Banks addressing Black business debt aversion is good business and good for city

Addressing debt aversion due to poor relationships between banks and the Black community is good for banks and the city.  

The Biennial Black Business Survey, conducted by my company looked at the issue of debt aversion with Black businesses. This focus was prompted by a previous survey which found that nearly 80% of Black businesses never applied for a loan throughout the life of their business.

Until recently, Black business formation in Indianapolis was relatively low with Indianapolis ranking 55^th out of 85 metros in business formation. More recently there has been a substantial increase in Black business formation.

For example, when the survey was distributed to certified Black owned businesses using the city and state lists in 2021 there were 487 businesses, in this last distribution using the same sources the list grew to 1,001 certified Black owned businesses.

The Black community’s relationship with financial institutions started with the short-lived Freedman’s Bank—an institution that was initially set up to support newly freed African Americans to obtain some level of economic security.

Unfortunately, the bank was an unmitigated disaster with inattention by Congress, the panic of 1873 and massive theft and mismanagement by trustees ultimately resulting in its closure in 1874, a little over 9 years.

Black financial institutions would experience a golden era for a brief period between 1918 through the 1930s reaching to as high as 130 banks and 50 credit unions by 1934. This period roughly coincided with the golden age in Black business which was partly driven out of segregation and Jim Crow laws that forced dollars to circulate within the Black community due to the limitations imposed on Black customers.

According to Forbes, there at 31 Black banks and 31 Black credit unions in the country—including community based micro-lender Mount Zion Indianapolis Federal Credit Union.

Mount Zion Indianapolis Federal Credit Union was formed in 1963 when Rev. Dr. R.T. Andrews, then the pastor of one of the largest Black churches in the city sought a loan and was not only denied but called a racial slur.

Dr. Frank Lloyd would start a Black led financial institution called Midwest National Bank in 1972, which was eventually purchased by another bank.

But with the surge in Black business creation are we seeing different attitudes regarding financial institutions?

180 certified Black owned businesses responded to a 2023 survey on business lending. These were small businesses with an average of 8 employees with approximately 45% of business incomes ranging between $50,000 – 100,000 (24%) and $100,000 to $250,000 (21%).

In 2021, only 22.97% of Black business owner respondents reported using a traditional business loan to finance their business, while in 2023 the percentage dropped to 19.58%.

Slightly over 70% of respondents reported not pursuing a PPP loan.

When asked if the respondent had ever pursued a business loan from a bank in the life of their business slightly over 60% reported that they had not.

But another part of the story is that when Black businesses did pursue a loan, only  approximately 22% received the full requested amount with 65% receiving less than half or no funding. 

When Black businesses were asked why they did not apply for a loan, slightly over 24% did not think their application would be approved and just under 35% stated that they did not want to accrue debt.

Of the businesses that did not think they would be approved, slightly under 50% cited low credit scores.

While 52% of Black business respondents believed business debt was good for a business, only 46% felt like they understood the process banks use to decide who gets a loan.

Equity1821, a Black-led loan fund is responding to this data with the help of a banking partner to try to understand how to improve capitalization of Black businesses.

A promising start is demystifying the underwriting process to help Black businesses.

Between redlining, bank closures in Black neighborhoods, low Black homeownership rates and high unbanked and underbanked rates in the Black community there has been a poor relationship between the Black community and banks.

Racial wealth gaps both inform and exacerbate this problem.

But there is a mutually beneficial reason to try to overcome the legacy of distrust between banks and the Black community.

A strong Black business community is not only good for banks but it’s even better for the city.