Research shows minority businesses have lower loan approval rates compared to their white counterparts

Posted at 8:18 PM, Feb 09, 2021

Many small businesses across the country have been doing all they can to stay afloat after being hit hard with COVID-19 restrictions.

Owners applied for small business loans to help keep their doors open, but research published by the Federal Reserve Bank of New York revealed minority-owned business were less likely to receive loans than their white counterparts.

To benefit from the Paycheck Protection Program as well as other loans, businesses have had to turn to third party lenders or banks to apply. The applications vary from bank to bank, with some requiring information on race and gender.

Data from the branches that did require that information shows a disparity between white and minority businesses who received funding.

“If they don’t not have a long-standing relationship with a financial institution, that could increase the difficulty of establishing one,” said Dr. Robert Tennant, Professor of Finance and Economics A&M Central Texas.

Dr. Tennant says there are a number of different things that go into getting approved for a business loan. He believes the most important thing is forming a relationship with your bank or loan officer.

“So that way if you ever need to borrow money or you need any financial services, you're not just an application. You're an individual that they have an establish relationship with," Dr. Tennant said.

The professor advises having a third party look at the loan application before submitting to ensure you have all the required paperwork. However, there are some people who get denied.

“I think that there is a huge disparity because racism is real,” said Luvina Sabree, owner of So Natural Catering.

So Natural Catering

Crossing her T’s and dotting her I's, Sabree says she’s done everything right yet was denied the Economic Injury Disaster Loan, forcing her to choose between her business and her family.

“For what unknown reason I don’t know. I just know that it’s having a negative impact on our community and our businesses. Right now, today in February 2021, I’m still waiting. I had to choose who did I want to feed, the family or the customers, and of course I chose my family,” Sabree said.

Nationally the number of active small businesses dropped by 22% between February and April of 2020, which is the largest recorded drop on record, according to the Federal Reserve Bank of NY. They report 44% of Black businesses became inactive during the peak of the pandemic. That’s more than double the 17% of white businesses that went belly-up during the same time.

There are a lot of factors that play into these statistics. One of them is the lack of approval for loans.

“We have good credit. We don’t have any problems paying our bills, we’ve shown that we don’t have any problems paying our bills. It hurts to see that other people are getting loans and we’re not,” Sabree said.

Sabree says she had been able to receive grants in the past, but when applying for loans with the same information used for the grants, she was told there was a discrepancy with her paperwork.

With the help of the Innovation Black Chamber of Commerce and support from the community, she has been able to stay afloat.

The Federal Reserve Bank of New York also analyzed the geographic distribution of PPP loans and discovered the aid has not reached many of the hardest hit areas. This data also correlates with areas that have a high concentration of minority businesses.