Small Business and the Racial Wealth Gap

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Minority-owned businesses are growing at a rapid pace: from 2007 to 2012, the number of minority-owned firms increased by 38%, while the number of non-minority-owned firms declined by 6%. More impressively, the number of Black women-owned businesses and Latina women-owned businesses grew by 67% and 87%, respectively. These strong numbers demonstrate the potential for minority-owned businesses to drive local economic development.

However, minority-owned businesses are lagging in terms of total revenue, payroll, and number of employees, a problem that is all the more pressing when considering that minorities are on the way to becoming the majority of Americans. The vast majority of all small businesses do not have employees, and this is even more the case for those owned by blacks, Hispanics, and/or women: 94% of businesses owned by black men and 98% of those owned by black women do not have employees, as compared to 76% of those owned by white men.

What’s the reason for this disparity? One reason could be the racial wealth gap in the United States, since most business owners turn to their own wealth or that of their friends and family when starting and operating a business. Overall, white Americans have levels of wealth that are ten times higher than those of Hispanic and black Americans. In Boston, the median wealth of white households is $247,500; the median wealth of U.S. black households is $8, and it is $0 for Dominican households. You can read that again. Minorities who have lower levels of wealth on average therefore have less of their own capital to invest in their businesses.

But on the other hand, minority-owned small businesses have the potential to reduce the wealth gap. Small businesses are crucial job creators for members of their communities. On top of that, minority employers are more likely than whites to hire people of color. These quickly growing groups of entrepreneurs could provide valuable employment for their communities. For example, in 2015, Interise small businesses that created jobs did so at an average rate of 5.8 jobs per business. Within that group, minority-owned companies created an average of 7.2 jobs per business.

This is the first post of a series accompanying Interise’s issue paper on the relationship between the wealth gap and small business. The series and paper will explore the history of the racial wealth gap, how it has affected small businesses, and the potential of small business to reduce the divide. Since 2004, Interise has focused on building the capacity of small businesses with the goal of creating wealth and jobs in low-income communities and aiding local economic development. Future Interise research will use Interise’s proprietary database of firm-level data, collected annually from a network of over 5,000 business owners, to take a closer look at how building capacity among small businesses can help build wealth among minority communities.

Come back next week to read about what factors led to and maintain the racial wealth gap.