Creating Ecosystems that Support US Black-Owned Businesses
Entrepreneurship and business ownership, especially in the context of community-based enterprises, play a crucial role in fostering communal wealth generation, benefiting both business proprietors and their employees. The presence of thriving Black-owned firms has the potential to play a crucial role in addressing the wealth disparity between Black and white individuals in the United States. Our projections indicate that this wealth gap is expected to result in an annual economic loss of $1 trillion to $1.5 trillion (in 2018 dollars) by the year 2028. The COVID-19 pandemic has exacerbated the challenges faced by Black-owned firms, perhaps exacerbating the existing racial wealth disparity. The existing disparity presents a significant economic potential, currently valued at $290 billion and projected to increase further. This potential lies in the achievement of revenue equality between businesses owned by individuals of Black and white racial backgrounds. Additionally, this potential encompasses the provision of assistance to small and medium-sized businesses (SMBs) owned by nonwhite individuals, specifically those with a workforce of up to 500 employees. Our calculation of this wealth-building opportunity is predicated on the assumption that Black-owned businesses, upon attaining revenue parity, would generate an additional $200 billion in annual revenue. It was postulated that the enterprise value of private enterprises in the United States is 2.54 times their yearly sales, and a debt-to-equity ratio of 0.43 was employed. These assumptions result in a translation of the $200 billion revenue growth into an additional $290 billion in corporate equity.
The authors of the study titled “COVID-19’s impact on minority-owned small businesses in the United States” (Dua, Mahajan, Millán, & Stewart, 2020) examined the effects of the pandemic on these firms. Additionally, the Electronic Code of Federal Regulations, specifically Part 121—Small Business Size Regulations (October 5, 2020), was consulted for relevant information. The source of this information is the official website of the Small Business Administration (sba.gov).
The pandemic-induced economic downturn has had a disproportionate impact on black business owners, primarily due to their higher likelihood of being situated in vulnerable positions, including communities with unfavorable business environments that contribute to suboptimal business outcomes. According to a study conducted by Claire Kramer Mills and Jessica Battisto at the Federal Reserve Bank of New York in August 2020, it was found that approximately 58 percent of businesses owned by Black individuals faced a significant risk of financial distress prior to the onset of the pandemic. In comparison, approximately 27 percent of businesses owned by white individuals were in a similar predicament. The COVID-19 pandemic was a significant factor in causing the closure of 41 percent of Black-owned businesses in the United States between February and April 2020 (Fairlie, 2020). A significant majority, above 50 percent, of the proprietors of extant Black enterprises who were questioned in May expressed a high level of apprehension regarding the sustainability of their operations. This issue may be associated with encountering greater challenges in obtaining credit since the onset of the COVID-19 pandemic. According to the findings of a survey conducted by McKinsey & Company, 36 percent of Black business owners reported experiencing this difficulty, in comparison to 29 percent of all respondents.
The survey, which collected responses from 1,004 small and medium-sized businesses with an annual revenue of less than $500 million, was conducted between May 8 and May 13, 2020.
Black Americans have historically faced significant barriers that have hindered their capacity to fully access the advantages associated with company ownership. The disparity in business equity ownership between white Americans and Black Americans is notable, with around 15 percent of white Americans possessing business equity compared to only 5 percent of Black Americans. According to Exhibit 1 from the McKinsey Survey of Consumer Finances in 2019, the average business equity of Black Americans is approximately 50 percent of the average business equity of all Americans, and about one-third of the average business equity of white Americans.
Black-owned firms exhibit a tendency to generate lower sales across all industries, with a disproportionate representation in sectors characterized by limited growth and income, such as food service and hotels.
The disparity in business engagement results in a diminished level of prosperity for Black households, as seen by the fact that the median wealth of white families exceeds that of Black families by nearly tenfold. The existence of this inequality represents a missed chance for the overall economy of the United States. If Black-owned businesses were able to achieve the same average revenue as their white-owned counterparts within their respective industries (excluding publicly held companies), it would lead to an incremental $200 billion in recurring direct revenues. This increase in revenue has the potential to contribute approximately $190 billion to the Gross Domestic Product (GDP), which would represent a roughly 1 percent growth in the GDP for the year 2017. Please refer to the sidebar titled “Quantifying the impact of revenue parity” for our analytical approach.
In order to assess the economic implications of attaining revenue equality between Black-owned and white-owned small and medium-sized businesses (SMBs) in the United States, we employed the latest findings from the Survey of Business Owners conducted by the US Census Bureau in 2007 and 2012. Initially, an estimation was conducted to determine the rate of new-business establishment and revenue growth among enterprises owned by Black and white citizens in the United States. Subsequently, the growth rates were employed to derive estimations about the quantity of companies owned by individuals of Black and white ethnicities within each respective industry, alongside approximations of the corresponding revenues generated by those enterprises.
Based on our data, it is evident that Black-owned enterprises have the potential to generate around $200 billion in additional revenue, if they achieve the same average sales levels as their white-owned counterparts within their respective industries. The aforementioned increase in revenue would mostly be observed within the healthcare, retail, and wholesale industries, collectively contributing to 51 percent of the total additional revenue generated by small and medium-sized businesses owned by individuals of Black ethnicity. The provided estimate fails to consider the potential multiplier effects of increased revenue, which would reflect the broader economic implications of the proposed change.
In order to assess the macroeconomic implications of achieving revenue parity between enterprises owned by Black individuals and those owned by white individuals, we employed a comprehensive model.
This model incorporates data from over 141 nations and 60 sectors, enabling us to analyze the translation of disruptions, shocks, and policy modifications into cross-industry and macroeconomic consequences. The augmentation of revenues by $200 billion corresponds to an approximate increment of $190 billion in the annual Gross Domestic Product (GDP), which equates to a roughly 1 percent upsurge in the GDP for the year 2017. In our examination, we made the assumption that the economy has the capacity to assimilate a significant portion of the revenue increments. Thus, any reduction in revenues for Black-owned firms, resulting from their pursuit of parity with white-owned firms, is not counterbalanced by losses incurred by white-owned firms.
Prior to the onset of the pandemic, the typical American individual possessed firm equity amounting to 15.3 percent of their total wealth, with a mean monetary worth of $147,000. Small and medium-sized businesses (SMBs) comprised 99 percent of the total number of firms in the United States. Moreover, these SMBs had a significant role in contributing to job growth in the private sector, accounting for 62 percent of the overall net increase in employment between 1993 and 2017 (US Small Business Administration Office of Advocacy, October 2017, sba.gov). The importance of entrepreneurship and the capacity to initiate new businesses is highly significant in this context. It is noteworthy that over 50 percent of the aforementioned net increase can be attributed to the establishment of new businesses, which are defined as those that have been operational for less than 3.5 years (US Small Business Administration, sba.gov). For further information regarding the classification of small and medium-sized businesses (SMBs) and access to a dataset pertaining to SMBs in the United States, please refer to the resources titled “Size standards tools” and “Frequently asked questions” provided by the US Small Business Administration Office of Advocacy (August 2017, sba.gov).
The analysis conducted in our study identified and categorized the obstacles encountered at several stages of the entrepreneurial process, including ideation and initiation, sustainability, expansion, and eventual exit (refer to the supplementary section under “Entrepreneurial pathway: Constructing a business, from conception to termination”).
The process of entrepreneurship often adheres to a five-step framework, ultimately leading to the founder’s exit (as depicted in the exhibit).
During the ideation phase, aspiring entrepreneurs engage in the process of researching and evaluating potential business concepts prior to formulating comprehensive business plans in anticipation of commencing operations. At this stage, essential actions encompass acquiring the necessary patents, engaging in business incubators, and procuring money and assistance, frequently through the entrepreneur’s networks.
During the initial phase of a company venture, typically spanning approximately three and a half years, entrepreneurs primarily concentrate on the establishment and sustainability of their enterprise. The company has the option to engage in personnel recruitment, secure more funding, and establish a financial buffer for the organization.
Entrepreneurs prioritize the augmentation of income and the attainment of profitability as they endeavor to sustain their firm operations. During this phase, entrepreneurs engage in the formulation of growth strategies, enhance their organizations’ sales and marketing endeavors, expand their teams, and establish scalable company activities. Business entities have the potential to persist in procuring venture financing.
Once firms achieve yearly revenues of at least $1 million, they have the potential to expand their operations and increase their scale. The primary objective of this stage is to augment the working capital in order to facilitate expansion and diversify into untapped geographic or product markets. During this stage, businesses may also engage in the process of acquiring or merging with another company.
Ultimately, entrepreneurs have the option to conclude their commercial ventures by means of an acquisition or an initial public offering (IPO), which affords them the opportunity to obtain a singular realization of the business’s worth.
This study examines the systemic obstacles that impede the efforts of Black entrepreneurs to generate ideas and establish and maintain local businesses. Specifically, we are referring to small and medium-sized businesses (SMBs) that operate within established supply chains within their communities. It is important to note that these systemic barriers also impact Black entrepreneurs who are leading potentially high-growth start-ups, which will be discussed separately in future research. Subsequently, we delineate interventions that possess the capacity to mitigate the ramifications of these impediments, with a specific focus on avenues for collaborative endeavors. It is imperative for US institutions to address the issue of restoring the trust of Black business owners inside the business ecosystem, specifically in enterprises operating in the financial and business services sector. A business ecosystem refers to a network of organizations that engage in collaborative and competitive activities to generate products or services. The presence of a longstanding deficit in trust has potentially impeded the progress of business establishment. Evidence indicates that Black entrepreneurs may perceive a necessity to possess superior qualifications compared to their white counterparts. Specifically, 30 percent of Black owners of employer firms, defined as businesses with at least one paid employee, possess an advanced degree, whereas this is the case for 22 percent of their white counterparts (US Census Bureau, census.gov, 2016).
One potential positive outcome of the COVID-19 pandemic and the racially charged violence witnessed in 2020 is the emergence of initiatives by prominent corporations aimed at providing assistance to Black-owned businesses. For instance, a notable social media company recently allocated a substantial sum of $40 million in grants to support small-scale Black-owned enterprises operating within the United States11Sheryl Sandberg, “How we’re supporting Black-owned businesses,” Facebook, August 19, 2020, fb.com. A financial services organization has committed to allocating $1.15 billion, with $350 million specifically designated for procurement expenditures towards Black-owned firms, in an effort to address and mitigate the racial wealth disparity in the United States. (Alcorn, 2020) Nevertheless, it is important to note that these individual activities, while significant, may not be sufficient in isolation to bring about the required transformation. In order to achieve a comprehensive and far-reaching influence, the engagement of complete business ecosystems will be crucial. Upon achieving success, it is worth noting that this endeavor would not only contribute to the economic growth of the United States, but also have a positive impact on American society as a whole.
One potential positive outcome arising from the COVID-19 pandemic and the racially tinged violence incidents in 2020 is the emergence of initiatives by major corporations aimed at providing support to Black-owned enterprises.
Black company owners encounter several difficulties during the process of establishing their businesses, including economic, market, social, and institutional obstacles. These barriers are interconnected and can be attributed to racial prejudice prevalent in the United States. Economic barriers encompass the phenomenon of disempowerment and the financial burdens associated with limited initial resources, affecting people, families, and communities. Market obstacles arise due to unmet demands, frequently associated with difficulties in obtaining access to essential resources such as financial capital, specialized knowledge, and necessary services. Sociocultural barriers refer to the discriminatory and exclusive mechanisms that impede the acquisition of social capital by Black entrepreneurs, particularly in terms of establishing beneficial contacts within business networks. Institutional barriers are substantiated by the structures under which enterprises owned by individuals of African descent operate, including several characteristics, including fundamental aspects such as their geographical placements.
Black entrepreneurs sometimes have a tendency to make decisions throughout the business-ideation phase that are more inclined towards maintaining smaller-scale enterprises. Black entrepreneurs tend to gravitate towards industries that are often less profitable. According to the data obtained from the 2012 survey of business owners conducted by the US Census Bureau, it is evident that a significant proportion of Black women business owners (74%) and Black male business owners (62%) are concentrated in only five industries. These industries include healthcare and social assistance, professional, scientific, and technical services, administrative support and waste management services, construction, and transportation and warehousing (Exhibit 2) (US Census Bureau, census.gov, 2012 survey of business owners; 2016 annual survey of entrepreneurs, US Census Bureau, census.gov).
These sectors account for a mere 20 percent of the total business revenues. In contrast, it is noteworthy that while wholesale businesses account for 24 percent of overall business revenues, the representation of Black women and men entrepreneurs in this sector is significantly lower, with only 1 percent and 2 percent respectively (refer to the sidebar titled “Uphill climb for Black women in entrepreneurship”) as indicated by the 2012 survey of business owners conducted by the US Census Bureau and the 2016 annual survey of entrepreneurs, also conducted by the US Census Bureau. These statistics shed light on the underrepresentation of Black individuals in the wholesale business industry.
Approximately 20% of the total 12.3 million women-owned businesses in the United States are under the ownership of Black women (American Express, 2018). According to a report by Dell Gines (2018) from the Federal Reserve Bank of Kansas City, it is evident that Black women have achieved a significant milestone by surpassing 50 percent ownership in businesses within their own racial or ethnic category. Nevertheless, Black women face intersecting economic and institutional obstacles due to the combined effects of their racial and gender identities.
The high prevalence of entrepreneurship among Black women may be attributed to economic necessity rather than favorable circumstances. This is evidenced by the fact that 64 percent of Black women dedicate less than 40 hours per week to their businesses, indicating that their entrepreneurial endeavors may serve as supplementary sources of income or that they face constraints that hinder their ability to fully commit to entrepreneurship. Moreover, it is worth noting that a significant proportion of Black women entrepreneurs, specifically 68 percent, who have employees under their payroll, are concentrated within three industries. These industries, namely healthcare and social assistance, professional services, and administrative, support, and waste-management services, collectively contribute only 13 percent to the overall business revenues. This information is derived from the 2016 annual survey of entrepreneurs conducted by the US Census Bureau and can be found on their official website, census.gov.
Black women exhibit a lower employee count compared to Black males, despite the fact that they possess a 50 percent higher number of enterprises. This information is derived from the “Statistics for all U.S. firms by industry, gender, ethnicity, and race for the U.S., states, metro areas, counties, and places: 2012” report published by the US Census Bureau in 2012, available on data.census.gov. Due to these disparities, there exists a discrepancy in the average annual earnings between employer businesses owned by Black men and those owned by Black women, with the former earning approximately $660,000 more per year. This information is derived from the “Annual Business Survey: Statistics for Employer Firms by Industry, Sex, Ethnicity, Race, and Veteran Status for the U.S., States, Metro Areas, Counties, and Places: 2017” conducted by the US Census Bureau in 2017 and available on data.census.gov. Furthermore, it is worth noting that the revenues of Black women-owned firms had a significant reduction of 11 percent, equivalent to an average annual decrease of $3,000, during the period from 2012 to 2018 (American Express, 2018, as cited in womenentrepreneurscharleston.com).
Black women are subject to a disproportionate exclusion from venture-capital funding, a crucial source of cash that can significantly accelerate business expansion.
According to the data provided by projectdiane.com, it has been observed that women of color receive a disproportionately low amount of venture-capital funding, accounting for less than 0.2 percent. Additionally, these women are only represented in approximately 4 percent of funded start-ups in the United States. There exists a notable disparity in the representation and financial support of black women founders within the entrepreneurial landscape. The average amount of investment raised by start-ups run by Black women was $42,000.
The geographical context might also impose constraints on the entrepreneurial prospects of Black entrepreneurs. According to the 2017 American Community Survey conducted by the US Census Bureau, it has been found that a significant proportion of Black Americans, specifically 65%, reside in 16 states that fall below the national average in terms of economic opportunity indicators. This information is also supported by the Leading States Index of 2018, as reported by McKinsey.com. Black Americans are found to be disproportionately clustered in socioeconomically deprived neighborhoods within their respective towns. Entrepreneurs hailing from marginalized populations, particularly those of African descent, face a higher likelihood of encountering limited exposure and restricted access to profitable business prospects compared to their Caucasian counterparts.
Black entrepreneurs may also have challenges in accessing networks and establishing relationships that could potentially facilitate informed decision-making in their commercial endeavors. According to a study conducted on start-ups based in New York, it has been found that founders who receive mentorship from highly successful entrepreneurs have a significantly higher likelihood of becoming top performers compared to their counterparts who do not have mentors. This finding suggests that mentorship plays a crucial role in the success of start-ups. (Morris, 2015) In contexts beyond the realm of start-up enterprises, an individual possessing expertise in the field can offer valuable guidance to a potential entrepreneur in navigating critical choices, such as the option between investing in a franchise with an initial capital outlay versus establishing an independent business.
Significantly, Black businesses encounter greater challenges in obtaining cash and accessing finance. Despite possessing strong personal credit, Black business owners and entrepreneurs belonging to marginalized groups face a significantly lower likelihood of obtaining complete financing compared to their white counterparts. This disparity is highlighted in the 2016 Small Business Credit Survey, which reported on minority-owned firms and was conducted by the Federal Reserve on November 30, 2017. The minority population encompasses individuals who identify as Black, Hispanic, and Asian-American and who are engaged in entrepreneurial activities. The determination of financing for a business is contingent upon the utilization of either the self-reported business credit score or the personal credit score of the entrepreneur. In the event that the organization employs both methods, the risk rating with the biggest magnitude is utilized. A “low credit risk” is typically indicated by a corporate credit score of 80-100 or a personal credit score of 720 or more.
Additionally, it is worth noting that friends and relatives may not possess the means to provide financial capital in such situations. The majority of surveyed Black families indicated a lack of acquaintances capable of providing them with a loan of $3,000.18. In light of this, it is vital to explore the available resources that families can rely on during times of financial crisis. The significance of emergency savings in ensuring the financial stability of families has been examined in a study conducted by the Pew Charitable Trusts in November 2015, available on pewtrusts.org. Additionally, the Federal Reserve Board’s research conducted by Lisa J. Dettling et al. on the recent patterns in wealth accumulation among different racial and ethnic groups, published on September 27, 2017, can provide further insights on this topic, accessible on federalreserve.gov.
The primary emphasis throughout the first stages and subsequent sustainability of entrepreneurship should be directed towards securing the business’s continuity and augmenting its financial viability. Nevertheless, the lack of trust among Black entrepreneurs towards institutions can be attributed to their own experiences and awareness of the historical prejudice that has plagued the United States. Consequently, this mistrust often leads them to approach external resources with caution, particularly those that lie beyond their immediate communities. The isolation of Black entrepreneurs from potential sources of assistance can be exacerbated by a lack of informal and geographic links to these resources, including venture-capital networks. It is worth noting that venture networks often exhibit a high degree of regional concentration. Another relevant source is the policy proposal titled “Minority and women entrepreneurs: Building capital, networks, and skills” by Michael S. Barr. This proposal was published on March 9, 2015, by The Hamilton Project. The source can be accessed at ww.hamiltonproject.org. To gain a comprehensive understanding of the public sector’s endeavors to address the disparities between enterprises owned by Black individuals and those owned by white individuals, as well as the challenges encountered in these efforts, please refer to the supplementary section titled “Legislating for more equitable business outcomes.”
Since the year 1974, legislative measures have been implemented to address and mitigate the disparities that exist between enterprises owned by individuals of Black descent and those owned by individuals of white descent. In 2019, the Small Business Administration facilitated approximately $210 million in loans and played a pivotal role in the allocation of $2.3 billion in federal contracts to businesses facing disadvantages.1 Bell (2020) asserts in a press release issued by the US Small Business Administration that there are flourishing opportunities for black-owned firms. The press release was published on February 21, 2020, and is available on the official website of the US Small Business Administration, sba.gov. Nevertheless, the execution of laws and programs is frequently flawed, resulting in deficiencies such as insufficient guidance on the application process for programs that could potentially support Black entrepreneurs.
The Equal Credit Opportunity Act was enacted in 1974. The legislation prevents credit providers from engaging in discriminatory practices based on characteristics such as race, gender, and marital status. The enactment of the Community Reinvestment Act occurred in 1977. The technology in question aims to mitigate redlining, a practice that involves financial institutions being urged to fulfill the credit requirements of individuals residing in low- and moderate-income communities. Nonetheless, the phenomenon of “credit redlining” continues to endure, whereby those residing in predominantly white neighborhoods are more prone to obtaining approval for credit cards compared to those residing in predominantly Black communities (Prater, 2008). The regulatory guidelines pertaining to the execution of the Community Reinvestment Act are now being revised by the US Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 was enacted by Congress as a response to the savings and loan crisis. This legislation aimed to enhance the capacity of external oversight entities to scrutinize bank records and detect instances of discriminatory lending practices. Nevertheless, loan originators transitioned from rejecting loan applications from Black people to specifically focusing on Black areas for loans that included higher costs and more risks (Justin P., 3). The article titled “The social structure of mortgage discrimination” by Steil et al. (2018) examines the phenomenon of mortgage discrimination within the context of housing studies. The study investigates the social factors that contribute to discriminatory practices in mortgage lending. The research findings are published in Housing Studies, Volume 33, Issue 5, and may be accessed on the website ncbi.nlm.nih.gov. In 1998, the Small Business Administration established the Mentor-Protégé Program with the specific aim of providing support to small and medium-sized companies (SMBs) belonging to marginalized communities. The program, which aimed to match small and medium-sized businesses (SMBs) from underprivileged communities with seasoned government contractors, was subsequently discovered to have inadequate measures in place to guarantee that the evaluation of applications aligned with its original purpose. The potential lack of attention to this matter could have hindered the involvement of Black-owned firms, particularly those who already harbored doubts about the program. (Evaluation of SBA’s All Small Mentor-Protégé Program, US Small Business Administration, September 17, 2019, buildsmartbradley.com)
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 necessitated the establishment of Offices of Minority and Women Inclusion by several federal agencies, such as the Securities and Exchange Commission. Nevertheless, the challenge of upholding the essence of the legislation frequently placed enterprises held by individuals of African descent at a disadvantage. In the context of the prevailing and continuing crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was designed with the objective of delivering immediate assistance to small and medium-sized businesses (SMBs). However, it has been observed that a significant number of Black-owned enterprises did not receive the intended support from this legislation. A portion of the discrepancy arose due to the program’s omission of numerous community-development funding entities. The legislation also lacks provisions for disseminating information and providing training on the application process and accessing financial resources. (Popken, 2021)The source of the information is NBC News, specifically an article published on April 29, 2020, available on the website nbcnews.com.
According to data from the Global Entrepreneurship Monitor (2017) and Dow Jones VentureSource (2018), the survival rate for Black American enterprises during the start-up phase stands at a mere 4 percent, despite the fact that 20 percent of Black Americans engage in entrepreneurial activities. Despite successfully through the initial phase of establishment, Black-owned enterprises continue to face a disproportionate burden of debt and encounter difficulties in securing capital. Moreover, they encounter other barriers, including a dearth of beneficial connections within the business community. The focus groups, sponsored by a prominent US financial institution, were performed in May 2019. Participants expressed their perception that loan officers exhibit hesitancy in lending to them based on their ethnicity, and occasionally their age and gender. The study participants consisted of entrepreneurs from diverse racial backgrounds, including both Black and non-Black individuals, who were selected from the cities of Atlanta, Detroit, New York, and Oakland. The business revenues claimed by the entrepreneurs ranged from $100,000 to $1 million. These challenges contribute to a decreased likelihood of survival and growth for enterprises owned by individuals of African descent.
According to Brian Headd’s study published in Small firm Economics, Volume 21, Number 1 in August 2003, there is a correlation between start-up funding and improved firm performance. However, Black entrepreneurs possess a comparatively lower amount of it. According to a study conducted by Fairlie, Robb, and Robinson (2017), it was found that black entrepreneurs typically initiate their business ventures with an average capital of approximately $35,000, while their white counterparts begin with an average capital of around $107,000. The study, titled “Black and white: Access to capital among minority-owned startups,” was published as a working paper by the Stanford Institute for Economic Policy Research in February 2017. The source of this information can be accessed at siepr.stanford.edu. One of the outcomes is that Black-owned firms experience elevated levels of debt in relation to their income. According to the McKinsey & Company COVID-19 US SMB Financial Pulse Survey, conducted between May 8 and 13, 2020, among a sample of 1,004 small and medium-sized businesses with annual revenues below $500 million, it was found that approximately 30 percent of Black-owned businesses allocated more than 50 percent of their revenues towards debt servicing in 2019. According to a study conducted by Alicia Robb and Arnobio Morelix in October 2016 for the Ewing Marion Kauffman Foundation, it was found that Black entrepreneurs are significantly more inclined to express that their businesses’ profitability is adversely affected by a lack of access to capital compared to their white counterparts. Additionally, Black entrepreneurs are nearly twice as likely to attribute this issue to the cost of capital. This research sheds light on the disparities in startup financing trends based on race. Despite the fact that the conditions for Black candidates are more severe, there is still a lack of funds available to them. According to a research study, a higher proportion of Black loan applicants, namely 73 percent, were requested to furnish financial statements for their enterprises, in contrast to 50 percent of white applicants with similar backgrounds. Furthermore, it was found that a significant proportion of Black applicants, specifically 31 percent, were requested to furnish their personal W-2 forms. According to a study conducted by Sterling A. Bone et al. (2019), it was found that there were no instances where white applicants received a similar request. The study titled “Shaping small business lending policy through matched-pair mystery shopping” was published in the Journal of Public Policy & Marketing. The source of this information can be seen at journals.sagepub.com.
According to the findings, black entrepreneurs express a significantly higher likelihood, around three times more than their white counterparts, of perceiving a detrimental impact on their enterprises’ profitability due to limited access to finance. Moreover, black entrepreneurs are nearly twice as likely to attribute this situation to the high cost associated with acquiring capital.
The observed interactions between individuals and financial institutions align with previous research indicating that minority business ownership is a significant factor in loan rejection, particularly in communities where nonwhite individuals make up the majority. This correlation was identified by Timothy Bates and Alicia Robb in their study titled “Loan availability among small businesses operating in urban minority communities,” presented at the Reserve System Community Development Research Conference on April 11, 2013. The website frbatlanta.org is a valuable resource for accessing information related to the Federal Nevertheless, the mere presence of a business in a co-ethnic market, characterized by individuals, customers, and proprietors sharing the same ethnic background, leads to diminished revenue, even when businesses possess similar levels of quality (Shinnar, Aguilera, & Lyons, 28).The citation provided is from the International Business Review journal, specifically Volume 11, Issue 6, published in December 2002, with pages 646 to 658. Indeed, empirical evidence indicates that firms located in majority-Black communities exhibit lower sales levels compared to their counterparts situated outside such regions, despite possessing superior Yelp evaluations. Black-owned firms face a conundrum that leads to a loss in revenue.
Black entrepreneurs may have challenges when it comes to getting specialized knowledge and business services. Black entrepreneurs who own employer enterprises, and who would potentially benefit from services such as legal and financial advising, exhibit a lower likelihood of actively seeking out these services. According to the 2016 Annual Survey of Entrepreneurs conducted by the US Census Bureau, it was found that a lower percentage of Black owners, specifically 58 percent, sought professional services compared to their white counterparts, who had a higher percentage of 70 percent. The reasons cited for this disparity were concerns about the cost, limited accessibility, and a sense of mistrust among Black owners. This data highlights the challenges faced by Black entrepreneurs in accessing and utilizing professional business advice or mentoring services. To gain further insights into the heightened levels of distrust among Black entrepreneurs, it is recommended to refer to the publication titled “The tapestry of Black business ownership in America: Untapped for success” by the Association for Enterprise Opportunity in 2016. The aforementioned publication may be accessed at aeoworks.org.
Business networks have the potential to provide assistance to Black entrepreneurs; nevertheless, there exists a disparity in their awareness and access to these networks, hindering their ability to benefit from the support and promotional opportunities they offer. It is evident that Black entrepreneurs face a higher probability of being marginalized in terms of accessing information pertaining to lucrative prospects. This exclusion persists despite the expressed desire of focus-group members to establish connections with diverse business professionals and mentors. The aforementioned exclusion results in a reduced number of linkages to established centers, as stated by Robb and Morelix in their study on startup financing trends by race, which examines the influence of capital accessibility on profitability. This information may be seen on the website of Transparent Collective. Examples of sources of funding include financial institutions like banks and venture-capital funds, as well as informal networks. One indication of this alienation is the underutilization of corporate and government procurement initiatives specifically aimed at supporting firms owned by individuals of Black ethnicity. According to a report published by the Minority Business Development Agency (MBDA) in 2016, there was a disparity in the utilization rates between Black-owned firms and white-owned enterprises within the same industry, with the former seeing lower levels of usage compared to their availability. According to a disparity study conducted by the Minority Business Development Agency, the distribution of contract dollars awarded to Black-owned businesses in five prominent industries (architecture and engineering, construction, goods and supplies, professional services, and other services) ranged from 4 to 44 percent of the contractors’ availability. In contrast, white-owned businesses received a higher proportion of contract dollars, ranging from 49 to 61 percent. This study sheds light on the existence of contracting barriers and various factors that impact minority business enterprises. The source of this information can be found on the website of the Minority Business Development Agency.
The cumulative obstacles to initiating and maintaining a business owned by individuals of African descent result in the conversion of systemic prejudice into reduced availability of financial resources, decreased revenue, and diminished opportunities for business expansion. The involvement of the mainstream financial system in perpetuating these obstacles has contributed to the perpetuation of Black Americans’ lack of confidence in the financial sector and their apprehension towards incurring debt (US Census Bureau, 2018). To gain further insights into the topic of inclusion within the financial services industry, it is recommended to refer to the scholarly work authored by Aria Florant, JP Julien, Shelley Stewart, Nina Yancy, and Jason Wright, titled “The case for accelerating financial inclusion in black communities,” published on February 25, 2020.
The limited availability of cash, knowledge, and assistance significantly hinders the economic mobility of Black entrepreneurs, hence constraining the capacity of entrepreneurship to generate wealth for Black families and communities. Addressing these obstacles necessitates the collaboration of stakeholders from the public, private, and social sectors to assess existing business ecosystems and reconstruct them in a manner that promotes fairness and provides greater support for Black entrepreneurs. Specifically, local anchor institutions, such as hospitals and universities, have the potential to assume a leadership role in fostering collaboration between the public and social sectors, thereby facilitating the coordination of various groups. Various local economic development institutions, community development banking institutions, chambers of commerce, and government agencies, such as the Small Business Administration or MBDA, are currently involved in undertaking these endeavors. However, because to the inherent connection between anchor institutions and their respective communities, these institutions have the potential to gain significant advantages in the long run by allocating resources towards fostering more equitable and healthier business environments.
This task necessitates the implementation of policies that not only provide fair access to finance but also promote equal outcomes. The involvement of Black leaders can play a pivotal role in fostering positive experiences and cultivating trust among Black entrepreneurs towards organizations and ecosystems that have historically been perceived as exclusive. Furthermore, it is imperative for both the corporate and social sectors to actively contribute towards the development of competencies and the promotion of knowledge sharing among Black-owned firms. The augmentation of mentorship (advisory) and sponsorship (advocacy) initiatives might enhance the cohesion between Black entrepreneurs and various stakeholders within business ecosystems.
The removal of institutional barriers for Black-owned enterprises can be facilitated by the active involvement of several sectors, including the governmental, private, and social sectors. Stakeholders has the ability to guarantee that laws, rules, and practices are intentionally crafted to generate fair and just opportunities and outcomes.
Various stakeholders, including policy makers, industry groups, affinity groups, and coalitions, possess the capacity to implement and uphold laws and policies that are designed to mitigate inequitable procedures and outcomes. Upon conducting an analysis of the existing legislation and policies, together with their corresponding impacts, it may be advisable for relevant parties to contemplate the revision of antidiscrimination measures. Significantly, stakeholders possess the ability to establish or provide assistance to internal and external oversight organizations that are specifically focused on generating research pertaining to equity in processes and policy results.
Furthermore, it is imperative that procurement procedures, particularly at anchor institutions and major enterprises, undergo a transformation to enhance inclusivity towards Black-owned firms. In addition to allocating financial resources towards procurement from Black-owned enterprises, major corporations have the potential to streamline their certification procedures for minority suppliers, hence expediting the onboarding of new suppliers. It is imperative for organizations to allocate financial resources towards supplier-development initiatives aimed at enhancing the involvement of Black-owned companies in supply chains.
Once organizations have created their supplier programs, it is imperative for them to monitor their procurement spending across significant supplier categories and enhance the accessibility of this data to facilitate progress tracking and foster accountability. As an illustration, a bank in North America has made a commitment to monitor its expenditures with a variety of suppliers, the extent of engagement with suppliers who hold minority certifications, and the number of inquiries and proposals directed towards these suppliers (Royal Bank of Canada, “Supplier diversity at RBC,” rbc.com, 33). The current economic crisis, which is closely associated with the ongoing pandemic, underscores the pressing need for this activity. Consequently, organizations that possess a vested interest in maintaining thriving business ecosystems may be well-positioned to assume a leadership role in spearheading these efforts.
In order to address economic obstacles, it is imperative for small and medium-sized businesses (SMBs) owned by individuals of Black descent to receive direct investment or equity contributions in the form of in-kind resources. These resources may encompass grants, subsidies, loans, and revenue-participation agreements. Direct investment has a crucial role, particularly in the context of the ongoing COVID-19 problem. Based on our analysis, it is indicated that an estimated range of $7.6 billion to $15.4 billion in liquidity could be allocated to small and medium-sized businesses (SMBs) owned by individuals of Black ethnicity during the period of 2020-2021. This amount represents less than 3 percent of the total authorized funds of $659 billion under the Paycheck Protection Program. By providing this additional financial support, it is projected that approximately 460,000 to 815,000 jobs could be preserved. This information is sourced from the US Department of the Treasury’s publication on the assistance provided to small businesses through the CARES Act. The average cost per job ranges from $9,325 to $33,478.
In the time period of 2020-21, allocating an extra $7.6 billion to $15.4 billion in liquidity specifically for small and medium-sized businesses owned by Black individuals may potentially safeguard 460,000 to 815,000 job positions. It is worth noting that this amount represents less than 3 percent of the total $659 billion that has been permitted through the Paycheck Protection Program. On average, this allocation would amount to approximately $9,325 to $33,478 per job.
The primary focus of both the governmental and commercial sectors during the economic crisis caused by the COVID-19 pandemic has been to offer subsidies and defer loan payments to small and medium-sized businesses (SMBs). Enhancing the accessibility of financial resources, namely cash for both initiating and expanding enterprises, among Black entrepreneurs, will play a pivotal role in enhancing the entrepreneurial landscape and fostering the growth of businesses. One potential avenue for increasing access to capital for Black-owned businesses is the involvement of many stakeholders, such as banks, conventional and social-impact investors, foundations, and public programs. These entities have the potential to allocate additional financial resources towards supporting and empowering Black-owned firms. Potential initiatives encompass those aimed at mitigating the risk associated with giving financing to enterprises owned by individuals of Black descent, such as implementing fund guarantees. Additionally, there are programs designed to enhance the skill sets of entrepreneurs from marginalized communities. One potential strategy to mitigate the impact of bias in the loan process is to reduce the frequency of face-to-face interactions. According to Cameron Costa’s article titled “Minority entrepreneurs at a tipping point as Black-owned banks dwindle in the U.S.” published on CNBC on August 25, 2020, it is evident that Black entrepreneurs exhibit a higher propensity to seek online borrowing options, potentially due to the reduced prominence of their racial identity in such platforms. A software application designed specifically for small-business investment firms has the potential to facilitate the provision of finance and research and development (R&D) funding to small businesses with significant growth prospects. Moreover, such a program might potentially expedite the growth trajectory of Black-owned enterprises that own valuable intellectual property, thereby fostering entrepreneurship within the Black community in industries characterized by high growth rates.
One potential solution to assist Black-owned businesses in accessing loans, grants, and affordable capital is the establishment of a volunteer network comprising professional service providers and coaches. This network would offer guidance and support to these businesses in navigating the complex process of securing financial resources, including those provided by large corporations and nonprofit organizations (Local Initiatives Support Corporation, 2020).
Furthermore, alongside the ongoing endeavor of fostering Black leaders in influential roles pertaining to capital funding, it is plausible for cross-sector organizations to assemble and endorse a consortium of Black fund managers. This consortium would be involved in the issuance and management of debt and equity investments specifically targeted towards small enterprises. The Small Business Administration (SBA) currently grants licenses to small-business investment companies (SBICs) that provide financial guarantees for funds dedicated to investing in small and medium-sized businesses (SMBs). Enhancing the representation of Black fund managers within this program, while concurrently allocating investments towards Black managers and fostering the development of Black leaders in the private sector, may have cumulative outcomes.
In order to surmount market barriers, small and medium-sized businesses (SMBs) held by individuals of Black ethnicity necessitate assistance in developing their capacities and facilitating the dissemination of a more substantial body of knowledge. Organizations dedicated to promoting equity in entrepreneurship might enlist the expertise of black service providers to spearhead capacity-building initiatives. This endeavor aims to safeguard and enhance the viability of businesses owned by individuals of Black ethnicity, while concurrently establishing interconnected networks of businesses with Black-owned small and medium-sized enterprises (SMBs) serving as central nodes.
The allocation of resources from the commercial and social sectors, with a particular emphasis on anchor institutions, has the potential to facilitate the enhancement of workforce capabilities inside Black-owned small and medium-sized businesses (SMBs). This support may encompass many forms of assistance, such as reskilling and upskilling initiatives, aimed at fostering agility and adaptability within these enterprises. As an illustration, a prominent social-media platform developed a comprehensive repository to furnish organizations with sector-specific knowledge that may be utilized amongst the ongoing pandemic. Likewise, the utilization of on-the-job training and freely accessible web-based courses presents viable avenues for knowledge dissemination across several businesses, hence facilitating widespread accessibility and adoption. Business-service providers have the potential to play a significant role in enabling digital transitions, hence assisting organizations in the identification of novel market opportunities.
Ultimately, the enhancement of digital capabilities will serve to augment the proportion of opportunities available to Black entrepreneurs. However, it is important to note that the accompanying business services required to fully capitalize on these potential have yet to be adequately addressed. Numerous Black-owned enterprises encounter limitations in their capacity to engage service providers capable of facilitating the digital transformation of their operations. However, both private-sector entities and social-sector organizations possess the potential to offer complimentary technological services and managerial guidance. The provision of complimentary or subsidized installation, technical assistance, and personnel training can facilitate the acquisition of enhanced digital capacities by Black-owned enterprises, hence enabling them to effectively disseminate this knowledge to other Black-owned firms within their localities.
The engagement of Black entrepreneurs in networking, mentorship, and sponsorship initiatives might serve as a means to surmount sociocultural obstacles. It is imperative that the commercial sector assumes a proactive role in fostering inclusivity by actively cultivating diverse teams. It is imperative for managers across all hierarchical levels to actively cultivate and support the professional advancement of Black leaders as a strategic response to mitigate the impact of structural racism. According to a study conducted by David F. Larcker and Brian Tayan at Stanford Graduate School of Business in February 2020, it is evident that the representation of Black individuals in top leadership positions within Fortune 100 companies is significantly low. Merely 3 percent of current Fortune 100 company CEOs are Black, and an even smaller proportion, less than 4 percent, hold leadership roles responsible for profit and loss within departments. These positions are typically associated with accelerated career progression. (Larcker & Tayan, 2020) In addition, the phenomenon of unconscious bias has the potential to impact the dynamics of mentorship and sponsorship, as individuals often exhibit a tendency to gravitate towards mentoring others that they perceive to be similar to themselves (Petri, 2017).
Community initiatives have the potential to facilitate the connection between Black entrepreneurs and role models, as well as commercial networks. This connection can significantly enhance the confidence and support available to Black individuals aspiring to engage in business ownership. One potential approach involves the facilitation of networking and partnerships between established businesses and complementary start-ups, which might be undertaken by both the private and social sectors.
Investing in more business ecosystems that offer Black business owners fair and unbiased access to resources and opportunities has the potential to unlock a portion of the estimated $1 trillion to $1.5 trillion in yearly GDP that would result from addressing and narrowing the racial wealth disparity. Moreover, via the establishment of social and economic institutions that are conducive to a broader range of individuals, stakeholders have the potential to address the prevailing lack of trust that has emerged between Black entrepreneurs and various institutions. The potential positive impact on societal well-being, in addition to the economic benefits, could represent a progressive advancement for American society.
David Baboolall and Nina Yancy serve as consultants at McKinsey’s New York office. Kelemwork Cook fulfills the role of a consultant at the Cleveland office, while Nick Noel operates as a consultant in the Washington, DC, office. Shelley Stewart holds the position of a partner at the New Jersey office within the organization.
The authors express their gratitude to Katie Chen, Michael Chui, JP Julien, Mike Kerlin, Michael Lazar, Ricardo Pena, and Duwain Pinder for their valuable contributions to this article.
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