University of Washington Research Uncovers Inequities in Small Business Lending

A recent study from the Consulting and Business Development Center (CBDC) at the University of Washington’s Foster School of Business has revealed stark inequities in small business lending practices in the United States. Titled “Interest Rate and Collateral Differences,” this comprehensive analysis highlights how racial, ethnic, and gender biases affects lending decisions which impact the growth and profitability of businesses owned by people of color and women.

Despite equal creditworthiness and comparable firm characteristics, these businesses face higher interest rates, stricter collateral requirements, and significant economic burdens—issues that demand attention from lenders, regulators, and policymakers alike.

First survey since 2003

The research, led by Dr. William D. Bradford, Dean Emeritus of the Foster School, and Michael Verchot, Director of the Consulting and Business Development Center. Between January 2022 and June 2023, their team collected data from 44 states on loans made to privately owned businesses with 500 or fewer employees. This data set, collected through surveys, contained interest rate and collateral differences in loans to small and mid-sized businesses along racial, ethnic, and gender lines. It is the first such survey since the Federal Reserve’s Survey of Small Business Finances (SSBF) in 2003.

Unjust interest rates: The cost of bias

Bradford and Verchot’s research reveals that minority-owned businesses routinely pay higher interest rates than their white-owned counterparts.

Black-owned businesses are charged 3.09 percentage points more in interest, Hispanic-owned firms pay an additional 2.91 points, and Asian-owned firms face a 2.88-point penalty. Women-owned businesses are also affected, with interest rates averaging 2.38 percentage points higher than those offered to male-owned firms. These disparities are not rooted in differences in credit risk but rather point to systemic biases that undermine the financial health of these businesses.

A staggering economic toll

The financial repercussions of these inequities are profound. Minority-owned businesses collectively bear an additional $8 billion in interest costs annually, creating a substantial economic burden that limits their ability to grow, innovate, and compete effectively. This systemic overcharging stifles economic opportunity and perpetuates wealth and business ownership disparities.

Collateral requirements further compound the challenges faced by minority-owned businesses. These firms are more likely to be asked to secure loans with external co-signers, erecting another barrier to accessing credit.

Broader implications for economic equity

The implications of these findings extend beyond individual businesses. The additional costs borne by minority- and women-owned firms exacerbate existing economic inequalities and hinder their ability to contribute fully to the economy—including creating jobs.

This research highlights the need for systemic reforms, including more equitable lending practices, enhanced oversight, and targeted policies to support underrepresented entrepreneurs.

A wake-up call for small business lenders

This groundbreaking study by the Consulting and Business Development Center (CBDC) serves as a wake-up call and a roadmap for change.

By shedding light on the systemic inequities in small business lending, Bradford and Verchot aim to inform business borrowers, help lenders improve their competitiveness, and provide critical insights for regulators. Addressing these disparities is not just a matter of fairness but an economic imperative that can unlock the full potential of minority- and women-owned businesses, fostering a more inclusive and prosperous economy for all.

Read the complete study here. The Schultz Family Foundation provided generous financial support for this project. 

Learn more about Consulting and Business Development Center.