Minority entrepreneurs at a tipping point as Black-owned banks dwindle in the U.S.

Black Americans have been hit disproportionately hard by the Covid-19 pandemic, and the White-led financial institutions that could theoretically offer economic support may simply not be enough. The coronavirus pandemic has exacerbated a crisis for Americans already facing poor economic and health outcomes, and highlights the lack of financial services institutions run by Black founders and executives.

Black and brown business owners have faced a disproportionate share of Covid-19 failures: from February to April of this year, there was a 41% decline in Black-owned businesses and a 32% drop in Latinx business owners. White entrepreneurs experienced only a 17% decline. Among those who applied for Paycheck Protection Program support, a report from Color of Change and Unidosus found that only 12% received the assistance they had requested. Forty-one percent received none.

“The lack of access to capital is the single highest driver for business failure, and Black founders are less likely to gain it,” said Melissa Bradley, Georgetown McDonough School of Business Professor. “Access to capital is limited not because of demand, but due to pattern recognition by investors, different social capital based on educational and social choices (e.g. golf clubs), and a limited number of sponsors ... who can vouch and validate the entrepreneurs.”

Entrepreneurs seeking initial funding typically turn to venture capitalists, traditional banking institutions, or community and personal wealth. Venture capital, the common route for tech-focused and some consumer start-ups, distribute a mere 3% of funding to Black founders, and of that, less than 1% goes to Black female founders. In other industries, a company’s initial investments come from the founder’s community, family, or bank.

In a 2018 report, the Small Business Association found that personal and family savings are the most common sources of financing for all entrepreneurs, and among Black and Latinx founders, the reliance on those funds is even higher. However, Black households’ median net worth is about a tenth of that of White households.

Black Americans are the U.S. demographic with the lowest median income, according to Brookings Institution’s The Hamilton Project, and they display the highest Covid-19 mortality rate in the country, over twice that of Whites and Asian Americans. Black adults also have the highest likelihood of working in an essential, and low-paying, high-risk job.

While the national unemployment rate fell almost a full percentage point in July, Black unemployment remained virtually unchanged, at 14.6%, compared to White unemployment at 9.2%, Asian American unemployment at 12%, and the Hispanic jobless rate at 12.9%. 

Some resources do exist to help close this funding gap, but as BLCK VC founder and Storm Ventures principal Frederik Groce points out, those avenues of funding only work if a founder has access to them. For Black founders, that access is limited Groce’s BLCK VC functions as a Black venture capital resource group, connecting and supporting Black founders. 

Georgetown’s Bradley co-founded Ureeka, which works to reduce costs and risks associated with building a small to medium-sized businesses, and Bradley’s 1863 Ventures is a business development program for entrepreneurs of color. Despite these initiatives, Groce concedes, “These communities are often over-mentored and under-resourced.”

That’s where banks come in. 

 

Source: Cnbc