Why Are Black-Owned Businesses Struggling to Rebuild?

Black-owned businesses are central to creating vibrant communities and neighborhoods, creating important connections between customers, suppliers, nonprofits, and others. That’s why it’s so troubling that the issues Black businesses had before the pandemic have only been worsened by COVID-19. We’ll explore the reasons behind these issues and suggest how we can support these businesses through difficult times.

Black-Owned Businesses Have Been Dealing with Years of Economic Inequality

The financial challenges that Black businesses face have been around for decades. The National Community Reinvestment Coalition has an excellent report that digs into the details behind this inequality. Some of the key points are:

  • Over a 20-year period, the number of Black-owned businesses almost tripled to just under ten percent. During the same time, the proportion of Black business revenue fell from one percent to 0.5 percent.
  • The median income of Black households only rose by a tiny amount over the same period. 
  • Black-owned businesses are underrepresented as a percentage of the US population. Black people make up 13 percent of our citizens, yet only account for 9.5 percent of our businesses and only two percent of firms with employees.

“African American and Hispanic families are not on the same wealth-building path as White families. They are less likely to own homes and retirement accounts, so they miss out on these traditionally powerful wealth-building tools… …These are dollars that can be used for important investments, such as higher education, down payment on a home, or to invest in a small business… …Self-employment can patch income shortfalls, improve earnings growth, and diversify a family’s wealth base beyond homeownership and retirement assets. But access to capital is more difficult for minorities, who are less likely to receive conventional small business loans or large gifts from family members that could finance small businesses.”—Urban Institute, Closing the Wealth Gap: Empowering Minority-Owned Businesses to Reach Their Full Potential for Growth and Job Creation

The Pandemic Worsened the Financial Situation of Black-Owned Businesses

The racial inequality wealth gap and chronic under-funding left Black businesses unprepared for COVID-19. Coronavirus closures and social distancing had an enormous impact on local businesses that relied on face-to-face interactions—traditional mainstays for Black entrepreneurs. 

“The racial disparities in entrepreneurship mirror overall racial economic inequality in the United States. Black income and wealth disparities, coupled with low revenue generation among Black businesses, low rates of pay and the challenges of Black firms to attract capital infusion from financial institutions, all highlight the limited return of Black business ownership in terms of income and wealth.”—The National Community Reinvestment Coalition, Black Entrepreneurship’s Lethal Pre-Existing Condition: The Racial Wealth Divide During The COVID Crisis

These businesses have felt the full impact of COVID-19:

  • During the early stages of the pandemic, African American businesses experienced the sharpest drop in active business owners, 41 percent.
  • Black-owned businesses were more than twice as likely to close due to the pandemic as their White counterparts
  • In April 2021, half of small and mid-sized minority-owned businesses couldn’t pay their rent on time.
  • Roughly seven in 10 women of color small business owners have experienced an average of a 46 percent decline in revenue.

How Black Business Owners Can Get the Financial Support They Need

The statistics paint a grim picture, but it’s vital that we learn lessons, change policies, and focus on what we can do to support Black businesses in future. Areas like racial wealth inequality are generational and endemic, and require major commitments from federal and state governments. Small Business Administration pandemic grants and loans are good starting points, although additional access for minority-owned businesses is needed.

Over the shorter term, there’s plenty we can do to create a more immediate impact.

Boost Banking Relationships with Black Businesses

Many Black entrepreneurs do not have pre-existing relationships with banks, increasing their concern that they will not be accepted for a loan. Banks have a responsibility here, to hire a more diverse and representative workforce and also to emphasize the need to lend to communities of color. 

Black business owners can move the needle too, by initiating conversations with banking staff to form new business relationships. Better connections with banking institutions can encourage a smoother loan acceptance process, benefitting the bank and business owner.

Focus on Local and Community Banks for More Lending Flexibility

Local banks and credit unions have much deeper insight into their local communities, and a stronger drive to provide investment where it’s most needed. Local business lenders understand common neighborhood business challenges and have more flexibility when it comes to funding.

Consider Online Loans and Loan Matching Marketplaces

For entrepreneurs that don’t want to deal with a bank face-to-face, the online small business loan marketplace is a great choice.Specialized services like Connect2Capital provide comprehensive loan-matching to connect small businesses with online, mission-driven lenders, freeing up thousands of dollars of extra capital for entrepreneurs outside of traditional banks.

“Online lending solutions, such as digital lending platforms and Fintech companies, can be a significant piece of the solution to these problems by overcoming the typical infrastructural boundaries that often unfairly keep communities of color locked out of the best financial opportunities.”—Forbes, Why Black-Owned Businesses Struggle To Get Small Business Loans

Have the Confidence to Apply for a Small Business Loan

Loans to Black-owned businesses are rejected at a higher rate than White businesses. But, that should not dissuade Black entrepreneurs from applying anyway. Getting all of your paperwork in order, creating a strong business plan, and demonstrating a clear understanding of customers and needs will all strengthen your application and likelihood of acceptance.

Consider Financial Support from Other Areas

Loans are not the only game in town. Black business owners have other options for funding:

The pandemic has been tough for your business, but with the right focus, you can rebuild, succeed, and thrive. Explore your options, and get the funding you need to continue making a difference.

Webinar: Writing a Business Plan

If you are applying for financing, a solid roadmap becomes especially important as it is the best way for a lender to get a feel for you and your business.

Disclaimer:  the information provided on this page is meant for general informational purposes only and may not reflect the most current resources and recommendations available. Please consult with your financial, tax, legal, and other relevant advisors when making decisions about your small business.