The availability of capital has always been a bone of contention in the small business community. Of the many problems business owners face when it comes to lending, one of the most enduring is a lack of equality. There is a very large gap between capital available to white-male business owners when compared to women and minority owners.
This diversity problem has, in turn, created a culture where minorities and women fear applying for capital. And when a 2016 Biz2Credit report indicates that women business owners are likely to receive loan approvals 33% less often than their male counterparts, the fear is understandable.
Can we fix this clear inequality, or do women and minorities need to start looking elsewhere?
Dissecting the Problem
In an attempt to understand the problem and come up with solutions, the Small Business Administration conducted an initiative in 2016. At the end of the study, the SBA and other organizations that included the Library of Congress and Duke University’s Fuqua School of Business, concluded that the racial and gender makeup of boards was likely to affect race and gender investment recipients.
The study’s findings also indicated that venture capitalists are also less likely to invest in people with diverse backgrounds. Considering the following breakdown of diversity in private equity and venture capitalist firms as detailed by TechCrunch, the future for minority borrowers seems bleak.
-Only 8% of investing partners of active micro-venture firms are women
-Women make up only about 7% of partners in the top 100 firms
-87% of venture capitalists are Caucasian
-89% of these venture capitalists are male
Is the Solution to the Minority Lending Problem Diversity in Investment Boards?
It is easy to think all that needs to be done is to diversify the investment boards and the minority problem will go away. But while the SBA has made recommendations to do so, there are some glaring problems with this solution.
To begin with, the process of diversifying boards is not one that can be done overnight. It is a process that is bound to take years or decades before the investment community can get used to the idea.
Without transparency in the borrowing process, it is also likely that the minority problem will not go away by simply diversifying the boards. Lenders have to be willing to be transparent about all aspects of the borrowing process. Regulation of the industry may come into play and that may also take years to implement.
Fortunately, blockchain technology is coming to the aid of minorities by providing peer to peer cryptocurrency-backed lending.
Millennials and Eliminating Bias through Tech
Older millennials who have graduated into a struggling job market could very well be the next victims of the minority lending problem. Over 54% of millennials are looking to start their own businesses and up to 10% are young people of color. Without diversity and transparency in the current lending system, these young people could well have a very hard time accessing capital.
But millennials more than any other group have been known quickly adapt to new technologies. Cryptocurrency, thanks to its naturally unbiased nature, may very well end the minority lending problem.