How Fintechs Funded More Than Half of All PPP Loans to Black-Owned Businesses, Part 1: Low Loan Amounts

May 5, 2022

The Paycheck Protection Program (PPP) was meant to help all small businesses survive the pandemic, but until fintechs got in the game, Black-owned businesses lacked access. A 2021 study lays out the three main reasons why fintechs were the most effective at reaching this underserved community, and what all lenders can learn from these results. In this 3-part blog series we give insight into this game changing study and our take on how fintechs serve undercapitalized communities. 

Online Lenders Come Through for Black-Owned Small Businesses

When the numbers came in, fintechs were by far the most impactful lenders for Black-owned businesses seeking Paycheck Protection Program (PPP) loans. In fact, a paper written by NYU professors called Automation in Small Business Lending Can Reduce Racial Disparities: Evidence from the Paycheck Protection Program” reveals that:

While fintech lenders accounted for only 17.4% of all PPP loans, they were responsible for 53.6% of PPP loans to Black-owned businesses. 

Black-owned businesses were about 12 percentage points more likely to get their PPP loan from a fintech lender.

It turns out, automation is the key to equitability. 

Because fintechs use automation to accept applications, perform underwriting, and guide decision processes, they overcame by design many of the issues that have historically caused minority-owned businesses to be overlooked in the financial industry.

According to the NYU paper, “At the lower end of the distribution, 3.3% of PPP loans originated by small banks went to Black-owned firms. At large banks, Black-owned firms represent 5.3% of originated PPP loans, while top-4 banks made 6.2% of their PPP loans to Black-owned firms. At the top end of the distribution, CDFIs made 10.6% and fintech lenders made 26.5% of their PPP loans to Black-owned firms. Overall, fintech lenders were responsible for 53.6% of PPP loans to Black-owned firms in our sample.”

The study sites three main reasons why fintechs were able to fund so many underserved small business owners who applied for PPP: loan amounts, online origination , and removal of bias . This article focuses on the first.

Lower Loan Amounts Are Not a Barrier to Capital at Fintech Lenders

Automation makes it faster and cheaper to process a high volume of loans. This makes it financially viable for fintechs to approve loans in lower amounts. 

Banks, both large and small, sited capacity restraints as an influential factor when prioritizing PPP applications. Loans in smaller amounts are an ongoing challenge for small businesses who lack service at traditional banks due to operational efficiency. At lenders without fully-automated processes, it’s more expensive to process each loan, so they focus on fewer loans in larger amounts to remain profitable. 

The study confirmed that offering loans in lower amounts benefits the minority business community. Black-owned firms averaged the smallest PPP loans, with a mean amount of $24,315, compared to about $54,000 for Hispanic- and Asian-owned firms, and $110,317 for White-owned firms. The median PPP loan amount for fintech lenders was $31,228, compared to $87,164 for small banks.

This finding underscores a gap in small business lending that has been growing for decades. Due to consolidations in community banking, small businesses that are ready to graduate beyond financing themselves through credit cards and home equity are finding far fewer community partners available to help them take the next step in their growth. At the same time, traditional banks require higher and higher minimum loan amounts, starting in the millions, when most small business owners needed $25-$500K. Into this vacuum came predatory lenders, who appeared to be the only option for small business owners who needed capital quickly to keep the lights on and pay their employees. 

This blog series continues the conversation of fintechs, their undeniable impact in underserved communities, and how PPP provided the perfect test case for subverting human and statistical bias.

Click here to read Part 2, on how fintechs overcome geographical limitations to capital access.

Click here to read Part 3, on how automation in underwriting and decision making removes human biases.

While fintechs were the number one PPP lender for the Black community, CDFIs, which are mission-driven and active in underserved communities, were number two. Lendistry is both. An African American-led lender, Lendistry is the only CDFI with end-to-end automation and a national lending footprint. Lendistry SBLC, LLC, a wholly-owned subsidiary of Lendistry, offers SBA 7(a) loans from $50K-$5MM nationwide. Click here to contact Lendistry’s finance team.