Addressing the issue of the "wealth gap," particularly among people of color and other disadvantaged groups, has been one of the primary focuses of many politicians, activists, and industry leaders as well as financial services professionals. Small business ownership is an established method for individuals of varying backgrounds to amass significant wealth.
In this paper, we aim to assist financial advisers in understanding the challenging landscape for African American business (AAB) owners and utilizing this knowledge to help their clients improve their business outcomes by studying the role personal credit has on access to credit.
Analyzing data from the extensive database Survey of Consumer Finances (SCF), we first show that AAB owners have worse credit profiles than business owners of other ethnic groups. We then document a positive association between better personal credit and the use of personal financial planners for AAB owners, with the expectation that this will improve access to capital and therefore improve business outcomes.
We also provide guidance for financial advisers to improve their efficacy in assisting African American business (AAB) owners in improving business outcomes, such as utilizing decentralized finance as a means for obtaining capital and mitigating the discrimination risk inherent in obtaining credit from traditional banking institutions.
Learning Objectives:
Understand the challenging landscape facing AAB owners when seeking capital for their business.
Assess the influence personal credit has on access to business credit.
Align the financial planning key subject areas to factors that help improve individual’s credit profile.
Have an awareness of the possible alternatives to bank lending, and how they can help close the “wealth gap.”
