Businesses owned by people of color and women pay significantly higher loan interest rates, study finds

What the Federal Reserve does with interest rates matters, because those rates are often what lenders use as a baseline to decide how much they will charge to lend to the rest of us — individuals and businesses.

But lenders have plenty of leeway when it comes to what interest rates they charge different folks. And despite laws banning discrimination in lending, disparities still exist. Especially when it comes to race and gender.

New research out from at the University of Washington’s Foster School of Business found businesses owned by women and people of color are charged markedly higher rates for loans, costing about $8 billion a year in excess interest payments.

It took three years for Nyacko Pearl Perry to get funding to start the restaurant she co-owns, Comfort Kitchen, in Dorchester, Massachusetts. She had to do some crowdfunding first before regular lenders would even give her a shot.

Even so, “I know that our lending terms are probably not the best,” she said.

For one thing, she had to put up her house as collateral.

And Perry, who also works with the Center for Women and Business at Bentley University, believes a lot of the struggle was because of her race and gender.

“It was as if I had to justify our decades of experience, our background, where I know that there are other restaurants that that’s not the case … frankly, because of their background,” she said.

The University of Washington study backs up her experience.

“For Black-, Hispanic- and Asian- and women-owned businesses, they paid higher interest rates after you adjust for attributes to the loan that a lender would say affected the risk of the particular firm,” said Bill Bradford, head of the study and emeritus dean of the Foster School of Business.

Black-owned businesses paid upward of 3% more in interest than white business owners. Hispanic-owned businesses paid 2.9% more.

Andre Perry, a senior fellow at The Brookings Institution, also noted how the study found lenders were more likely to require cosigners for loans to minority-owned businesses, “which suggests that Black-, brown- and Asian-owned entrepreneurs aren’t really trusted with money,” he said. “White-owned firms committed the least amount of collateral relative to the loan amount, so they’re more likely to be trusted with money.”

These disparities can also shape what kind of business someone decides to start.

The study authors say more expensive loans push people into less capital-intensive industries — industries that could be creating more jobs and more economic growth for everyone.