At a time when some credit unions are looking for ways to boost their loan portfolios, they may want to consider giving more consideration to two groups that fear seeking out financing for their business start-ups or expansions.
Rather than apply for capital from lenders, women and minorities are more likely to turn to their own savings to start or grow their businesses, according to a new report from the SBA Office of Advocacy, “Access to Capital Among Young Firms, Minority-Owned Firms, Women-Owned Firms, and High-Tech Firms.”
The data showed that in the current financial climate, new high-tech businesses rely more than other firms on outside loans and investments, while non-technology businesses owned by African-Americans, Latinos and women simply operate on less capital.
The SBA report used data from the Kauffman Firm Survey to look at new businesses’ access to capital during the 2004-2010 period, the agency said.
African-American and Latino owners of young firms were less likely than others with similar credit scores to have access to bank financing, the data showed. During the financial crisis, women and minority owners of new startups were also less likely to apply for credit, fearing loan denial.
Alicia Robb, the author of the report, said she found that minority firms in particular rely more on their own funds and have less capital to start up and grow.
“Studies indicate that women entrepreneurs have less access to financial capital or make less use of it than male entrepreneurs,” Robb said. “For many minorities, starting out at lower wealth levels also acts as a barrier to entrepreneurship.”
Women-owned firms, for instance, tended to obtain smaller loans, pay higher interest rates, must put up higher collateral and are dissatisfied with the bank loan process, Robb noted.
Firms owned by African-Americans and Latinos utilize a different mix of equity and debt capital, relative to firms owned by nonminorities, according to the report. Relying disproportionately upon owner equity investments and employing relatively less debt from outside sources, primarily banks, the average firm in these minority business subgroups operates with substantially less capital overall, both at startup and in subsequent years, relative to their nonminority counterparts, the data showed.
“Ensuring that these firms have adequate access to financial capital enables them to continue to drive innovation, growth, and job creation in the U.S. economy,” Robb said. “As the minority population continues to rise, it is more important than ever that these prospective business owners have the resources they need to launch successful firms.”
Citing previous research, Robb noted that African-Americans, Hispanics, and Asians were all more likely to be denied credit, compared with whites, even after a comparison of credit history, credit score and wealth. Hispanics and African-Americans were more likely to pay higher interest rates on the loans they obtained.
Women were slightly more likely than men to say that they didn’t apply for credit when they needed it at some point during 2007–the year leading up to the Great Recession–because they feared their loan application would be denied, according to the report.
Black and Hispanic owners were nearly three times as likely to have this fear, compared with white owners. Nearly one third of black and Hispanic owners stated they had this fear in 2007, and the percentage was even higher in the years of the financial crisis.
“It is hoped that these findings will help policymakers in developing policies to ensure optimal access to debt and equity capital among all small businesses, especially during tough economic times and among those that have been disadvantaged historically in financial markets,” Robb said.
The report comes at a time when the SBA has issued a proposal that would eliminate a personal resources test from the regulations for the agency’s 7(a) and 504 loan programs and allowing SBA applicants more flexibility to use their loans to finance expenses.
“CUNA strongly supports efforts of federal agencies to eliminate unnecessary, outdated regulatory restrictions on credit unions,” CUNA Senior Assistant General Counsel for Regulatory Advocacy Luke Martone, wrote in a comment letter.
There were 347 credit unions with over 8,100 SBA loans outstanding, totaling $921 million in funds, at the end of 2012, according to Martone.
CUNA said the SBA-guaranteed portion of a 7(a) loan is not counted against a credit union’s member business lending cap, but there are approximately 500 credit unions that are currently constrained by or actively managing their caps.
NAFCU has also backed the SBA proposal with a recommendation that the agency revise its policy of certifying the guarantee of a loan, wrote Tessema Tefferi, NAFCU senior regulatory affairs counsel, in a comment letter.
“Many potential credit union SBA lenders are discouraged from engaging in SBA lending because of the lack of certainty relative to the SBA guarantee,” Tefferi said. “Currently, a lender is not provided certification of the guarantee after the loan has been consummated. This inaction has served to discourage entry to the SBA market.”
NAFCU said it would support a certification of the SBA’s guarantee that is subject to particular exceptions such as the guarantee would not apply in cases of fraud, material defect, and failure to perfect a lien.