Race and Discrimination in Business Loan Borrowing
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UPDATED: Apr 4, 2013
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Crowdfunding is all the rage. From funding educations, to films, to new businesses, it seems like everything is going to be crowdfunded before long.
This explosion in popularity should come as little surprise though, as the traditional route of obtaining capital for a startup — applying for business loans at your local bank — has begun to fail a huge portion of our population.
A 2010 report from the US Department of Commerce Minority Business Development Agency, found that minority-owned businesses have less access to borrowing business loans due to racial discrimination.
The report found that minorities are more likely to pay higher interest rates or be outright denied for business loan financing.
Shockingly, minority-owned businesses, perhaps due to facing the obstacle of racism and being forced to rely upon scrappy resourcefulness, grew faster than non-minority owned businesses between 1997 and 2002.
But now that 2010, the year in which the report was released, is three years passed, have things changed much? Unsurprisingly, they have not.
While anti-minority voices are quick to dismiss any attention to inequality as “playing the race card,” there are some entrepreneurs who see inequality as an opportunity for change rather than an opportunity for increased divisions.
Crowdfunding for Minorities
One group of entrepreneurs, led by Salim Mhunzi, have created UNITE, a business loan crowdfunding startup built to help under-represented minority entrepreneurs, artists, and non-profits.
UNITE works by having project creators explain their business and fundraising goals. Funders then support various businesses by pledging funds to them or offering to become mentors. UNITE offers a combination of crowdfunding, SBA loans, and private investment. Once a proposed business has their financial support or business loan, they can then prosper, grow, and receive the helpful advice from mentors and the UNITE community.
Unfortunately, not all minority entrepreneurs will be lucky enough to find UNITE. Many have already experienced the damaging consequences of borrowing business loans from a lender who practices institutionalized racism, and the harsh reality is many more will continue to experience such a fate.
A Cautionary Tale
Dilia Wood, owner and CEO of Inspirador, is one such minority entrepreneur who pursued the American Dream but saw her dream twisted into a nightmare by unscrupulous lenders who preyed upon her.
She borrowed an SBA 504 business loan back in 2006 in order to finance the purchase of commercial real estate and to perform construction renovations.
In her experience she learned that “where no obstacles should be, they can be created by certain unscrupulous lenders.”
Wood says she was discriminated against when she was denied prudent lending mechanisms that are in place for traditional business loans. Her business loan lenders improperly overcharged her on appraisal fees, then charged her for structural engineering reports that were never ordered.
While Wood’s case against her lender is ongoing, her legal counsel has discovered that similar incidents have occurred against the very same lender.
Having gone through her own ordeal, she agreed with the 2010 report that minorities have less access to capital when it comes to starting a business.
“Minorities, in some instances, tend to be greeted with subtle skepticism about being able to go through the lending process,” said Wood. “This serves as a barrier to capital and can be intimidating to potential minority start-up business owners.”
Wood believes that alternative solutions to accessing capital, such as minority-focused crowdfunding, are critical to leveling the playing field. However, she cautions that wherever both money and human nature are involved, prejudice is sure to play at least a small role.
“Anytime money is involved it is subject to inequality, whether known or unknown, but these alternatives, like crowdfunding, are important for leveling the playing field,” said Wood.
A New Reality and a New Future
The internet, long heralded as a leveler of the business playing field and the sole reason for the existence of crowdfunding, is considered by Wood to be a beneficial aid to minorities.
“It has been helpful in the sense that the Internet provides access to information, best practices, and markets for products and services,” she said. “For example, it allows a person to educate oneself about a highly-regulated loan program where otherwise information is difficult to obtain. The internet is an essential research and business analysis tool that opens doors to information and opportunities.”
Minorities, far from being powerless groups in a victim-blaming society, can actively protect themselves from institutional racism when applying for business loans according to Wood.
“The idea of racism in lending is often-times very subtle and difficult to discover upfront,” she said. “It sometimes doesn’t reveal itself until after the fact and until it is too late to protect against. I suggest maintaining honesty, integrity, understanding the process and conducting the due diligence necessary to successfully to complete your business loan.”
Despite unsubstantiated criticism that minorities receive unfair advantages, Wood dispelled such arguments.
“One the surface, there appears to be advantages with various loan programs for minority business owners,” she said. “The reality is starting and owning a business is hard work and requires a level of perseverance sometimes unimaginable.”
While minorities and non-minorities may be worlds apart when it comes to experiencing discrimination and prejudice, at the very least the two can agree that a successful business requires strong effort. As minorities gradually become the majority, the need for minority-oriented business loan crowdfunding should evaporate with time, just as many other objects of racial inequality have slowly disappeared from America. In the decades to come, America can look forward to a time when minority-oriented crowdfunding is as nonexistent as water fountains and bathrooms labeled “Colored” and “Whites.”