Study: Minority businesses use online lenders, personal funds to shore up operations
Disparities in access to credit and capital for minority-owned businesses have led to lower levels of wealth, income and poor credit histories among black business owners, respondents said. Wiersch.
Due to credit barriers, 74% of black-owned businesses used personal funds to meet financial shortfalls, compared to 61% of white-owned businesses.
“It is important to recognize that some of these issues raised by this particular investigation and report are not new,” Wiersch said. “We’ve seen in the past where businesses owned by people of color, and especially businesses owned by black people, are more likely to use personal funds in response to financial challenges.”
Business owners of color were more than twice as likely to borrow funds from friends and family, at 38%, compared to 18% for white business owners, and 25% said working a second job or overtime outside the company for financial assistance, compared to 13% of white owners saying the same.
Additionally, businesses owned by people of color were twice as likely to forgo using traditional financial service providers during the pandemic, and even minority-owned businesses with good credit were less likely. to have their financial needs met.
Black business owners were three times more likely to seek credit or capital through online financial services or fintech – financial companies that use technology to automate financial services. These companies tend to be faster alternatives to traditional lenders, but they can have higher rates and more onerous repayment requirements.
“We’ve found that with our minority sole proprietorships, a lot of them don’t have a bank,” said Michael Obi, director of UBIZ Venture Capital, which provides growth capital to small businesses owned by minorities through the Urban League of Greater Cleveland. .
“Then came these easy plug-and-play credit card companies or PayPal, which have a mechanism to borrow money based on credit card receipts and spend it immediately. Now these places have become their bank because that’s who they have a transactional relationship with”.
Obi said the rise in the use of fintech, including companies like PayPal, Square and Kabbage, is a matter of familiarity for minority businesses, and it bucks a trend, based on a history of rejection, for some minority business owners not to apply for credit. at all.
“A study from years ago shows that 60% of black businesses that are turned down by a bank, nearly double the turndown rate of white-owned businesses, never go back there again,” he said. he declares.
There is some good news. According to the study, Black business owners were more likely to say they expected to see increases in revenue and employment over the next 12 months and “would seek future emergency assistance from the government”.
Obi thinks some of that optimism can be attributed to financial education by groups such as the Urban League. He said changes to some loan programs to accommodate small businesses “have started to move the needle” in getting more people approved for loans.
“It had a ripple effect,” he said. “I can see the number of black businesses getting loans has improved over time, it’s not where it should be, but I think it’s getting better.”