Chapter 9 – Minorities and Debt Financing
When it comes to minorities and debt financing, the numbers can be staggering. The approval rates for business owners are as follows (according to reseach commissioned by the SBA):
|Black / Hispanic||28% Approval|
|All Firms||61% Approval|
When minorities are at such a disadvantage, when getting approval on debt financing, it deters minority entrepreneurs from even applying. If they don’t apply when they need money, their businesses could fail. This data suggests that the system is set up to make it easier for white-owned businesses to succeed than black or Hispanic-owned businesses.
NOTE: The one thing not mentioned about this data is the creditworthiness of each applicants. Are they comparing business owners in the same credit tiers? It’s uncertain and private research can be attached with an agenda. So please take these statistics as individual, not general.
When it comes to credit cards, the SBA research found that white-owned businesses use credit cards the least, while Islanders used them the most. The table below represents the percentage of businesses that use credit card financing, based on their race.
Another thing we don’t know about the research is what types of businesses are being studied and if they can pay for things without a credit card or not. Small businesses may rely more on credit cards than a larger business. For the sake of relating it to minorities, it would appear that minorities rely on credit card financing more than white-owned company.
What I’m not denying is that there is a bias that exists when it comes to minority businesses and applying for loans. Each minority owned business that is denied a bank loan must rely on other sources of cash to pay for business expenses. In the aforementioned example, this alternate source is a credit card. The lower approval rate of bank loans for minorities may have a correlation with the fact that minority owned businesses rely on credit cards for more purchases than white owned businesses do.
There are banks out there that specialize in minority business loans, such as Wells Fargo, and Accion USA. It’s great to know that there are two banks willing to finance minority owned businesses, but once you have most minority owned businesses applying at the same two banks, it may still be difficult to get approved.
Rogers, Steven. Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur – Third Edition. McGraw Hill, 2014.