Female coffee shop owner.
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August is National Black Business Month, and supporting Black-owned businesses is more important than ever. According to the Small Business Administration’s (SBA) Office of Advocacy, there are roughly 3.6 million black-owned businesses in the U.S. that support over 3 million jobs (including business owners and their employees) and generate more than $200 billion in annual revenue
Often concentrated in major urban centers, with significant numbers in cities like New York, Atlanta, Washington D.C., and Chicago, Black-owned businesses are critically important, expanding the diversity and success of the overall U.S. economy. They create jobs, reduce unemployment rates, and stimulate local economies, particularly in underserved areas.
Black business owners are resilient, bring unique perspectives and innovation to their companies, and often cater to underserved markets and provide products and services that reflect the diversity of America. Successful Black entrepreneurs serve as role models and mentors, inspiring future generations of business leaders. Significantly, they contribute to the overall dynamism of the economy and enrich the cultural fabric of the nation while fostering a sense of identity and belonging.
Further, Black business owners frequently invest in their communities, support local suppliers, and donate to schools and community projects. They provide opportunities for wealth-building within minority communities, thereby promoting economic independence and reducing wealth gaps. A significant portion of Black-owned businesses are owned by women. According to the Pew Research Center, about 39% of Black-owned businesses are owned by women.
Yet nearly a quarter of the way through the 21st century, Black-owned businesses still face significant challenges, most notably, limited access to capital.
Access to Capital
Black-owned businesses often face challenges in securing funding. They are more likely to be denied loans or receive lower amounts than other business owners. In fact, according to Bankrate, just 16% of black business owners received the funding they applied for, compared to 35% for white business owners.
Historically, Black-owned businesses have faced significant challenges in accessing capital due to a variety of factors. Racism has, no doubt, negatively influenced lending decisions. Another challenge is that Black-owned businesses are often located in underserved areas with fewer economic opportunities and less access to banking services.
Economic issues have played a role as well, since Black entrepreneurs often have fewer personal financial resources or family members that can help get a business off the ground. If an entrepreneur cannot self-fund the business venture, which is usually the case, obtaining startup capital becomes even more critical to success.
However, banks typically make their lending decisions based on factors that include existing banking relationships, personal financial history and credit scores. This formula has proven problematic for aspiring Black business owners.
Since there has frequently been mistrust of financial institutions among members of Black communities, aspiring entrepreneurs who have limited experience in traditional banking services — or perhaps none at all — face disadvantages by not having existing banking relationships.
Potential borrowers who have little credit history or have a record of delinquent or missed payments, face scrutiny when applying for business loans. Someone with a poor credit history – or little or no personal credit history – will find it hard to meet banks’ lending criteria. Thus, if they are able to secure capital, Black business owners may be offered higher interest rates (reflecting the perceived greater risk in lending to individuals with poor credit histories). This makes accessing capital particularly challenging during today’s high interest rate environment.
When traditional banks are unwilling to lend, Black business owners have to look outside the traditional banking system. Unfortunately, African Americans are underrepresented in venture capital and investment networks, which are often influenced by personal connections. Because Black-owned businesses tend to be newer, smaller and generate less revenue, they appear riskier to lenders and investors.
Black small business owner calculating income and planning budget
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Where to Find Funding for Black-Owned Businesses
Improving access to capital for Black-owned businesses has been an important initiative on the Federal level for years. The Small Business Administration (SBA) has played a crucial role in supporting minority-owned companies through the agency’s various lending programs.
1. SBA Loans
In FY 2021, the SBA approved a record $44.8 billion in loans: over $36.5 billion through its flagship 7(a) loan program (maximum loan amount $5 million that can be used for a variety of purposes) and another $8.3 billion through its 504 loan program (long-term, fixed rate financing of up to $5 million for major fixed assets). Additionally, the SBA approved approximately $85 million in microloans (loans up to $50,000) to small businesses, many of whom are members of minority groups.
Despite the large number in the total amount of loans that were given out by the SBA, just 8% of 7(a) loans and 3.6% of 504 loans went to black business owners in FY 2023.
2. CDFIs
Community Development Financial Institutions (CDFIs), typically focus on underserved communities, also play an important role in lending to Black-owned businesses. The Treasury Department’s CDFI Fund offers both financial and technical assistance awards to CDFIs across the country. These competitive awards support and enhance the ability of these organizations to meet the needs of the communities they serve.
Young Black businesswoman working at her office.
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3. Non-Bank Lenders
Non-bank online lending platforms, through the use of technology, proactively help expand access to financing to support businesses run by people of diverse backgrounds. Non-bank lenders are less focused on credit scores than traditional banks are since they tend to make decisions based on revenues and the overall financial health of the applicants. Their focus is on a borrower’s business performance, not factors that can lead to unconscious discrimination or unfair financing practices.
Beyond loan programs themselves, Black-owned businesses can benefit from mentorships and educational programs that offer financial literacy and insights into best business practices that can help Black entrepreneurs improve their finances.
While significant progress has been made in recent years, Black-owned businesses continue to face unique challenges that require policies that help expand access to capital and educational programs that can help maximize their potential. Until more progress is made in getting business funding in the hands of Black entrepreneurs, they will continue to encounter greater challenges to achieving financial success than other groups.
Source : Forbes