Business Owners of Color and the COVID-19 Crisis

According to the Rate of New Entrepreneurs series by the Kauffman Foundation, those Americans who identified as Black had the lowest rate of new entrepreneurship in 2018. Since 1996, the rate has increased only for Asians and Latinos.

Rapid growth in Latino business creation and growth is borne out by a survey brief from the Stanford Latino Entrepreneurship Initiative (SLEI). They report that, over the past decade, Latinos started new businesses at “a faster rate than all other demographic groups.” The number of Latino businesses grew by 34% compared to 1% for all other groups.

There are greater differences when we look at business performance. According to Kauffman, the “opportunity share of new entrepreneurs” by race and ethnicity varies:

• Asian: 91.95%
• White: 86.17%
• Latino: 84.75%
• Black: 80.5%

This means that a lower share of Black entrepreneurs started their business because of opportunity rather than necessity.

An analysis of Census data by researchers at the Brookings Institution found that, from 2007 to 2012, minority and women-owned businesses added 1.8 million jobs while firms owned by white men lost 800,000 jobs. (The reason, they note, has to do with “industry trends and demographic differences in ownership rates within industries.”)

Yet when we pull apart the numbers, performance differences emerge. Black-owned businesses owned have lower sales, lower payroll, and lower payroll per employee than white and Hispanic-owned businesses.

These numbers raise concerns about how the COVID-19 crisis and recession may be affecting the near-term performance of businesses of color—and their long-term viability.

Going into the crisis, EIG finds that minority-owned businesses were generally younger than others. In 2016, the latest year of Census Annual Survey of Entrepreneurs (ASE) data, nearly half (45%) of minority-owned businesses had been in business for five years or less. That compared to just under one-third (31%) of white-owned businesses. One interpretation of that data is encouraging: it shows a strong rate of new business creation by minorities.

Most of that, as noted, was driven by Latinos. On the other hand, younger firms are more likely to close and they tend to be smaller—this age distribution partly explains the skew in the charts above. According to the Small Business Credit Survey from the Federal Reserve system, Black and Hispanic business owners were 40% more likely to rely on personal funds as their primary funding source.

As the crisis erodes personal finances, then, we will likely see business failures result—and the impact may fall harder on business owners of color. In a recent survey by the 10,000 Small Businesses program at Goldman Sachs, taken in late April, 44% of Black business owners said their personal finances had been greatly hurt. That compared with 33% of small business owners overall in the survey.

The SLEI survey was taken at the end of March, just as the pandemic was escalating and restrictions were coming into force. Respondents were 224 “scaled” Latino-owned businesses, with over $1 million in revenue. At that time, according to SLEI:

• 86% reported a negative impact—79% said declining revenue was their top challenge. This accords with other survey findings from March and April.
• Two-thirds (65%) said they wouldn’t be able to stay in business longer than six months “if current conditions continue.” That was one month ago, and conditions haven’t improved.
• Nearly half, 46%, said they would only be able to operate for one to three months.

In the Goldman Sachs survey, 26% of Black business owners said they had less than one month of cash reserves, compared to 17% of business owners overall.

With the CARES Act, Congress authorized the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDLs) to guarantee and issue loans from the Small Business Administration. In the SLEI survey, 23% had applied for EIDLs (the survey was taken prior to the rollout of PPP).

The Goldman Sachs survey found a “stark disparity” for Black business owners in utilization of the PPP:

• While 91% of respondents had applied for a PPP loan, 79% of Black business owners said they had.
• Just over half (52%) of business owners who applied said their loan had been approved. For Black business owners, it was 40%.

When asked what else should be done, 78% of respondents in the Goldman Sachs survey said that the time period of the PPP should be extended beyond June 30. (That’s the current end date for when loan funds spent on payroll retention can be forgiven.) Additionally, 77% said more funding should be made available. Just over half said funding should be easier to apply for (53%) and that the time from application to disbursement should be shortened (52%). The Center for Responsible Lending also finds that business owners of color are less likely to benefit from the crisis support programs.

As pointed out by others, disparities in access to PPP funds may reflect pre-crisis financing trends. In the Fed survey, with data collected from 2018, one-third of Black or African American business owners and one-quarter of Hispanic business owners had applied for an SBA-backed loan or line of credit, compared to 21% for white business owners. Approval rates for those were, respectively, 56%, 42%, and 52%. Those findings wouldn’t seem to indicate major challenges in securing SBA-guaranteed loans. But they do point to underlying challenges since a pre-crisis criterion for SBA-backed loans was failure to obtain credit elsewhere.

More striking in the Fed data are application and approval rates by financial institution:

• 51% of Black or African American business owners had applied for a loan or line of credit at a large bank, compared to 59% for Hispanics and 47% for whites.
• Approval rates, however, were 29%, 50%, and 60%, respectively, for those groups.
• Far more Black or African American business owners, meanwhile, applied for financing at Community Development Financial Institutions (CDFIs): 17% compared to three% for Hispanic and three% for white business owners. A similar contrast characterized use of credit unions.

The Great Recession a decade ago hit minority-owned businesses harder than white-owned businesses. Exit rates—capturing business closure and failure—rose much more steeply for black-owned businesses in 2008 and 2009 than for white and Asian-owned businesses. The gap in exit rates persisted into the recovery as well. Likewise, exit rates for Hispanic-owned firms rose higher in 2008 and 2009 than for non-Hispanic businesses.

One of the reasons for that disparity, as documented by Census Bureau researchers, is that business owners of color rely more on home equity to finance their businesses. When house prices crashed in the Great Recession, there was a “collateral channel” affecting the performance of those businesses—“employment growth and exit rates for African American and Hispanic-owned firms are more sensitive to changes in home prices than those for white-owned firms.”

This time around, we’re not in a housing-bubble-induced recession, but house prices will be affected. Earlier this month, there were already signs of “price deceleration” as economic shutdowns hit during the early stages of peak real estate season. Those could persist, or they could be mitigated by a fall in housing inventory as sellers wait out the crisis.

Yet the current recession will affect industries unevenly, just as the Great Recession did. The Brookings analysis notes that “20% of businesses in immediate-risk industries are run by Asian American or Black owners, compared to 7% of business industries at near-term risk and 12% at long-term risk.”

At the present moment, according to new survey data released by Kauffman, African American entrepreneurs are “more optimistic” about the crisis and their business compared to white or Latinx entrepreneurs. Just over one-quarter (28%) of African American entrepreneurs are very concerned about the impact of the COVID-19 crisis on their business, compared to 39% of all entrepreneurs.

This positive outlook is also evident in the Census ASE data: 81% of Black and African American business owners reported their aspiration as growing “larger in sales or profits,” compared to 71% for white owned firms. Three-quarters (74%) of Hispanic-owned businesses reported growth aspirations. By contrast, one-quarter of white business owners expressed a desire to stay “about the same sales or profits” compared to just 16% of Black or African American business owners. Similar sentiments are found in the Fed survey.

These survey data are, admittedly, from 2016 (Census ASE) and 2018 (Federal Reserve). But they point to a silver lining. Coming out of this crisis—and even in the midst of it, according to the recent Kauffman survey—business owners of color will be looking to grow. They want to succeed. They will not be merely content to survive.

That, however, raises another challenge. What can public and private institutions do to help realize those growth aspirations?