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Does Race Affect Small Business Funding?

By Aditi Mukherji, JD | Last updated on

A new study is adding to the growing body of evidence that the playing field for entrepreneurs is tilted depending on the color of their skin.

A research paper released by the Small Business Administration finds that black and Hispanic entrepreneurs face greater difficulty than ever in securing business loans, Bloomberg Businessweek reports.

Here are some of the study's key findings:

  • Black and Hispanic entrepreneurs start their businesses with less money than whites.
  • On average, black and Hispanic business owners put up 56% of their initial capital, while white owners put up 39%.
  • Black and Hispanic business owners are less likely to have loans approved, even after controlling for characteristics like credit score or the type of business -- and the disparity worsened during the financial crisis.
  • The differences in funding between minority-owned and white-owned businesses persist for years after companies are founded.

If the results are right, the bottom line is troubling: White entrepreneurs are seemingly more likely to get business loans than blacks or Hispanics.

Is the Disparity Due to Discrimination?

The study's authors, however, insist they found no direct evidence of bias -- deliberate or otherwise -- in the financial system, Bloomberg Businessweek reports.

That being said, credit discrimination happens to many people. It's often hidden and, in many cases, unintentional, which makes it tough to spot. Warning signs of credit discrimination include:

  • Being treated differently in-person, compared with how you were treated on the phone;
  • Being discouraged from applying for credit;
  • Being offered credit with a higher rate than the one you applied for, even though you qualify for the lower rate;
  • Being denied credit without being given a reason why or told how to find out why; and
  • Overheraing a lender's negative comments about race, national origin, sex, or other protected groups.

If you suspect that you might be a victim of credit discrimination, you can file a complaint with the Consumer Financial Protection Bureau. If that doesn't solve your problem, you may also want to consider consulting an experienced attorney.

Above all, you need to be your own best advocate. Protect yourself by doing your own research, knowing your credit history, not giving in to pressure, and not signing on the dotted line until you're completely satisfied.

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