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Understanding minority-owned businesses

New research highlights details about population, credit trends

Better lending to minority-owned small businesses begins with better information about this market. New data from Experian fleshes out banker knowledge of this potential customer base. Better lending to minority-owned small businesses begins with better information about this market. New data from Experian fleshes out banker knowledge of this potential customer base.

How can banks do more for minority-owned small businesses? A key is knowing more about them, and new research has uncovered some helpful data.

For example, one out of three—31%—minority-owned businesses are owned by minority women, according to a new study by Experian. Most typically, these businesses are eating places and beauty parlors, the research found.

This is especially interesting, according to Pete Bolin, director of consulting and analytics at Experian, because the firm’s research indicates that a large share of the credit extended by business-oriented marketplace lenders like Kabbage and OnDeck goes to restaurants and other eating places.

Knowing the minority business borrower

Bolin says that understanding more about minority-owned small businesses can help banks reach and serve them better. Banks attempting to promote their services can select targeted marketing channels, such as publications serving eating places, for instance, rather than more general channels.

Overall, the most common industries chosen by minority businesses are eating places, especially ethnic cuisines (7.3% of all minority businesses); beauty shops (5.8%); legal services (2.9%); business services (2.7%); and real estate (2.5%).

The choice of images used in small business marketing can be assisted by knowing about the makeup of that market as well.

“You don’t want them thinking, ‘Don’t they know who I am?’,” said Bolin.

And banks can focus that marketing on the types of credit the firms actually need. For example, he says, Experian’s research indicates that working capital loans are much more important to minority business borrowers than commercial mortgages.

Credit view of minority businesses

A key element of helping minority businesses to start and to grow is financial education, including, in Experian’s view, the importance of reaching and maintaining a positive credit profile.

“For example, keeping debt levels low and paying bills in a timely manner can help small-business owners better position themselves for growth,” says Bolin.

Minority-owned firms are slightly behind in credit management, says Bolin, based on the research.

The average business credit score for minority-owned firms, based on a scale of 1 to 100—with 100 being least risky in Experian’s system—is 49.7, nearly five points less than the average for the general small-business population. Minority business owners, as consumers, have an average credit score of 707, 15 points lower than the overall average for all small business owners. (That is based on Vantage score methodology, which has a maximum of 900.)

Bolin also spoke about usage of business credit cards and personal business cards. He said that minority business owners tend to use consumer cards for business charges more, in order to safeguard their business credit line.

Experian found that 1.2% of minority small business owners have at least one business credit card that is severely delinquent, while 8.3% have at least one consumer credit card that is severely delinquent. By comparison, 1.1% of the general small business owner population have at least one severely delinquent business credit card account and 6.8% have at least one severely delinquent consumer account.

The company’s research is based on a sampling of data from both its consumer and business credit databases, as of December 2015.

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