The Wealth Gap’s Influence on Minority-Owned Businesses

banner-image-web

(This blog post is part of a series. Read the previous posts here and here.)

The racial wealth gap has significant implications for entrepreneurship in terms of access to capital. Most business owners turn to their own wealth or that of their friends and family when starting and operating a business. Minorities have lower levels of wealth on average, due to the policies and discrimination that created and maintained the racial wealth gap, and minority business owners therefore tend to have less of their own capital to invest in their businesses.

This is compounded by the fact that minorities have less access to other types of capital. When it comes to loans, minority business owners are more likely to be declined than white business owners. If they do receive a loan, they are more likely to receive smaller amounts and with higher interest rates than white business owners. This leads to a “trust gap,” where black business owners do not apply for capital from financial institutions and banks because they think they will be turned down.

This lack of access to capital may explain a key difference between minority- and white-owned firms. Minority-owned businesses have smaller revenues and average payroll, and are less likely to have employees. While the vast majority of businesses do not have employees, this is exacerbated for those owned by women and/or blacks and Hispanics, as demonstrated by the following graph from The Color of Entrepreneurship report:

Color-of-Entrepreneurship

This inhibits these businesses’ opportunity to support economic development in their local communities, since small businesses that have paid employees can have much more economic impact on their communities than those who do not. They are also more able to scale. This gap in employment is a symptom of the racial wealth gap and shows the extent of the problem.

The next and last blog post in this series will focus on how entrepreneurship can positively affect the racial wealth gap. You can read Interise’s full issue paper here for more information.