3 Ways Black Owned Businesses Can Expand Their Access to Capital

August is National Black Business Month, and supporting Black businesses is more important than ever. According to the Small Business Administration’s (SBA) advocacy office, there are approximately 3.6 million black-owned businesses in America that support more than 3 million jobs (including business owners and their employees ) and generate more than $200 billion in annual revenue.

Often in the centers of large cities, with large numbers in cities such as New York, Atlanta, Washington DC and Chicago, black-owned businesses are very important, increasing the diversity and prosperity of the American economy as a whole. They create jobs, reduce unemployment, and strengthen local economies, especially in underserved areas.

Black business owners are resilient, bring unique perspectives and creativity to their companies, and often cater to underserved markets and provide products and services that reflect the diversity of different from America. Successful Black Entrepreneurs serve as role models and mentors, inspiring future generations of business leaders. Importantly, they contribute to overall economic growth and enrich a community’s culture while fostering a sense of identity and humanity.

In addition, Black business owners often invest in their communities, support local retailers, and donate to schools and community projects. They provide opportunities to build wealth within disadvantaged communities, thereby promoting economic independence and reducing wealth gaps. A large proportion of Black businesses are owned by women. According to the Pew Research Center, approximately 39% of black-owned businesses are owned by women.

However about a quarter of the way through 21^St century, black-owned businesses continue to face major challenges, most notably, limited access to capital.

Access to Capital

Black-owned businesses often face difficulties in obtaining financing. They are more likely to be denied loans or receive lower income than other business owners. In fact, according to Bankrate, only 16% of black business owners received the financing they applied for, compared to 35% for white business owners.

Historically, black-owned businesses have faced significant challenges in securing funding for a variety of reasons. Racism, without a doubt, has a negative impact on lending decisions. Another challenge is that black businesses are often located in disadvantaged areas with little economic opportunities and few banking services.

Economic problems also played a role, as Black entrepreneurs often had little financial resources or family members to help get the business off the ground. If an entrepreneur cannot make a living from a business venture, which is often the case, getting start-up capital is even more important to success.

However, banks often make their lending decisions based on factors including existing banking relationships, a person’s financial history and credit score. This formula has proven problematic for aspiring Black business owners.

Because there has often been a distrust of financial institutions among members of the Black community, aspiring entrepreneurs with little or no experience in traditional banking services they face problems by not having an existing banking relationship.

Potential borrowers with poor credit history or with a criminal or amended credit record face scrutiny when applying for business loans. A person with a bad credit history – or little or no credit history – will find it difficult to meet the banks’ lending criteria. Thus, if they have access to more capital, Black business owners may be offered higher interest rates (indicating a higher risk of lending to people with poor credit history). This makes access to cash extremely difficult in today’s high interest rate environment.

When traditional banks are unwilling to lend, Black business owners must look outside the traditional banking system. Unfortunately, African Americans are underrepresented in business and investment networks, which are often influenced by human connections. Because black-owned businesses tend to be new, small and generate little revenue, they appear risky to lenders and financiers.

Where To Get Funding For Black Businesses

Improving access to finance for Black businesses has been a priority at the Federal level for years. The Small Business Administration (SBA) has played an important role in supporting minority-owned companies through the agency’s various loan programs.

1. SBA loans

In FY 2021, the SBA approved a record $44.8 billion in loans: more than $36.5 billion with its 7(a) loan program (a maximum loan amount of $5 million that can be used for various purposes) and another $.8.3 billion through its 504 loan program (long-term, fixed-rate financing of up to $5 million for large fixed assets). In addition, the SBA has approved approximately $85 million in microloans (loans of up to $50,000) to small businesses, many of which are members of small groups.

Despite the large number of total loans issued by the SBA, only 8% of 7(a) loans and 3.6% of 504 loans were directed to black business owners in FY 2023.

2. CDFIs

Community Development Financial Institutions (CDFIs), often targeting underserved communities, also play an important role in lending to Black businesses. The Treasury Department’s CDFI Fund awards financial and technical assistance to CDFIs across the country. These competitive awards support and enhance the ability of these organizations to meet the needs of the communities they serve.

3. Non-Bank Lenders

Non-bank online lending platforms, through the use of technology, are actively helping to expand access to finance to support businesses run by people from diverse backgrounds. Non-bank lenders are less focused on credit scores than traditional banks are as they tend to make decisions based on the income and financial health of applicants. They focus on the borrower’s business performance, not factors that may lead to unintended discrimination or unfair financing practices.

In addition to the loan programs themselves, Black-owned businesses can benefit from training and education programs that provide financial literacy and insight into best business practices that can help Black-owned entrepreneurs to improve their finances.

Although significant progress has been made in recent years, black-owned businesses continue to face unique challenges that require strategies that help expand access to finance and educational programs that can help increase capacity. they see. Until more progress is made in getting business financing into the hands of Black entrepreneurs, they will continue to face greater challenges in achieving financial success than other groups.