Lack of Access to Capital is Crippling the US Small Business Sector in Communities of Color

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darrell byersBy Kimber Lanning
Executive Director
Local First Arizona 

Local First Arizona is a local partner in Accelerate Latinx powered by Interise

As a small business owner myself, and now as the Executive Director of an organization focused on powering my state’s entrepreneurs, it’s become evident that capital - which is like oxygen for successful small business development - is still not flowing evenly in communities across the US.

Capital allows a business to invest in the best tools to run their operations so as to remain competitive. Entrepreneurs who start a business already having access to capital through their personal assets (i.e. home, property, stocks), good credit, and/or loans with reasonable interest rates have higher business success rates than those who do not. According to the Office of Minority and Women’s Business Enterprises, entrepreneurs who seek to start a business without pre-existing capital face higher probabilities that their businesses will not succeed. 

Entrepreneurs who cannot start their business with a safe source of capital usually come from middle- and low-income backgrounds and communities, which often presupposes lower credit scores, high-interest rate loans, and few, if any, assets to liquidate for investment in their business. Disproportionately, people in these class categories are people of color. 

Given this reality, entrepreneurs with greater affluence fare better in small-business entrepreneurial ventures. Likewise, entrepreneurs with lower income, who are disproportionately people of color, struggle to compete in the small business sector due to fewer sources of capital to draw from.

"Small businesses are the backbone of broad-based economic development; yet, at the same time, the U.S. has seen a significant (and growing) underrepresentation of minority-owned small businesses." -Milken Institute

According to the United States Chamber of Commerce, “Capital Access remains the most important factor limiting the establishment, expansion, and growth of minority-owned businesses (MBEs).” Accordingly, we can see the differences in the number of businesses, their revenue, and their employees when comparing minority-owned businesses to classifiable employer businesses.

In 2015, Blacks made up 12.7 percent of the population, yet only owned 2.2 percent of classifiable small employer firms that made up 1.0 percent of sales (average receipts of $818,512), 2.0 percent of employees, and 1.4 percent of payroll (average wages of $28,241). 

Latinos were 17.6 percent of the population, yet owned 6.0 percent of classifiable small employer firms that accounted for 3.5 percent of sales (average receipts of $1,020,706), 5.0 percent of employees, and 3.8 percent of payroll (average wages of $30,534).

The best way business owners can fight unfair bias in lending is to establish relationships with local bankers, and establish accounts with smaller, local banks or credit unions. Small business capacity builders and technical assistance providers can help business owners understand how capital providers view their business financials. Capacity builders can broker relationships between small business owners and reputable alternative lenders such as CDFIs or other mission-based lenders, and they can make introductions or referrals to local banks, and local credit unions.

Big banks have a role to play as well, a social responsibility to re-examine their business models that perpetuate inequality and the results of redling. There is the need for smaller loan and line of credit products that are conducive to small businesses. Bring back relationship banking where getting to know and mentoring small business owners creates a pipeline for other bank products and strengthens the local economy.