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Broken Dream

Hard work and a can-do spirit aren't enough. For minority entrepreneurs, the American ethos can be a hollow promise, especially when seeking small-business loans.

It started out like a regular afternoon. The three Williams boys were roaming the Nittany Mall, a teenage hotspot not far from Penn State University, where their father, Jerome Williams, was on the faculty. Dressed in shirts their mom had purchased for them earlier that week, the boys were having a good time until a security guard approached. He stopped them on suspicion of shoplifting their new tees.

Cartoon people pushing a massive Rubix cube

“When this event happened, I was trying to explain it to colleagues and friends, but to my surprise, very few people understood what I was saying,” says Williams, now the director of the Rutgers Business School PhD program. “They said I shouldn’t be upset about it. They said the guard at the mall was just doing his job.”

To his white coworkers, it was an honest mistake. To the African-American Williams family, it was all-too-familiar racial profiling. The experience underlines a troubling matter: not only does racism still exist in far too many facets of life, but too many of us are blind to it.

“There is a belief that things like this used to happen,” says Glenn Christensen, an associate professor of marketing at BYU. “People think it is no longer real. Unfortunately, this still remains a reality for a significant portion of the US population.”

Discrimination is especially real for minority entrepreneurs. According to a study published by Christensen, Williams, and lead author Sterling Bone, a Utah State University business professor, minorities face more challenges than their white peers in the perennially high-stress process of securing business financing. That racial profiling can lead to discouragement and diminished self-worth.

“There is a general belief among Americans that we’re in the land of opportunity and that anyone can pull themselves up by their bootstraps,” Christensen says. “It is a land of opportunity, but that opportunity is not always equally accessible.”

Discovering Discrimination

Studying minorities wasn’t the original plan for Bone and Christensen.

Their research on marketplace decision makers took a sharp turn when they were tipped off to the surprisingly unregulated arena of small-business loans. To see it firsthand, the two jumped on a plane to New York City, drove to boroughs outside Manhattan, and embedded themselves alongside struggling entrepreneurs.

“You go to the Bronx, and you see how they have to go beyond typical creativity to survive, both as a business and as a family,” Bone says. “It’s an uphill battle for minority entrepreneurs.”

The more they talked to people, the more they realized the issue went deeper than their initial understanding. Neither Christensen nor Bone had ever faced the types of obstacles these hard-working minority business owners had experienced. Both men admit that the first time their race became salient to them was while serving LDS missions in areas where they were no longer a part of the majority—Christensen in North Carolina and Bone in Colombia.

“I grew up white in upper-middle-class America,” Christensen says. “When I was eighteen, my dad cosigned on a loan to help me build some houses, which paid for my mission and, later, for my wife’s wedding ring. I went through the whole process completely oblivious to my race. I never thought once, ‘Oh, I’m white.’ These folks live a completely different experience than I do.”

Needing an expert more familiar with the marketplace discrimination they were uncovering, Christensen and Bone reached out to Williams, whom Christensen studied with during his time as a doctoral student at Penn State. Williams’s extensive work in retail discrimination and social justice is well known nationally—he’s been called as an expert witness in more than one hundred court cases. They knew he could bring added direction and credibility to the research.

“When Sterling and Glenn approached me, I thought, ‘I’ve done all this work on the retail side, I wonder if the same things I found in retail settings would apply in the world of business loans,’” says Williams, a self-described child of the ’60s and a victim of discrimination himself. “That’s exactly what we found.”

The trio conducted a three-part study that not only answered the question of whether minorities face discrimination in bank lending but also delved into the psychological effects of that repeated denial.

Float a Loan

To start, the researchers recruited nine mystery shoppers—three black, three Hispanic, and three white—to seek small-business loans from seven national banks in the greater Los Angeles area. The mystery shoppers were selected carefully to have similar personal characteristics, such as age, height, body build, attractiveness, and education.

The shoppers were then sent to the banks wearing matching styles of a black or blue polo shirt and khaki trousers. Once at the banks, they asked for nearly identical loans ($60,000 to $70,000) to expand nearly identical small businesses in the computer-services industry. The mystery shoppers were told they were evaluating the banks’ customer service.

Person looking at a tax form

The research team found that the minority loan seekers faced a steeper hill in acquiring financing than their white counterparts. Minorities were given less information on loan fees and loan terms, but they were quoted an interest rate significantly more frequently.

Additionally, minorities were asked to provide more information about their businesses and personal finances than white business owners and were offered less application help and encouragement by loan officers.

“From the very beginning of this research, we kept getting good results as far as the study was concerned,” Christensen says. “Unfortunately, those results were not good for society.”

Uncovering the loan discrimination was bad enough. Learning of its dire effects on minority entrepreneurs was completely disheartening.

Mountain Climbing

The rejection, discrimination, and other forms of unfair treatment faced by minority small-business owners threaten the success of their businesses and have swift and damaging effects on their self-esteem.

Bone, Christensen, and Williams learned this through the second part of their study, which included in-depth interviews with thirty-nine small-business owners—sixteen white, thirteen Hispanic, and ten black—about their experiences seeking funding. The entrepreneurs were asked to collect pictures that represented their thoughts and feelings about applying for business loans and then to explain them in the interviews.

The results showed clear and compelling differences between the minority consumers and the white consumers. While white loan seekers focused on images of a journey through something—such as a river or a maze—minorities likened their experience to climbing a steep hill or mountain.

“It’s close to impossible,” one black male research participant said. “Only a few people have done it, and [the] only people who can do it are those that have help from people who have done it before. And I don’t know those people. . . . I can’t get to the top of Mount Everest.”

The breakdown of rejections and granted loans for study participants provided strong support for the idea that minorities faced a steeper challenge to funding. Whereas fourteen of the sixteen white small-business owners had received loans at some point (with only five having ever been rejected), only six out of the twenty-three minority business owners had ever secured financing. All but three had been rejected at some point, including some who received as many as six, eight, or even nine rejected applications.

As the interviews continued, researchers found that the repeated rejection and restricted access to loans for the minority entrepreneurs led to self-questioning and a diminished sense of self-worth. Excerpts from interviews show deeply personal wounds.

From a black male:

My self-esteem and confidence are strong, and yet I’m being denied, so it makes me feel bad about myself, bad about my business. I walk into the bank and they ask, “Have you applied for a loan?” Oh yeah, already got denied. They say, “Thank you very much.” It leads to this feeling of incompetence, this feeling of being insufficient, of being unable to be functional. You’re made to feel like you’re just not competent or capable. I feel very, very insecure and very, very—like I said—childlike, almost.

And this, from a Hispanic male:

You don’t feel good about yourself. You don’t feel confident. You almost feel like a failure. When you feel this way, it affects your relationships, both personal and professional.

Over and over again Christensen and his colleagues were uncovering personal pain and dejection from the minority business owners. Beyond expressing an alarming drop in their self-worth, they were feeling a loss of personal control.

Control Panel

The team wanted to explore this phenomenon further, so they carried out a third exercise for the study. The researchers recruited 120 individuals to try out a new system to apply for online educational loans.

As part of the experiment, half of the subjects were asked to report their race and nationality on the loan application while the other half were asked nothing about race. Everyone was then rejected for the loan.

When the researchers looked at how the first group processed rejection, they found the minorities took a hit to their

Page Breakself-esteem and to their sense of autonomy and control, but their white counterparts didn’t experience such feelings. Minorities assumed race played into the decision, though, in this experiment, that wasn’t the case. Those who were not asked to report their race did not suffer decreased self-esteem, regardless of race.

“Since modern discrimination is rarely obvious, the minority consumer is always left with the lingering question: ‘Am I being denied because I am unqualified or because of my race?’” Bone says. “Since there is no way to answer this question for certain, minorities are forced to interpret denial through a lens white people simply do not encounter.”

Next Step

Though their study was published last year in the Journal of Consumer Research, Bone, Christensen, and Williams say the work is just beginning.

None of them is satisfied with simply pinpointing an area of society where remnants of discrimination are still at play. They want to see a marketplace in which access is not restricted to anyone.

Williams explains, “As scholars, if we just write this work and it doesn’t move the needle, it doesn’t do any good.”

To move that needle, the team believes there are three key groups who can take action to bring about positive change:

  1. Consumers and entrepreneurs, so they understand the challenge and better prepare to face it
  2. Legislators and policy makers, so they can be aware of and address the disparities
  3. Bankers, so they can adjust their practices to be less discriminatory

Of those three, reaching the ears of public-policy makers is the most critical. There are certain laws in place that can be detrimental to enforcing discrimination issues, so the researchers are eager to make a dent in the policy arena. They’ve already put in a fair share of work.

To date, the researchers have testified before congressional committees, penned opinion pieces for major media outlets, and appeared on national talk shows. In addition, they have presented their findings at conferences and venues to promote economic development and equitable access to capital by minority entrepreneurs, especially in urban markets. Their research has also been covered by several prominent national media outlets, including the Washington Post, Businessweek, and Fox Business.

Efforts to reach policy makers are already paying off, with their work being presented this past summer at the Rainbow PUSH Wall Street Project and City of Newark Economic Summit, cochaired by Reverend Jesse Jackson and Ras Baraka, mayor of Newark, New Jersey. Yet even with the progress they’ve made, Christensen, Bone, and Williams know that if their message doesn’t lead to policy change, any efforts to eliminate prejudice may be wasted.

“While racial and ethnic minorities have made significant progress in terms of race relations over the past several decades, the harsh reality is that there still are remnants of discrimination in society,” Williams says. “It is appropriate to continue asking the question, ‘Is the glass half empty or is the glass half full?’ in terms of progress being made in eradicating discrimination in the marketplace.”

If lenders continue to remain insensitive to racial and ethnic minority consumers, they run the risk of alienating these segments. And, in addition to propelling discrimination forward in the marketplace, they open themselves to suffering severe economic consequences, such as tarnished brand image.

Ultimately, the researchers say, every person—regardless of race or ethnicity—should have the same chance to pursue their ambitions. But unless that access becomes truly universal, the American Dream will remain hollow.


Article written by Todd Hollingshead
Illustrations by Lincoln Agnew

About the Author
Todd Hollingshead is a media-relations manager for University Communications at BYU. He graduated from the university in 2004 with a bachelor’s degree in communications and has since added a master’s degree in the same field. Hollingshead has written for several publications, including the Deseret News, Daily Herald, and Salt Lake Tribune. He joined University Communications in 2007 and teaches in the BYU School of Communications as an adjunct faculty.

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