Business Owners Struggle to Access Credit in Low-Income Areas of Chicago

Inside Subprime: September 12, 2019

By Lindsay Frankel

Small business owners in low-income areas of Chicago and across Illinois have a harder time getting bank loans than those in richer areas, according to a new report from nonprofit The Woodstock Institute. Though bank lending has increased overall in Chicago, small businesses and startups located in low-income census tracts or in communities with large minority populations have disproportionate access to capital.

Businesses located in low-income areas accounted for 24.5 percent of all businesses in the region, yet only 19.7 percent of loans under $100,000 were issued to these businesses between 2015 and 2017. Similarly, while 48.7 percent of businesses were located in neighborhoods with high minority populations, they only received 42 percent of small business loans during the two-year period.

In Downstate Illinois, the divide was even greater, with some areas showing disparities of greater than 10 percentage points. Unlike Chicago, most of these areas have also seen a decrease in small business lending.

Unfortunately, predatory lenders target the same populations that banks reject, often adding financial strain to struggling businesses.

Small businesses in low-income and minority communities that struggle to access credit may turn to merchant cash advances, which carry the same risks as payday loans in Chicago. While not technically considered loans, these advances carry high interest rates that trap borrowers in debt, forcing them to renew their contracts, a behavior that the industry relies on for revenue.

Deavay Tyler, executive vice president of the Illinois Black Chamber of Commerce, said the growth of small businesses is most inhibited by a lack of access to credit, especially for minority-owned companies. In some cases, racism is the driving issue: “There’s a perception in the banking community that a loan for a business in the minority community is just going to be harder,” said Tyler. “They don’t give the borrower the benefit of the doubt.” The Woodstock Institute recommends that the Consumer Financial Protection Bureau and the U.S. Justice Department further analyze the results to determine if racism is at play. The nonprofit also suggests that lenders be required to disclose the race and gender of borrowers.

Tyler added that both business owners and banks need more education and training to dissolve the disparity.

Woodstock president Dory Rand said CRA reform and other regulations are essential to ensuring all businesses have equal access to capital and “that it’s no longer the norm that whiter and wealthier neighborhoods receive a disproportionate share of small business loans.”

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including Florida, Ohio, and more.