By now, it’s common knowledge that small businesses were hit hard by the pandemic. But not all business owners struggled equally—or received equal access to the resources that helped them stay afloat. While owners from every other demographic reported their main financial challenge to be low customer demand, Black business owners reported a different one: access to credit. 

Racial disparities in credit access and disbursement 

The data is striking: 30% of Black small business owners cite access to credit as their main financial challenge, compared to just 12% of white business owners who cited credit access as a concern, according to the Federal Reserve’s 2021 Small Business Credit Survey. 

In part, access refers to approval rates for funding. When Black business owners did apply for financing including loans and lines of credit (but not including emergency funding applications), they were disproportionately turned down. Firms owned by people of color were among the least likely to report receiving the full amount of financing sought, with just 13% of Black business owners reporting they received the full amount of funding, as compared to 80% of white business owners, according to the Federal Reserve. 

But access may also refer to the lack of support for Black business owners right out of the gate. Minority-owned business owners were found to be “discouraged” from applying for traditional loans, according to a 2021 Fundera Report, and even black business owners who were found equally creditworthy to white business owners applied less frequently for capital than their white counterparts. Fewer opportunities coupled with less encouragement to apply means less capital is flowing to Black-owned businesses. 

Access has more concrete implications, too: Black applicants also face added scrutiny while applying for loans, like being asked to show additional documentation, while also receiving less assistance during what is often a complicated application process.  

And when Black business owners did receive funding, the stark disparities continued: Black business owners were found to receive smaller term loan amounts at higher interest rates as compared to their white counterparts, even when they had comparable revenues.  

The data paints a clear picture: Black entrepreneurs are disproportionately turned down for capital and report more loan challenges than non-minority owned firms.

Recognizing—and challenging—systemic lending inequalities

Small businesses are America’s backbone. They create jobs, stimulate economic growth, deliver  crucial products and services, and add to the vibrancy of communities across the nation. For many small business owners, a stable line of credit can mean the difference between seeing their dream thrive or shutting their doors. 

A lack of capital often translates to an inability to optimize and grow. It also means small businesses may lack the financial cushioning to withstand lean times, which in turn perpetuates a vicious cycle and the nation’s racial wealth gap. Consider that  54% of white business owners said their companies were in weak financial shape—as compared to nearly 80% of Black or Asian small-business owners. The systemic inequalities in the lending ecosystem place added hurdles in the path of Black business-owners trying to obtain credit, from a lack of encouragement pre-application to more stringent repayment terms.

Small banks play a big role in community-building 

With widespread vaccine distribution and restrictions easing, community banks and credit unions are in a position to support small businesses and work to eliminate the funding obstacles in the way of Black small business. Here are three ways to start: 

  • Reframe the criteria for creditworthiness: The lending ecosystem has changed dramatically in recent years, and traditional indicators of creditworthiness such as business credit score and debit-to-credit ratio don’t tell the whole story. That means many small business owners who deserve the capital they seek are getting declined. More telling measures of creditworthiness for small businesses are cash flow and overall assets. Reframing creditworthiness for the small business client sector can help community banks expand their pool of potential applicants while limiting risk, and provide an edge over the competition.

  • Offer pre-approvals: Don’t assume that small businesses owners aren’t applying because they don’t need credit. For the reasons above, they may hesitate to apply or be uncertain about the criteria. Small banks can leverage existing relationships and proactively reach out to current customers with depository accounts to offer pre-approvals. In particular, banks with existing merchant processor relationships have the advantage of understanding a client’s revenue and cash flow. This approach is a win-win: your bank supports more customers in your community, while business owners avoid the hassle of searching for lenders and getting approved.

  • Offer flexible payment plans: Even—and especially—in lean times, businesses need support, and community banks can offer it without compromising their risk profile. Offering flexible payment options gives business owners the advantages of a manageable repayment plan and  steady cash flow. This approach also helps struggling small businesses build up their credit, making them viable candidates for bigger, long-term loans down the line. And when they are ready for that loan that can tip their business from small to high growth, they’re more likely to stick with your bank.