With government officials decreasing covid-19 restrictions, businesses are working to make a comeback. Many of them are re-opening their doors, hiring, and jumpstarting sales and marketing tactics to increase awareness and cash flow. But with supply chain issues, labor strains, and record-high inflation, companies are facing seemingly insurmountable challenges that could easily stunt or eliminate their comeback altogether.
In fact, according to the Small Businesses on the Brink survey by Goldman Sachs, 86% of business owners believe the current economic trends are negatively impacting companies. As a result, some entrepreneurs think the solution to growing and staying afloat is access to capital. However, black-owned business owners are uncertain they’ll get the money they need.
The same survey found that 30% of business owners expect to take out a loan or line of credit, and 31% feel confident in their ability to do so. Conversely, 48% of black-owned businesses expect to borrow money but are less optimistic they’ll secure capital, with only 19% feeling assured.
Why black business owners feel insecure about getting capital
It’s easy to understand why black-owned business owners feel uncertain about borrowing money. Access to capital is inequitable, and the pandemic proved it. According to the 2021 Report on Firms Owned by People of Color, black business owners had trouble borrowing money at the peak of covid-19.
Among companies with good credit scores, only 24% of black-owned businesses received all the capital they sought compared to 48% of white-owned companies. That means black entrepreneurs were half as likely to receive funding, even when they had similar credit scores as their white counterparts.
Research by the U.S. Federal Reserve also indicates that access to capital was inequitable pre-pandemic. Before covid-19, black business owners were denied access to loans about twice as often as white entrepreneurs.
How black-owned businesses can access capital
The struggles black business owners experience when accessing capital are nothing new. Minority-owned companies have consistently faced more issues than white-owned businesses when it comes to financing. But that reality can’t stop African Americans from confidently pursuing their entrepreneurial dreams. While the road may be difficult, there are five paths black-owned businesses can take to access capital.
1. Online Lenders
Typically, online loan lenders are more flexible than traditional banks regarding eligibility requirements. In some cases, online lenders will provide capital to business owners and startups with bad credit. The Federal Reserve also indicates that minority business owners have a higher chance of accessing capital through online lenders than banks, but the loan will probably cost more. Additionally, loan amounts usually range from $1,000 to $500,000.
2. Community Development Financial Institutions (CDFIs)
A CDFI is a great way to access capital. This type of lender is a bank, credit union, or other financial institution that offers loans to minorities and other underserved and economically disadvantaged communities. An excellent example of one is The National Minority Supplier Development Council Business Consortium Fund. It offers minority business loans that range from $100,000 to $750,000.
3. Small Business Administration Lenders
The U.S. Small Business Administration offers various types of SBA loans, all of which are issued by banks and other lenders. One of the best financing options is the SBA Community Advantage loan program. This offer is specifically for businesses in underserved communities, and borrowers can access up to $250,000.
4. Nonprofit Microlenders
It may sound unconventional, but it’s possible for minority-owned businesses to receive a microloan from a mission-based nonprofit organization. The SBA also works with these nonprofit organizations to provide microloans of up to $50,000. This program can be ideal for black entrepreneurs and minority business owners with imperfect credit scores.
5. Credit Unions and Banks
Of course, credit unions and banks typically provide the best business loans. Some of them even have lending programs that are specifically designed for minority-owned companies. But because this route usually includes many obstacles, black business owners need to get creative with how they approach it. Some have found it easier to access capital through credit unions and banks by establishing strong relationships with them as soon as possible. For example, getting a smaller loan and then contacting the institution regularly to develop a relationship can help minorities borrow higher amounts of money in the future.
Black businesses are a cornerstone
While the road to getting capital may not be straightforward or easy for black entrepreneurs and business owners, it’s worth it. Black-owned companies are a cornerstone of the U.S. economy. The Department of Commerce indicates that these businesses grow faster than non-minority-owned companies, are vital pillars in their communities, and help create well-paying jobs.
Hopefully, these benefits will one day show lenders that they should treat black businesses fairly and make access to capital equitable. But until that day arrives, black-owned companies mustn’t give up on confidently pursuing financing and every option available to achieve their entrepreneurial goals.