An Analysis of SBA Loans in Lower-income and Black neighborhoods in Detroit and Michigan
In this article, we analyze the extent to which the Small Business Administration (SBA) 7(a) loan guarantee program helps facilitate flows of credit to small businesses in the city of Detroit, and to black and low- and moderate-income neighborhoods in Michigan. In an environment of financial austerity and constrained small business credit, federal government programs like those administered by the SBA can facilitate lending to businesses. The SBA administers several programs designed to encourage lenders to provide loans to small businesses that might not otherwise obtain financing on reasonable terms and conditions. In the SBA’s primary business loan program, the 7(a) program, the SBA guarantees as much as 85 percent for loans of $150,000 or less; up to 75 percent for loans over $150,000; and up to 50 percent for loans made under the SBA Express program. Using SBA data for the state of Michigan, we revisit the question of whether SBA 7(a) lending fills gaps in the credit market to small businesses in lower-income and minority areas in a case analysis of Detroit.
Perhaps nowhere is the need for business development, financing, and community revitalization more pronounced than in the city of Detroit. The business landscape there has been hindered for decades by declining population and property values, high concentrations of poverty, as well as a diminished presence of local banks and restricted credit flows (Toussaint-Comeau and Newberger, 2012). The recent (and historic) city bankruptcy raises further concerns regarding the availability of resources to address these long-standing issues.
The federal government has long intervened in credit markets, through bank regulations (such as the Community Reinvestment Act or CRA), through government guaranteed lending programs, and through creation of government sponsored secondary markets that expand the capacity of (increasingly smaller) banks to lend by linking them to national capital markets. These measures have improved access to credit by small businesses in low- and moderate-income (LMI) neighborhoods, where business owners may lack the types of financial/business relationships, the liquidity, and credit profile necessary to access mainstream business credit (Petersen and Rajan, 1994). Several studies have found that SBA lending programs are particularly impactful in certain markets. Craig, Jackson and Thomson (2006) of the Federal Reserve Bank of Cleveland found that the SBA 7(a) programs have a positive influence on the rate of economic growth in metropolitan areas and counties, and that the effect is greater in low‐income markets. Researchers for the Urban Institute also found that these programs facilitate capital availability for firms that would otherwise not be served by alternative capital providers (Brash and Gallagher, 2008). In particular, women- and minority-owned firms, as well as start-up firms, which tend to have the most difficulty obtaining credit, accounted for a larger share of loans made under the 7(a) and 504 SBA programs. In a similar vein, a descriptive analysis by the Initiative for a Competitive Inner City (ICIC) suggests that the same two programs are relatively successful in steering credit to inner-city and low-income entrepreneurs (Lynch and Rho, 2011).
In the aftermath of the 2009 financial crisis, new issues have surfaced concerning the reach of SBA lending, particularly to black-owned small businesses (e.g., Simon and McGinty, 2014; Moskop, 2013; Switzky, 2012). After falling by more than 30 percent between 2007 and 2009, SBA lending somewhat stabilized nationally by 2012, around the 2009 level of 44,000 loans. But trends across white, black, and other minority groups (including Asians, Hispanics, and all other minorities) diverged significantly from 2010 to 2012. SBA 7(a) lending to black-owned businesses declined by an annualized rate of 17 percent between 2010 and 2012. SBA lending for whites, which has traditionally comprised more than 70 percent of SBA 7(a) loans, declined at an annualized rate of 11 percent between 2010 and 2012. SBA lending to other ethnic/racial minority groups improved since the recession, increasing at an annualized rate of 6 percent between 2010 and 2012 (chart 1). It is unclear what these trends suggest for access to SBA loans, with no additional information on businesses, demand, or geographies. While the lack of information on race in the Michigan state data precludes an analysis of differences in SBA lending by racial groups, the address-level loan information enables us to analyze factors that affect lending in different racial/ethnic locations. The Michigan data is well suited for exploring these dynamics insofar as the state and the city of Detroit have some of the largest populations and some of the highest growth rates of black-owned businesses in the U.S. In 2007 (the latest year for which census data on the characteristics of business owners was available), close to 9 percent of firms in Michigan were black-owned, compared to 7.1 percent for the nation (U.S. Census, 2007). In addition, the number of Michigan-based black-owned businesses increased by 63.5 percent between 2002 and 2007. To the extent that SBA lending reaches LMI and black neighborhoods, we expect to capture this tendency in the Michigan data. In addition, a large share – about three-quarters – of the Michigan SBA 7(a) lending occurred in the three-county Detroit MSA. From 2000 to 2012, 63 percent of all Michigan SBA loans were made in Macomb, Oakland or Wayne County, excluding Detroit, and an additional 10 percent of all Michigan SBA loans were made in the city of Detroit. The place-based analysis of SBA lending in Detroit and Michigan provides a first step toward understanding some of the underlying issues impacting recent lending trends to minority businesses, and those in places with a predominantly minority population.