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New research sponsored by The Boston Foundation finds that, even after the pandemic put racial disparities in business lending into stark relief, Massachusetts entrepreneurs of color are still struggling to access capital.
Local consultancy P2 Advisors compiled 2022 data from the Federal Reserve to calculate that white-owned Massachusetts businesses faced an 18 percent denial rate for bank loans, while applications from Black-owned startups were denied 50 percent of the time. Among Latino-owned and Asian American-owned businesses that figure was 32 percent and 31 percent, respectively.
In addition, the data showed 57 percent of white-owned businesses received the full amount they applied for, while only 20 percent of Black-owned firms received the same, compared to 38 percent of Latino-owned and 33 percent of Asian-owned companies.
In total, P2 Advisors calculated there was a $603 million gap between the financing small businesses of color sought in Massachusetts and 2022 and what they were able to get from banks. That figure is up 5 percent from the last Boston Foundation report on the topic, which covered 2019.
“Economic growth in communities of color is vital for closing the racial wealth gap,” Boston Foundation President Lee Pelton told attendees at a presentation of P2’s research Tuesday, calling the data “distressing.”
“The data shows that entrepreneurs of color have huge unmet demand to finance and help grow their businesses,” he added.
A panel of experts speaking following the presentation of data said a significant part of the racial gap in access to capital comes down to how banks have historically underwritten loans and lines of credit.
“We know anecdotally that a lot of it has to do with perceptions of risk, that people of color are riskier investments,” said Betty Francisco, CEO of the Boston Impact Initiative and co-founder of Amplify Latinx.
Another part of the problem, she said, was that banks in general are restricting access to credit now that they face much higher costs of deposits and interest rates, along with economic uncertainty. That’s also driving some banks to reduce how much money they give to community development financial institutions or similar organizations, like the Boston Impact Initiative, she said.
Banks have historically often turned to CDFIs to help fulfill their obligations under the state and federal Community Reinvestment Acts to invest in minority neighborhoods, or through a desire to boost capital availability for minority businesses, due to CDFIs’ ability to be more flexible in their lending and the stronger relationships the institutions might have with minority communities in particular areas.
“It’s unclear if the billions of dollars committed during the George Floyd era will flow, but there are lenders that are standing strong,” she said, referencing commitments many large financial institutions made to increase investments in businesses of color following the 2020 murder of George Floyd, a Black man, by Minneapolis police and the subsequent wave of racial justice protests.
Some local banks have already identified this racial gap in access to capital as a growth opportunity, including smaller community banks like Bay State Savings Bank in Worcester and New Valley Bank & Trust in Springfield.
