Growing a healthy, vibrant economy requires a diversity of businesses and business owners. Particularly in the small business community, having a wide representation of business owners is critical in fostering a robust economic ecosystem.
In Arkansas, small businesses form the backbone of the state’s economy, at roughly 247,000 businesses, as of 2018, according to the Small Business Administration. Minority business owners own 15 percent, or 36,000, of these small businesses, while women own 32 percent, or 79,000 businesses.
Despite the substantial number of businesses minority and women business people own, a recent study has found that there is a significant racial and gender disparity in business lending in Arkansas. Commissioned by the Winthrop Rockefeller Foundation and Winrock International, the Arkansas Small Business Access to Capital Study found that almost three-fourths of minority entrepreneurs relied on personal cash and savings to fund their businesses during their startup years and that these groups applied for bank loans at disproportionately lower rates for funding.
For this study, Precise Data Consulting, LLC was engaged to survey Arkansas businesses to determine the rate at which different demographics depended on different sources of funding. In total, more than 3,000 business owners were invited to participate with 307 responding. The consulting company used 231 business owners’ responses in the survey due to 73 participants not completing the survey and two being disqualified or eliminated. There were 36 out of 75 counties, or 46 percent, represented in final analysis.
The researchers concluded that there was a substantial disparity in the bank lending practices in the state based on the answers provided in the survey. This data, the researchers stated, could have harmful repercussions for the state’s economy. “Thus, unequal capital access could stifle the growth of thousands of businesses and households, and prevent economic advancement of communities across the state,” the report reads.
Non-minority males had the largest percentage of bank loans, according to the capital access study, with 45 percent taking out a bank loan to finance their business during the first three years of operations. This was the only group, in both race and gender, to have more than 40 percent of owners obtain bank loans.
Eight non-minority males applied for one loan, while 12 applied for two loans and 11 applied for three or more.
The closest group for comparison was non-minority females, which had 36 percent take out a bank loan for business funding. The numbers dropped significantly for minority males and even more dramatically for minority females. Only 23 percent of minority males took out a business loan and 12 percent of minority females took out a business loan.
Curiously, non-minority females had the greatest number and percentage of three or more loans applied for, at 18 or 31 percent. Only 11 non-minority males applied for three or more loans, while 13 minority males and 13 minority females applied for three or more loans.
In total, 98 study participants, or 42 percent, had not applied for a loan in the past three years. This group included 45 minority females, 24 minority males and 22 non-minority females. Only seven non-minority males did not apply for a bank loan.
When asked why they did not apply for a loan, a significant portion – 42 percent – responded that they did not require one. In this category, 57 percent of non-minority males and 59 percent of non-minority females said they did not need a loan, while 46 percent of minority males said they did not need a loan. However, only 24 percent of minority females said they did not apply for a loan because they didn’t need one.
Other than a lack of need, the biggest reason minority business owners cited for not applying for a loan was credit history. This was the reason for 33 percent of minority females and 17 percent of minority males but only nine percent of non-minority females and no non-minority males.
Non-minority males did cite unaffordable payments and being declined in the past at higher rates than the other groups at 14 percent each.
For those minority business owners who applied for a bank loan, the owners were denied loans at a higher rate than non-minority owners. Minority females had the highest denial rate at 45 percent with minority males just behind them at 39 percent. Meanwhile, only 11 percent of non-minority females and 10 percent of non-minority males were denied for loans. Non-minority males had the highest approval rating at 56 percent, and non-minority females were approved at a rate of 53 percent, while only 25 percent and 18 percent of minority females and males, respectively, were approved.
As a result, minority business owners, whether POC business owners or women business owners, relied more heavily on other funding sources. These included personal cash, credit cards, private loans and business earnings.
Overall, personal savings accounted for the largest percentage of funding for all demographics. Based on the study’s findings, 71 percent of minority males used personal cash from savings, stocks, earnings or other sources to fund their business in the first three years. An even greater percentage – 76 percent – of minority females used personal cash to finance their ventures.
By contrast, 53 percent of non-minority males relied on personal cash for business funds. The percentage was higher for non-minority females at 60 percent.
All demographic groups relied on credit cards at roughly the same rate. Both minority and non-minority females had the same rate of credit card usage for business expenses – 33 percent. In the study, 32 percent of non-minority males relied on credit cards and 31 percent of minority males relied on credit cards.
Approximately 40 percent of male and female minority entrepreneurs used business earnings to finance their business during the startup year with 43 percent of minority males and 40 percent of minority females using business earnings. With non-minority females, 47 percent used business earnings to fund their business while only 21 percent of non-minority males used their business earnings to fund their endeavor
Traditional banks were the main source of loans for businesses, providing 63 percent of the business loans to these owners. Approximately 19 percent used online or out-of-state lenders, while 11 percent used credit unions and 6 percent used CFDIs. Two percent of the business owners obtained financial assistance through credit cards.