Report: Inner city businesses drastically undercapitalized

Facing a more fragile risk environment, banks are understandably tightening their credit decisions. While such initiatives are intended to cushion against capital losses, the unintended consequence has proven harmful to a number of disadvantaged borrowers. Inner-city small businesses serve as an ideal example of this trend. According to a report released Friday by the Initiative for a Competitive Inner City, as much as 71 percent of inner-city businesses in the U.S. are significantly undercapitalized. Of these institutions, roughly 50 percent are owned by minorities. The data highlights the current troubles facing the credit market, namely how excessive risk is holding back lending and, consequently, harming small urban enterprises. "This study is the first of its kind to look at both the demand and supply for capital in economically distressed urban areas," said Teresa Lynch ICIC senior vice president and director of research. "We believe it's a critical step in better understanding the capital access challenges of inner city businesses." The study also found more small firms are turning to Community Development Financial Institutions to balance the dearth of credit available from established institutions.