No one has emerged unscathed from the COVID-19 pandemic, and the far-reaching effects on a global, local, and personal scale are still felt as we take the next steps toward recovery. But just as each of us suffered varying degrees of loss this past year, the negative impacts felt by small and medium-sized businesses were not equally distributed either.
Not only have Black and Latinx communities suffered higher rates of COVID-19, but the businesses owned by them and other minority groups have been disproportionately hit by the revenue-slashing effects of quarantine, lockdowns, and market disruption. These same business owners have also historically faced bigger financing and cash-flow hurdles than their white counterparts, which placed their businesses in precarious situations even before the crisis.
Here’s a closer look at the difficulties minority groups face raising capital to fuel their businesses—now more than ever—and how to support your diverse customer base with diverse financing options.
Racial Disparities in Big Bank Lending
In a report issued by McKinsey & Company at the outset of the 2020 pandemic, researchers flagged “limited access to credit” as a compounding factor that weakened the pre-pandemic stability of SMBs owned and operated by under-represented groups. Additionally, the Brookings Institution, citing data from the 2018 Small Business Credit Survey, reports that large banks approve:
- 60% of loans sought by White SMBs
- 50% of loans sought by Hispanic/Latinx SMBs
- And only 29% of loans sought by Black SMBs
Even when controlling for credit score and business characteristics, researchers also found that Black SMB owners were more likely than White SMB owners to be asked for additional paperwork, such as personal financial statements and W-2 forms, when applying for loans.
It should come as no surprise then that COVID-19 only made financing more difficult for minority-owned SMBs—according to McKinsey’s U.S. Small Business Pulse Survey, 42% of minority-owned SMBs said that obtaining credit was getting even harder.
As a result of inequalities in the traditional lending space, fear of rejection has many Black business owners turning to other financing solutions.
How Fear of Rejection Affects Financing
Forbes published an article near the end of 2020 titled “Why Black-Owned Businesses Struggle to Get Small Business Loans,” and quoted Gauntlett Eldemire, a Black business owner operating a chain of coin-operated laundries in Cleveland, Ohio: “It’s scary to go in and talk about your credit scores with a guy who is dressed in a suit and sitting behind a desk—especially if you’ve never gotten a loan before. Fear of rejection does play a big role.”
In 2019 the Fed reported that only one in ten Black non-employer firms had a recent borrowing relationship with a bank, compared to one in four White-owned non-employer firms. Additionally, at least 37% of Black employer firms report feelings of discouragement (fear of rejection) compared to 12% of White-owned firms when it came to applying for loans.
“It is notable,” writes Forbes author Rohit Arora, “that Black business owners perceive a higher probability of funding success from online lenders and are more likely to turn to online providers for financing.”
Empower Minority-Owned SMBs with Fear-Free Financing
Racial disparities in traditional lending have pushed minority business owners away from the old ways of securing business capital. Fintech companies and digital lending platforms are “a significant piece of the solution,” according to Arora, as they help seekers of funding “[overcome] the typical infrastructural boundaries that often unfairly keep communities of color locked out of the best financial opportunities.”
Using a proprietary underwriting algorithm, Clicklease creates access to funding for all credit profiles and provides instant approvals without the lag of paperwork. Additionally, as a no-fee, incremental purchase option, equipment costs are broken into manageable and affordable installments. Plus, with Clicklease, applying for financing won’t affect customers’ credit.
Now more than ever, diverse financing options like Clicklease are an essential solution for cash-strapped and credit-challenged SMBs as they get back on track after the pandemic, especially for the minority-owned businesses you serve.