The impact of COVID-19 on minority-owned small enterprises in the United States.
Minority-owned small businesses may provide an early indication of how U.S. businesses will adapt in the aftermath of COVID-19, whether through necessity or ingenuity. These companies are experimenting with new methods of operation to ensure the safety of their employees, providing financial assistance to employees and community members, and introducing new services, such as free delivery for those in need.
1McKinsey COVID-19 US Small and Midsize Businesses Financial Pulse Survey, administered May 8 through May 12, 2020, with 1,000 respondents. The sample represents a representative cross-section of industries and states (North American Industry Classification System, Version 2). This article concentrates on small businesses with between one and four hundred and fifty employees. More than forty percent of minority-owned small businesses have added new services to support their employees and communities, compared to only twenty-seven percent of all respondents. A majority of minority entrepreneurs are optimistic about economic recovery in general: 56% of minority small-business owners reported optimism regarding post-COVID-19 economic conditions, compared to 49% of all respondents (Exhibit 1).
However, minority entrepreneurs, who face a multitude of obstacles, are also concerned about business hazards. Minority-owned small businesses may be the most susceptible of all disadvantaged small businesses. Many minority-owned small businesses were already in financially precarious positions prior to COVID-19 lockdowns, and their industries are frequently more susceptible to disruption. To ensure the survival of these enterprises in the current environment, private, public, and social-sector organizations will need to make fundamental changes in how they collaborate to support them.
The COVID-19 crisis affects all types of small enterprises. The 1,1 million minority-owned small businesses with employees in the United States are an essential source of employment, employing more than 8.7 million workers and generating an annual economic output of more than $1 trillion. Nearly 300,000 of them are owned by women, employing 2.4 million individuals.
Minority-owned small businesses may be disproportionately affected by the crisis for two crucial reasons: they are more likely to be concentrated in the industries most directly impacted by the pandemic, and they are more likely to encounter underlying challenges that make them more difficult to operate and grow.
Small businesses owned by minorities encounter structural obstacles that highlight the inherent economic fragility of underrepresented groups, such as the black and Latino communities.
These underlying obstacles may have an immediate impact on the health of minority-owned small enterprises. In an evaluation of the financial health of companies, the Federal Reserve Banks found that minority-owned small businesses were significantly more likely to exhibit signs of limited financial health, as measured by profitability, credit scores, and the propensity to use retained earnings as a primary source of funding.2Can small firms withstand the economic effects of COVID-19?Federal Reserve Bank of New York, April 2020; fedsmallbusiness.org; Federal Reserve Bank of Atlanta, December 2019; fedsmallbusiness.org. Small business credit survey: 2019 report on minority-owned firms. Approximately twice as likely as nonminority-owned small enterprises to be categorized as “at risk” or “distressed” (Exhibit 2). The US Federal Reserve also indicates that distressed companies are three times more likely to close than healthy businesses following a two-month revenue shock.3A company’s financial health is determined by profitability, credit risk, and business funding. Companies classified as “healthy” are profitable, have high credit scores and low credit risk, and rely on retained earnings to fund the business. Companies that meet only two of these criteria are considered “stable,” those that meet only one are “at risk,” and those that meet none are “distressed.”
Minority-owned small businesses’ underlying health is exacerbated by their limited access to credit. Using data from the 2018 Small Business Credit Survey, the Brookings Institution discovered that large banks approve approximately 60 percent of loans sought by white small-business owners, 50 percent of those sought by Hispanic or Latinx small-business owners, and only 29 percent of those sought by black small-business owners.4Sifan Liu and Joseph Parilla, Businesses owned by women and minorities have increased. Will COVID-19 reverse this?14 April 2020, Brookings Institution, brookings.edu. When applying for small-business loans, black small-business owners were significantly more likely to be asked to provide additional personal financial information, including personal financial statements and personal W-2 forms, than white small-business owners, even after controlling for credit score and business characteristics.
In general, black-owned businesses begin with significantly less capital, whether from investments or bank loans, than their white counterparts. And only 1% of minority business owners receive a bank loan in the first year of operation, compared to 7% of white business owners. During their first year in business, 30 percent of white business owners and 15 percent of black business owners use business credit cards, respectively.5Robert Fairlie, Alicia Robb, and David T. Robinson, Black and white: Access to capital among minority-owned startups, Stanford Institute of Economic Policy Research working paper number 17-003, February 2017, siepr.stanford.edu. The COVID-19 crisis is likely to exacerbate this problem: 42% of minority-owned small businesses responding to McKinsey’s US Small Business Pulse Survey reported that obtaining credit was becoming more challenging, compared to 29% of all respondents.
The average minority-owned mature small business is 30 percent smaller than the average nonminority-owned mature small business, according to research.6Zero barriers: Three mega trends shaping the future of entrepreneurship, State of Entrepreneurship 2017, Ewing Marion Kauffman Foundation, February 2017. 11 percent of minority-owned small businesses had employees, compared to 22 percent of nonminority-owned small businesses, according to our own analysis of Minority Business Development Agency data.7″U.S. business fact sheets,” Minority Business Development Agency, 11 May. Excluding sole proprietorships, we found that minority-owned small businesses, on average, had 32% fewer employees and 47% lower revenue than non-minority-owned small businesses (Figure 3).
A large proportion of minority-owned small businesses are susceptible to the pandemic due to their concentration in industries more susceptible to disruption. In the near future, service industries, such as accommodation and culinary services, personal and laundry services, and retail, which have the highest proportion of minority-owned small businesses, could experience the most disruption. These services frequently necessitate physical proximity to others, and remote delivery is less likely. And despite the fact that the healthcare and social assistance sector is less likely to experience immediate net job loss and company closures, it is the industry most susceptible to contracting the infection (Figure 4).
Whether or not a small business is owned by minorities, 51 percent of jobs performed by minorities in small businesses could be at risk in the near future, compared to 47 percent of jobs performed by white employees in small businesses. Hispanic workers, for instance, account for approximately 25 percent of all small-business employment in the accommodation and food services industries, the most immediately vulnerable sectors. 33 percent of all nursing auxiliaries are black; this is a high-contact, essential occupation with elevated risks of virus transmission. Small enterprises owned by minorities and jobs held by minorities are already disproportionately affected by the COVID-19 crisis. Minorities comprised 37% of the labor force in February 2020, but 58% of the newly unemployed on March 14, 2020.8US Bureau of Labor Statistics Household Survey.
58% of minority-owned small businesses are “extremely” or “very concerned” about their business’s financial viability, according to McKinsey’s US Small Business Pulse Survey. The percentage is 68 percent for firms owned by Native Americans, compared to 47 percent for all US-based respondents. In addition, minority-owned small businesses in the United States are more likely to have conducted reductions, furloughs, or closed their business: 55% versus 48% of all respondents.
Decision-makers in the private, public, and social sectors must act swiftly to address the immediate challenges minority entrepreneurs and their enterprises face. To address their long-term needs and ensure their longevity and success, additional effort and more fundamental adjustments will be required.
The government has taken measures to aid and support small enterprises and their employees. However, according to our Small Business Pulse Survey, businesses with less than $250,000 in annual revenue were substantially less likely to apply for the US Small Business Administration Paycheck Protection Program. Small-business advocates assert that this may be due to a lack of clarity surrounding the programs or shifting guidance.9″AICPA, NFIB, and others say SBA must issue more guidance on PPP loan forgiveness,” Association of International Certified Professional Accountants, May 12, 2020, aicpa.org.
Regardless, the lower application rate is likely to have a significant impact on the average smaller size of minority-owned small enterprises.
Liquidity is of utmost importance for all small enterprises, but the challenges may be more severe for the most vulnerable. Aid in the form of grants, loans, subsidized access to legal counsel, professional assistance to negotiate with creditors or landlords, and free advertising credits could assist minority-owned small businesses in responding to the pandemic and protecting their employees. Community-relief funds could provide businesses with declining revenues with short-term assistance. Large companies could also provide small enterprises in crisis with emergency grants.
Reach is essential for ensuring the effectiveness of the previously mentioned measures. In some instances, public institutions may need to improve and customize their delivery mechanisms in order to reach minority-owned businesses and meet their particular requirements. Similarly, all willing actors, including government agencies, non-profit organizations, and private-sector businesses, may need to reevaluate their outreach programs and educational campaigns in order to raise awareness about the types of assistance they provide. They may also identify opportunities to improve the usability and accessibility of their programs and services.
Expanded access to funding could significantly improve the underlying health of minority-owned small businesses, increase their likelihood of attaining scale, and bolster their financial resilience. The public sector could assist in this situation by incentivizing lending and addressing banks’ concerns regarding the risk of lending to underserved small businesses. Community-development financial institutions could play a significant role, as they are deeply rooted in their local communities and may have a greater understanding of the challenges that minority entrepreneurs confront than traditional financial institutions.
On the revenue side, accelerating receivables from government or large corporate customers could assist with cash management. Businesses that could afford to pay their suppliers early and reduce their cash conversion cycle would provide significant relief to their suppliers. Government and private sector procurement commitments could also help to balance the playing field for minority-owned suppliers. Government agencies could, for instance, utilize programs such as the US Department of Commerce’s Office of Small and Disadvantaged Business Utilization and the US Department of Transportation’s Disadvantaged Business Enterprise programs to ensure that minority-owned small businesses have the chance to compete for contracts.
Assisting businesses in adapting their models and operations could also have an immediate impact. In high-risk domains, such as businesses and workplaces requiring physical proximity, it will be necessary to make rapid adjustments by redesigning contactless experiences and safer work environments. Technology accessibility is vital. Non-profit organizations and volunteers across the nation are assisting local small businesses in going online, developing applications, and launching pick-up and delivery services. In a broader sense, technology companies could play a crucial role by providing affordable or free access to digital tools and solutions to assist the most vulnerable businesses in upgrading their technology and remaining competitive in the digital age.
In addition to addressing the immediate requirements of minority-owned businesses, decision-makers in the private, public, and social sectors should use the COVID-19 pandemic as an impetus to address the numerous structural challenges these businesses face. Minority entrepreneurs and their enterprises may be more likely to achieve long-term success if longer-term changes are made. To establish a specific set of longer-term recommendations for creating better business ecosystems, increasing access to funding, improving the availability of business and financial advice, and expanding peer networks for minority entrepreneurs, additional research is required.
The pandemic of COVID-19 has exacerbated the numerous difficulties faced by minority-owned small businesses. There are resources available for all small businesses, but there are few current and granular data on those owned by minorities. Such information would aid private, public, and social-sector actors in understanding and addressing the challenges minority entrepreneurs and their businesses confront. This will not only enhance the overall resilience and long-term outlook of the U.S. economy, but it will also contribute to the development of a more equitable society.
In the Miami office of McKinsey, André Dua is a senior partner, Deepa Mahajan is a partner, Ingrid Millan is an associate partner in the Washington office, and Shelley Stewart is a partner in the New Jersey office.The authors would like to acknowledge the contributions of David Baboolall, Neha Jain, Nick Noel, Alfonso Pulido, Kelemwork Tariku-Shotts, Yohann Velasco, Jason Wright, and Nina Yancy.