Data from the Census Bureau shows there were 3.12 million Black-owned businesses by 2018. During the pandemic, there was a spike in Black business ventures at a 30 percent increase compared to pre-pandemic numbers. Now a new CNN report reveals Black entrepreneurs still face barriers despite owning 2 percent of all U.S. businesses.
The study explained how the lack of Black-owned businesses contributes to widening the racial wealth gap. Black households reportedly comprise 16 percent of the U.S. population and hold 3 percent of overall wealth. However, white households comprise 68 percent and hold 87 percent.
Black entrepreneurs and minority-owned businesses have been held back by banks and financial institutions for decades. The intentional avoidance of doing business with minority-owned businesses often reveals bias and discriminatory practices.
Black Entrepreneurs’ Battle
These numbers are attributed to Black entrepreneurs’ battle with receiving inadequate support and obtaining capital through loans and credit.
“The issue is not starting the business, but being able to keep the businesses afloat, being able to help the businesses grow and scale over time,” said Brandon Andrews, co-founder of Gauge, an AI-enabled mobile market research platform.
Andrews and a panel of experts spoke at an event sponsored by CNN Business and Most Influential People of African Descent (MIPAD). They agreed that systemic racism makes it difficult for Black small business owners and startups that cannot afford to be self-sufficient.
“How do we empower those micro businesses? How do we ensure that they have access to capital?” he asked. “How do we ensure they have access to business education?”
Black entrepreneurs are more likely to fund their business with their personal income and credit cards. But according to the Alliance of Entrepreneurial Equity found that six in 10 Black business owners had challenges obtaining capital long before the pandemic began in 2020. Nevertheless, data from the Federal Reserve revealed that Black owners are denied loans at twice the rate of white owners. It also proves that Black-owned businesses are less likely to be approved for bank loans, with an approval rate of 46.5 per cent compared to 75.3 per cent for white-owned businesses. Even more shocking is that minority owners who applied for capital or pandemic-rated support experience high turn-down rates and are more likely not to receive any funding.
How to Help Black Businesses
The report boosted the wide-ranging conversation about Black entrepreneurship. It also touched on how to invest and support Black businesses, which includes intentionally using their services, said venture capitalist Gayle Jennings O’Byrne. She co-founded of the Wocstar Fund, which directly invests in tech innovation ventures led by women of color. They aim to create growth opportunities and “wealth for women by funding women.”
Meanwhile, nonprofit founder Alfa Demmellash suggested Black business owners invest in themselves by hiring within their own communities before others. He believes supporting Black entrepreneurs will strengthen local economies.
“Communities of color are actually enabling communities. We saw this during the pandemic,” Demmellash explained. “It’s like if you are sitting at home and you needed that food to be brought to you, who’s cooking the food? Who’s driving that truck? Who’s bringing it to your home? Who’s cleaning your home? Who’s taking care of sanitation? It’s literally our livelihoods.”
He continued, “They’re the essential workers, and they’re essential entrepreneurs. They create culture. They create livelihoods.”
Blacks in Underserved Communities
Black owners in underserved communities still face the same obstacles in obtaining financial support. Black-owned companies are more likely than other ethnic groups to apply for bank financing despite less than 47% of those applications being fully funded. However, the closing of local branches in low-income and minority areas presents yet another barrier for black business owners.
Areas without banks are commonly considered banking deserts and decrease loan opportunities. In fact, the Federal Reserve Bank of St. Louis has identified over 2,100 existing and potential communities without a bank or branch. Additional research found that banks without a local branch were less likely to originate small business loans in their surrounding community.
Not to mention, banks and lending institutions have underwriting criteria to determine “when an applicant is creditworthy and should receive a loan.” According to the FDIC, underwriting standards include assessing the applicant’s repayment history, credit performance, interest rates, and other data for protection against any risks or losses.
In certain circumstances, management has the authority to amend the bank’s policies and procedures, like increasing credit limits. Most Black-owned businesses often struggle within the first few years without financial backing, while others were received support through GoFundMe accounts, personal savings, and investments from family. However, reports show that despite 20% of Black Americans who start businesses, only 4 percent of Black-owned businesses survive the five-year startup phase.
How the Accreditor Investor Rule Is a Barrier for Black Businesses
Meanwhile, Andrews brought up one of the biggest barriers for Black and minority entrepreneurs and business owners: the accreditor investor rule. This further widens the racial wealth gap when individuals are unable to invest back into their own communities.
“Most people in our communities literally are legally barred from doing it in the United States because of that accredited investor definition,” he said. “So there’s, again, systemic oppression that’s there that keeps our communities from having access to even spend our money on our businesses in the way that we might do otherwise.”
The U.S. Securities and Exchange Commission requires an accredited investor in an early-stage company have a net worth of over $1 million. They must also have an income of $200,000 for individuals over the previous two years. Assuming their income remains the same throughout the current year, the price for couples is $300,000.