The recession struck hard and for many small business owners, recovery is proving to be an extremely long process that is being hindered by a lack of available finance. Without funding it is all but impossible to stimulate growth and take advantage of new opportunities.
According to a recent report in the Wall Street Journal, it appears that some ethnic groups are finding it harder than others to secure finance, with SBA small business loans failing to reach African-American entrepreneurs.
Before the recession struck, African American-owned small businesses received a total of 8.2% of all small business loans issued through the SBA. According to The Journal report, the figure now stands at 1.7% of the total number of small business loans issued, yet African Americans account for 13% of the population and own approximately 7% of small businesses in America.
The problem is not restricted to loan amounts, as the total volume of SBA small business loans issued to African Americans was only 2.3%, representing a reduction of over 11% compared to pre-recession levels in 2008. The problem is highlighted further still by the figures for small business loans issued to other ethnic groups.
In 2009, Hispanics accounted for 4.7% of SBA-small business loans, while today the rate is largely unchanged at 4.5%. Asian owned businesses have fared the best with lending levels now at high as in 2007. The recession hit all three ethnic groups to a similar degree, with lending to Asian-run businesses bouncing back the quickest with a steady increase in SBA loan approvals since 2009. Lending to Hispanic-run businesses has remained constant since 2009, while small business financing for African American businesses continued to fall until 2013, and is now only seeing a slight recovery.
The cause is reported to be due to a number of factors. One of problems appears to be lenders preferring to issue larger loans which provide greater profit, rather than issuing numerous small loans to businesses which increase risk. The majority of loan applications by African-Americans are for less than $150,000 – considerably lower than the current $426,796 average – mainly due to the fact that black-owned businesses tend to be smaller.
Also many African Americans were very badly hit badly by the recession with the majority of wealth in property. The Journal reports a lower net financial worth of African Americans compared to other ethnic groups, lower credit scores, few assets and negative equity on property making them less attractive to traditional lenders. Unfortunately, many of the lenders previously relied upon by black small business owners have all but stopped providing finance due to far stricter lending criteria now in operation.
With African-American businesses falling through the net and failing to secure SBA loans, many are choosing alternative vendor financing loans to secure finance. Alternative lending institutions assess clients’ eligibility using non-traditional means with less reliance placed on credit score, resulting in higher approval rates and faster issuing of loans.
While there are touch times ahead, it is hoped that the SBA does more to ensure that all ethnic groups benefit from the SBA loan scheme. In the meantime, financing heavy equipment, gas station and commercial truck financing, merchant cash advances and unsecured loans are available from alternative lenders.