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Federal Reserve Study Confirms Minority Business Lending Disparities – Minnesota Researchers and Practitioners Have Reported this for Decades

Bruce P. Corrie, PhD,

I recently interviewed Freweini Sium, entrepreneur and owner of the new international mall by Snelling and University. She is doing some remarkable work bringing to life “Little Africa” through her entrepreneurial activity. Her success did not come easily. In every stage she had great difficulty finding a lender and invariably had to rely on investors who charged a very high interest rate on her loan. Yet she is located in an area with great bank density in Saint Paul’s midway area.

A new national Federal Reserve Bank study (which included firms from Minnesota in the sample) offers many insights observed locally in Minnesota by researchers and practitioners. Some of these findings are listed below.

Minority businesses face lending disparities as they launch their businesses. This disparity is especially sharp for Black owned businesses. According to the study, “Black-owned firm application rate for new funding are 10 percentage points higher than white-owned firms, but their approval rates are 19 percentage points lower.”

The study also found that a large number of minority firms, especially black-owned firms did not apply for funding because they were discouraged and thought they would not be approved.

Of those minority firms that were approved for 40 percent received full funding compared to 68 percent of nonminority-owned firms.

There is a greater use of personal funds to finance business development for minority owned firms. The study points to this reality in the context of black-owned business owners having lower wealth levels than white business owners.

In response to financial challenges cutting staff was the most common action especially for Asian-owned firms.

Minority firms take on a great risk to obtain debt using future sales as collateral more often than white-owned firms.

Black and Hispanic-owned firms tend to apply for higher-cost products and are more likely to apply to online lenders.

Minority firms tended to apply to large banks while small banks was most common for white-owned firms. Minority firms located in low and moderate income neighborhoods experienced higher loan approval rates from large banks than other zip codes possibly because of the role of CRA lending requirements. In the case of small banks minority owned firms located in low and moderately income zip codes experienced lower approval rates than minority firms in other zip codes.

Local Studies and Reports Have Been Detailing These Trends for Decades

A number of disparity studies have documented these trends to the State of Minnesota for decades reflected in statewide “disparity studies”, research reports and community meetings (see below).

A report documenting discrimination in financial lending by banks done by Dr. Samuel Myers, at the Humphrey School has largely been on the shelves of academics even after presentations to City Councils in Minneapolis and Saint Paul. There is also been relatively little media reporting of that study.

A report on the economic potential of African immigrants which included business owners and presented to key leaders at the Minnesota Legislature and elsewhere is yet to result in concrete action at the legislature. This study was widely reported in the media but had little impact on policy makers. One of the findings of the study was that African immigrant business owners reported very little assistance from public entities.

A community gathering of the top practitioners in minority business development in the state documented strategies that could be done to grow minority businesses but again while there has been some very visible success stories of public sector efforts to grow minority businesses there is yet to be a systematic long term coordinated strategy to grow minority businesses in Minnesota.

Yet minority owned businesses have consistently been growing more rapidly in numbers as compared to nonminority-owned businesses over the past three decades. See links below –