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Growth in Minority Entrepreneurship in The Pandemic Era


Minority entrepreneurship

Entrepreneurship is a key driver of wealth-creation for individuals and communities. In this blog post, The National Bankers Association examines changes in business formation and explore the significance of the recent surge in minority entrepreneurship. We also discuss the role of MDIs in sustaining this progress, explore what the recent anti-DEI backlash could mean moving forward, and highlight newly proposed legislation that could provide even greater capital and credit.


At the beginning of the pandemic, business formation significantly fell, and losses for businesses owned by minorities were especially severe. In particular, there was a 41 percent drop in the number of active African American business owners, and a 32 percent drop in the number of Hispanic business owners. But the enactment of key federal policy soon reversed the trend. This was especially evident after the passage of the CARES act which contributed to a surge in entrepreneurship beginning in the later part of 2021, contributing to 5.4 million businesses formed in 2021.  The surge of entrepreneurship has continued into 2023, particularly in the South.


This surge in entrepreneurship has been driven disproportionately by minorities.  Here, analyzing data from the American Business Survey 2022 and 2021 data, which represented 2021 and 2020, respectively, which represents the revenue, value of shipments, and sales of all businesses, including partial goods and imports, within the United States. We find that minorities entrepreneurs, including Asian, Black, Hispanic and American Indian or Alaska Native entrepreneurs drove the pandemic business recovery. While overall business growth continued at a meager 2%, minorities rates of growth were orders of magnitude faster, particularly for Black and Native businesses.




 

Our findings parallel a study by the AEA which found high levels of entrepreneurship in Black communities. Specifically, that study found that Black majority counties saw 103% jump in new business applications from 2019 to 2021, compared to a 54% increase nationally and that counties where 75% or more of the population were black saw a rise of 198% in business applications. We expect that growth in employer business ownership will be exceeded by non-employer businesses as Black and Hispanic businesses are more likely to be non-employer businesses, and also because there was an increase in sole proprietorships transitioning to employer businesses.


In addition to the American Business Survey, another key dataset is the Survey of Consumer Finances (SCF). In earlier analysis this year using SCF, we showed that minorities experienced significant wealth gains. Using this same dataset, we find Black and Hispanic households are now more likely to be business owners than they were before the pandemic. 

(Unfortunately, the SCF does not have a sample of American Indian or Alaska Native households, these households are grouped into the “other” category.)




The SCF data also reveals that business owners have meaningfully higher net worths than do non-business owners, both before and after the pandemic. For minorities specifically, business ownership has been a significant way of building community wealth.



 

Entrepreneurs who invest a significant amount of their time and resources into their businesses often need additional capital to grow their businesses. Despite this growth of new businesses in minority communities since the early pandemic, especially Black, and native communities, capital dollars are elusive.


Aspiring entrepreneurs need both capital and technical support, via credit and interpersonal relations, to launch new businesses. But part of the problem with getting =capital to minority business owners stems from differing networks and levels of social capital. Networks in Black and Hispanic Communities are less correlated with upward mobility than in White Communities. Furthermore, because white people have the most racially homogenous networks and race is the most important and consistent differentiator of social networks, the benefits of white capital networks are secluded from minority business owners.


Consequently, minority entrepreneurs are more likely to report having trouble finding support in their networks. For example, The Boston Globe found that the majority of businesses in Massachusetts list capital access as a main barrier to business growth, but that is especially true for Black, Hispanic, and Asian business owners. Amine Benali, managing director of the Local Enterprise Assistance Fund, told the Globe that companies in the area owned by people of color were “orphaned by their banking institutions.” Minority entrepreneurs are underserved by banking institutions.


Minority business owners still try to seek out traditional methods of banking service when they start their business. But 57% of Black business owners are denied a bank loan when they start their business compared to only 37% of non-Black business owners. 46% of Black and Hispanic, and 55% of Asian American or Pacific Islander business owners say they’ve faced issues accessing capital.  Lender discrimination may be at play here. A study by the Cleveland Fed found that Black, Hispanic, and AAPI owned businesses were less likely than white owned businesses to receive credit. And even with PPP loans, which came fully guaranteed by the government, there is evidence that lenders gave significantly smaller amounts to minority borrowers, especially Black borrowers. Another key component is simply the absence of banks in many majority neighborhoods. Over the last 10 years, the U.S. lost over 15,500 bank branches, Black majority neighborhoods were much less likely to have a bank branch than non-Black majority neighborhoods.


As a result of these barriers, Black and Hispanic business owners are more likely to need to rely on their personal credit in order to obtain loans than white business owners. Worse still, a disproportionate amount of Black business owners rely on their own personal savings or borrowing from family to help with business expenses – despite often having less savings or wealth to draw from in the first place. This problem is compounded because, on average, it costs Black business owners $5,000 more to start a business than their non-Black peers. Black entrepreneurs found businesses with less initial capital, more personal debt, and at a scale that limits their potential for growth and profitability.


Minority Depository Institutions help to serve the critical role that these neighborhoods and communities need. MDIs were able to step up and help small business owners in minority communities that non-MDIs overlooked. In the 2023 State of MDI Report we found that , MDI zip codes tend to have higher shares of businesses in educational services, health care and social assistance, and especially in professional, scientific, and technical services. These critical infrastructure businesses benefit from having access to MDIs, whose presence and expertise in relationship banking allows MDIs to serve businesses who cannot get capital investment otherwise.


But federal policy has a significant role to play as well.  President Biden’s Investing In America Agenda has contributed to growth. But we are still a long way from parity. Legislation like Rep. Sharice David’s Native American Entrepreneurial Opportunity Act that will invest particularly into tribal communities can foster business and economic growth. The Supreme Court’s Affirmative Action ruling has begun to have negative impact outside of academia, namely in business funding. A Trump-appointed Federal judge in Texas has ruled that the race-based government action could only be justified under the U.S. Constitution for the limited purpose of addressing specific, identified instances of illegal discrimination, and as such, the Minority Business Administration would be prevented from continuing its race-based funding scheme. The Fearless Fund, a Black-women owned and operated investment program targeted towards Black women entrepreneurs is facing an uncertain future after being targeted by an anti-DEI lawsuit. This new anti-DEI backlash threatens to worsen disparities precisely at the moment that notable progress is being made in gains for minority business owners.


As the entrepreneurial environment has improved since COVID-19, there is a risk that the benefits of this improved environment will not continue to be as beneficial to minority entrepreneurs as it could be. Capital and credit are difficult commodities to access in many minority communities and for minority entrepreneurs. Federal policy makers should consider the benefits to minority communities of business investment and utilization when contracting and when giving grants or making investments. Lastly, the judiciary should not allow bad-faith actors and special interest groups to undo the meaningful progress we have seen, nor allow racial animosity to thwart continued progress.   


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