Business Diversity and Debt Payment

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Business Diversity and Debt Payment

Women- and/or minority-owned businesses are disadvantaged in receiving loans from the traditional sources of lending. Their credit scores and history have not significantly improved in the past decade. Despite being a lack of quantitative evidence, the debt repayment performance of women- and/or minority-owned businesses are unlikely to have improved in the recent past.

Helpful Findings

  • Historically, women- and minority-owned businesses had short track records and low credit scores, hence, traditional lending institutions, such as banks, have tightened their lending standards and increased loan costs. The reluctance of financial institutions in granting loans to minority-owned businesses began in the time of the 2008 global financial crisis.
  • According to a study in 2009, Black African-owned businesses were more likely to default, which leads to the high denial rate of debt applications. Another study in 2011 revealed that the Community Express program administered by Small Business Administration saw the loan default rate reach up to 40% in comparison to the program's average cumulative default rate of 22%.
  • In the early stage of COVID-19, government financing programs, such as the Paycheck Protection Program (PPP) and the Small Business Administration Program, shut out most of the people of color due to either disqualification or insufficient funds.
  • The prioritization of large loans has crowded out minority and women-owned businesses, regarding bank finance. This is due to the fact that minority and women-owned businesses have, on average, 30% fewer employees than male- and white-owned companies and generate sales that are only 50%-90% of the counterparts. The small scale of minority and women-owned businesses are not expected to have a higher solvency rate than male- and white-owned businesses.
  • With the support from government programs, such as PPP and the grants by the Export-Import Bank of The United States, women- and/or minority-owned businesses are expected to receive more debt finance; this helps them build the track record of borrowing. However, no quantitative evidence shows the significant improvement of the creditworthiness of women- and/or minority-owned businesses in the US. Therefore, the debt default rate is not expected to have a noticeable change from a decade ago.

Research Strategy

The research reviewed a variety of news releases and research papers, however, there is a lack of recent statistics as to the repayment of debts granted to women- and minority-owned businesses in the US. The same situation applies to the debt repayment status of businesses that have a diverse ownership structure. Although some government financing programs for minority-and/or women-owned businesses are in place, such as Small Business Administration loans, minority business loans, and grants, the information on debt default rate is not publicly available; this level of detail is unlikely to be publicly available at private lending institutions either.
Sources
Sources