Research Points to Fintech as a Better Option for Black Business Owners

Nov 12, 2021 • 7 min read
PPP loan application disparity black business owners
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      When the COVID-19 pandemic hit in the spring of 2020, it amplified existing economic disparities between Black and non-Black business owners: between February and April 2020, Black business ownership dropped by 41%, according to a report from the Congressional Small Business Committee. 

      The report also found that “Black-owned businesses were less equipped to handle mandated closures, more likely to be located in areas with high volumes of COVID cases and had less access to relief.” This meant that when the pandemic arrived at the door of America’s small businesses, it had a disproportionately higher impact on Black-owned businesses.

      Due to entrenched racial inequalities, many minority-owned businesses were already in trouble prior to the pandemic. Only 1% of Black businesses receive loans in their first year of operations, compared to 7% of white businesses. And a study conducted by the Federal Reserve Bank of New York found that, before COVID-19 hit, 58% of Black-owned businesses were already at increased financial risk, compared to 27% of white-owned businesses. 

      As the pandemic continued, many Black business owners sought assistance through the Paycheck Protection Program (PPP), which provided government-backed loans to the small businesses and nonprofits that experienced business disruptions due to the pandemic. 

      However, traditional banks and lending institutions denied Black-owned businesses PPP loans at rates higher than for non-Black businesses. According to Vox, who spoke with the advocacy group Small Business Majority, “23% of Black business owners who did not receive PPP or Economic Injury Disaster Loans said their PPP applications were denied, compared to 9% of white business owners, 13% of Latino business owners, and 9% of Asian American business owners.” 

      Due to this disproportionate denial, many Black business owners turned to nontraditional sources to keep their businesses afloat—and some found the help they needed with fintech solutions. 

      The overall conclusion: 53.6% of PPP loans given to Black business owners came from fintech lenders, including Lendio.

      Paycheck Protection Program Loans and Black Business Owners

      PPP loans incentivized businesses to keep their workers employed and prevent any future layoffs at a time when many faced unexpected challenges to their survival. But PPP loans only had a 29% success rate (a rate defined by Reimagine Main Street as the percentage who applied for a PPP loan multiplied by the percentage who received relief) with Black business owners, compared to the 60% success rate achieved by white applicants. And PPP loans only reached 20% of eligible businesses in states with the highest number of Black business owners and entrepreneurs. 

      Some believed the problem causing this disparity was with the PPP loan application. When borrowers apply for other SBA loans, the option to disclose race, ethnicity, and gender is voluntary, making it harder to correct for existing racial and gender-based disparities in lending when deciding which businesses to fund. However, the option to disclose this data still usually exists.

      On PPP loan applications, though, the SBA originally excluded a demographic reporting option entirely, adding it to application forms at a later date—amplifying this challenge at a critical juncture for American small businesses. As a result, only 23% of PPP loan data includes data on applicants’ race and/or gender. This means that the full picture of racial inequality in PPP loan funding from traditional banks may never be fully visible—but it remains deeply experienced

      To attempt to rectify this inequity, the Biden administration and the SBA established a two-week exclusivity period, beginning on February 24, 2021, for the smallest (20 employees or fewer) and/or underserved businesses to apply for PPP loans. That month, SBA Senior Advisor Michael Roth stated that “we believe we can still do better” in regards to reaching underserved businesses, including Black-owned businesses. “The important policy changes we are announcing,” he shared, “further ensure inclusivity and integrity by increasing access and much-needed aid to Main Street businesses that anchor our neighborhoods and help families build wealth.”

      Black Business Owners Turn to Fintech Lending Solutions

      While the changes the SBA made to PPP guidelines in February 2021 may have aided underserved businesses at the tail end of the program, it was fintech (including Lendio, which facilitated more than $10 billion in PPP loans) not traditional banks, that ultimately came through for Black-owned businesses.

      Fintech, short for financial technology, includes any tech that financial institutions use to improve their offerings to customers—giving consumers more freedom and flexibility compared to traditional lending options, with automation as a distinctive hallmark for many fintech offerings. Types of fintech providers vary, ranging from small business lending institutions like Lendio to online payment services like Transferwise and PayPal. 

      According to an economic working paper analyzed in the New York Times, Black-owned businesses were more likely to get their PPP loans from fintech providers than traditional lenders. The study examined a sample of 5.7 million PPP loans granted from April 3, 2020 to February 24, 2021. It revealed that, in this timeframe, only 3.3% of PPP loans originated by small banks went to Black-owned businesses. 

      The study also found that Community Development Financial Institutions (CDFIs)—private organizations that deliver affordable lending options to low-income borrowers—gave 10.6% of their loans to Black-owned businesses, while fintech firms gave 26.5% of their loans to Black entrepreneurs. The overall conclusion: 53.6% of PPP loans given to Black business owners came from fintech lenders

      The study’s researchers noted that automation—while sometimes a contributor to racial bias—in this case actually may have mitigated bias that Black-owned businesses otherwise faced from traditional lenders.  “We find evidence,” reads the study’s abstract, “that when small banks automate their lending processes, and thus reduce human involvement in the loan origination process, their rate of PPP lending to Black-owned businesses increases, with larger effects in places with more racial animus.”

      While racial bias in banking is far from breaking news, the study’s findings may still come as a surprise to many hoping for an equitable-as-promised PPP rollout. The intention of the Paycheck Protection Program was to help small businesses most affected by the pandemic. Several banks, however, chose to do the opposite, prioritizing their own clients’ PPP applications with a “first come, first serve” approach. This method alienated Black-owned businesses (and others) and resulted in them seeking assistance from fintech lending solutions. 

      Black-Owned Businesses Moving Forward

      COVID-19 taught many small business owners, out of necessity, to think outside the box in the way they run their businesses. It also encouraged businesses to try different lending options that they may not have considered before. While the PPP program has closed, fintech options for other types of small business financing still exist. You can learn more about funding opportunities that fit your business here.

      Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
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