BlackEconomics.org®
We will flash numbers in this brief analytical essay. However, please do not run away without reading it if you believe that you are “not a numbers person.” We mainly cite important statistics and perform no sophisticated calculations. We are concerned with how “business” works in the US with an intent to clarify why Black (Afrodescendant) businesses have not been more successful. Certain answers to the question, “Why have Black businesses not been more successful?” are well known. A “woke” 12-year-old Black (Afrodescendant) American can likely pop back the following answer, which is a key factor in preventing more Black business success: “Inadequate access to financial capital.” It is this answer that we explore.
For clear context, we present a few important economic, business, and financial statistics for 2021 (the latest year for which all the statistics are available):
For the statistics provided in Table 1, we highlight at the outset that the economic and business statistics (lines 1-6 ) are national in scope; however, the financial statistics (lines 7- 12) only reflect estimates for US commercial banks as defined by the Federal Reserve Board (FRB). Suffice it to say that, while there is some uncertainty about commercial banks’ loan coverage, we believe that they may account for at least 50 percent of the total business-related (nonconsumer) loan assets (the flip side of loan liabilities on balance sheets) in the US economy for 2021.(ii)
Now considering lines 1-5 of Table 1, total receipts of Black American (Afrodescendant) owned business (line 3) is less than 1.0 percent of gross output and total business receipts, lines 1 and 2, respectively. In addition, if lines 5 and 4 are used to develop a ratio of operating surplus (profits)-to-total-income for the economy (i.e., about 26 percent), and if that ratio is applied to line 2, then we would arrive at our previous conclusion; i.e., that the total value of operating surplus (profits) for Black American (Afrodescendant) owned business is less than 1.0 percent of that for the nation’s businesses—assuming that, on average, Black American (Afrodescendant) owned businesses operate similar to US businesses broadly.
Our primary reason for presenting these data is to explore the nature of loan allowances for bad debt (charge offs) and delinquencies. The argument is that Black (Afrodescendant) businesses experience a high failure rate, which is assumed to translate to a high loan default rate. Lines 7-12 of Table 1 present statistics on total commercial bank loans and commercial bank’s business-related loans and their allowances for bad debt (charge offs) and delinquencies. The table presents “levels” not rates to emphasize the dollar amounts that are involved.
Considering lines 7-9 of Table 1, we estimate the charge off (0.0006 percent) and delinquency (1.4 percent) rates for all loans held as assets by commercial banks. Similarly, for commercial banks’ business-related loans, we estimate the charge off (0.0003 percent) and delinquency (1.4 percent) rates using lines 10-12 of the table. Keep in mind that 2021 was a year of economic recovery from the Covid-19 Pandemic when US monetary and fiscal policies injected financial resources into the economy to promote growth. Comparing the statistics that we just derived from Table 1 data with statistics for consumer loans that are available from the FRB, it is transparent that consumer loans are associated with charge off and delinquency rates that are about twice as high or higher than for business related loans.
Given the focus of this brief analytical essay and after contemplating the foregoing, the following questions arise:
- If Black (Afrodescendant) business loans are thought to be associated with charge off and delinquency rates that are higher than for non-Black business, is it not possible for banks to still provide loans to Black (Afrodescendant) business under these conditions by using “protective lending practices”? [The latter could include higher valued collateral requirements;iii additional loan signatories; longer duration loan repayment terms (i.e., lower levels of loan periodic payment amounts); some form of “loan default” insurance; etc.?]
- If it is well-known that Black businesses experience high failure rates and that an important contributing factor to this outcome is “inadequate financial capital,” then should banks not consider increasing loan amounts typically extended to Black entrepreneurs to help reduce the impact of this factor in precipitating business failure and, thereby, potential loan defaults, delinquencies, and charge offs?
- Do Black American (Afrodescendant) business loans reflect charge off and delinquency rates that are higher than those typically experienced for consumer loans?
These are logical questions that have, undoubtedly, been posed by others. There is plenty of scholarly evidence concerning Black (Afrodescendant) business failure rates being higher than for other racial/ethnic groups in the US. Given that evidence, there has been considerable analysis and recommendations on reducing Black (Afrodescendant) business failure rates. The idea proposed as item 2 above may be somewhat novel, but it is consistent with the adage: “If you and I have a small indebtedness, then it’s your problem. However, if you and I have a sizeable indebtedness, then it is our problem.” That is, if banks act to reduce Black American (Afrodescendant) business failure rates by extending higher valued loans, then that higher level of indebtedness should motivate banks to work to ensure that the related businesses do not fail.
What is unexpected about Black American (Afrodescendant) business loan charge off and delinquent rates is that there appears to be little-to-no scholarly research on this topic. One can identify ample research on Black American (Afrodescendant) business growth and failure rates, on business loan denial rates, on student and consumer loan default rates, but we are unable to identify a submission on Black American (Afrodescendant) businesses loan charge offs and delinquencies consistent with the information currently available at the FRB for commercial banks. It comes to mind that it should be easy to organize at least a onetime study and report on Black American (Afrodescendant) business charge off and delinquency rates for loans that are extended by the nations’ commercial banks. In the best of worlds, we all agree that loan officers should not use assumptions for decision making. Rather, data for Black American (Afrodescendant) loan charge off and delinquency rates should be collected and analyzed so that loan officers can adjust their “Bayesian Priors” about these rates. These adjusted Bayesian Priors could very well produce more and higher valued commercial bank loans to Black American (Afrodescendant) businesses that can then become long-lived and by operating successfully.
We cannot ignore line 6 of Table 1 concerning US national debt. It is transparent that the US Government has borrowed, and continues to borrow, beyond the point of debt sustainability, yet chooses not to expend significant amounts of borrowed funds to assist Black American (Afrodescendant) businesses improve their loan repayment performance (if it is, in fact, problematic) and their business survival and success rates.(iv)
We must never forget that Black Americans (Afrodescendants) have a choice. We can await favorable change by our opposers, or we can adopt our recently produced plan: The Long-Term Strategic Plan for Black America (LTSPFBA).(v) This plan, with a 100-year time horizon, does not countenance waiting for a change in the hearts and minds of our opposers. It urges Black Americans (Afrodescendants) to initiate change in our own hearts and minds that will motivate us to engineer self-reliance, self-determination, and liberty-enhancing efforts and to forge greater unity. On the economic front, a key requirement is that we must relearn to trust and Bank Black. The latter should increase prospects substantially for more loans for qualified Black American (Afrodescendant) businesses that plan to provide required goods and services in our areas of influence (communities). If we move urgently on this, we can soon convey to commercial banks and all the other non-Black US financial institutions that we received their messages loud and clear. Now we are transmitting a message of our own!
©B Robinson
02/07/25
End Notes:
i Sources for Table 1 statistics are as follows: Line 1: US Bureau of Economic Analysis (BEA), GDP by Industry, Interactive Data, “Gross Output by Industry Table;” https://apps.bea.gov/iTable/?reqid=150&step=2&isuri=1&categories=gdpxind&_gl=1*1vj4fsf*_ga*MjEwNjU1Njg2OS4xNzIzOTQ2MDY1*_ga_J4698JNNFT*MTczOTAzNDUzNi4xOC4xLjE3MzkwMzQ1NDguNDguMC4w. Lines 2 and 3: US Census Bureau’s estimates from its Annual Business Survey; https://data.census.gov/table/ABSNESD2021.AB2100NESD01?q=Sales,%20Shipments,%20Receipts,%20and%20Production&g=040XX00US06. Lines 4 and 5: US BEA, National Income and Product Account “Table 1.10 Gross Domestic Income by Type of Income.” Line 6: US Treasury Department, National Debt to the Penny; https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny. Lines 7-12: FRB’s FRED (St Louis); US Commercial Banks’ Charge Off and Delinquency Rates; https://fred.stlouisfed.org/release/tables?rid=231. (Ret. On or before 02/06/25).
ii This “swag” (scientific wild xxx guestimate) concerning US commercial bank coverage of business-related loans was adopted based on information appearing in “Table L214 Loans (1)” of the Financial Accounts of the United States for 2021, US Federal Reserve Board, Washington, DC.
iii We acknowledge that certain prospective Black American (Afrodescendant) entrepreneurs have little-to-no collateral, which means that business startup can be very problematic.
iv The US Government contributes to this Black American (Afrodescendant) business condition because government borrowing is known to “crowd out” private sector business investment and to elevate interest rates.
v The LTSPFBA volume is available at https://www.ltspfba.org/LTSP/fin_ltspfba_071223.pdf; it is a 1.5 MB file.