Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

89 Pages Posted: 18 Oct 2021

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Theresa Kuchler

New York University (NYU)

David Snitkof

Ocrolus

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jun Wong

University of Chicago

Date Written: 2021

Abstract

We explore the sources of racial disparities in small business lending by studying the $806 billion Paycheck Protection Program (PPP), which was designed to support small business jobs during the COVID-19 pandemic. PPP loans were administered by private lenders but federally guaranteed, largely eliminating unobservable credit risk as a factor in explaining differential lending by race. We document that even after controlling for a firm’s zip code, industry, loan size, PPP approval date, and other characteristics, Black-owned businesses were 12.1 percentage points (70% of the mean) more likely to obtain their PPP loan from a fintech lender than a traditional bank. Among conventional lenders, smaller banks were much less likely to lend to Black-owned firms, while the Top-4 banks exhibited little to no disparity after including controls. We use novel data to show that the disparity is not primarily explained by differences in pre-existing bank or credit relationships, firm financial positions, fintech affinity, or borrower application behavior. In contrast, we document that Black-owned businesses’ higher rate of borrowing from fintechs compared to smaller banks is particularly large in places with high racial animus, pointing to a potential role for discrimination in explaining some of the racial disparities in small business lending. We find evidence that when small banks automate their lending processes, and thus reduce human involvement in the loan origination process, their rate of PPP lending to Black-owned businesses increases, with larger effects in places with more racial animus.

JEL Classification: G210, G230, G280, G410, J150

Suggested Citation

Howell, Sabrina T and Kuchler, Theresa and Snitkof, David and Stroebel, Johannes and Wong, Jun, Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program (2021). CESifo Working Paper No. 9345, Available at SSRN: https://ssrn.com/abstract=3943028 or http://dx.doi.org/10.2139/ssrn.3943028

Sabrina T Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Theresa Kuchler

New York University (NYU) ( email )

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David Snitkof

Ocrolus ( email )

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Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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United States

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jun Wong

University of Chicago ( email )

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Chicago, IL 60637
United States

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