Black business owners are a huge untapped resource. Because of discrimination in hiring, starting and building a successful business has long been a path to financial security for Black Americans, as well as a way to boost the community.
But studies also show Black businesses are much more likely to hire Black workers, so boosting support could significantly improve employment figures. In a recent Brookings study, the lack of support for Black businesses is costing us millions of jobs and billions of dollars in revenues.
What’s needed to grow Black business?
So what if Black businesses were actively encouraged to grow? Let’s look at a few conditions that need to improve:
During the pandemic, Black business owners’ applications to the Paycheck Protection Program had higher approval rates with Fintechs' than with some of the nation’s biggest banks. Why? One reason could be the automated review systems used by Fintechs' found them more creditworthy than mainstream banks. (For whatever it’s worth, Asian and Latino applicants didn’t suffer the same gap.)
A lack of banking relationships could be to blame. A 2018 SBA report found that minority businesses “typically experience higher interest rates and more loan denials, and many Black owners are afraid to even apply.”
Before the pandemic, fewer than one in four of Black employers had secured loans from a bank (and only one in 10 Black sole proprietors). According to the Federal Reserve, while 54% of ‘healthy or stable’ white-owned small businesses had borrowed from a bank in the past five years, only 33% of similar black-owned businesses had done so.
Racial equity in credit
“At a local level, there are stark contrasts in access to credit for African Americans,” according to a 2021 Brookings report. “Interest rates on business loans, bank branch density, local banking concentration in the residential mortgage market, and the growth of local businesses are markedly different in majority Black neighborhoods.”
“Normal wasn’t good for Black businesses before [the pandemic],” said one expert in a 2021 McKinsey report. “How do we rethink our approach? How can this experience during the pandemic be like a cocoon opportunity for us as a nation, so that we emerge in a way that allows for businesses to be on a different footing than they were before?”
The potential is undeniable. Today, Black businesses create an average of 10 jobs per firm, compared to 23 for non-Black businesses. If the average employees per Black business increased to 23, it would create almost 1.6 million jobs.
More Black banks
More Black-owned banks could be a good start. Nationwide, only 21 are left now—half as many as in 2008. More Black banks could lead to better banking relationships.
Fintechs’ pure-data approach to lending also holds promise, given their approval rates for PPP loans.
Following the death of George Floyd, major corporations pledged tens of billions of dollars in credit and other aid to Black communities.
More private sector support
For example, Netflix moved $100 million in cash to community lenders in minority communities, funds that are attracting similar commitments.
“Other than the very slight inconvenience of having your money at different institutions and having to spread it around a bit, there’s really no cost or risk” to keeping cash in Black-owned banks and community lenders, according to Mark Kramer, a lecturer at Harvard Business School.
After the George Floyd killing, Google pledged to put $175 million into “supporting Black business owners, startup founders, job seekers and developers, in addition to a $100 million YouTube fund for Black artists and creators.”
Major lenders, like JPMorgan Chase, Citigroup and Bank of America, have also promised more capital to Black business owners (and Black home buyers).
Accountability and transparency are the next steps, making sure the support promised to Black businesses and communities comes through.
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This is one in an ongoing series of Bright articles on race, credit and money in America.