Woodstock Institute works to document the trends in small business lending to businesses located in lower-income and predominately minority communities. A number of studies show that even after controlling for key firm variables and aggregate neighborhood credit characteristics, African-American business owners are discriminated against in the extension and the cost of small business credit. There are several reasons for this apart from pure discrimination. One reason is that lenders may make individual credit decisions based on aggregate measures of a neighborhood, thus penalizing a business that presents less credit risk than other neighborhood businesses. Another is that lenders may be wary of making loans in neighborhoods they are not familiar with and about which they have insufficient information to make decisions. Woodstock’s research has described the comparative lack of bank branches in lower-income communities. That absence exacerbates the lack of knowledge in a business where character loans are still important. The same research shows that small banks proportionately provide much more of the small business credit extended in lower-income and minority communities than large banks.

This situation makes it important to continue to document the flow of small business credit to lower-income and minority communities and to work on policies that will promote more small business lending. One reason that small business lending has not received the attention paid to home lending is that data on small business lending only became available in 1996 and even then, in not nearly as useful form as data on home mortgage lending.

Reinvestment Alert #23: Small Business Lending in the Chicago Region

Reinvestment Alert #11: New Small Business Data Show Loans Going to Higher-Income Neighborhoods in Chicago Area