By Ray Birch
LOMBARD, Ill.—An opportunity exists now for credit unions to gain relationships with minority-owned small businesses, and the key in capturing the accounts is to simply communicate better, according to a new Raddon Study.
Improved communications, said Raddon Senior Research Analyst Marcus Rothaar, will also bring much-needed support to a segment of the business community hit hard by the pandemic. News reports have noted many African-American small businesses have failed during the health crisis at a much greater rate than non-minority-owned companies.
“Minority-owned businesses have been disproportionately impacted by the COVID-19 pandemic, with higher rates of business closures and slower rates of recovery,” stated Rothaar. “At the onset of the pandemic, research from Robert Fairlie at the University of California estimated the number of active small business owners dropped by 22% between February and April 2020.”
Black-owned businesses were impacted most severely, with a 41% drop. Latinx and Asian owned businesses declined by 32% and 26%, respectively. During the same timeframe, the number of white business owners declinced by 17%, pointed out Rothaar.
“The funding gap is even more bleak considering only 42% of Black-owned businesses entered the crisis in a financially stable state as measured by a mix of profitability, creditworthiness, and earnings,” said Rothaar. “In comparison, 73% of white-owned businesses were considered healthy or stable heading into 2020 using the Fed’s same criteria.”
Rothaar said Raddon data reflect this as well, with only 45% of minority-owned businesses describing their credit rating as excellent, compared to 63% of non-minority-owned businesses.
An Additional Finding
“Thirty-nine percent of minority-owned businesses also told Raddon that their firm’s financial situation was preventing them from applying for a loan that they might otherwise have applied for,” he said. “Only 12% of non-minority-owned businesses shared the same sentiment. The Raddon findings also paint a clear picture of a need for additional funding, with 80% of minority-owned businesses anticipating financing needs in the coming year, compared to 50% of non-minority-owned businesses.”
Marcus Rothaar
The frustration and stress of needing financing but being unsure of whether the business will be able to obtain that financing has led minority-owned businesses to be more pessimistic about the current lending environment and the borrowing process, Rothaar explained.
“Minority-owned small businesses are not getting the financial services they need, and then you overlay COVID on that and it makes that need even be more immediate,” Rothaar said.
Basic, But Effective
Given that backdrop, Rothaar said the opportunity for credit unions lies in something basic: letting minority-owned small businesses know the CU offers a full line of business services and products to meet their needs. The reason, said Rothaar, is a misperception among small businesses that credit unions don’t offer businesses services, at least not to the extent big banks do.
“Number one, this is about communication; increasing awareness of the credit union’s business services offerings,” said Rothaar. “Not only within the existing membership base, but outside the membership base within their communities.”
Rothaar pointed out the imbalance that currently exists in the small business space, with a tiny number of banks claiming approximately 50% marketshare.
“That is just among the top three big banks,” he said. “Credit union share among all small businesses is only 6%. That tells us there are a lot of credit union members out there using a credit union for their personal checking accounts or for their consumer auto loans, but they have opted to go to one of the large banks for the businesses products and services.”
What the Data Also Say
When credit unions promote their business services capabilities Rothaar said data indicate it is critical to promote digital banking capabilities, especially mobile banking.
He said Raddon data indicate minority-owned small businesses rely even more heavily on mobile banking, including remote deposit capture, than non-minority owned businesses—58% of minority-owned businesses use RDC compared to only 43% of non-minority owned businesses.
“Again, a lot of this problem here is perception,” explained Rothaar. “Minority-owned small businesses often think credit unions don’t have these capabilities. It comes down to marketing. The big banks have done a great job marketing their digital business banking capabilities. So, for credit unions to gain greater share of the minority small business market, their technology tools need to be front and center.”