For centuries, small businesses owned by people of color have contributed to the fabric of this nation’s innovation and economic growth. Between 2007 and 2017, businesses owned by people of color grew 10 times faster than the overall growth rate for U.S. small businesses during the same period, and today entrepreneurs of color operate more than 8 million businesses. But despite the tremendous impact this community has on local and national economies, small business owners of color have faced unique challenges when trying to start and grow a business due to discrimination in our banking system and society as a whole — problems that were greatly exacerbated by the COVID-19 pandemic. Without a concerted federal effort to truly invest in a diverse and equitable business ecosystem, entrepreneurs of color will continue to face systemic barriers and won’t survive the next crisis.
It’s no secret that Black and Latino-owned businesses not only faced the brunt of revenue loss and business closures, but they encountered more challenges in accessing federal emergency relief programs like the Paycheck Protection Program (PPP) and received less funding than their white counterparts. This is due to longstanding inequities in our traditional banking system, a process that favors larger businesses over smaller, women- and minority-owned businesses.
For example, while Black-owned businesses are more likely to apply for bank financing, less than half of those applications are fully funded. Lenders require businesses to supply overwhelming, extensive, and antiquated collateral for loan applications, making it difficult for smaller businesses to secure a traditional loan without additional assistance and resources. In fact, prior to the pandemic, women and minority-owned businesses received just over 4 percent and 5 percent of conventional loans, respectively.
These challenges have in turn enabled predatory lending practices that have preyed on minority-owned businesses in plain sight for years. Unlike payday loans for consumers, online and other alternative small business financing companies operate in an almost entirely unregulated market where it is legal for bad actors to disguise their fees or fail to provide that information altogether.
Expanding access to responsible credit and capital would help prevent these unfair lending practices and create a more level playing field for all small businesses. Too many entrepreneurs of color have shared their stories of crushed dreams because of a desperate need for a cash infusion to avoid indefinite closure. This is why we need more federal grants and low-cost loans for businesses owned by people of color that have been left behind by federal relief efforts, as well as federal passage of the Truth in Lending Act for small businesses, which would require more transparency and fairness in commercial lending to combat egregious predatory lending practices.
Another inequity facing small business owners of color is access to affordable, quality health coverage. More small business owners of color recently identified obtaining health insurance coverage as a challenge during the pandemic than white business owners. Access to affordable health care has historically been unequal in communities of color, and some businesses have been forced to make difficult decisions between making payroll or reducing health care benefits during the pandemic. It’s clear that small business owners of color would benefit from smart health care policies — such as expanding the Affordable Care Act and making premium assistance provided by the American Rescue Plan permanent — that would ensure that quality health care is affordable, accessible and equitable.
Health care costs can be overwhelming for small business owners of color but establishing a strong and trusted local business mentorship culture specific to a minority-business is a unique obstacle to success. Entrepreneurs of color thrive when there is an abundance of social capital to help develop their business. They rely on community-based organizations and state and federal agencies to access critical business assistance and education. Since some businesses of color have historically seen fewer investments in their communities, Congress should provide the funding and resources necessary to support free and low-cost training that will help minority business owners strengthen their financial literacy, credit building and procurement opportunities.
The importance of creating a solid financial foundation and building a successful business model goes beyond the surface of a brick and mortar; building generational wealth is often the primary goal for entrepreneurs of color and their motivation to do what they can to keep their doors open. After all, entrepreneurship is the best avenue to build wealth after home ownership. But for far too long, people of color have been discouraged from pursuing their entrepreneurial dreams because of policies in place that are unfair and racially motivated. Now that we’re looking forward to a post-pandemic economy, we must prioritize legislation that will better position minority owners to withstand the next crisis.
While Congress may be quick to turn the page to the next issue, moving on is not as simple for small business owners of color. Let’s build long-term financial sustainability, promote a level playing field for minority-owned businesses, and acknowledge that predatory lenders often target communities of color. This starts with supporting policies that will close these gaps and promote meaningful and long-term relief for small business owners of color who are pursuing the American dream.
Sarkash government affairs director of Small Business Majority.