The rigid requirements of traditional commercial banks do not accommodate the needs of small, community-centered businesses in Baltimore’s most distressed neighborhoods, according to new research from the Johns Hopkins Carey Business School.
Drawing on over 60 in-depth interviews with Baltimore entrepreneurs and representatives of financial institutions, researchers found that modern bank lending practices are inadequate in providing capital to entrepreneurs in historically under-resourced neighborhoods in East and West Baltimore today.
While the research focuses on Baltimore, its findings provide a national blueprint for understanding how modern banking practices may be inadvertently perpetuating inequality through automated screenings and location-based risk assessment, creating a cycle of disinvestment.
“Our research shows that traditional banks are not suitable to serve early-stage businesses in poor neighborhoods, yet these businesses are vital to revitalizing communities and their local economies,” said Suntae Kim, co-author of the study and an assistant professor at the Johns Hopkins Carey Business School. “Small-business owners in certain Baltimore communities have limited access to bank loans for reasons that are unrelated to the quality of their businesses, such as poor credit scores, lack of existing assets, and the low average income of their neighborhoods, all of which they inherited from their under-resourced backgrounds.”
The study, conducted as part of a larger community-participatory research series, showed banks often flag as “high risk” neighborhoods where the income level is below 80% of the region’s median income. The use of “location-based risk assessment can pose a threat of inadvertent race-based discrimination particularly in hyper-segregated places like Baltimore,” the research states.
Roughly 80% of bank lending is for businesses in need of $1 million or more, yet most community entrepreneurs require much smaller amounts, which banks often deem unprofitable to loan. In addition, many banks utilize automated screening systems that reject any applicant with a credit score below 680, regardless of the business’s actual potential.
Entrepreneurs who lack personal wealth are often forced into high-interest rate, predatory loans, creating additional barriers to success. According to the research, this is known among entrepreneurs as a “poverty tax:” those with the fewest resources pay the highest fees to join the already difficult pursuit of entrepreneurship.
“Our study highlights the number of barriers entrepreneurs face and how consistently those barriers are produced by routine lending practices,” said Yolanda Christophe, co-author of the study and a postdoctoral research fellow at the University of Notre Dame. “This creates a double bind for many entrepreneurs—because they are excluded from bank lending, they are forced to piece together capital through alternative sources, but the time and effort required to do so often limits the business development that lenders later expect to see.”
Without commercial bank loans, many local entrepreneurs have little or no access to capital. This results in a lack of investment in local businesses and communities that have historically struggled. The authors of the study call on banks to “reevaluate their risk management practices, which often overestimate the risks of under-resourced entrepreneurs while underestimating their upside potential.”
“It is critical for bankers to understand the structural and historical factors that make under-resourced entrepreneurs seem less desirable in their evaluation mechanisms, and to appreciate how much additional effort and competency are required for a marginalized entrepreneur to build a viable business,” the research states.
The study points to alternative sources of capital as one path forward for small business owners in under-resourced communities. Community development financial institutions, which provide essential technical assistance, can accept what traditional banks might consider higher risk profiles. Local crowdfunding programs allow residents to invest directly in their neighborhood businesses, and impact investment funds prioritize community revitalization over “explosive growth.”
“We saw considerable creativity and persistence among entrepreneurs and the organizations supporting them,” said Christophe. “With better-designed systems and stronger alternative capital ecosystems, these businesses could spend less time navigating barriers and more time building viable businesses that support their communities.”
The full report, "Baltimore Black Butterfly Entrepreneurs’ Access to Capital: Barriers, Consequences, and Alternatives," was supported by the Ewing Marion Kauffman Foundation and the Johns Hopkins Carey Business School. The study is the last of three reports that completes a research series spearheaded by the Bmore Collab, a Johns Hopkins University initiative that connects local leaders, researchers, entrepreneurs, and organizations to design solutions tailored to Baltimore's unique challenges and opportunities.
The first report, authored by Lawrence Brown, a researcher at Morgan State University, detailed historical evidence of how government redlining maps affected banks’ lending practices and the lingering impacts on present-day entrepreneurs. The second report, authored by Mac McComas, senior program manager of Johns Hopkins University’s 21st Century Cities Initiative, uncovered that business owners in East and West Baltimore neighborhoods get far fewer business loans than those in wealthier areas of the city. Lindsay Thompson, a professor of practice at the Carey Business School and lead of the Bmore Collab, served as the primary investigator for the research series.
