By KENT HOOVER
American City Business Journals

Minority-owned businesses have a more difficult time getting loans than other businesses do, and the financial crisis has made this problem worse.

That's the message the Senate Small Business & Entrepreneurship Committee heard at a recent hearing. Narrowing this credit gap would help the nation's 4 million minority-owned businesses create thousands of new jobs, witnesses said.

"We could use those jobs right now," said Sen. Mary Landrieu, D-La., who chairs the committee.

The recession has hurt all kinds of businesses, but minority-owned businesses "are more vulnerable because they are generally smaller and have fewer resources to draw on," said Robert Fairlie, an economics professor at the University of California, Santa Cruz.

Minorities tend to have less personal wealth to bring into their businesses. Median household wealth for African-American families is only $5,446, according to the U.S. Census Bureau. For Hispanic families, that number is $7,950. Median household wealth for non-minorities is $87,056.

This wealth disparity has changed little since 1984, when the bureau began tracking it, Fairlie said. It's "one of the most depressing statistics" he's ever encountered, he said.

Minority-owned businesses also are much more likely to be rejected for loans than other businesses and charged higher interest rates when they are approved, said Fairlie, who studied the issue for the Minority Business Development Agency. These disparities hold true even after controlling for the business owner's age, experience and education and the company's creditworthiness, size, industry, age and location, he said.

Both the MBDA and the Small Business Administration are trying to address this credit gap. The MBDA is developing a public-private partnership to help minority-owned construction companies obtain surety bonding, so they can work on federal contracts. Fewer than 1 percent of all federal construction contracts now go to minority-owned companies.

The agency also is interested in collaborating with the private sector on an investment fund that would target minority-owned businesses in high-growth industries such as clean energy, health care and broadband.

The SBA, meanwhile, has been much more successful than conventional lenders in making loans to minorities. About 22 percent of all SBA-guaranteed loans last year went to minority-owned businesses, according to the agency.

That percentage increases to 40 percent for the SBA's Microloan program, which provides loans of up to $35,000 and technical assistance to small-business owners in low-income areas. The economic-stimulus bill enabled the SBA to add 20 new nonprofit intermediaries to the program.

The SBA also has asked Congress to increase the maximum size of the loans to $50,000. That's particularly important now because many small businesses that previously could get a regular loan are turning to microloans for working capital, said Grady Hedgespeth, director of financial assistance for the SBA's Office of Capital Access.

Landrieu noted an "alarming trend" in one of the SBA's capital programs. The percentage of investments made by SBA-supported Small Business Investment Companies in minority-owned companies has dropped from 26 percent in 1998 to just above 7 percent today. Hedgespeth said that's partly due to an SBIC trend toward larger investments, whereas minority-owned businesses are often early-stage companies. The SBA recently required SBICs to put 25 percent of their money into smaller investments.

Landrieu is pushing the Senate to increase the maximum size of SBA loans to help more businesses, including minority-owned companies. She also wants to extend the higher government guarantee and reduced fees on SBA loans through the end of this year. Those enhancements, first included in the stimulus bill, recently were extended through May 31.

SBA loans, however, aren't much help to small businesses that are struggling just to stay afloat, said Margaret Henningsen, founder and vice president of Legacy Bank in Milwaukee, Wis. Her bank, founded by three black women, focuses on minority- and women-owned businesses.

The cash and collateral requirements for SBA loans are unrealistic for many small businesses during this economic downturn, she said. She thinks the agency should reconsider these requirements, at least in underserved markets.

"At the end of the day, right now what our small businesses need is money to keep them going," Henningsen said.

Legacy didn't make any new loans in the first quarter of 2010, only renewals. The bank is mainly trying to keep existing customers in business. It is struggling along with its customers, Henningsen said, calling 2009 and 2010 "the worst 15 months of my life."