(Mis)Pricing in Loans to Businesses Owned by People of Color

William D. Bradford (), Chunbei Wang (), Magnus Lofstrom and Michael Verchot ()
Additional contact information
William D. Bradford: University of Washington
Chunbei Wang: Virginia Tech
Michael Verchot: University of Washington

No 17730, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This study uses survey data on small business loans granted 2022 -2023 to explore racial disparities in the terms of loans to small firms. Similar data has not been available since the 2003 Survey of Small Business Finances (SSBF). We find that for Hispanic-, Asian American- and Black-owned firms, the interest rate paid was higher than for comparable white-owned firms, adjusting for risk factors determining interest rate on loans, including the firm's industry, financial attributes, owner traits, credit history and type of loan. We also find that while Black-owned firms pay higher interest rates in states with greater broad racial disparity, while it is not statistically significant for the other minority groups. We conducted robustness tests to verify the strength of these results. If our results are nationally representative of firms that borrowed during the period we observe, then collectively on average, Asian, Black-, and Hispanic-owned businesses annually pay $9.1 billion more in interest than white-owned firms of equivalent risk attributes. Another component of credit is collateral. We find that co-signatures from third parties are required more frequently for minority firms than is justified by our economic analysis.

Keywords: entrepreneurship; self-employment; business ownership; racial disparity; minority; loan pricing (search for similar items in EconPapers)
JEL-codes: D4 G2 J15 L26 M (search for similar items in EconPapers)
Pages: 42 pages
Date: 2025-02
New Economics Papers: this item is included in nep-ent, nep-lab and nep-sbm
References: Add references at CitEc
Citations:

Downloads: (external link)
https://docs.iza.org/dp17730.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp17730

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().