Study says banks give fewer loans to businesses in minority neighborhoods

Inside Subprime: August 11, 2017

By Caroline Thompson

A report from the Woodstock Institute in Chicago has found that small businesses in low-income minority neighborhoods in both Detroit, MI and Richmond, VA are less likely to be approved for a loan than small businesses located in affluent white areas of these same cities. The report, which was released on Wednesday, takes a deep dive into small business bank lending before, during and after the Great Recession, and is the third of the Institute’s four-part series on small business access to loans across eight major American cities.

Nationally, the number of loans given to small businesses in 2015 (the most recent year data was available) was down 56 percent from its peak in 2007, just before the financial crisis hit. These lower numbers make sense: after the market crash, lenders tightened up regulations, making it more difficult for the average person or business to receive a loan. But these increased regulations, coupled with what looks very much like discriminatory lending practices on the part of both local and national banks, have hit businesses in minority communities especially hard.

In Detroit, for example, businesses in predominately minority neighborhoods made up 15.4 percent of the total businesses in the city between 2012 and 2015. In a perfect world, these businesses should have accounted for around 15.4 of the loans given to businesses in the city during that time period, but in reality, they received only 7.8 percent of those loans. The discrepancy between the amount of loans funded and these businesses’ overall share of the market comes out to about $247 million in lost opportunity for development in Detroit’s low-income, minority neighborhoods.

A similar pattern was seen in Richmond, where businesses in minority areas made up 13.6 percent of all city businesses between 2012 and 2015, but were awarded just 7.4 percent of the small business loans given out during that period, a $58.1 million loss for those communities.

“Small businesses are the backbone of a community. They create jobs, revitalize neighborhoods, and pump dollars into the local economy,” said Amanda Ballantyne, National Director of Main Street Alliance. “This report gives us a very clear picture of how hard it is for small business owners, particularly those of color and in low-income neighborhoods, to start and grow much-needed local businesses, and why regulatory protections like Dodd-Frank are vital for small businesses.”

These numbers are similar to what the Woodstock Institute found in earlier reports on small business lending practices in Los Angeles, San Diego, Chicago, Buffalo and New Brunswick.

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