Access To Capital
Minorities as a consumer group represent nearly $4 trillion in spending power in the United States. Unfortunately, much of this $4 trillion is not spent in minority-owned businesses, nor is it circulated in minority communities. The reason for this is simple: minority businesses—businesses that have the power to revitalize communities, provide jobs, build wealth, and inspire pride—fail to launch and thrive because minority business owners struggle to access capital essential to starting, running, and growing their businesses.
While some business owners ask friends and family for loans, leverage the equity in their homes as collateral, or rely on inherited wealth to launch and expand their companies, these funding options aren’t often available to minority entrepreneurs. Instead, minority business owners must turn to the traditional gatekeepers of capital funding—venture capitalists and traditional banking institutions—to get their restaurants, tech startups, gyms, clothing companies, marketing firms, and consulting agencies off the ground.
Unfortunately, statistics show that, when compared to their white counterparts, minority applicants are less likely to get approved for a business loan, and are more likely to receive lower amounts with higher interest rates when they are approved.
The reasons why minorities are denied access to capital funding are circular, self-perpetuating, and discriminatory: 1) minorities have lower net worths, and banks are biased against applicants with less money to spare, those who don’t own property, or those who have no collateral to put up against the loan; 2) minorities have lower credit scores—the average minority small business owner has a credit score 15 points lower than the average white small business owner—and are thus seen as a greater risk than white counterparts; 3) small businesses are often located in poorer, urbanized communities, which
limits their earning potential and makes them a riskier investment; 4) minority-owned and local banks are more likely to fund minority businesses, but as of 2018, only 21 Black-owned banks existed in the United States, and none managed assets over $1 billion.
The reality of this systemic and structural discrimination has had a detrimental effect on minority business owners. According to the U.S. Department of Commerce Minority Business Development Agency, minority business owners are less likely to apply for small business loans, usually out of fear of rejection.
Here’s the thing: increasing access to capital isn’t just great for the minority business owner; it’s great for the community as a whole. Increased investment in minority communities creates jobs for minority workers, and research confirms that, on average, minority firms hire minorities at triple the rate of white-owned firms. More jobs mean more opportunities for people of color to prosper, more dollars circulating in the community, and more opportunities for minorities to create generational wealth and equity. Seeing minorities own businesses and excel in life also provides inspiration for others; once they see it’s possible, other members of the community will be more likely to become entrepreneurs
When minority business owners are given access to capital, the negative cycle of systemic discrimination can be reversed. And once it is reversed, the positive effects—for the business owner, for the community, and for the country—become circular and self-perpetuating.