white business owners to refrain from applying for loans because they believe they will be turned down; about 37.9% of black-employer businesses reported being discouraged, compared to 12.7% of white-owned employer businesses.
Notably, African-American business owners perceive a higher likelihood of financing success from online lenders and are more likely to turn to online providers for financing. While Fintech providers were not initially authorized to lend PPP funds, many of them were granted the authority to process PPP loans, in part, to level the playing field for minorities to access PPP financing. However, after some delay in the process of getting these lenders up and running, it is likely that many black-owned businesses have failed on their first attempt to obtain PPP loans and have not benefited from authorization from online lenders.
Black-owned businesses, even the healthiest ones, are much less likely to have obtained bank financing in the last five years. Instead, they more often relied on personal savings and funding from family and friends. In fact, according to the Federal Reserve, 33% of businesses owned by healthy black employers have an existing banking relationship, compared to 54% of stable white employers. This seems to indicate that factors beyond the financial health of companies affect the ability to access conventional and affordable financing.
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The next round of Covid-19 relief needs to be more geographically targeted to focus on the hardest hit areas. Additionally, banks and other lenders must address racial disparities in lending and expand access to credit in communities of color. Online lending solutions, such as digital lending platforms and fintech companies, can be an important part of the solution to these problems by overcoming typical infrastructure limits that often unfairly prevent communities of color from getting the best benefits. financial opportunities.
But it cannot be only the private sector that pays attention to this lesson. Government stimulus, including the expected “PPP 2”, must ensure that minority business owners have access to capital. Otherwise, we stand to lose millions of small businesses along with the dreams of tens of thousands of non-white small business owners. The Equal Credit Opportunity Act prohibits discrimination based on the borrower’s race or color (among other protected classes). Lenders may not discourage you from applying for a business loan or take into account your race or color, or the race or color of people in the neighborhood where your business is located, when deciding whether to lend to you. They also may not give you less favorable loan terms for the same reasons.
One of the issues is the lack of transparency and how it affects enforcement, since commercial lenders are not required to provide information about the racial identity of their borrowers. This makes it difficult to identify the problem and enforce existing laws. The unconscious bias that drives the decision to lend and how a loan is structured is difficult to trace.
Perhaps the biggest problem is the overall racial wealth gap. This includes the legacy of red lines (denying mortgages to qualified black applicants and segregated neighborhoods), employment bias, underbanking in minority communities, barriers to education, and other discriminatory policies that have a multigenerational impact on wealth creation. Even if the laws have changed, the legacy remains.
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For example, black entrepreneurs are less likely to have the collateral typically required to secure a loan than their white peers, who have 11 to 16 times higher levels of wealth, according to the Minority Business Development Agency. USA). They also may not have as much family or personal wealth, a major source of start-up capital, to help them finance their business. Those living in unbanked communities may not have had the opportunity to build credit. Therefore, even when a financial institution applies its lending standards equally, black and other minority borrowers are often disproportionately burdened.
What is the Community Reinvestment Act (CRA) and how can it help me find a lender that serves my community?
The Community Reinvestment Act requires federal banking regulators to encourage financial institutions to serve the needs of the communities in which they reside, including low- and moderate-income neighborhoods. The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller
