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

90 Pages Posted: 15 Nov 2021

See all articles by Sabrina Howell

Sabrina Howell

Harvard University

Theresa Kuchler

New York University (NYU)

David Snitkof

Ocrolus

Johannes Stroebel

New York University (NYU); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jun Wong

New York University (NYU)

Date Written: October 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.

Keywords: discrimination, Fintech, PPP

JEL Classification: G21, G23, G28, G41, J15

Suggested Citation

Howell, Sabrina 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 (October 2021). CEPR Discussion Paper No. DP16623, Available at SSRN: https://ssrn.com/abstract=3960204

Sabrina Howell (Contact Author)

Harvard University

1875 Cambridge Street
Cambridge, MA 02138
United States

Theresa Kuchler

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

David Snitkof

Ocrolus ( email )

101 Greenwich St
New York, NY 10006
United States

Johannes Stroebel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jun Wong

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
4
Abstract Views
377
PlumX Metrics