According to Washington Post’s J.D. Harrison, new academic research reveals that minority entrepreneurs are treated significantly worse than their white counterparts when seeking financing for a small business. The study asserts that these conclusions are true even when all other variables — their credentials, their companies, even their clothes — are identical.
Conducted by 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.
Once inside the bank, their experiences were not so similar. 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.
One question they weren’t asked as frequently? Their name.
An SBA Office of Advocacy report found that Hispanic and black entrepreneurs tend to start companies with less money than white entrepreneurs, and 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. Two years ago the Federal Reserve released data showing that minority business owners pay interest rates on average 32 percent higher than what their white counterparts pay.
Discrimination-whether unconscious or inherent-remains a significant problem in business lending as well as a barrier for economic growth. What should business lenders do to take this problem head-on?
Read this column next Wednesday morning for some suggestions of how to address this persistent, gnawing problem that holds back loan growth for banks and economic vitality for thousands of entrepreneurs.