Black business owners denied credit twice as often as similarly qualified whites

November 17, 2003

HANOVER, N.H.--Widespread discrimination within the business credit industry is the most formidable hurdle facing black small-business owners, according to a new study led by Dartmouth College economist David Blanchflower. The study, published in the November issue of the Review of Economics and Statistics, found that black small-business owners are denied credit at a rate roughly twice that experienced by white business owners of similar creditworthiness.

"This study offers statistical and anecdotal evidence that the biggest problem for minority business owners is discrimination by lenders," said Blanchflower, the Bruce V. Rauner Professor of Economics at Dartmouth. "And if they can't get credit, they can't enter the marketplace."

After adjusting for factors that affect creditworthiness, the researchers found that on average white applicants were twice as likely to be approved for business loans as black applicants. Further, when blacks were approved for credit, they typically were subject to much higher interest rates than white borrowers. Hispanics also faced higher denial rates than whites, although not to the extreme experienced by blacks. Other minority groups, including women, did not show statistically significant differences in their rates of approval or denial.

Blanchflower and his fellow researchers also compared the business credit data to denial rates for other kinds of credit. Although blacks are denied home mortgages more often than whites, the gap is not nearly as wide between the two groups as it is with business credit. Rates of approval for credit cards -- which typically take place without personal contact between the lender and borrower -- were approximately the same for blacks and whites.

Data for the study came from the 1993 and 1998 National Surveys of Small Business Finances. Blanchflower worked with colleagues at Wellesley and Williams Colleges on the research, which also demonstrated how statistical data on the difficulty of getting business credit mirrors the results of anecdotal surveys of black business owners, who consistently report that getting credit is their largest concern. A substantial portion also report reluctance to apply for credit for fear of being denied because of their race, Blanchflower said.

"This study confirms what many black business owners have suspected all along: that they are being treated differently by banks and other lenders because of their race," Blanchflower said.

Dartmouth College

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