While multiple reports have shown rising interest in financing Black-owned small businesses, a new study shows an underlying problem still remains. According to the “State of Minority Business, March 2022” report by Creative Investment Research, there has been less understanding of the core issues small Black-owned firms face in gaining funding to start or grow enterprises.
The analysis pinpoints why Black-owned firms continue to experience under-performance in accessing capital across the nation’s financial services-industry.
William Michael Cunningham, an economist and owner of Creative Investment Research in Washington, D.C., says those factors include elevated discouragement when applying for financing, low-profit margin industries, and a reported undercount by the U.S. Census Bureau of the number of black owned businesses. He says potential discrepancy can lead to less funding from federal, state, and local agencies to support to those ventures.
Cunningham swears the lack of financing cuts across funding sources including banks, credit unions, venture capital firms, and fintech businesses. The research includes data on exit rates by year and race, the number times black firms re-opened, and the type of financing used.
“We were shocked by the layers of racism, discrimination, and anti-black Black behavior on the part of financial institutions and how that conspired to lower Black business activity,” he says.
“And the fact that policymakers seem to be unaware and unable to make things better for the Black community.”
Why did firms not apply or were hesitant about applying for financing?
“Some 40% of Black firms did not apply for financing because they were discouraged,” Cunningham says.
That number compares to only 12% for white firms, 24% for Hispanic firms, and 22% for Asian firms. Another 13% of Black firms did not apply for financing because they felt they had sufficient resources. Conversely, that number was a whopping 50% for white firms, 27% for Asian firms, and 26% for Hispanic firms. So why such a large gap for Black firms?
“This is the result of continual discrimination and racism repeatedly. You get to the point where you don’t even want to apply because you know you’re going to get rejected,” Cunningham says. His analysis was based on recently issued reports concerning the state of Black businesses in 2022.
Owner race by industry
Black-owned small businesses made 41 cents of every dollar their white peers made in 2014. That number grew to 48 cents in 2019. In contrast, Hispanic firms made 79 cents for every dollar a white firm collected in 2014. The number for Hispanic firms grew to 90 cents by 2019. Cunningham says Black firms start with less money and operate in businesses like low-profit personal services. He says that puts them at a competitive disadvantage to Hispanic and white firms operating in higher-profit areas like construction and high-tech manufacturing. Cunningham’s analysis is based on 30 years of knowledge on Black business conditions along with recent reports.
Number of Black-owned businesses
Cunningham says U.S. Census data show there were an estimated 134,567 Black businesses as of October 2021. But he is confident that is a gross undercount. Cunningham estimates that the number is closer to 900,000 based on his research.
“The problem with the Census number could result in a lowering of financial assistance from federal, state, and local government sources to Black businesses.”
All told, Cunningham says his firm’s report shows that there are still significant reasons why Black firms trail white firms when it comes to revenue and profitability.
“If these statistics remain as they are, then Black businesses will never catch up.”