The Consumer Financial Protection Bureau (CFPB) wants to know more about the credit needs of small businesses, particularly those owned by women and minorities. The CFPB recently launched an inquiry into the small business financing market and has called for comments from interested parties including banks, lending marketplaces, small business owners and consumer groups.
Though minority-owned businesses are becoming an increasingly growing share of the U.S. economy, they are disproportionately turned down by banks compared to their white counterparts. In fact, they’re also more likely to fail because of lack of access to capital.
The number of bank loans to minority small-business owners has dropped significantly from pre-recession levels. For example, in the state of California, the SBA backed $5.1 billion in loans last year, mostly through large banks. Of that, only 2 percent went to African American borrowers and 13 percent to Latino business owners.
Female small-business owners face similar credit struggles. Statistics show that women business owners make multiple attempts to secure bank loans and lines of credit, and 40 percent of women business owners that apply for a loan never succeed in obtaining funding. Loans to women make up only about 4 percent of all commercial loan dollars.
Experts say in part, lingering aspects of the Great Recession on lower-income communities are to blame. Low-income community members’ credit scores were affected, the banking industry became more heavily regulated and banks became much more cautious about lending, leaving many borrowers with nowhere else to go.
With their emerging technologies and streamlined application processes, lending marketplaces stepped onto the small-business lending scene, filling the void left by traditional financial institutions post-recession. For decades, small-business owners have mostly turned to banks, credit unions and the SBA for funding—sources that have been limited by complex regulations in the recovering economy. A recent Lendio infographic shows how lending marketplaces are fueling mom-and-pop shops across the U.S. at a staggering rate.
In the midst of a sharp decline in small-business bank lending following the 2008 recession, lending marketplace loan origination has exploded, up a whopping 700 percent. Lending marketplaces are helping to shatter the glass ceiling for women business owners and bridge the gaps in credit access for minority business owners as well.
Marketplaces are able to match business owners with a host of financing options from a variety of lenders. No longer bound by banks’ conservative lending standards, small-business owners can apply for capital on more than just collateral and credit scores alone. By assessing a business’s online sales, cash flow, banking transactions and other data, marketplaces are making it easier for underserved markets—including women and minority-owned businesses—to find a loan product that suits their needs so they can continue to become a vital part of the U.S. economy.