May 24, 2005--Minority small business owners, especially African-American and Hispanic owners, have faced restrictions in getting access to credit and have greater possibilities of getting their loans denied compared to white male owners, according to a report released last week by the U.S. Small Business Administration's Office of Advocacy.
The report analyzes previously released data and classifies the lending in two categories: "relationship loans" (lines of credit) and "transaction loans" (commercial mortgages, motor vehicle loans, equipment loans, capital leases, and other loans) from two types of creditors: commercial banks and non-bank lenders.
The report concluded that preferential lending practices come into play in the granting of transaction loans to a significantly greater degree than the granting of relationship loans.
"The findings are surprising. You would think that there is a greater chance of discrimination from personal conduct but our research shows that transaction loans which involve an impersonal evaluation of the borrower carry a greater chance of denial than relationship loans," says Dr. Charles Ou, senior economist at the Office of Advocacy.
The report, which took its data from the 1998 National Survey of Small Business Finances, also asserted that lenders do not "artificially" restrict the credit-access of female and Asian firm owners.
"We also uncovered evidence from all outstanding loans and from outstanding bank transaction loans that African-American and Hispanic firm owners are less preferred borrowers. We found no evidence in the pattern of outstanding loans that female- or Asian-led firms were less preferred borrowers," said the report.
Despite these findings, in the last few years, a number of banks have started initiatives to focus on lending capital to minority- and women-owned small business owners. Bank of America's SBA lending to minorities, based on the number of loans, has grown nearly 40% since 2002, said a Bank of America spokesperson.
Wachovia has developed partnerships with the U.S. Hispanic Chamber of commerce and sponsorship of events such as the Black Enterprise Entrepreneurs Conference.
Wells Fargo, meanwhile, has set various lending goals specifically for minority communities. In 1998, Wells Fargo set a lending goal of $1 billion over 12 years for African-American business owners and has surpassed the $500 million point so far, while in 2001, it set a goal of $3 billion over 10 years for Asian business owners and has surpassed the $1 billion mark for it.
However, the SBA has said that these efforts are not yet being reflected in the data they have received and the banks themselves declined to break down their lending allocations by ethnicity and gender.
"It is always a possibility that the next set of data will reflect the changes but for now minority owners continue to be not able to present themselves as effective borrowers to the banks," said Dr. Ou.
Not everyone thinks that minorities and women are being discriminated against as the SBA report found. The National Federation of Independent Business (NFIB) declined to comment specifically on the report, but noted that its own surveys do not break down its members" access to capital on basis of race and ethnicity. The NFIB said that in the last few years small business owners have increasingly reported that access to capital is not an issue.
"Less than 6% of our members say that they have difficulty borrowing," said Bruce B. Phillips, senior research fellow at the NFIB.
NFIB conducts a monthly survey of its members, in which 30-35% of the members report on their borrowing practices. Its last annual survey conducted in 2004 ranked access to capital among the lowest issues facing small business owners today.