Fed Survey Shows ‘Stark’ Race Gap in Credit Health of Small Firms

(Bloomberg) -- Minority-owned U.S. small businesses reported much weaker financial conditions than the average in a survey from the Federal Reserve, which highlighted “stark differences by race and ethnicity” in the face of the pandemic crisis.

Overall, 88% of firms with fewer than 500 employees said that sales were still below pre-pandemic levels, according to the Small Business Credit Survey released by the Fed on Wednesday. Firms owned by Asian, Black or Latino Americans were more likely to report “fair” or “poor” financial conditions and least likely to receive the amount of funding they sought, according to the report.

The survey was conducted in September and October, before a spike in Covid-19 infections led to activity restrictions across the country later in the year. It captures how broad the impact has been on small businesses financial health, with 95% reporting being hit by the crisis. While many of their larger counterparts benefited from a surging stock market and easy corporate credit, more than half of small-firm owners reported using personal funds to cover business expenses.

Nearly one-third of the firms that reported below-normal sales said their chances of survival would be at least somewhat unlikely without further government relief. Since the survey was conducted, Congress passed another round of the Paycheck Protection Program for small firms, which reopened last month with $284 billion in funding. As of Jan. 31, about 891,000 loans worth about $73 billion had been approved.

Outside of PPP and other government relief programs, access to capital has become harder as a result of the health crisis. The situation got even worse along racial lines. About 37% of respondents said they received all the non-emergency financing they asked for, down from 51% in the 2019 survey. And only 13% of Black-owned firms reported getting the full amount they sought.

The crisis exacerbated inequalities in access to capital, according to Fed officials who worked on the report. Minority business owners are less likely to have strong relationships with lenders than their White counterparts, which likely further impacted their ability to get credit when business conditions worsened at the onset of the pandemic.

Black business owners cited credit availability as a top concern for the next 12 months, while Asian and Hispanic owners said demand was the most important challenge in the coming year. Overall, 57% of the firms said their financial conditions were “fair” or “poor.” The figures for minority-owned firms were higher: 79% for Asian-, 77% for Black- and 66% for Latino-owned firms.

The number of firms with more than $100,000 in debt, excluding PPP forgivable loans, rose to 44% in 2020 from 31% the previous year.

The survey reached firms in all 50 states and the District of Columbia and included 9,693 businesses with employees.

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