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High Credit Scores Still Not Enough for Black Businesses to Secure Loans, Federal Reserve Data Shows

Black business owners are denied loans more than any other group, despite having good credit and steady profits, U.S. Federal Reserve data shows.

It’s no secret that securing a small business loan is far from easy. Racism and discrimination, however, have proven to be yet another barrier blocking Black-owned businesses from snagging the funding they need.

Black businesswoman
Black business owners are twice as likely to be denied a bank loan compared to white business owners. (Photo: Getty Images)

Missouri-based saucier Freddie Lee James Jr. and his wife, Deborah James, are among those who’ve been denied. In fact, they’re still struggling to get a loan from the bank.

“We have 750-760 credit score,” James, creator of the finger-lickin’ “Ghetto Sauce,” told St. Louis Public Radio. “We pay all our debts. We don’t have no problems with that. But they (the bank) were saying that the sauce business isn’t generating enough capital to their standards.”

Lee’s gourmet sauce line rakes in about $200,000 annually in profits, according to the outlet. His zesty home-whisked Ghetto Sauce lines the shelves of several major grocers across the nation, including Schnucks, Home Goods and the St. Louis-based Straub’s markets.

Still, it isn’t enough to help him secure a business loan.

The couple’s problem isn’t unique, with thousands of other Black entrepreneurs facing similar issues. Most recent data available from the Federal Reserve shows that, in 2014, more than half the loan applications of Black businesses were denied. Only a quarter of those by white businesses were denied in that same time period.

The same trend holds true for black homebuyers, who are more than twice as likely to be denied a home mortgage as white applicants, even when controlling for factors such as income, according to data published by the Federal Financial Institution’s Examination Council last year.

In 2016, 26 percent of African-Americans were denied home loans while a mere 10 percent of white homebuyers were passed up for mortgages that same year. The report showed that in many of these instances, Black home buyers weren’t given a reason for their denial.

This is just one part of a very complicated issue, said Dell Gines, a senior community development advisor with the Federal Reserve Bank of Kansas City. Oftentimes, Black applicant lacks intergenerational wealth and are unfamiliar with how the banking system works, he said. Then, couple that with race discrimination.

“Let’s say, hypothetically, there’s no discrimination in the banking industry, we would still probably have disparate outcomes because the system itself hasn’t prepared us to utilize the banking system effectively,” Gines told St. Louis Public Radio.

The disparities affecting Black business owners being granted credit have not escaped the notice of lawmakers. Democratic Sen. Ben Cardin of Maryland introduced two bills last year, the Closing the Credit Gap Act and the Unlocking Opportunities in Emerging Markets Act, that would pave the way to Black and other minority small business owners gaining greater access to capital from the Small Business Administration.

In a statement announcing the bills, Cardin’s office said: “Access to capital is an especially uneven playing field for minorities, who are two to three times more likely to be denied credit; more likely to avoid applying for loans, based on the belief that they will be turned down; and more likely to receive smaller loans and pay higher interest rates on the loans that they do receive. Due partially to these trends and other historical roadblocks, minorities own only 29 percent of small businesses despite representing 39 percent of the overall population. These challenges are felt most acutely by Black business owners.”

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