What you’ll discover:
Isn’t it unlawful to discriminate in financing based on a borrower’s race?
What is the Community Reinvestment Act (CRA), and how may it assist me in locating a lender in my community?
How can I locate minority-owned lending institutions or those that specialize in assisting minority-owned businesses?
Is there assistance available from the Small Business Administration (SBA) for minority-owned businesses?
Celebrate Black History Month by obtaining the money your company needs.
Statistics from the United States Federal Reserve, published in the 2017 Report to Congress on the Availability of Credit to Small Companies, demonstrate that African American entrepreneurs and Black-owned enterprises are twice as likely as their white counterparts to be denied a business loan. This chills Black entrepreneurs who opt not to seek for financing, while making it very difficult for Black-owned firms to endure growth challenges.
We cannot overlook the history of discriminatory economic policies that continue to perpetuate an uneven playing field, but Black-owned companies still have some choices for obtaining the financing they need. We’ll talk about loan discrimination, government initiatives to assist minority-owned companies, how to select the proper lender, and other topics.
Table of Contents
Isn’t it unlawful to discriminate in financing based on a borrower’s race?
The Equal Credit Opportunity Act forbids lenders from discriminating against borrowers based on their race or color (among other protected classes). When choosing whether to lend to you, lenders may not dissuade you from applying for a business loan or consider your race or color, or the race or color of the people in the community where your firm is situated. They may also refuse to provide you less advantageous loan conditions for the same reasons.
One issue is the lack of openness and how it impacts enforcement, since business lenders are not obligated to give information about their borrowers’ ethnic identities. This makes identifying the issue and enforcing current regulations challenging. It is difficult to trace the unconscious prejudice that leads up to the choice to lend and how a loan is structured.
Maybe the larger issue is the racial income disparity in general. This includes the legacy of redlining (the practice of rejecting mortgages to eligible Black applicants and dividing neighborhoods), employment prejudice, underbanking in minority areas, educational hurdles, and other discriminatory practices that have a long-term influence on wealth accumulation. Even if the rules have changed, the legacy has not.
According to the Minority Business Development Agency, Black entrepreneurs are less likely to have the collateral generally necessary to receive a loan than their white counterparts, who had wealth levels 11 to 16 times greater (U.S. Dept. of Commerce). They may also lack family or personal money, which is a key source of startup funding, to assist them launch their firm. Individuals who reside in underbanked areas may have missed out on the chance to develop credit. As a result, even when a financial institution applies equitable lending rules, Black and other minority borrowers are sometimes disproportionately burdened.
What is the Community Reinvestment Act (CRA), and how may it assist me in locating a lender in my community?
According to the Community Reinvestment Act, federal banking authorities must encourage financial institutions to satisfy the needs of their communities, especially low- to moderate-income regions. Commercial banks and other financial institutions are supervised by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency to ensure they are satisfying the CRA’s criteria.
If you’re looking for a loan, you may look at a financial institution’s CRA rating and performance reviews to see whether they’re a good match for you. The four-tiered CRA grade (ranging from “Excellent” to “Substantial Noncompliance”) indicates how effectively an institution meets its community’s credit requirements. A bank with a “Needs to Improve” rating, for example, may not be the best lender for a Black-owned company.
The Performance Evaluation (or “PE”) of a bank, as established under the CRA framework, is a written report that builds on their CRA rating. The PE explains what was evaluated, as well as the data and analysis utilized to make their judgment.
How can I locate minority-owned lending institutions or those that specialize in assisting minority-owned businesses?
Assessing a bank’s CRA rating is a good starting point, but there are an increasing number of minority-owned banks and lending institutions that serve minority-owned companies. This is particularly true of emerging “fintech” organizations. These are online banks and lenders that employ unique algorithms rather than conventional methods to establish creditworthiness. This helps to alleviate some of the restrictions that Black-owned and other minority-owned companies confront.
Look for the Minority Depository Institution (MDI) designation, which indicates that a certain financial organization is largely owned or controlled by Black Americans, Asian Americans, Hispanic Americans, or Native Americans. To be eligible for the MDI classification, 51% of an institution’s voting shares must be held by minority persons, or a majority of the board of directors must be made up of minorities, and the community serviced must be largely minority.
Is there assistance available from the Small Business Administration (SBA) for minority-owned businesses?
The Small Business Administration (SBA) also offers a few initiatives to assist socially and economically disadvantaged entrepreneurs and enterprises. Here are some examples:
8(a) Business Development Program – Assists enterprises owned by economically and socially disadvantaged persons in obtaining government contracts, mentorship, and finance support.
Microloans – Although it will not assist firms with capital requirements above $50,000, the SBA’s microloan program, which is managed via local community-based nonprofit groups, may assist smaller ventures in getting off the ground.
Community Advantage Pilot Loan Program – Offers up to $250,000 in SBA 7(a) loan guaranties for firms in underserved areas. Although strong credit is vital, qualifying is not based on cash on hand or accessible collateral.
Celebrate Black History Month by obtaining the money your company needs.
You are not alone if you are having difficulty obtaining capital for your Black-owned company. As the legacy of discriminatory economic practices endures, minority-owned enterprises have more funding alternatives than ever before. Perseverance, combined with the correct plan, frequently pays off.
