Despite all the challenges involved in starting a business, a number of young Black Americans are betting on themselves and putting their energy into entrepreneurship. Many of the financial resources necessary to grow a small business, however, remain out of reach for Black Americans, who have long faced historical bias and systemic racism.
A recent paper in the Journal of Marketing Research, published online last month, found that Black entrepreneurs are still severely discriminated against by banks, even when they are more qualified than their white counterparts. In an attempt to update a similarly troubling study from a decade ago, a team of researchers conducted three field studies, with two focusing on Atlanta and Washington respectively, that yielded concerning results. Apparently, not much has changed in how discrimination is “tainting the American Dream for minority entrepreneurs,” as a report on the new paper eloquently puts it.
In the research from the Atlanta area, white and Black test subjects used fabricated portfolios to apply for business loans at banks to determine how the experiences of the two groups differed. But even when the Black testers had stronger financial profiles and higher credit scores than their white peers, they still received inferior loans.
The data in Washington showed that while Black testers with high socioeconomic profiles received similar treatment to their white counterparts, white testers with low socioeconomic profiles were subject to less discrimination than their Black peers. This opens up a whole other conversation about classism — but I’ll save that for another time.
These findings echo the results of a recent Intuit QuickBooks survey in which 57% of Black business owners said they were denied at least one bank loan during the formation of their business, while only 37% of non-Black business owners said they were denied. Other reporting suggests that such rates may be even worse for Black women who own businesses.
While this discrimination is due to a broken and racist banking system, researchers behind the Journal of Marketing Research paper aimed to empower Black entrepreneurs by offering advice on detecting bullshit bias and fighting back. According to their findings, Black entrepreneurs who had joint business structures experienced less racial bias in loan approvals, while those who established limited liability companies or S corporations were approved at even higher rates than their white peers.
Because of this, the researchers suggested that Black entrepreneurs “put their best foot forward” by structuring their businesses as LLCs and mentioning high credit scores early in the application process with lenders.
Look, it’s exhausting to have to play the game in this way, but until we beat racism out of the banking system — and that’s going to take a minute — it’s necessary.
And speaking of disrupting the system, the researchers had suggestions for financial institutions too: Take accountability for historical prejudice, and then enforce systems that prevent and address it. Also, develop policies that ensure all products are advertised to every customer, a checks-and-balances system to mitigate employee bias during the selection process, and self-service technology so that customers can access resources directly.
The researchers further asserted that policymakers need to create standardized lending forms, find programs that inform and provide assistance to Black-owned businesses, and increase oversight.
“The bias training at banks is simply not working,” said Sterling Bone, a professor of marketing at Utah State University who co-authored the new paper. “It’s time to do something different.”