Credit market discrimination impacts the likelihood that Disadvantaged Business Enterprises (DBEs) will succeed, and the adverse impact for minority communities must never be understated. Moreover, discrimination in the credit market often prevents such businesses from opening in the first place. This assumption has been held by the courts to justify a public entity’s compelling interest in remedying discrimination.
Qualitative and quantitative evidence supports the view that DBE firms, particularly African American-owned firms, suffer discrimination in the credit market.
Timothy Bates, professor emeritus at Wayne State University, and Alicia Robb of the Ewing Marion Kauffman Foundation, prepared a report for the Federal Reserve System Community Development Research Conference on April 11, 2013 titled “Loan Availability Among Small Businesses Operating in Urban Minority Communities.” Their examination of bank lending in the form of SBA-guaranteed loans reveals trends in small-business borrowing patterns among racially-defined owner subgroups.
The SBA in 2009 increased its lending substantially, particularly in its 7a program, providing banks with guarantees against loan default. Particularly noteworthy is the increase in SBA loan volume to existing small firms in 2010, in comparison to 2009. Overall approvals rose from 30,513 to 38,464. Loans to Asian-owned firms increased from 4,439 to 5,261.
Among black-owned small firms, in contrast, SBA 7a loan approvals fell from 2,711 nationwide in 2009 to 1,601 in 2010. This decline continued in 2011 (and again in 2012), generating a drop in the black-business relative share of SBA 7a loan approvals nationwide from 8.9 percent in 2009 to 3.7 percent in 2011.
During the years that SBA loans to minorities declined (2002-2007) there was a slight – some may say, significant – jump in minority-owned franchises, from 19.3 percent of the total to 20.5 percent. Franchising as a entry point for African Americans into entrepreneurship is no longer theory. This sector is and has been an important contributor to the U.S. economy, and has served as a viable avenue through which African Americans became entrepreneurs and built wealth.
In 2001 there was only one branded hotel owned by an African American. Today the number of African American-owned hotels exceeds 500, and the majority are franchises. The major brands such as Marriott, Hilton and Choice established Emerging Markets Divisions offering franchise opportunities and financial incentives to African Americans, Hispanics and Native Americans.
Black Enterprise developed a list of the 40 Best Franchises for African Americans, after consulting with the International Franchise Association (IFA) to determine which sectors are experiencing the greatest growth in franchise unit sales and revenue generation. Approximately 500 IFA member franchisors were sent a proprietary franchise survey in which they provided further clarity regarding costs and sales potential of franchises. The surveys also requested diversity and inclusion efforts made by the franchisors.
Black Enterprise editors rated the franchises according to affordability, revenue potential, effectiveness of diversity programs, and marketing/advertising support. A examination of the Portfolio Performance by Franchise Codes for the Top 40 Franchises approved for SBA 7(a) & 504 Loans between 2000 and 2008 compared against Black Enterprise‘s 40 Best Franchises for African Americans found only two in common: Subway Sandwich Shops (the No. 1 franchise securing SBA funding for the period) and Wingstop Restaurants.
The number of SBA-backed loans to minority businesses in the United States fell over the past five-years. Unfortunately, the 2013 minority lending numbers reflect the sad reality that, as a percentage of the population, not enough minority-owned businesses are receiving the capital they need. What the numbers do not tell is how many minority business enterprises apply and are declined. Stay tuned for more about that and the St. Louis-area numbers.
To be continued in next week’s St. Louis American.
Pruitt is president of the St. Louis city chapter of the NAACP.
