Credit Where Credit is Due?: Race, Gender, and Discrimination in the Credit Scores of Business Startups

Introduction

Access to sufficient and affordable credit is a key determinant of a business startup’s ability to finance projects and pursue growth opportunities. An entrepreneur’s creditworthiness is often assessed using their credit score, which has been lauded for expanding access to credit and financing to credit-worthy business owners. However, research also suggests the credit-scoring process is unfairly biased toward white and male entrepreneurs. 

The consistency and fairness often perceived to be a key feature of credit scores are undermined by the many women and people of color who experience barriers in accessing startup funds. These inequities in access to sufficient and affordable credit are a critical challenge both to individual entrepreneurs and to sustaining the central role of startups in promoting economic growth. This study, therefore, seeks to understand the degree to which access to startup credit, as mediated by credit scores and other factors, is influenced by race and gender.

Loren Henderson is an Assistant Professor in the Department of Sociology, Anthropology, and Public Health at the University of Maryland, Baltimore County. Cedric Herring was a Professor and Director of the Language, Literacy, and Culture doctoral program at the University of Maryland, Baltimore County. Hayward Derrick Horton is a Professor of Sociology at the University of Albany. Melvin Thomas is an Associate Professor at the College of Humanities and Social Sciences at North Carolina State University. 

Methods and Findings

The authors used the Kauffman Firm Survey of startups to access background information on a nationally representative sample of startups, including owner’s race, ethnicity, gender, age, education, work experience, and previous startup experience. They specifically assessed the impact of race and gender of the primary business owner on business creditworthiness, scored by a standardized index of a firm’s bill payback history, and credit access, quantified by the total of a business’ maximum credit lines across debt financing options. The authors also controlled for relevant firm characteristics including number of employees, value of equity, primary location, owner-reported competitive advantage or intellectual property, and legal incorporation status. They also controlled for relevant owner characteristics like industry experience, age, and education. This analysis was limited to startups, or businesses with less than one year of credit history.

Regression analyses demonstrate that when controlling for other relevant firm and owner characteristics, Black-owned startups have significantly lower business credit scores than white-owned startups. Observed gaps in credit scores for Latinx- and Asian-owned startups relative to white-owned startups and between male- and female-owned firms were present, but not significant when controlling for firm and owner factors.

This analysis also found that women and people of color receive significantly lower financing than male and white owners, respectively, controlling for other relevant firm and owner characteristics. When controlling for credit scores, this disparity was slightly less, but still significant for Black and women entrepreneurs, and greater and still significant for Latinx and Asian entrepreneurs. 

Conclusions

Although credit scoring is often perceived as an important merit-based process that equitably expands access to capital, this study finds that race and gender disparities in credit scores and credit access exist when controlling for other relevant factors. While there is some research on discriminatory mortgage practices, this study adds to the more limited body of research on group-based differences in business credit scores and entrepreneurs’ ability to access capital. 

These results suggest more work is needed to promote consistency and equity in creditworthiness assessments and capital allocation. Further research may further unpack how entrepreneur race and gender affect a startup’s access to credit and their long-term fiscal outcomes, and attempt to identify ways to promote more equitable and well-functioning credit markets.