Fashion stylist Daun Green started her company Dusk ‘Til Dawn in her home in 2015. However, as she booked more film and photo shoots and found herself carrying more supplies, she knew she needed a change of pace–a truck and a showroom.
Green decided to apply for a business loan at her preferred bank in 2021. She was surprised when, despite having good business credit, she was denied a loan based on her personal credit history.
“If I’m looking at my business account and I’m flourishing over here in my business, what does my personal account have to do with anything?” Green said.
For many Black business owners like Green, getting a loan has always been a difficult task. But those challenges have gotten even greater due to higher interest rates and tighter lending standards from banks.
The percentage of banks tightening their lending standards for small firms reached around 49 percent in 2023 because of high interest rates from the Federal Reserve to combat inflation and a banking crisis that saw the second-, third- and fourth-largest bank failures in U.S. history. Since then, this percentage has fallen to around 18 percent, according to January’s Senior Loan Officer Opinion Survey on Bank Practices, but lending standards are expected to remain tight through the remainder of 2024.
Tight lending standards tend to be worse for Black-owned businesses, who are less likely to get approved for business loans, even when standards are eased, due to racial discrimination and other socio-economic factors.
The number of Black-owned businesses grew dramatically in the aftermath of the COVID-19 pandemic. According to the Federal Reserve’s blog Fed Communities, 57 percent of Black-owned businesses currently in the U.S. started during the pandemic.
Despite this important leap, Black entrepreneurs still face significant discrimination when it comes to securing funding from institutions for their businesses. For example, startups led by people of color were 20 percent less likely to fund themselves through lenders or institutions, according to Fed Communities. And, despite being as likely as white people to apply for loans and lines of credit, they were less likely to be “fully approved.”
Torrence Mack, who founded Florida-based TDM Technologies International in 2017, also could not get a business loan due to credit and other stringent standards, such as the amount of time the business had been operating.
“A lot of places didn’t believe that what I do would generate the income that would keep a business running,” Mack, whose business focuses on teaching technological literacy to seniors, said. “They called it a hobby. They didn’t think it was a real business.”
Tight lending standards are a side effect of high interest rates from the Federal Reserve, which is trying to reduce inflation to a target 2 percent. Interest rates currently sit between 5.25 and 5.5 percent, the highest they’ve been in over two decades.
When bank lending standards are tight, these barriers to funding access are only exacerbated, said Dr. Sterling Bone, a Professor of Marketing at the Jon.M. Huntsman School of Business at Utah State University.
“It’s great that we live in a place where we can start a business and chase that American dream,” Bone said. “But when that chase is hindered because of one’s race, or you know, factors that inhibit their ability to get the capital they need to grow, that’s concerning.
Black borrowers are often considered riskier loan candidates due to factors like communication cues, socioeconomic status and level of education, the study found.
“That’s microaggressions compounding over and over and over again,” Bone said.
When loans were approved, they were often for loan products that were riskier and less flexible than those suggested for white business owners.
“For a small business this is particularly problematic, especially given the success rates and tender rates of how long Black-owned businesses stay in business,” Bone said.
After their initial trouble with banks, Green and Mack both found funding: Green through a credit-blind loan pilot program from CDC Small Business Finance in 2022, and Mack through a grant from the Coalition to Back Black Business enhancement grant in 2023.
With the loan, Green was able to acquire a truck and showroom, and is currently considering opening a brick-and-mortar store.
“It helped fund my dreams and aspirations,” Green said.
Likewise, the grant enabled Mack to expand his online presence and make people more aware of his mission of helping seniors.
“Technology is always changing,” Mack said. “It gives the seniors empowerment, to know that they can use technology themselves without having help from others.”
Bone said that while community alternatives, such as peer-to-peer lending or Community Development Financial Institution programs, are useful, more action is needed from banks. When banks engage in discriminatory lending practices, the harm it causes to marginalized communities also harms the wider economy by not allowing money to transfer down to individual consumers.
“It’s a necessary fact that businesses need money so that that can return to the banks and to our economy at large,” Bone said. “They’re leaving money on the table, but they’re also taking away the opportunity for economic development in our neighborhoods and in our communities.”