Study Shows Small Businesses in Majority Minority Areas Can’t Get Business Finance
A recent study conducted by the non-profit research and policy organization – the Woodstock Institute – has shown that small businesses located in low-income majority minority areas are being failed by banks and are struggling to secure the working capital fund necessary to make their businesses succeed.
The recent study analyzed small business loan applications between 2008 and 2012 from the six-country Chicago region, with its data sources including the U.S. Department of Housing and Urban Development and the Federal Financial Institutions Examination Council, in addition to data obtained from the U.S. Census.
The data from regulated financial institutions has now been analyzed and clearly showed the disparate access to credit for small businesses in Cook, DuPage, Kane, Lake, McHenry and Will counties, with just two out of every seven businesses in these areas receiving small business loans. Forms of credit mainly included traditional bank loans and credit cards to establish credit lines lower than $1 million.
The study shows that in areas with in excess of 80% of residents from minority groups, access to the finance necessary to make local businesses expand and thrive is not being provided. Not only has the Great Recession hit these businesses harder than average companies, but they are also being hindered from being able to make a full recovery. Even when solid accounts can be provided, loan approvals are disproportionately low and the chance of obtaining no collateral loans is lower still.
Small businesses in low-income minority areas are attempting to secure the financial assistance they need from the banks, only to have their applications turned down, leaving small business owners unsure about how to get business finance to kick start recovery.
According to the data, businesses in low income areas in the 6-county Chicago region were being failed by the financial system and were over two thirds less likely to obtain finance compared to average businesses in the same areas. This equates to a loss of $817 million during the study period. If the average loan approvals in other regions were achieved, it would mean 34,800 more loans would have been approved, which equates to 725 extra loans per week.
The two key findings from the report were that the lower the average income in a region is, the lower the probability of small business loan applications being granted. In addition, it is clearly evident that the volume of residents from minority groups affects loan approvals. The more minority residents an area has, the lower the chance of lines of credit being established and small business loans approved.
In 1977, Congress passed the Community Reinvestment Act – CRA – the aim of which was to encourage banks and financial institutions to meet the finance needs of residents in the areas in which they operate, but the report shows that a large percentage of the population is being failed by this legislation. Even the introduction of the New Markets Tax Credit Program (NMTC Program) which was initiated in 2000 to increase investment in low-income communities does not appear to be helping all small businesses equally.
The report also highlighted that there was a lack of accurate data available in order to determine the true extent of the problem. While it is clear that small business loans are not being provided at anywhere near the level in predominantly white areas with lower minority populations, there was scant data available on failed applications. This makes it difficult to determine the actual need for finance.
In order to accurately assess whether these and other Acts are achieving what they set out to, it is first necessary to determine how many businesses need finance and from there it will be easier to establish how many are failing to get it.