Asian, Black and Hispanic small-business owners pay higher interest rates on loans than their white counterparts, a new University of Washington report found.

UW researchers surveyed more than 2,700 businesses across 44 states about loans they had received in 2022 and the first half of 2023. Most of the respondents were firms that conducted business with other companies or with government agencies.

The survey asked about loan terms including interest rates and collateral requirements, as well as financial risk factors that influence those terms such as business size, credit rating, revenue and experience.

Researchers found that firms owned by people of color saw higher interest rates, even after controlling for financial risk factors. Compared with white-owned businesses, paid interest was higher by 2.88 percentage points for Asian-owned businesses, 2.91 percentage points for Hispanic-owned businesses and 3.09 percentage points for Black-owned businesses.

“If businesses owned by people from those population groups are having to pay more for the capital they need to grow, then they will continue to be smaller,” said Michael Verchot, director of the consulting and business development center at the UW Foster School of Business and one of the authors of the report.

These percentage point differences also add up to a sizable economic impact nationwide: Researchers estimated on aggregate, small businesses owned by Asian, Black and Hispanic people pay $8 billion more each year in interest due to the discrepancies.

The report also looked at interest rate differences by gender, and found that businesses owned by women paid 2.38 percentage points higher interest than businesses owned by men after controlling for financial risk.

“To me, the most interesting finding is that the race and ethnicity and gender of the business owner has an impact on the interest rate and the collateral that’s required for them to secure a business loan,” said Verchot.

“We know that for all businesses, regardless of race, ethnicity and gender, for all businesses to grow, they need access to money, loans and investments,” Verchot said. These findings illustrate that “businesses aren’t playing on an equal playing field,” he said.

Seattle-area business groups weren’t surprised by the findings and emphasized that discrepancies in interest rates have been a serious concern among their members.

“If you cannot get an equitable rate, that means that your competitiveness is going to be diminished strongly,” said Marcos Wanless, president of the Seattle Latino Metropolitan Chamber of Commerce.

The chamber works to connect its member businesses to equitable financial services, including funding from the U.S. Small Business Administration that doesn’t require collateral.

“Your margins are going to be lower than the regular business,” Wanless said. “Your income is going to be lower, diminished because you have to pay higher interest on your financial services.”

The report also examined interest rate discrepancies by financial institution type, with unexpected findings. Researchers looked at six common lender types: big banks, small banks, community development financial institutions, credit unions, fintech lenders and nonbank finance companies.

Black-owned businesses paid higher interest rates than white-owned ones at credit unions, fintech lenders and nonbank finance companies, but saw interest rate parity at big banks, small banks and community development financial institutions.

Verchot said he was surprised by the findings, in part because banks are often the target of criticism related to economic inequality. By contrast, credit unions typically bill themselves as institutions aimed at serving their communities.

Hispanic-owned businesses paid higher interest rates across all six lender types compared with white-owned businesses. Asian-owned businesses paid higher interest rates at large banks; there wasn’t enough data to draw conclusions about other lender types.

“This can give business owners guidance on the type of lender that is most likely to treat them most fairly,” Verchot said.

It’s difficult to pinpoint how exactly interest rate discrepancies arise, but industry experts said that they can stem from differences in how potential loan applicants are treated when they approach lenders, as well as differences in credit offerings by ZIP code.

Last November, the Consumer Financial Protection Bureau conducted a nonrepresentative study in which it sent individuals representing fictitious small businesses to banks across New York and Virginia. The study found that Black borrowers received less encouragement to apply for financing than their white counterparts, and that they were more often steered to nonrequested credit products.

“It just has to do with a long history of discrimination in banking and lending and financial institutions,” said Dion Cook, chief executive office of Denkyem Coop, which provides loans and business support for Black entrepreneurs in Washington.

The ramifications could eventually be felt at the city and state level. Businesses that spend a disproportionate amount of money servicing debt find it more difficult to operate and succeed, resulting in less tax revenue and fewer jobs.

At the individual level, the issue is also a matter of fairness, Cook said. “It’s really just about equity, being able to have the same opportunities for different groups.”

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