Small businesses are, in many ways, the backbone of the American economy — and in a society in which racial disparities in income, asset accrual and economic mobility remain challenges, entrepreneurship is one of the most effective pathways for historically marginalized Americans to earn, grow and pass on wealth.
President Joe Biden has pledged to tackle those structural inequities with provisions and programs in his Build Back Better initiative. With his flagship economic agenda stalled in the Senate, advocates and entrepreneurs alike say the stakes couldn’t be higher for Biden’s economic legacy, as well as the financial solvency of an untold number of mom-and-pop businesses.
Minority entrepreneurs are more likely to rely on their own savings — which can put their families’ financial security in jeopardy.
“Where there’s a market failure is access to capital — is there a role for government to play to fill that gap? In Build Back Better, there are some steps to get there,” said Ben Koltun, the director of research at Beacon Policy Advisors. Those steps include $5 billion in funding to strengthen and expand the lending capacity of the Small Business Administration, through direct loan programs, startup incubators and a pilot called the Community Advantage Loan program targeting underserved businesses.
Historically, minority entrepreneurs have faced greater challenges in launching, operating and growing small businesses compared to their white counterparts. “The stage for this collapse was set far in advance of the pandemic,” said Phil Berkaw, a program manager at the National League of Cities.
Della Clark, the president and CEO of The Enterprise Center, a resource organization for minority entrepreneurs, said: “The challenges around capital did not start with Covid. There have been long-existing challenges around capital. What Covid has done is put a spotlight on the issue.”
A paper published by the Federal Reserve Bank of Atlanta in 2019 found that 78 percent of Black business owners reported financial challenges, compared to 62 percent of white owners. Another Fed paper, published the previous year, said minority-owned businesses faced significant disadvantages in access to capital.
“Undercapitalization of minority-owned firms is widely recognized as a major determinant of their lower profits and higher closure rates, in comparison to white-owned businesses,” the paper said, noting that minority entrepreneurs are more likely to rely on their own savings or personal credit products — which can put their families’ financial security in jeopardy if their businesses suffer downturns.
“You take a founder or CEO from a low-wealth community, and versus a prosperous community they’re fundamentally different in resources,” Clark said. “Prior to the pandemic, if you were in a low-wealth community, you probably had very little assets to collateralize a loan ... and didn’t have the ability to get financing.”
Tanieka Randall said that has been her primary challenge. “Last year, I put in at least $38,000 of my own money into the business. ... I was not able to get that back,” she said.
Randall, who is based in Houston, founded Tee’s Hair Secret, a line of hair products for “women with kinky, curly or coily hair,” as she characterized it, in 2014 as a side hustle before she took the plunge to make it a full-time venture in 2019 — only to find her business plan wholly upended by the pandemic.
What we don’t need in underserved communities are more programs. What we need is more investment capital.
“When the pandemic was happening, our business really started to grow ... but as we started growing, the issue we were really having was our cash flow. Our demand was really high, but it was taking forever for us to get paid,” she said, adding that her application for Paycheck Protection Program assistance was inexplicably denied. “I started looking into other options, like loans, and I was eligible for nothing.”
Nationwide data suggest that Randall’s problem is vexingly common. A Federal Reserve report published last year said that while small businesses owned by people of color account for slightly less than 1 in 5 of all small businesses, these entrepreneurs shouldered a greater share of the economic disruption caused by the coronavirus pandemic and got significantly less assistance to recover: While 79 percent of white-owned businesses received all of the funding for which they applied through the Paycheck Protection Program, only 43 percent of Black-owned companies did.
Even when the Fed controlled for credit scores, it found that the disparity remained: Among business owners with good credit scores applying for financing from mainstream financial institutions, 48 percent of white owners received all the money they sought to borrow, compared to just 24 percent of similar Black business owners.
“What we don’t need in underserved communities are more programs. What we need is more investment capital ... that can be put to work to facilitate the creation of wealth,” Clark said.
What that means in practice is that even entrepreneurs with decades of profitability face the indignity — and the financial harm — of being unable to borrow money.
“We prepared a business plan, and we’ve submitted it to two banks so far and gotten turned down. It’s frustrating,” said Noel Lowe, the president of FutureNET Inc., a Philadelphia-based IT service provider. “We don’t have a history of failure.”
With nearly three decades in business and long-standing vendor contracts in the public sector, Lowe said, he has been trying to expand so he can gain more private-sector clients and focus on cloud computing.
“The main reason why we’re doing it is the industry is changing to cloud computing services. The midsized companies are looking to focus on their core competencies,” he said. Lowe said he sees that as a great opportunity to expand but that to do so, he needs to invest in talent and equipment — and he said he’s been hitting a wall.
“We’ve been in business for 28 years. We’ve never defaulted on a loan. We struggle to understand why they can’t approve us for a loan,” he said. “I give them my story and all they say to us is ‘We don’t believe you can manage the payment.’ All I can think of is ‘You’re African American.’ ... They don’t come out and tell you that, but I don’t know what else it can be.”
We’ve been in business for 28 years. All they say to us is ‘We don’t believe you can manage the payment.’ All I can think of is ‘You’re African American. ... They don’t come out and tell you that, but I don’t know what else it can be.
While the personal finances, financial security and accrued wealth of the business owners themselves are most immediately at stake, the success or failure of minority-owned businesses also has a major impact on the neighborhoods where they operate.
Minority entrepreneurs aren’t creating the same number of jobs they would if they had more financial resources, said Sarah Treuhaft, the vice president of research for the National Equity Atlas, a data resource on inclusive growth. “Black and Latino people are just as likely to own businesses as white people that are sole proprietorships, but we see wide racial inequities in businesses that have employees,” she said. “That is caused by inequitable access to capital and business support and other barriers to growing successful businesses.”
As the pandemic drags into its third year, the clock is ticking. Even as the fate of Build Back Better remains uncertain, the Biden administration is seeking other channels to promote greater economic equity. A White House announcement last month, for instance, pledged to reform the federal procurement process to make it easier for minority-owned businesses to secure government contracts.
“When it comes to supporting small businesses, and especially businesses of color, the Biden administration has been quite strong,” Berkaw said. The White House more than doubled the goal of federal contract dollars that are being channeled to such businesses, from 5 percent to 11 percent, and asked individual agencies to design and implement processes and protocols to achieve the goals.
That’s a pressing concern, according to research from the National Equity Atlas. “Although a larger share of federal contracts are going to small businesses, fewer small businesses — and fewer communities — are benefiting from these business opportunities,” it said in a recent report.
In aggregate, the group’s data suggest that the federal government is already close to that goal, but when the data are disaggregated by agency, gaps appear. For instance, while 74 percent of eligible contract dollars allocated by the Small Business Administration go to small disadvantaged businesses, the Energy Department spends less than 3 percent of its contract dollars with disadvantaged businesses. The Agency for International Development spends less than 7 percent, and six other federal agencies fall below 10 percent.
The White House has already more than doubled its goal of channeling federal dollars to minority-owned businesses.
Some policy experts point to Biden’s earlier legislative victories as an indication that the administration is prioritizing small businesses: One promising development they highlight is the State Small Business Credit Initiative, a Treasury Department program that got a $10 billion infusion when Biden signed the American Rescue Plan Act in March.
“The SSBCI program is one of the most rigorously evaluated programs we have for investing in small business. It leaves a lot of flexibility to regions and states to meet the needs of their business community,” Berkaw said, which means businesses with the greatest need — such as the historically underserved — have a better shot at getting timely access to support. “It’s the flagship investment vehicle the federal government has to invest in small businesses.”
Advocates say supporting entrepreneurs of color isn’t simply a matter of “doing the right thing” or addressing a social issue — it’s good capitalism, especially when it comes to fostering economic equity among marginalized groups of Americans.
“We do know that businesses owned by people of color are more likely to be located in communities of color, to provide accessible jobs to the community, and are more likely to hire people of color,” Treuhaft said.
Berkaw said: “Black-owned businesses play a huge role in local economies and economic mobility. As a result, when these businesses fail, the ripple effects are especially acute for those communities. Losing them is brutal.”