WHY BLACK OWNED BUSINESSES DON’T SURVIVE?

THIS BLOG MAY CONTAIN SENSITIVE CONTENT


Since the coronavirus outbreak was declared a pandemic, hundreds of thousands of businesses have been forced to shut their doors. Some, permanently. Entrepreneurs across America have had to face the uncertainty of the worst economic crisis in decades. While minority-owned businesses have been disproportionately affected, Black-owned businesses suffered the most, declining by twice the rate of White-owned businesses. Systemic problems surrounding the economic gap aren’t new.

African-American owned firms have historically struggled to get started and stay afloat. Getting approved for loans and receiving federal support can be nearly impossible for many. From 2007 to 2017, more than half of Black-owned companies got turned down for loans, a rate twice as high as White-owned businesses, according to the Federal Reserve. In the summer of 2020, the murder of George Floyd sparked a renewed interest in the economic advancement of black people. Businesses owned by people across the African diaspora saw huge surges in sales as people poured out in support.

It was very bittersweet for me because almost immediately I saw a surge in sales during that time last summer. And so there was this part of me that was extremely excited to see, you know, so much support. On the other hand, it was very saddening that it had to come off of the heels of someone dying. So why do Black entrepreneurs continue to lag behind Whites and other minority groups in terms of market share? And what will it take to keep them in business?

HISTORY

It can be difficult for any business to succeed, but Black entrepreneurs have historically faced unique challenges. Congress passed the Freedmen’s Bureau Act in 1865, awarding compensation to freed slaves in the form of 40 acres and a mule.

After President Lincoln’s assassination, this bill meant to help freed slaves gained financial stability, was rescinded. The legacy of slavery and Jim Crow left African-Americans at a lasting economic disadvantage. Without an equal footing, poverty continued to cycle through descendants of those slaves, creating a long history of wealth inequality. What you see is that the median level, or the kind of fiftieth ranked White family in the US has $170,000 in their net worth. When you compare that to the average Black family in the US, what you see is that same comparable black family has $10,000.

So these levels of inequality, you can see business ownership or business success is kind of at that high end where we see just enormous amounts of inequality, especially when we start looking at revenues or employment size or the scale of the business. While America has a long history of Black entrepreneurship, it also has a history of racism and violence that systematically undermined efforts of African-Americans to get ahead in the business world.

Several exclusively Black communities were home to thriving businesses and the post reconstruction era. The Greenwood District of Tulsa, Oklahoma, became widely recognized as a Black Wall Street, an affluent black community ripe with businesses, banks and educated professionals. But in June 1921, the entire town was bombed and burned to the ground by a white mob. What happens is that black businesses did not have the money to recover after they were targeted, after they were attacked, after were burned down to the ground and in the system of oppression, as well as these notions of fear. And so you have this desire, of course, to rebuild. But with what resources?

So it wasn’t just individuals who were targeting businesses. You have the cops who refused to protect these businesses. You had a judicial system that refused to prosecute. And so it really wasn’t safe for African-Americans to continue to be entrepreneurs in this climate. The hope for Black wealth in America burned, stripping families of their opportunity to create generational wealth. Having a family background in business is really important.

So, for example, if your parents are business owners, you’re twice as likely to be a business owner yourself than someone who doesn’t have parents that are business owners. Now, if you go back, you know, a generation or two generations, if you have low business ownership rates then, then it gets kind of passed along to future generations. And so that creates this kind of barrier that you don’t have that family business experience. Real estate is one of the most common ways to build wealth in America. But discriminatory housing practices have historically kept Black Americans out of the game. Starting in the 1930s, the Federal Housing Administration refused to insure homes in African-American neighborhoods.

This is known as redlining. What would be the reaction of the community to a Negro family moving in? Oh, I don’t think they’d like it. Black people were kept out of the newly developing suburban neighborhoods and pushed into urban housing projects. Modern day redlining still exists. According to 2020 data from the Home Mortgage Disclosure Act, Black applicants are denied mortgage loans at a rate 80 percent higher than white applicants.

These events laid the groundwork for the increasing wealth gap in America. It is still more difficult for African-American entrepreneurs to get and stay in business.

THE BUSINESS OF STARTING A BUSINESS

About 6.5 million businesses are launched in the United States each year. There are six different types of businesses to file under. Each of these defines how a company will handle taxes, liabilities, ownership and finances. There are 30.2 million small businesses in the U.S.

They make up about 99 percent of all businesses, but only a fraction of them survive. 20 percent of small-owned businesses fail by the first year, 30 percent by the second, 50 percent by the fifth and by the tenth year, a staggering 70 percent of businesses have shut off their lights.

Some of the most common challenges, though, that do precipitate a business closure relate to fundamental issues: lacking a firm business plan and a concrete business plan with real clear strategic direction and getting some of the fundamentals in place at the onset. For minorities, the numbers can be even more daunting. Eight out of 10 black owned businesses fail within the first 18 months.

And despite making up 17.6 in 13.2 percent of the population, Hispanics and Blacks make up 5.8 and 2.1 of all employer businesses, or, in other words, businesses with paid employees. For reference, white employers make up 88 percent of overall sales and control 86.5 percent of U.S. employment, according to the Small Business Administration.

Lack of capital is the biggest challenge for African-American small business owners, and studies show that Black owned firms have weaker ties with banks. According to a 2019 survey by the New York Fed, fewer than one in 10 Black non-employer firms have a recent relationship with the bank, compared with one in four White-owned non-employer firms and less than 47 percent of financing applications filed by African-American business owners get approved.

According to evidence from the survey, the discrepancies aren’t due to Black entrepreneurs applying for financing at a lower rate. Black-owned firms applied for bank financing just as much as white-owned firms, if not more. 28 percent of black-owned non-employer firms applied for financing in 2018, compared to 25 percent of white non-employers. The difference? Black applicants are denied at a higher rate.

It tends to be concentrated in industries that require less start-up costs or less capital intensive. But on top of that, so that setback, has an impact as well on the ability to secure bank loans, lines of credit. Because, of course, in those cases, when you’re an entrepreneur, you’re starting out. What are you going to pledge? You’re going to pledge your personal assets, whether it’s your house or other type of collateral. And so if you’re starting out where, you know, you’re at a disadvantage there, that’s going to create headwinds for you in securing external capital for your business. In the summer of 2020, a study by the National Community Reinvestment Coalition found a disparity in the way Black and White loan applicants were treated.

The study highlights one example where a Black applicant was turned away for not having an account with the bank. That same bank encouraged a White applicant with a similar profile and credit history to open an account and offered to send PPP information.

Fear plays a part to Federal Reserve Data shows that one in four black owned firms reported forgoing applying for credit, with 56 percent of those firms stating that they do not want to accrue debt. And 60 percent, indicating that they felt like they will be turned down if they applied. For a long period of time, I didn’t even try to go to bank lenders because I knew that on file my application wouldn’t be as strong as someone maybe who wasn’t an entrepreneur who hadn’t been in business for, you know, two years at the time or whatever.

My application wasn’t strong. And so I’m sure that lots of entrepreneurs go through that as well.

CORONAVIRUS PANDEMIC

COVID-19 has exacerbated some of the issues facing the black community. Black Americans are dying at a rate of three times that of White Americans. In addition to having a disproportionate death rate, African-American entrepreneurs have had to close their doors at more than twice the rate of their White counterparts.

Black owners declined by 41 percent between February and April 2020, compared to 17 percent of White owners. As coronavirus continues, many Black business owners are pessimistic about being able to survive. A CNBC survey in July 2020 showed that only about half of minority small business owners believe their business can last for more than a year under current conditions.

And the numbers prove that another shutdown would disproportionately affect Black owners. 58 percent of small business owners say they remained open to stay at home orders, but Black small business owners fall short at 47 percent. That is in part because Black entrepreneurs are overrepresented in industries that are most affected by stay-at-home orders.

According to a report from McKinsey and Company, 40 percent of revenues from black-owned businesses are in the five most vulnerable sectors. That includes hospitality, retail and food service, compared to 25 percent of revenues from all U.S. businesses. They also received less federal support, including the rescue loans provided through the Pay-check Protection Program.

The administration has prioritized big businesses over small businesses and the American workers that Congress intended to protect. The administration needs to refocus the Pay-check Protection Program. Just 20 percent of PPP loans went to areas that had the highest concentration of Black-owned businesses, according to the New York Fed. African-American businesses disproportionately do not have those formal, entrenched, institutionalized types of relationships with large banks that other businesses do.

I mean, the relationship you have with the bank is like, most relationships, it’s ongoing, its’ long, it’s sustained. People will know, sometimes, their loan officer or in person over many years. And so African-American businesses and business owners really didn’t have those formal relationships. And so when they are getting guidance on how to process these applications, when this submit these applications, what do you need on these to make sure that your application makes it and is approved quickly?

African-Americans just didn’t have that type of inside resources, and so they were just left out and excluded from receiving any of these loans.

PROTESTS AROUND SOCIAL INJUSTICE

The killing of George Floyd by a white police officer in May 2020 renewed interest in supporting the economic advancement of African-Americans. Spreadsheets and lists of Black businesses circulated all over social media. Apps designed to help people find Black-owned businesses, like the BBLK app, took off. According to Apptopia, downloads of Black-owned business directory apps saw increases as much as 44 percent.

We are trying to promote an anti-racist society, for you not to support a Black-owned business means that you’re part of the problem. And so therefore to be part of the solution, you must be intentional. I don’t think is OK anymore.

I think that’s what the summer indicated, it’s not OK anymore to just continue to go about your life and say, you know what, I, you know, in my heart I support equality and equality and diversity and inclusion. No, I think it’s very clear that you need to be intentional, that you need to make an effort to support a Black-owned business.
Big companies rolled out ads and sent statements marking their commitment to diversity, but some activists felt that wasn’t enough. A social media initiative called the 15% pledge called on big corporations to dedicate 15 percent of their shelf space to Black-owned businesses.

Major retailers like Macy’s, Sephora and Bloomingdale’s have signed the pledge. And some big brands took an extra step and released new features. In June 2020, Google My Business rolled out a feature that allows businesses to identify if they are Black-owned. Yelp added a similar feature. Uber Eats announced it would wave delivery fees for Black-owned businesses through the end of the year. It worked. Amid all the online support, Black businesses saw huge spikes. Google searches for Black-owned businesses near me reached an all-time high between May 31 and June 10th According to a survey by the Black Chamber of Commerce, about 75 percent of small Black business owners saw upticks in customers in the two months following Floyd’s death. We skyrocketed over 300 percent the first month.

We were able to open up our first brick and mortar location in September, which was just one month after everything had happened. The good times didn’t last. After the surge, sales at many Black-owned firms plummeted back to their pre-COVID rates. But others have seen a lasting impact. Now that it’s over—that I just constantly was on the edge of my seat was like, OK, well, when is this over?

You know, when…is this going to be a stint in time? Is this a seasonal thing? Is this a one-time initiative or campaign? And so, you know, there’s still questions to be asked, if this is going to be something that’s continued.

SOLUTIONS GOING FORWARD

It’s hard to say exactly what the solution is. For decades, African-Americans in business have fought to dismantle systems of oppression standing in the way. But with the COVID-19 pandemic helping to shine a light on the economic inequalities that still exists, more and more people are lending a hand to struggling small Business owners.

In the early months of the pandemic, Magic Johnson teamed up with MBE Capital Partners to offer $100 million dollars to minority-owned companies who were left out of PPP funding. They probably didn’t have a relationship with the banks when the stimulus package went out. So now we’re able to say, hey, you can have a relationship with us, you can keep your employees, keep your doors open.

And that’s what we want to do, make sure that minority-owned firms, women-owned firms, can stay open. In June 2020, PayPal announced a $100 million-dollar grant program to support Black-owned business and economic inequality. In December of 2020, the company added an additional $5 million more.

There are tons of other grants and resources for Black small business owners, like the Black Business Association, National Minority Business Council and the U.S. Black Chambers, to name a few. Experts say whatever aid is out there needs to be done.

One of the first steps we need to take is to redistribute the resources in some way. Now, I don’t want to be crude about it or reductionism in that process, I think the government must be involved to think also about large banks like Bank of America, Wells Fargo need to again, be more intentional.

I think it’s everyone’s responsibility, you know, to support Black-owned businesses, not just the government, but non-profits, corporations. If everyone did their part, you know, we would allow the whole to become great together. So some things could be grants, grant opportunities that, you know, loans you have to pay back, grants you’re afforded based on, not only the need, but you know what the focus area is. Invest in you, ready, set, grow.

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