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Mind the Gap: How Do Credit Market Experiences and Borrowing Patterns Differ for Minority-Owned Firms?

by Alicia Robb and Mels de Zeeuw, Federal Reserve Bank of Atlanta, and Brett Barkley, Federal Reserve Bank of Cleveland

This was co-published with the Federal Reserve Bank of Atlanta.

Primary Issue

Given the relationship between a small business's access to financing and its outcomes, and given the growing share of minorities in the U.S. population, it is important that creditworthy firms and entrepreneurs, irrespective of race or ethnicity, are able to secure adequate financing to achieve growth and success. Data from the Federal Reserve System's 2016 Small Business Credit Survey allow for a closer examination of the experiences of minority-owned small businesses in applying for and obtaining financing.

Key Findings

The authors find evidence for disparities in credit approval by the race or ethnicity of the business owner. Notably, black-owned firms are less likely to receive approval for financing when compared with otherwise similar white-owned firms. Additionally, black-owned firms feel discouraged from applying for financing at significantly higher rates. Also, Hispanic- and black-owned firms are more likely than white-owned firms to apply for financing at nonbank online lenders, though both groups do not appear to have a significantly different chance of being approved. Finally, the authors find minority-owned firms are more likely to be dissatisfied with their lender.

Takeaways for Practice

Greater knowledge of minority-owned firms' financing needs and disparities is crucial to understand and bolster the small business sector, an important component of the U.S. economy. The findings can inform policymakers and workforce and economic development practitioners who aim to boost small business formation and improve the broader economic well-being of minorities in the United States. Potential approaches to address some of the differences between white- and minority-owned businesses could include technical assistance, such as training in business management practices, or financial literacy programs aimed specifically at minority business owners. Programs that address language barriers for immigrant-owned businesses could also have an impact.

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