Thought Leadership

Disproportionate Impact of the COVID-19 Pandemic: Financial Health and Capital Access

In the US, those already vulnerable stand to be the most negatively impacted from COVID-19 related health and economic crises. This piece is the first of a three-part blog series focusing on disproportionate consequences of both COVID-19 and efforts to limit its spread for minority-owned and low-income-area small businesses. Equity needs to be at the forefront of economic relief and recovery efforts to ensure we are best positioned to further build an inclusive economy. Doing otherwise will only deepen our country’s racial health and wealth gaps.

COVID-19 has upended business plans, forced entire industries to shutter, and fueled unprecedented economic uncertainty. To weather periods of significant revenue loss, small businesses need both underlying financial health and access to suitable forms of capital. Minority-owned firms and those in low and moderate income communities face deeply entrenched systemic challenges in these areas that threaten their survival. As a result, communities risk losing the contribution of local businesses as product and service providers, and engines of wealth and job creation. Foundational neighborhood institutions will be lost.

From redlining to the recent unjust “recoveries” from hurricanes Katrina and Harvey and the Great Recession, a pattern of partial and uneven economic recovery is clear throughout our recent history. Historically, black and Latinx-owned small businesses, regardless of their size, number of employees, age, or industry, typically have worse financial health than their white-owned counterparts. They have lower credit scores, are less likely to be profitable, and more likely to use personal resources to fund their businesses. 

In 2018, 78% of black-owned firms and 69% of both Latinx and Asian-owned firms reported financial difficulties in areas like paying operating expenses, credit availability, making debt payments, and purchasing materials. Smaller shares of black-owned businesses either grew revenue or added employees, compared with white-owned businesses. Minority-owned businesses also tend to secure a disproportionately lower number and dollar amount of government contracts, limiting access to a substantial revenue opportunity.

Lack of cash reserves and existing financial health risk factors can prove disastrous when disruptions hit hard and fast. The median small business retains a cash reserve that can last for 27 days. Leisure and hospitality industry businesses have already faced drastic operational changes and shutdowns for weeks and will undoubtedly be among the hardest hit. Of the $2.2 trillion CARES Act, only $10 million was allocated to the Minority Business Development Agency (MBDA), a crucial support resource promoting the fundamental financial well-being of minority-owned firms.

Inequitable access to capital resources is also compounding the ongoing detriment of minority-owned small businesses and those in low-income communities. More limited credit history and assets, along with lower net worth, make securing a loan more difficult for minority business owners and contribute to a greater dependence on credit cards. They are more discouraged from applying for new financing because they expect to be denied and report a heavier reliance on personal savings

On average, black and Latinx owners who do apply for loans receive smaller shares of what they request, and are also more likely to receive none of the capital they apply for. Interise’s 2019 Impact Report shows that minority and Latinx-owned businesses received amounts of new capital that were about 35% lower than white borrowers on average. Black and Latinx owners are also more likely to turn to higher-cost and less-transparent credit products and to express dissatisfaction with their lenders than white owners.

Federal loan and debt relief initiatives must confront these disparities in capital access to quickly reach those most vulnerable. For example, Economic Injury Disaster Loans require collateral and taking on debt,that many business owners operating on already thin margins will struggle to pay back at risk of losing assets, like their homes. More limited staffing capacity, existing banking relationships, and resources means many minority-owned and low-income-area businesses face disadvantages in navigating first-come first served programs like the Paycheck Protection Program (PPP). 

Additional funding and new equity mechanisms are needed for the PPP to ensure support is specifically oriented toward those facing barriers to access. Federal action to ensure more Community Development Financial Institutions (CDFIs) are financially stable themselves and approved to participate in relief lending will help to close capital access gaps. Coordination among the various types of local relief funds, including those from city governments, public entities, philanthropy, financial institutions, and business chambers, will direct funding to the smallest of small businesses and those operating outside the mainstream banking system.

We can’t afford to repeat past mistakes and must intentionally focus our recovery on systems change and advancing equity. 

The time to protect our vibrant and dynamic small businesses most in need is now. The COVID-19 crisis is only exacerbating existing disparities in small business financial well-being and capital access that are embedded in our larger economic system and have always disproportionately hurt disadvantaged firms. These disparities are deeply rooted in historic inequalities, namely racial and ethnic discrimination. Our recovery from this crisis must chart a new course. We can’t afford to repeat past mistakes and must intentionally focus our recovery on systems change and advancing equity.