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Can Financing Institutions Discriminate Against Minority Business Owners?

by Business Cave
August 27, 2021
in Business
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Discriminate Against Minority Business Owners
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One of the most challenging jobs for any entrepreneur is convincing a financial institution to fund your business project. However, it’s even tougher for minority-owned businesses.

Minority-owned businesses in the US contribute over $400 billion annually in revenues and employ over 2 million people. Despite this fundamental contribution to the economy, accessing small business loans to increase their productivity has remained a challenge.

Recent data indicate that minority-owned businesses seeking financing are less likely to get their loan request approved by financing institutions compared with their non-minority counterparts. And when they get the approval, they’re financed for a lower loan amount and at a higher interest rate.

Such a skewed financial playing field creates a fear of rejection among non-minority businesses that leads to a lower appetite for loans.

Table of Contents

  • How Minority-Owned Businesses are Disadvantaged When Seeking Financing
  • The Process of Obtaining Financing From A Bank
  • Fintechs That Focus on Underserved Companies and Business Owners.
  • Conclusion

How Minority-Owned Businesses are Disadvantaged When Seeking Financing

There’s no doubt that minority-owned businesses have a huge impact on the US economy in terms of revenue, jobs, and taxes. They’re also experiencing unprecedented growth.

However, statistics on how they’re treated when they come to the market for financing paints a grim picture of near-blatant discrimination.

  • According to the Federal Reserves, businesses owned by Latinos and Blacks had less than half the chance non-minority businesses had in getting their loan applications fully approved. The rate of loans declined by applicants of smaller minority-owned firms was higher, almost thrice when compared with non-minority applicants.
  • Almost half of all applicants of minority-owned businesses had their loan applications rejected. This compares to a loan denial rate of one in every five applicants for non-minority firms.
  • On average, minority-owned businesses received less than half the loan amount advanced to non-minority firms. High sales minority firms received an average loan amount of $149,000 compared with $310,000 for non-minority business applicants.
  • According to Minority Business Development Agency (MBDA), minority-owned businesses have a higher likelihood not to apply for financing from financing institutions for fear of their requests for funding being denied. 33% of small minority firms did not apply for financing for fear of rejection as compared to 17% for white-owned businesses.
  • Minority-owned businesses registered delays in receiving loans for the Paycheck Protection Program.
  • Minority-owned businesses paid a higher average interest rate of 7.8% on loans compared with 6.4% for businesses owned by non-minorities.

The fact that the coronavirus pandemic had a greater impact on minorities made the matter even worse.

The Process of Obtaining Financing From A Bank

Obtaining small business loans from a bank can appear intimidating but it doesn’t have to be.

Here’s what you need to do to access bank financing.

  1. Establish your eligibility for a loan; check out your credit score, your business ability to repay, if you meet the bank’s minimum revenue threshold, and if you’ve got collateral. Some require you to have been in business for a minimum number of years, usually two.
  2. Determine the purpose of the loan; you may borrow to start, grow, or meet the day-to-day expenses of a business.
  3. Shop around for lenders who suit your peculiar borrowing needs
  4. Assemble all the necessary documentation and apply for the loan; Have your business plan, business, and personal financial statements, tax returns, business ownership documents, and other legal documents as the bank prescribes.

Fintechs That Focus on Underserved Companies and Business Owners.

To bridge the financial inclusion gap, several fintech companies have sprung up. Most of these firms offer small business loans digitally. This allows small businesses to get financing without needing collateral. They make it simple to create credit scores to assess the loan eligibility of a business.

Furthermore, these fintech companies often avail their services via easy-to-use mobile apps. These companies accommodate clients by circumventing the bottlenecks associated with traditional bank loans.

Examples of new fintech that promote financial inclusion: Camino Financial, Remitly, CNote, Chime, Gig Wage, Forward Financing, Kiva, Avant, Blend, Guaranteed Rate, Ripple Impact, and many more.

Conclusion

Studies have shown that minority-owned businesses are disadvantaged in accessing financing from financial institutions. Several minority-owned firms are reluctant to apply for bank financing due to high refusal rates. New fintech companies have stepped in to provide financial inclusion to minority-owned businesses. Find one that works for you.

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