The St. Louis Post-Dispatch
By: Robert Boyle and Eddie Davis
August 24, 2010
The U.S. Census Bureau recently reported encouraging news about one segment of the nation's economy: The number of minority-owned businesses is increasing at unprecedented rates, and more minorities own their own companies than ever before. Yet, despite these signs of development, the bureau's findings also revealed a shocking disparity in racial economic equality: White-owned companies outnumber minority-owned businesses by almost four to one.
According to the research, the economic influence of minority companies lags far behind those owned by whites. For example, sales at minority-owned companies made up barely 3 percent of all business receipts.
This disparity has its roots in the issue of the "unbanked" and "underbanked." According to research from the Federal Deposit Insurance Corporation, at least 9 million U.S. households are unbanked, meaning they have no checking or savings accounts and no access to mainstream financial services. Similarly, roughly 21 million, or 18 percent, of all households in the United States are underbanked, meaning they have limited or sporadic access to mainstream financial services.
The unbanked/underbanked crisis affects minorities at a much higher rate than whites. Almost 22 percent of black households and more than 19 percent of Hispanic households are unbanked. By contrast, less than 4 percent of whites are unbanked.
Here in St. Louis, the racial disparity in banking is the largest in the country: more than 31 percent of black households do not have checking or savings accounts, whereas only 1 percent of white households are unbanked. Furthermore, 33 percent of black households in St. Louis are underbanked and, in the last year, used check-cashing services, payday loans or pawn shops.
In total, a staggering 64 percent of black households in the St. Louis area either are unbanked or underbanked.
Locally and nationally, large segments of minority populations are severely disadvantaged in terms of owning their own businesses, simply because their lack of credit history limits their ability to access the capital they need to run a business.
What's more, minority-owned businesses are, on average, more vulnerable to failure and bankruptcy for precisely this reason. Because more minorities are unbanked or underbanked, they have fewer savings and less ability to borrow money on affordable terms. So when business slows and the bills pour in, these companies are more likely to go bust or borrow from payday lenders at astronomical interest rates and whopping penalties.
Simply put, without strong credit profiles, minority-owned businesses are on thinner ice.
The answer to leveling the racial disparities in both business sustainability and banking involves raising and maintaining high credit scores in minority populations. When entrepreneurs increase their credit scores, they demonstrate a clear ability to manage their finances, making it easier for them to secure business loans.
In fact, a high credit score possibly is the single most important asset for a business owner in today's economy. Despite the federal government's call to increase small business lending, business owners are experiencing a credit crunch as a result of the recession. This is making it harder than ever for business owners with less-than-perfect credit to borrow money to sustain or grow operations.
The good news is that with the right information and financial tools, any business owner can earn -- and maintain -- a high credit score, regardless of cash flow or their business' performance over the past year. This means that owners of even modest businesses have the power to increase their ability to access to capital to stabilize or expand operations.
While the credit crunch has made borrowing from banks more difficult than before, regulated and affordable alternatives are available. Community Development Financial Institutions (CDFIs), as well as nonprofit microlending organizations, are increasing in number and lending capacity across St. Louis and the nation. These organizations provide smaller loans on average than banks, and serve as critical resources for small businesses in need of capital.
While these organizations are growing nationwide, it is more important than ever that federal and state legislators, civic leaders, national and regional banks and national and local community organizations work to raise awareness of the importance of building strong credit. We must join efforts, starting in the St. Louis metropolitan area, to create and support policies and programs that focus on reducing the populations of unbanked minorities and helping them to improve their credit scores.
By addressing the unbanked crisis, we will help empower millions of credit-underserved entrepreneurs to improve their financial capacity so they can play a larger, more powerful role in the local and national economies.
Robert Boyle is founder and CEO of Justine PETERSEN, a St. Louis non-profit group that helps low- to moderate-income people build financial assets, buy homes and obtain microloans. Eddie Davis is president and CEO of the Center for the Acceleration of African-American Business and a Justine PETERSEN board member.