The State of Minority- and Women- Owned ... - Cleveland.com

Statistical Disparities in Capital Markets
The results provided so far strongly indicate that financial institutions treat African Americanowned
and nonminority male-owned small businesses differently in lending. Other
considerations, however, may limit our ability to interpret this finding as discrimination; in
particular the possibility that we may not have adequately controlled for differences in the
creditworthiness of firms. If African American-owned firms are less creditworthy and we have
failed to sufficiently capture those differences, then we would be inadvertently attributing the
racial difference in loan denial rates to discrimination. On the other hand, if financial institutions
discriminate against African American-owned firms, then the greater likelihood of denial for
African Americans in earlier years is likely to hurt the performance of these firms and appear to
make them look less creditworthy. Therefore, controlling for creditworthiness will likely
understate the presence of discrimination.
As a check on the foregoing results, therefore, our first approach was to identify the types of
information that financial institutions collect in order to evaluate a loan application and compare
that with the information available to us in the NSSBF. First, a selection of small business loan
applications was collected from various banks. An Internet search of web sites that provide
general business advice to small firms was also conducted. Such sites typically include
descriptions of the loan application process and list the kinds of information typically requested
of applicants. 278
Bank loan applications typically request detailed information about both the firm and its
owner(s). Regarding the firm, banks typically request information on: (a) type of business,
(b) years in business, (c) number of full-time employees, (d) annual sales, (e) organization type
(corporation or proprietorship), (f) owner share(s), (g) assets and liabilities, (h) whether the
business is a party to any lawsuit, and (i) whether any back taxes are owed. Regarding the
owner’s personal finances, banks typically ask for: (a) assets and liabilities, (b) sources and
levels of income, and (c) whether the owner has any contingent liabilities. Some applications ask
explicitly if the firm qualifies as a minority-owned enterprise for the purposes of certain
government loan guarantee programs. The race of the applicant, however, would be readily
identifiable even in the absence of such a question since most of these loans would be originated
through face-to-face contact with a representative of the financial institution.
These criteria seem to match quite closely the information available in the 1993 NSSBF. The
particular strength of the NSSBF is the detail available on the firm, which covers much of the
information typically requested on loan application forms. The only shortcoming that we have
identified in the 1993 NSSBF data is that less detail is available on the finances of the owner of
the firm, as opposed to the firm itself. 279 Although our creditworthiness measures enable us to
identify those owners who have had serious financial problems (like being delinquent on
personal obligations), we have no direct information regarding the owner’s assets, liabilities, and
income (as opposed to those of the firm). These factors would be necessary to identify whether
the business owner has sufficient personal resources to draw upon should the business encounter
278 An example of a typical application form is presented as Appendix B in Blanchflower, Levine, and Zimmerman
(2003).
279 This is remedied in the 1998 SSBF and the 2003 SSBF, discussed below, both of which contain information on
the owner’s home equity, and personal net worth excluding home equity and business equity.
NERA Economic Consulting 201