A few years ago, it seemed a new dawn of racial equity was emerging. Then things changed. Last year, venture funding to Black-founded startups tumbled. It’s time to get back on track.
The turning point was the Covid-19 pandemic, with its devastating impact on communities of color, and the murder of George Floyd. Corporations pledged billions to confront and dismantle systemic racism. DEI initiatives were everywhere. Startups with Black founders experienced a funding peak in 2021, receiving $4.9 billion.
Now, the rays of potential racial equity seem dim—or maybe they never shone brightly to begin with.
A March 2024 Federal Reserve report found that when small businesses applied for a loan, line of credit, or merchant cash advance, 56 percent of white-owned firms were fully approved for the credit they sought, compared to 34 percent of Asian-owned firms, 32 percent of Hispanic-owned firms, and 32 percent of Black-owned employer firms.Last year, venture funding to Black-founded startups totaled just $705 million, the first time that number failed to reach $1 billion since 2016, according to Crunchbase. That’s an 86 percent drop from 2021—a sharp but unsurprising reversal, given the long history of systemic barriers to minority business funding.
Breaking down such barriers and creating equitable access to funding is imperative to create an inclusive economy, one where Black-owned firms—and the American economy overall—can maximize their potential. Black majority-owned businesses provided income for 1.4 million workers in 2021; their annual payrolls were estimated to be $53.6 billion, according to the Pew Research Center.
Widening access to capital markets for minority-owned businesses will generate even greater job opportunities, increase local spending and empower and uplift long-disinvested communities.
Factors complicating Black business funding
Multiple factors—besides the most obvious, racism—have contributed to minority business funding inequities.
The racial wealth gap is one major problem. A 2023 Fed analysis found persistent disparity in median wealth, the equity held by a typical family. The typical Black family’s wealth was only $44,900, about 15 percent of a white family’s $285,000 wealth. While the typical Black family’s wealth increased between 2019 and 2022, the white-Black median wealth gaps widened by about $50,000.
As part of a recent Pew analysis, researchers broke U.S. household wealth into lower, middle and upper tiers and found that in 2021, more than half of Black households—55 percent—were in the lower wealth tier, meaning that they had less than $41,700 in wealth. Overall, the wealth of U.S. households increased during the Covid-19 pandemic, but Black households that were poorer remained in debt. About 1 in 4 Black households overall, or 24 percent, had no wealth or were in debt in 2021.
The growing wealth gap puts Black Americans at a disadvantage on multiple fronts, including entrepreneurship. Most startups fund their businesses using personal dollars, drawing from the founder’s saving or cash infusions from friends and family. Black families, and therefore Black entrepreneurs, have less wealth to tap. The average amount of startup capital is $35,205 for Black entrepreneurs, compared to $106,720 for white entrepreneurs, according to a Stanford Institute for Economic Policy Research paper published in 2017.
Bank branch closures are another barrier obstructing funding for Black-owned businesses. Closures are on the rise, as are banking deserts—neighborhoods lacking nearby bank branches. This pattern was made worse by the pandemic; since 2020, the pace of branch closures nationwide has doubled, according to a February 2024 Federal Reserve Bank of Philadelphia report.
Fewer banks can hurt communities, especially communities of color, and diminish access to capital. Between the end of 2019 and mid-2023, total U.S. bank branches declined by 5.6 percent. But in majority-Black census tracts, the total number of branches fell by 6.6 percent.
Local branches allow entrepreneurs to establish personal, trusting relationships with bankers, and those bonds can be a boon to small-business owners seeking financing. Banks consider “soft information” about business customers’ creditworthiness—qualitative data gathered over the course of a banking relationship. When branches close and those relationships falter, or never develop in the first place, entrepreneurs suffer.
In particular, the decline of smaller community banks also hurts entrepreneurs. Community banks are more likely to lend to small businesses than larger banks, according to a National Community Reinvestment Coalition report.
Fortunately, the pace of bank closures slowed in 2023, a departure from record highs in 2020 and 2021, according to S&P Global Market Intelligence. Still, a net 1,409 branches closed last year.
Minority business milestones inspire hope
There are glimmers of progress that the work of dismantling systemic barriers to minority business funding is underway. Here are a few encouraging developments:
Major federal investments have been deployed to help under-resourced businesses. The U.S. government has invested $12 billion into community lenders, including community development financial institutions (CDFIs) and minority depository institutions (MDIs). CDFIs, which can be banks, credits unions, loan funds, microloan funders or venture capital providers, are focused on increasing economic opportunity and access to capital in marginalized communities.
The Federal Deposit Insurance Corporation (FDIC) defines MDIs as depository institutions where 51 percent or more of the voting stock is owned by minority individuals or a majority of the board of directors is minority and the community that the institution serves is predominantly minority. Estimates from the U.S. Treasury Department predict that these multibillion investments in community lenders will lead to a nearly $80 billion increase in lending to Black communities over the next 10 years.
U.S. Small Business Administration (SBA) loans are also expanding access to capital. In the 2023 fiscal year, the SBA backed 4,781 loans to Black-owned businesses, totaling $1.45 billion. The number of SBA 7(a) and 504 loans going to Black businesses has more than doubled since 2020; 7(a) loans guarantee up to $5 million for lenders who provide financing to small businesses, making it more likely that lenders will fund projects that may not otherwise meet qualification criteria. SBA 504 loans provide up to $5.5 million in long-term, fixed-rate financing for assets that spur business growth and job creation, such as real estate and machinery.
Supplier diversity is gaining momentum. Diversifying supply chains by including more minority-owned businesses not only fosters racial equity but also enhances overall business resilience. Wider supplier pools allow corporations to better respond to supply chain disruptions, exhibiting greater adaptability in dynamic markets. A 2023 supplier diversity report from Supplier.io, a software company connecting businesses with diverse and sustainable suppliers, found that 72 percent of companies now have clearly defined supplier diversity goals and 48 percent include supplier diversity metrics in management’s performance objectives.
Pledges aren’t set in stone, but they are promising, and there have been some big ones. Disney pledged to spend at least $1 billion with diverse suppliers annually by 2024. Target committed to spending more than $2 billion with Black-owned businesses by the end of 2025.
A 2022 report from the National Minority Supplier Development Council found that minority businesses saw an increase in annual revenues over the previous year—good news that comes with a caveat: Black businesses saw the lowest increase. Black revenue totaled $59.6 billion, a 4.6 percent increase from 2021. By comparison, Asian Pacific revenue totaled $94.4 billion, a 34.9 percent increase from 2021.
Necessary steps to bring about racial equity in small business
A growing body of research contends that racial disparities hold back regional growth. An Urban Institute initiative with the Metropolitan Planning Council found that the Chicago region would gain $4.4 billion annually and the gross domestic product would rise by about $8 billion were it less economically segregated.
In a 2020 report, McKinsey & Company estimated that if Black-owned businesses reached the same average revenue as white-owned industry firms (not including publicly held companies), the end result would be an additional $200 billion in recurring direct revenues, about $190 billion in additional GDP.
Institutional investors and high-net-worth individuals can and should do their part to increase the flow of capital to minority entrepreneurs. Their options include meaningfully contributing to CDFIs and other mission-driven lenders; investing in Black-owned startups during the “friends and family” pre-seed stage, when funds are crucially needed for businesses to scale; and collaborating with neighborhood organizations (such as business councils and faith-based groups), which can help direct funders to local initiatives and entrepreneurs who need capital to make a greater impact.
Corporations should take action to build robust supplier diversity programs. A Harvard Business Review article outlines savvy steps such as creating a database of minority-owned businesses, building relationships with organizations like the National Minority Supplier Development Council and Minority Business Development Agency, and organizing outreach programs.
McKinsey recommends that large corporations also simplify their minority-supplier certification processes in order to take on new suppliers more swiftly. Companies who take the above steps could spearhead transformative change, fostering vibrant, self-sustaining communities and strengthening regional economies.
Black entrepreneurs, for their part, can seek financing through SBA loans, look into local CDFIs, explore federal and private grants for minority-owned businesses (which are competitive but worth the effort) and try peer-to-peer lending platforms.
Dismantling systemic barriers that disadvantage minority businesses won’t be easy or speedy. But it’s profoundly important work. With perseverance and concerted effort from investors and public policy advocates, racial equity for entrepreneurs could be on the horizon.
Byron Brazier is the lead developer of Woodlawn Central, an $895 million mixed-use development project on Chicago’s South Side.
