Small businesses are vital to the American economy, enriching local communities and diversifying the marketplace. Unfortunately, the racial wealth gap and systemic racism in the U.S. have long made it more difficult for Black entrepreneurs to thrive, and the COVID 19 pandemic disproportionately impacted black-owned businesses in the U.S.
Despite these challenges, the number of Black-owned businesses in the U.S. rose steadily pre-pandemic and has continued to rise. There were 28 percent more Black business owners in the third quarter of 2021 than pre-pandemic.
The continued growth of Black-owned businesses is vital to economic growth and the overall well-being of their communities. It is important for Black entrepreneurs to be aware of the resources available to them and that consumers understand the importance of shopping local and supporting Black-owned businesses.
What is a minority-owned business?
The National Minority Supplier Development Council (NMSDC) defines a minority-owned business as any business that is at least 51 percent minority-owned, operated and controlled. The business owners must be U.S. citizens, and the business must be located in the U.S.
Some local state governments and corporations around the U.S. set a percentage of their contract budgets to work specifically with minority-owned businesses. This is to take steps toward racial equity and ensure that the businesses they work with represent the whole community.
- There were 134,567 Black-owned employer businesses in the U.S. in 2019, an 8 percent increase from 124,551 in 2018.
- Over 1.2 million African Americans were self-employed in February of 2022, compared to 1.1 million in 2020.
- Black owners have accounted for 26 percent of all new business websites since the pandemic began, compared to 15 percent before the pandemic.
- Black-owned businesses currently bring in an average total revenue of $1,031,021, compared to $6,485,334 for non-Black businesses.
- Nearly one-third of Black-owned businesses in the U.S. are in the healthcare and social assistance fields. Black women own 54 percent of those businesses.
- Black-owned businesses are much more likely to hire Black workers.
Importance of Black-owned businesses in the community
Black-owned businesses are incredibly important to the communities they serve. Historically, businesses owned by people of color in the U.S. are much more likely to serve a local market and prioritize their communities regardless of profit.
According to a study from Brookings, “Black, brown, and Asian American firms are more likely to report that their neighborhood is the site of most of their business transactions, which points to a willingness to serve a community as well as restricted markets.” Black entrepreneurs are more likely than any other demographic to run businesses in the health care and social assistance fields. It is also important to note that Black-owned businesses are more likely, on average, to hire Black employees.
Promoting Black-owned businesses is important in reducing the racial wealth gap and creating job opportunities for people of color. More needs to be done to promote the success of these businesses. Despite the overall growth of Black-owned businesses after the pandemic, the racial wealth gap in the U.S. remains staggering. The median wealth of Black households in 2019 was $14,100, compared to $187,300 for White households.
Economic power is social power. While many large corporations have committed funds to support Black communities and businesses, the problem is often that they are not well connected to the needs of the people and communities they want to help. Investing in and partnering with Black-led financial firms would be ideal for these corporations to have a meaningful impact.
Taking these initiatives is more important than ever as the racial wealth gap is growing and hurting the economy. It is projected that the racial wealth gap will cost the U.S. economy up to $1.5 trillion per year by 2028.
Why it may be more difficult for African Americans to get business loans
Black entrepreneurs have always faced more difficulties taking out business loans than white entrepreneurs. This is largely due to the generational racial wealth gap and institutional racism. Repairing the damage done by decades of institutional barriers and racism will not be easy. Research suggests that it could take more than 200 years for Black families to acquire the same level of wealth as white families due to the impact of structural racism in the housing market alone.
Ways systemic racism and the racial wealth gap impact Black-owned businesses
- 8 out of 10 Black-owned businesses fail within the first 18 months.
- 58% of Black-owned businesses were at risk of financial hardship before the pandemic, compared to 27% of white-owned businesses.
- Only 4% of Black American businesses survive the start-up stage, even though 20% of Black Americans start businesses.
- Only 5% of Black Americans hold some business equity, compared to 15% of white Americans.
- Black entrepreneurs start their businesses with an average of $35,000 of capital. White entrepreneurs start their businesses with an average of $107,000 of capital.
Due to the obstacles Black entrepreneurs face in the financial world, it makes sense that Black businesses tend to have a harder time qualifying for business loans.
Evidence suggests that Black borrowers face discrimination from lenders. In one study, researchers found that 73 percent of Black loan applicants were asked to provide financial statements for their businesses during the loan application process, compared to 50 percent of white applicants. While submitting financial statements is typically a standard part of the loan application process, it is telling that Black applicants were so much more likely to have to submit those documents.
Black entrepreneurs are three times more likely than white entrepreneurs to cite a lack of access to capital negatively impacting their business’s profitability. Black businesses are also more likely to struggle with debt. These problems can be traced back to the racial wealth gap and a lack of helpful relationships in the business community.
Funding for Black-owned businesses
Given Black entrepreneurs’ challenges when starting their businesses, business owners should know about available resources. Here are some popular funding options for Black-owned businesses:
- Business loans and lines of credit: Black business owners who need capital may consider taking out an installment loan or line of credit for business purposes. A loan could give you access to the funds you need quickly, but you should only do so if you are confident you will be able to pay the loan back. For this reason, micro-loans and business lines of credit are great options for new business owners. These loans allow you to take out a smaller amount to ensure you do not overborrow and get into debt.
- Coalition to Back Black Businesses: This organization provides grants and other financial resources for Black-owned businesses. Its Enhancement Grant grants $25,000 to 20 Black-owned small businesses each year.
- Community Development Financial Institutions Fund (CDFI): This fund is backed by the U.S. Treasury Department and consists of financial institutions like banks, credit unions, loan funds, microloan funds and venture capital providers. These institutions provide government-backed loans to businesses in low-income communities.
- Grants.gov: This is a database of all federal grant programs for businesses. It contains grants from every eligible U.S. agency.
- Minority Business Development Agency (MBDA): The MBDA is an agency backed by the U.S. Department of Commerce that promotes the growth of minority-owned businesses. This agency connects entrepreneurs with resources to find capital.
- Minority business certifications: If you get your business certified with the NMSDC, you will have access to networking opportunities and many other resources the organization provides.
- The National Association for the Self-Employed (NASE): This organization offers micro-grants up to $4,000 for members of the association.
- Private equity firms: Private equity firms are investment management companies that invest in and support the growth of companies.Several private equity firms seek to specifically work with small minority-owned businesses. Backstage Capital, for example, works specifically with women, people of color and members of the LGBTQ+ community.
- The USDA Rural Business Development Grant Fund: This grant program is specifically for small businesses in rural areas. This program aims to bolster small businesses to improve rural communities.
- U.S. Small Business Administration (SBA): The SBA is a U.S. government agency that provides financial support for small U.S.-based businesses. Their lender match program can match you with a loan or investment capital to meet your business needs.
These are just some of the financial support options for Black-owned businesses. If you are a Black business owner or entrepreneur looking for capital, make sure to do some research and see if any loans or grants in your area fit your needs. The resources available can also vary depending on your business’s industry, so try some industry-specific searches.
How to choose the right funding for your business
If you need funding for your business and are trying to decide where to look, there are several things to consider.
First, you need to know how much money you need. This will allow you to narrow your search and focus on lenders, grants and potential investors that offer the amount you’re looking for.
You also need to know your credit score, as this impacts the loan rates and terms you might qualify for. Before deciding if you want to take out a loan, apply for a grant or find an investor, it is important to understand the requirements, benefits and drawbacks of each option. If you need money quickly, taking out a loan or line of credit is likely the fastest option. However, loans come with interest rates and fees, and you must pay back what you borrow. A grant or federal funding is the best option if you can get one.
If you are looking to take out a loan, research multiple lenders before choosing one. Compare lenders to find the best interest rates, fees and terms available. It is also worth prequalifying with a few lenders before applying for one. This lets you know what you are eligible for with a specific lender without making a commitment or hurting your credit score.
How to support Black-owned businesses
If you are looking for ways to support Black-owned businesses in your area, here are some things you can do as a consumer.
- Budget money with a purpose for spending on Black-owned businesses: If you want to consistently support Black-owned businesses, set aside a set amount of money each month specifically to spend at Black-owned stores and restaurants.
- Promote on social media: If there are Black-owned businesses that you enjoy doing business with, it is worth it to promote the business on social media. Word of mouth is a great way to bring in business, and supporting a business on social media is likely to help them bring in more profit.
- Shop local businesses: The best way to support Black-owned businesses is by patronizing those businesses. If you know of any Black-owned businesses in your community or online, try to shop there first. If you need help finding Black-owned businesses, Black Owned Everything is a centralized database of Black-owned businesses.
- Write reviews and online suggestions: Reviews mean a lot to small businesses, and writing positive reviews is a great way to support a Black-owned business you love. Consumers often rely on reviews when choosing a business, and more positive reviews can increase a business’s online visibility.
The bottom line
Black-owned businesses are important to their communities and the U.S. economy. There are structural barriers in place that make it harder for Black-owned businesses to thrive, but there are things these businesses can do to combat those obstacles. Financial support for Black-owned businesses is a critical part of closing the racial wealth gap in the U.S. It is vital that government agencies and corporations invest in Black businesses and communities, not just for Black business owners but for the country at large.
In the words of Backstage Capital founder Arlan Hamilton, “It’s not about ‘helping founders.’ It’s about fueling an untapped ecosystem so that you may be lucky enough to reap the rewards in years to come.”