Massachusetts banks made more SBA-backed loans to minority-owned businesses in the first eight months of 2023 than they made in all of 2022. iStock illustration

Lending to minority-owned small businesses is increasing rapidly in Massachusetts, as some local bankers and federal officials work to level the playing field.

The federal Small Business Administration recently reported a big increase in SBA-backed loans being made to Black- and Latino-owned small businesses in 2023. In Massachusetts, a total of 1,533 SBA-backed 7(a) and 504 loans were issued to minority-owned small businesses, amounting to $575.92 million in the first nine months of the year which is already higher than 2022’s 1,463 loans to minority-owned small businesses, valued at $571.6 million.

Thanks to the SBA’s guarantee of a large share of each loan’s total, 7(a) and 504 loans are often a community bank’s tool of choice when lending to small businesses that aren’t seeking a line of credit.

Out of the total, 26.3 percent was lent to minority borrowers in Massachusetts from January to September, an increase from the 20.85 percent in 2022. This includes people of color such as Hispanics (up to 11.9 percent from 10 percent in 2022), Asians (up to 8.2 percent from 6.7 percent), Blacks (up to 5.74 percent from 3.83 percent) and Native Americans (up to 0.46 percent from 0.34 percent).

But minority business owners still face persistent challenges in accessing funding from banks.

Data from the Federal Reserve’s 2023 Small Business Credit Survey shows startup businesses owned by people of color across the country were less likely to receive the funding they sought. These firms were less than half as likely than white-owned startups to be fully approved on loan applications, but around twice as likely to be denied.

Only 17 percent of loan applications from minority-owned startups were fully approved in 2022 versus white-owned startups that had 45 percent of their loan applications approved. And around 53 percent of loan applications from minority-owned startups were denied, doubled the 27 percent denial rate for white-owned startups.

Even with the Paycheck Protection Program during the pandemic, majority or 70 percent of white owned businesses secured the most amount of funding, while only 31 percent of black owned businesses were approved, and 34 percent of them were denied.

Banks Averse to Risks?

Historically, some bankers have excused racial disparities in small business lending by claiming that when a bank lends to borrowers with low credit scores or not enough credit history, it is opening itself up to more risks as the ability of the borrower to repay is unknown.

But Gary Levante, Berkshire Bank’s senior vice president for corporate responsibility and communications, said that minority small business borrowers’ risk profile profiles is not that far off from risks in a business loan to traditional borrowers – more likely to be white-owned.

“When we look at the perception that these loans are riskier, I think we found in our experience that that’s not the case. These loans aren’t any more risky than a standard business loan,” Levante said.

Levante said that the bank offers what it calls the “Futures Fund Program” which provides a low interest line of credit of up to $50,000 to small businesses owned by historically marginalized and underrepresented individuals.

Under the Futures Fund Program, Berkshire helps individuals such as women, people of color, persons with disabilities, LGBTQIA+ individuals and veterans to have access to working capital and resources. The program also provides borrowers with “wrap-around services” such as access to accountants, lawyers and other services that can help them better conduct business, in partnership with nonprofit organizations.

A regular small business loan will typically require a credit score of at least 600, but programs like the Futures Fund can give credit lines to people with credit scores as low as 545, as long as they present “a true business” that has been operating for at least two years, Berkshire’s First Vice President Ron Molina-Brantley said.

“Something like a credit score is important to determining someone’s creditworthiness, but it’s not the only thing to determine if someone is creditworthy and if someone has the capacity to repay,” Molina-Brantley said.

If a borrower winds up in bankruptcy or is having a harder time making loan payments, Levante said, Berkshire will continue to work with the individual or business owner to find the right funding and loan repayment structure for the business to stay afloat. The bank may adjust repayment terms, while Berkshire’s partner nonprofit organizations may assist the troubled borrower with their business and tax-related processes.

SBA Looks to Shift Incentives

For its part, the Small Business Administration is also applying some changes in its rules to encourage more lending to minority communities, said Robert H. Nelson, the agency’s district director in Massachusetts.

Nelson said that the agency is trying to make it easier for lenders to service minority-owned small businesses by adopting changes such as increasing the dollar amount – from $500,000 to $1 million – after which the SBA charges fees as well as increasing Small Business Lending Company licenses, allowing lenders to follow their own policies and procedures in processing the loan applications and the SBA assuming all eligibility risks, among other changes.

Nika Cataldo

“As far as SBA is concerned, ordinarily, a lender is spending the same amount of time on a loan of $100,000 versus the time they would [allot] for a loan of $1 million,” Nelson said.

“For efficiency, some lenders have looked at just doing larger loans. We’re trying to get them with a simpler process for loans under $500,000 with the intent that if we can get them to do more low-dollar loans, it’s going to help underserved communities with more loans,” he added.

Nelson said the agency and banks that work with it are doing their own outreach programs to provide one-on-one coaching, education, and guide to financial literacy and wellness to towns with predominantly minority communities such as people of color.

Even with his 25 years of experience with SBA, he said that the work in reaching marginalized and underserved communities never stops.

“We try to help them achieve their American dream through entrepreneurship and small business ownership,” Nelson said.