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

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 financial resources to achieve growth and success. This paper employs data from the Federal Reserve System’s 2016 Small Business Credit Survey to explore under what conditions credit market experiences differ for various racial and ethnic ownership groups of small employer firms. 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. Additionally, black-owned firms report being discouraged from applying for financing at significantly higher rates when compared with otherwise similar white-owned firms. 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, compared with white-owned firms. Finally, the authors find minority-owned firms are more likely to state they are dissatisfied with their lender.