Academic journal article Academy of Entrepreneurship Journal

The Borrowing Experience of Black and Hispanic-Owned Small Firms: Evidence from the 1998 Survey of Small Business Finances

Academic journal article Academy of Entrepreneurship Journal

The Borrowing Experience of Black and Hispanic-Owned Small Firms: Evidence from the 1998 Survey of Small Business Finances

Article excerpt

ABSTRACT

Commercial bank loans are a primary source of external capital for firms that are too small to access the public debt and equity markets. Thus, the availability of credit at a reasonable cost is a key concern for small firms. This article explores the extent to which black and Hispanic-owned firms are willing to pursue commercial bank loans and the extent to which they are able to obtain them. Results reveal that, although black and Hispanic-owned firms were just as likely to apply for a loan as white-owned firms, they were significantly less likely to be approved for one. Further, black and Hispanic-owned firms were significantly more likely to avoid applying for loans because they believed they would be denied. These findings did not reveal any differences in the interest rates charged on approved loans to black, Hispanic, or white-owned firms.

INTRODUCTION

Small businesses are a vital and growing part of the United States economy. According to the United States Small Business Administration (SBA), small firms having fewer than 500 workers employ 53 percent of the workforce and contribute 47 percent to all sales. They are also responsible for 51 percent of private gross domestic product and account for over 75 percent of new jobs (The facts about small business, 1999). Small firms are also a major source of innovation. According to the SBA (The facts about small business, 1999), small firms produce twice as many product innovations as large firms.

Traditionally, securing sources of capital has been a frequent concern for small and growing firms (Ang, 1991; Ennew & Binks, 1995; Pettit & Singer, 1985; Van Auken & Holman, 1995). Many small firms start with the intention of remaining relatively small. These micro-businesses or "mom-and-pop" operations are typically funded with the firm owner's personal savings, loans or gifts from family and friends, and with earnings from the firm (Petty & Bygrave, 1993). Somewhat larger firms, and particularly growing firms, however, may require capital from external sources. These sources are typically somewhat limited.

Small firms are unable to issue public debt and equity due to their small size and the high relative cost of issuance (Schnabel, 1992; Weinberg, 1994). Small, "entrepreneurial" firms with the prospect of rapid growth may have the option of funding from angels and venture capitalists. These firms represent a relatively small percentage of the total number of small firms, however. For most small firms, the major source of external financing is debt in the form of commercial bank loans (Ang et al., 1995; Berger & Udell, 1995; Binks & Ennew, 1996; Cole & Wolken, 1996).

Firms owned by minority business owners, and in particular, firms owned by black and Hispanic business owners represent a special subset of small firms that are growing even more rapidly than small firms in general. The number of black-owned firms increased by 108 percent from 1987 to 1997 to a total of 881,646 firms. Simultaneously, their revenues increased by 109 percent for the same time period. Hispanic-owned firms increased even more dramatically, increasing by 232 percent from 1987 to 1997 to a total of 1.4 million firms, while their revenues increased by 417 percent (The facts about small business, 1999).

Previous studies conducted by the SBA have noted that black and Hispanic-owned firms are less likely to use credit and less likely to use bank loans than small firms on average (Minorities in business, 1999). It is unclear as to whether or not these discrepancies are due to lack of access to debt capital, differences in firm characteristics, or, alternatively, different preferences on the part of firm owners. If, in fact, black and Hispanic-owned firms are less able or less willing to secure bank loans, the major source of external financing for small firms, that constraint may affect their ability to grow, to add jobs, to develop innovative products and services, and even to survive. …

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