As Citigroup establishes its $150 million Impact Fund, it takes aim at the issue of funding minority-owned businesses. A fund like this one should look to create a successful equity financing vehicle in a sector with few sources of financial support.
Banks have extended less credit to small firms than they did prior to the Great Recession. According to a Richmond Federal Reserve study, 51% of black-owned small businesses experienced challenges in the availability of credit, compared to 30% of white-owned small businesses. (1)
This trend is also seen in the size of loans received. A smaller share of black, hispanic, and female-owned businesses tend to receive loans over $100,000 and they are also more likely to use owner loans than white and white-male owned businesses. (2)
This points to the larger trend that, while black-owned businesses are the most likely to apply for bank financing, they are the least likely to receive full funding, with only 31% receiving the whole amount requested.
While there is a well recognized shortage of credit to hispanic and black-owned businesses, we note that the main reason these firms seek to borrow is to pursue new opportunities and business expansion. (3)
Similarly, female-owned firms are less likely to receive financing than male-owned firms.
Positive efforts such as the Citi Impact Fund stand to potentially drive an increase of credit to the aforementioned minority groups.
[1] McKay,
Shannon. Key Findings from the Small
Business Credit Survey on Minority-Owned Firms. Federal Reserve of
Richmond, pp. 1–29.
[2] Report to the Congress on the Availability of Credit to
Small Businesses. Board of
Governors of the Federal Reserve System.
[3] McKay,
Key Findings