What can we do to close the racial funding gap?

Unfortunately, the disparity that BIPOC (Black, Indigenous, and People of Color) business owners face is perpetuated by systems and societal structures within our everyday lives.

In virtually every facet of modern life, many BIPOC business owners face barriers, discrimination and outright racism that impact the outcomes of our lives. The truth is that these problems are not isolated — they are interwoven and dependent on each other because all the systems we engage in on a daily basis are part of a larger ecosystem. It is impossible to separate the disparity in small-business funding from other inequalities in personal banking, housing, education or racial justice. Dismantling systemic racism is bigger than any one solution to any one problem.

That being said, through our research and in talking with several organizations including the Community Reinvestment Fund, USA — a national nonprofit that strengthens communities through innovative financial solutions — we have identified some steps that lenders, corporations and business owners can take to close this gap, in some small way. Assuming that a reallocation of rights, resources and representation is beyond our individual grasp, what else can be done?

1. Enforce the Equal Credit Opportunity Act

The ECOA prohibits creditors from discriminating against credit applicants on the basis of many factors, including race. Stricter enforcement of the Act by the Justice Department by filing lawsuits against lenders that have a pattern or practice of discrimination is one way to enforce the act. As suggested by “Impacts,” the kind of audit study where BIPOC and white business owners apply for a loan at the same institution and measuring the outcome — not just in application approval but in behavior by the loan officers — could help establish proof of these patterns.

By demonstrating a willingness to prosecute violators of the ECOA, the federal government would motivate banks and other lenders to subject their BIPOC applicants to the same degree of scrutiny — or offer the same amount of aid — as they do white applicants.

What can you do as a BIPOC business owner or freelancer for lines of credit?

Make sure you are compliant and eligible as a business owner. If you need more assistance please contact us or apply to join the agency today! Learn more here.

2. Consider soft information and character-based lending

Smaller banks and community lenders, such as CDFIs, tend to consider “soft information,” such as character and context, alongside "hard information." Hard information includes things like credit score or time in business — they are quantitative stats, rather than qualitative. A strong and singular focus on hard information tends to disqualify BIPOC business owners with lower credit scores while using soft information in conjunction with traditional factors gives all business owners a chance to demonstrate why they’re worth investing in.

Lenders often must refer to hard information for regulatory reasons. Large lenders, such as national banks, may use hard information exclusively to review a loan application, as it's faster and easier than examining the larger context. Lenders such as Community Reinvestment Fund, USA (CRF) take a different approach.

“Most business lending is credit-based, the five Cs,” says Keith Rachey of Community Reinvestment Fund. “We're really looking at the propensity to repay from a character basis. And so that means understanding a little bit more about their personal backgrounds, their network and digging deeper into the future business plan. That’s really building a relationship with small-business loan applicants to understand that they have the support system in place and the entrepreneurial drive to actually make the business successful. And we have a lot of confidence in that.”

In this way, though CRF follows all necessary program guidelines when funding SBA 7(a) loans and abides by a credit underwriting and lending policy, they are more flexible when it comes to listening to a borrower’s story. This other information may outweigh a lower credit score and personal financial hurdles.

Such character-based lending could be even more important in an economy that has been shaped and impacted by the coronavirus pandemic, said Rachey. People will be challenged, their credit scores might have taken a hit and lenders will have to find different ways to approve applicants rather than just reviewing quantitative information. “I’m hopeful that’s the case,” Rachey said.

The challenge will be to make this work at scale. It’s much easier for most lenders to simply accept or reject an applicant based on hard numbers, rather than getting to know and understand the business. In the meantime, BIPOC applicants seeking greater access to funding may be best served by working with a CDFI like Community Reinvestment Fund, USA.

How can you as a BIPOC business owner or freelancer build "character based lending"?

Now is the time to start investing in your personal brand, collaborating with other business owners and reviewing your data which includes testimonials because this form of lending is reliant on your network, personal relationships and context of character. If you need help in terms of strategy, design or overall development feel free to contact us or apply to join the agency here.

3. Commit to diversity and bias training

A lack of diversity and unconscious biases at financial companies contributes to the racial funding gap. Even the algorithms that many lenders use to determine the creditworthiness of an applicant can be biased, due to the use of data points that favor certain groups over others.

One of the best ways to reduce these biases is to hire a diverse workforce which will, in turn, diversify the perspectives that make their way into creating machine-learning systems, or that meet with potential loan applicants in person.

Committing to bias training for all employees is another important step for lending institutions. As noted in American Banker: “Many AI developers are white, male and with similar backgrounds in terms of education and experience. There are countless examples of how this causes problems, from facial recognition that doesn’t recognize people with darker skin tones, to voice recognition that doesn’t hear women… AI engineers must also understand how each data point used for machine learning amounts to a lever in their companies’ compliant fair-banking apparatus. AI teams must also be trained on anti-discrimination laws and implicit bias, emphasizing that negative impacts on protected classes of people can often be just as costly as ill-intended acts.”

Lenders must actively work to remove biases from their workflows in order to close this funding gap.

Move money to banks that serve BIPOC communities. Corporations and other big businesses can make an impact in this space as well by following the lead of companies like Netflix, which recently announced plans to move some of their cash holdings to financial institutions and organizations that directly support Black communities.

The capacity of lenders who focus on BIPOC communities is limited by the literal amount of capital they have on hand to lend. As Netflix puts it, “[I]f every company in the S&P 500 allocated a modest amount of their cash holdings into efforts like the Black Economic Development Initiative, each one percent of their cash would represent $20-$30 billion of new capital.”

This would greatly expand lenders’ ability to approve loans to new and growing small businesses led by BIPOC.

How can you as a BIPOC business owner advocate for diversity and inclusion?

It is your responsibility to create equitable solutions at every opportunity. When you are witnessing an injustice please speak up and advocate for those who are unable to. We have to continue to strengthen each other with genuine support and leadership.

4. Encourage BIPOC to apply for financing more often

Finally, it’s worth reiterating that some of the unmet financial needs of BIPOC stem from the discouragement they feel about their chances of success. Organizations that work with BIPOC business owners must encourage them to actually apply for bank loans, SBA loans and other forms of financing that make economic sense for them. As “Impacts” puts it: “[S]eeking loans equal in dollar amount to those sought by equally creditworthy White-owned firms is a sound business strategy.”

In many ways, lending institutions fail BIPOC business owners. They don’t seek to help them; they rely on practices and algorithms that deny them; they may offer them loans at prices that are purposely higher than what they would offer to white business owners because it is more profitable to do so. The opportunity to obtain a needed loan isn’t always available to BIPOC due to forces outside their control — but when it’s possible to claim one, they should take it. The more often a BIPOC-led business receives a loan and succeeds thanks in part to that capital, the more often lenders will, hopefully, extend offers to their peers in the future.

How can you as a BIPOC business owner increase funding applications within the community?

The bottom line

There are no easy solutions to a problem like this. The factors that created the racial wealth gap are long-standing and deeply ingrained in the biases, conscious and unconscious, of many. The first step is to address and acknowledge the disparity. The next steps will be different for each of us, but they must all point toward a common goal: Leveling the entrepreneurial playing field and giving every business owner the opportunity to succeed, no matter who they are, where they live or what they hope to achieve.

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