Linkages between regional characteristics and small businesses viability

Our study identifies regional traits associated with small business viability, paying particular attention to bank lending to minority-owned firms. Although creditworthy minority business enterprises (MBEs) have less access to bank financing than similar White-owned firms, they have increased their nationwide employee numbers substantially since 2002, more so indeed than White-owned firms. The discouraged borrower incidence among creditworthy MBEs, nonetheless, is quite high. Given their limited access to financing, the dynamism displayed by these firms is surprising. To link regional characteristics to bank lending policies, local economic well-being measures and racial intolerance levels are used to identify areas where banks participate in Community Reinvestment Act (CRA) agreements, a proxy for their willingness to disregard owner race and firm geographic location when financing firms. We find that regional prosperity is positively linked to CRA agreement presence, while a legacy of institutionalized racism is negatively linked. We next explore whether the presence of local CRA agreements is linked to relatively fewer discouraged small business borrowers. The incidence of creditworthy borrowers discouraged from seeking bank financing drops significantly when CRA agreements are present locally. Plain English Summary Access to bank financing, a key growth determinant for Black and Latino-owned firms, is most accessible in prosperous metro areas with large minority populations and much less so in those with an entrenched heritage of institutionalized racism. Minority-owned firms doubled their nationwide paid employee numbers from 2002 to 2018, while White-owned firms generated only a 5% increase. Increased bank lending facilitated their rapid growth. Our objective is to identify regional traits associated with small business viability, paying particular attention to the ability of minority-owned firms to obtain bank financing. To link regional characteristics to bank policies, local economic well-being measures and racial intolerance levels are used to identify areas where banks are inclined to employ fair lending practices. Our fair lending proxy measure is the willingness of banks to participate in CRA agreements. Local customs and traditions shape bank acceptance or rejection of these agreements. Most banks in metro areas where institutional racism is deeply embedded do not participate in CRA agreements, while in prosperous areas with large minority populations, most do. The incidence of creditworthy borrowers discouraged from seeking bank financing drops significantly where CRA agreements are present locally.