Small businesses and startups in low-income neighborhoods in the Chicago area have a harder time obtaining bank loans than their counterparts in wealthier areas and often resort to online financing with interest rates so high that they threaten their solvency, according to a report published Tuesday by the association. Woodstock Institute.
The report found that despite an overall increase in bank lending in the Chicago area, small businesses in low-income census tracts or those with large minority populations still do not get a proportional share of loans under $ 100,000.
For example, the report found that 24.5% of all businesses in the region are in low to moderate income census tracts, while they only received 19.7% of loans below 100. $ 000 from 2015 to 2017, a difference of 4.8 percentage points.
The results were similar when the leaflets were reviewed by minority population. Those with 40 percent or more of a non-white population accounted for 48.7 percent of businesses, but received 42 percent of loans during the same period, a variance of 6.7 percentage points.
The disparity was greatest in the northern Illinois markets, which the report also covered. Areas such as Champaign-Urbana-Danville, Moline-Rock Island and Springfield-Decatur had disparities of more than 10 percentage points. Unlike Chicago, much of Downstate also suffered from a drop in the number of loans reported under the Community Reinvestment Act from 2000 to 2017.
Deavay Tyler, executive vice president of the Illinois Black Chamber of Commerce and entrepreneur, said the lack of capital is the biggest hurdle for small businesses, especially those owned by minorities. He said the problem is exacerbated by the lack of training of bank loan officers and the poor preparation of business owners who cannot afford accountants.
Racism is at play in a small percentage of cases, Tyler said. “There is a perception in the banking community that a loan for a business in the minority community will just be more difficult,” he said. “They are not giving the borrower the benefit of the doubt.”
He added: “The missing link is education on both sides. “
The Woodstock Institute, which is researching ways to make financial services fairer, said the US Department of Justice and the Consumer Financial Protection Bureau should examine whether racism is at the heart of the results. It further recommends that all small business lenders, bank and non-bank, be required to declare the race and gender of loan recipients.
Entitled “Patterns of Disparity: Small Business Lending in Illinois,” the report builds on similar research published by Woodstock in 2017 and involving major cities in the United States.
It highlights the effect of the high interest rates charged by “fintech” operations that offer business loans or cash advances online. Previous studies have shown that some can charge interest rates of over 300%, leaving business owners in a bind similar to what individuals can see with payday loans.
“There is space for them, but there has to be some accountability,” Tyler said. “The standard interest charge is 30%, and those are the good guys. “
Dory Rand, president of Woodstock, said sensible regulations, including a stronger CRA, are needed to ensure “it’s no longer the norm that the whitest and wealthiest neighborhoods receive a disproportionate share of loans. small businesses ”.
The data in the report only covers the lending activity of large banks, which are required to report their CRA-related activities. But even with that limitation, it still covers most small business loans, he said.