Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
- Source: fedsmallbusiness.org
Treliant knows lending, fairness, and community development. If your firm needs assistance with small business fair lending analysis or community development strategies, Treliant can help.
In December 2019, the 12 Federal Reserve banks released “Small Business Credit Survey: Report on Minority-Owned Firms.” Based on the 2018 Small Business Credit Survey data, the report’s key findings included differences in firm growth and profitability among firms owned by demographic groups:
- Although minority-owned small businesses only account for approximately 18 percent of businesses with less than 500 employees, the number of minority-owned employer firms grew by 11 percent between 2014 and 2016, compared to just 1 percent growth in non minority-owned employer firms.
- A greater proportion of White-owned firms were profitable at the end of 2017 than Asian- or Black-owned businesses, and a larger share of White-owned firms than Black-owned firms reported revenue growth.
- Similarly, a larger share of White-owned firms (37 percent) than Black-owned firms (31 percent) reported an increase in the number of employees.
- Black-, Asian-, and Hispanic-owned firms were more likely than White-owned businesses to report financial challenges.
In addition, the survey revealed that financing options, credit-search patterns, and credit application outcomes differed between White- and Minority-owned firms:
- Minority-owned firms are more likely than White-owned firms to rely on business owner personal funds and personal credit scores.
- On average, White and Asian small business owners had higher personal credit scores than Black and Hispanic small business owners. Approximately 43 percent of White and 39 percent of Asian business owners reported personal credit scores above 760, while only 20 percent of Hispanic and 14 percent of Black business owners reported similar scores. Conversely, more Black (20 percent) and Hispanic (15 percent) small business owners than Asian (9 percent) and White (7 percent) small business owners reported personal scores below 620.
- Without considering creditworthiness, Black- and Hispanic-owned firms were less likely than White-owned firms to receive either no credit or less credit than requested. Conversely, White-owned businesses were more likely than Asian-, Black-, or Hispanic-owned businesses to receive all the credit requested. This result was consistent across bank and online lenders.
- Black- and Hispanic-owned firms were more likely than White-owned firms to seek higher-cost credit, such as merchant cash advances and factoring.
- Black- and Hispanic-owned firms were more likely than White-owned firms to seek credit from large banks or online lenders. White-owned firms were more likely than Black- or Hispanic-owned firms to seek credit from small banks.
- Black-owned firms were more likely than White- or Hispanic-owned firms to seek credit from credit unions or community development financial institutions (CDFI).
- White-owned firms are more likely than Black- or Hispanic-owned firms to be satisfied with their bank lenders. Conversely, White-owned firms are less likely than Black- or Hispanic-owned firms to be dissatisfied with their lender.
The survey results reveal both opportunities and risks for lenders. The differences in denial rates, receipt of less financing than requested, and use of higher-cost credit by minority-owned firms may reveal fair lending risk. Treliant encourages lenders to include small business credit in their fair lending compliance risk management systems and analyses.
However, the relatively greater success of CDFIs in reaching Black-owned businesses shows that partnering with CDFIs may be a successful strategy community development loans and investments that could also increase access to credit by Black-owned businesses.