Bank Discrimination and Its ‘Debilitating’ Effect on Minority Entrepreneurs

For a recent mystery shopper experiment, three business school professors recruited black, white, and Hispanic entrepreneurs across the U.S., dressed them in matching polo shirts and khakis, and sent them into banks to ask about small business loans. The results are disheartening, if not a big surprise.

White business owners got better and more encouraging service, according to a new paper describing the study in the Journal of Consumer Research. Bank employees were more likely to tell them about loan terms and fees and more likely to offer help filling out an application. Bankers were more likely to ask minority entrepreneurs about their personal finances and less likely to offer the black and Hispanic mystery shoppers a business card.

It’s not news that black and Hispanic small business owners have a harder time finding financing than white businessmen, but the JCR paper offers insights into how entrepreneurs experience the process of seeking new capital.

In one part of their research, authors Glenn Christensen, Sterling Bone, and Jerome Williams asked business owners to collect photos that best describe the experience of applying for a loan. Minority entrepreneurs chose images including a dry faucet, a beggar, and a set of handcuffs. White business owners focused less on the hard road and more on the satisfying result, selecting photos of a water slide and a beachfront idyll.

In interviews with researchers, both groups described the loan application process as a journey, but “minority consumers framed the journey as uphill, while white consumers consistently framed their journeys as on level ground.” White entrepreneurs sought lenders who would serve as a partner or friend, according to the paper, while minority business owners reported hiring white employees for the purpose of attending meetings with bankers. The result, the authors write, is “a cumulative debilitating effect on [their] psychological and physical well-being.”

These are anecdotal findings, but they’re supported by quantitative research. In 2012, Federal Reserve data revealed that minority business owners were paying interest rates that were 32 percent higher than what whites paid for loans. Last year, research from the Kauffman Foundation showed that minority entrepreneurs were more likely to be turned down for loans and less likely to apply, for fear of rejection.

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