Fed study reveals racial disparities in small-business lending

Though banks are the most broad-reaching lending channel for small businesses, many business owners do not seek funding from banks, according to a survey conducted by the Federal Reserve. In fact, less than half of small firms have obtained funds from a bank in the last five years. The most common source of funding for firms overall was personal savings or funds from friends or family.

Among firms that did obtain external financing — outside of their family and friend networks — banks were the most common channel (44 percent), followed by online lenders (2 percent) and credit unions (6 percent).

The use of bank financing varies significantly when one factors in the race and/or ethnicity of the business owner, the survey found. Most Black-owned firms lack strong banking relationships.

In the “2019 Small Business Credit Survey,” fewer than one in four Black-owned employers had a recent borrowing relationship with a bank. This number drops to one in 10 among Black-owned firms without employees. Compare that to one in four white-owned firms without employees.

Funding gaps are not due to differential rates in Black-owned firms applying for financing. Survey evidence indicates that Black-owned firms — both employer and nonemployer — apply for financing at equal or higher rates than white-owned firms but are denied at higher rates. Black business owners are also more likely than white owners to report being discouraged, or not applying for financing because they believe they will be turned down.

Perceiving a higher probability of funding success from online lenders, Black-owned employer and nonemployer firms are more likely to turn to online providers for funding.

While a company’s financial health plays an important role in its ability to access bank financing, racial gaps in banking relationships exist among the financially healthiest firms. When controlling for just those firms that are healthy or stable, the Fed reported differences between bank funding, based on the race of the business owner. Even among the firms that should not have major difficulties accessing credit from a bank, given their business performance and creditworthiness, Black-owned employers were much less likely to have obtained bank financing in the past five years, and instead relied most commonly on personal savings or financing from family and friends.