Bank Financing Discrimination against African-American Owned Small Business

By Lussier, Robert N.; Greenberg, Greg et al. | Journal of Business and Entrepreneurship, March 1998 | Go to article overview

Bank Financing Discrimination against African-American Owned Small Business


Lussier, Robert N., Greenberg, Greg, Corman, Joel, Journal of Business and Entrepreneurship


ABSTRACT

An analysis of phone survey data provides strong support for bank financing discrimination against African-American small business owners, even when are as creditworthy as whites; in other words, discrimination is a major factor in African-Americans receiving smaller bank loans than whites. Furthermore, substantial progress to eliminate such discrimination has not been made since 1982.

INTRODUCTION

Data reported in 1991 from the Home Mortgage Disclosure Act suggests that white applicants in all income groups had lower rates of loan denial than black or Hispanic applicants (Residential, 1994). In November 1991, the Federal Reserve Board released a study of Home Mortgage Disclosure Act data, which indicated high rejection rates for minorities compared to white applicants (Bush, 1992). Lonchofer (1995) indicated that a lending bias against minorities may exist. If factors other than the true creditworthiness of the applicants are considered, then illegal discrimination may exist.

THE NEED FOR BUSINESS FINANCING

Lussier (1995; 1996a; 1996b) and Lussier and Corman (1995; 1996) have conducted extensive research to determine which variables predict business success. Tests of the difference between successful and failed businesses, with capital as a predictor of success or failure, has been mixed. However, a preponderance of the literature contends that securing some type of financial loan is crucial to the long-term success of many small businesses, regardless of race, and that AfricanAmerican business owners receive less financing than white business owners.

Bates (1996) stated that limited access to financial capital stunts the African-American community in three ways. First, some potential entrepreneurs never open a business because they can not get start-up financing. second, inadequate capitalization depresses firm size. Finally, inadequately capitalized firms are more likely to go out of business (Bates, 1996). Price (1995) concluded that expected profit for African-American owned companies is low, thus discouraging die entry of new African-American owned firms. Prewitt (1995) noted that scarcity of investment dollars and loans was a key reason for derailing minority franchising efforts.

AFRICAN-AMERICAN VERSUS WHITE BUSINESS FINANCING

The Commerce Department reported that one of the major roadblocks for minorities is access to adequate financing (DECs, 1994). Bates (1991) found that African-American firms were undercapitalized and more likely to fail than whites businesses. Branch (1992) stated that lack of access to capital is one factor that has historically lead to the higher failure rate of African-American business. Oleck, Sokolove, LaBreccue, Freeman, and Nichols (1992) found that the percentage of African-American franchises is far less than the percentage of African-Americans in the general population. seemingly, the reason for this underrepresentation is die lack of startup financing. Mack (1991) stated that the greatest problem facing African-American business owners is finding venture capital.

Wold (1992) found that minority owners of inner-city businesses must work harder to get financing, and few get financing. Bates (1996) found that the African-American-owned firms that get a bank loan receive smaller loans than white-owned firms of identical credit worthiness. Bates reported that the average loan for whites was $51,700, compared to only $25,073 for AfricanAmericans. The businesses of African-American owners who find financing grow faster than average, but remain smaller than average due to smaller loans (Mergenhagen, 1996).

Brown (1993) found that African-American business owners continue to scramble for capital from family and friends. Reynolds (1993) found that of all minorities, African-Americans have the hardest time acquiring funds; 71 percent must completely finance their businesses by themselves. U.S. Department of Commerce researchers (1987) strongly supported the hypothesis that minorities start their businesses with less startup capital than do whites. …

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