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More Light on Minority Loans

Building a small business is a day-to-day challenge, monitoring cash flow and payroll and keeping abreast of commercial trends. Access to credit is a common problem in the endeavor, especially for minority-owned, inner-city businesses.

So a recent study that showed minority-owned businesses in parts of Los Angeles and Orange counties do not even bother to apply for business loans or lines of credit came as a surprise. The prospective entrepreneurs wrongly thought that banks cannot--or will not--serve their needs. That’s a communications gap that banks and other lenders need to overcome since start-up funds and other capital is now generally available.

The Greenlining Institute of San Francisco, a nonprofit community rights group, initially conducted its study to uncover bias in lending to small, minority-owned businesses. Instead, the survey of 700 such firms, more than 90% of which had been in business for longer than three years, and half with annual sales of $100,000 or more, revealed a more subtle problem than direct denial of loans:

In South-Central Los Angeles, for example, 75% of small merchants surveyed said they had not sought commercial loans because they believed they would be denied. In Santa Ana, 87% of survey respondents said they did not believe they could get bank loans.

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The next step is to gather more data on minority business loan applicants, similar to the compilation of demographic data on home loans. The Federal Reserve, which received a copy of the Greenlining Institute report, has invited public comment on the issue and is preparing a report.

Banks, meanwhile, can have the most immediate impact with increased marketing and outreach programs aimed at minority businesses, especially in the inner cities where they are burgeoning. Owners sometimes only need to know that loans are available for qualified borrowers. This would be the kind of situation economists call win-win.


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