Minority-owned businesses, trade credit and discrimination : an empirical study of the impact of racial discrimination on access to trade credit for minority-owned vs. non-minority-owned firms

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Southern New Hampshire University
Access to credit in particular and capital in general is a major determinant of the rate of both the formation and survival of small businesses. During the last thirty years a growing body of theoretical and empirical research has developed that explores how a firm’s access to credit varies by the business owner’s race and/or ethnicity and test specific hypotheses about why these variations might occur. The overwhelming majority of empirical studies show that on average African-American and Hispanic borrowers receive credit in amounts and on terms less favorable than those obtained by non-minority borrowers. Much of this research asks, "does racial discrimination in part account for the observed disparities in credit outcomes for various racial and ethnic groups?" While numerous studies have tested for the existence of discrimination in commercial bank lending to firms, to date, this author has found only two empirical studies that explore how access to trade credit varies with the race and/or ethnicity of a firm’s owner. This study begins the process of addressing this gap in the literature. This study explores if and how the amount of trade credit obtained by small businesses varies by the owner’s race and/or ethnicity. Our findings clearly shows that firms owned by African-American men, Hispanic white men and Asian-Americans on average receive significantly lower levels of trade credit relative to those owned by non-Hispanic white men. After controlling for industry, the owner’s human capital, the creditworthiness of the firm and the firm’s owner, this study finds no statistically significant evidence that the race/ethnicity of a firm’s owner explains the observed disparity in the levels of trade credit provided to firms owned by Hispanic whites and African-Americans. For firms owned by Asian-Americans, this study does find statistically significant evidence that race explains in part the observed disparities after controlling for industry, the owner’s human capital, the creditworthiness of the firm and the firm’s owner. This finding is noteworthy because many scholars suggest that Asian-Americans do not experience difficulties in accessing credit comparable to those experienced by other minorities. (Author abstract)