we first need to identify the specific barriers that are holding back minority-owned businesses the most. In many cases, access to financing is one of the
most obvious and detrimental barriers for these business owners, along with a lack of access to educational resources around business management skills.
April 20, 2021
The Funding Gap: How To Address Two Huge Challenges Holding Back Minority-Owned Businesses
Every business owner understands it’s not easy to build or run an enterprise, with a range of challenges — from developing a solid business plan and product development to analyzing the competition and effectively marketing goods and services — popping up along the journey. While these challenges are familiar to business owners across the board, minority-owned businesses experience this and then some, as evidenced by the 8 out of 10 Black-owned businesses that fail within the first 18 months.
Short of overhauling the entire system — and with these realities in mind — what can be done to level the playing field for all business owners within the current frameworks?
To work out appropriate solutions, we first need to identify the specific barriers that are holding back minority-owned businesses the most. In many cases, access to financing is one of the most obvious and detrimental barriers for these business owners, along with a lack of access to educational resources around business management skills. Let’s start with access to financing.
Numbers released by the U.S. Commerce Department’s Minority Business Development Agency show that minority-owned businesses are less likely than white-owned businesses to secure funding, especially for businesses with less than $500,000 in gross receipts. Additionally, for minority-led businesses that do secure funding, interest rates average higher than those for their white-owned counterparts. This is due to biased frameworks that exist within many traditional banking institutions, which favor white-owned businesses as they’re typically considered “less risky.”
Additionally, a study from the National Community Reinvestment Coalition found that Black-owned businesses seeking options and information regarding small business loans under Covid-19 programs like the Paycheck Protection Program, or PPP, were treated differently than white business owners. According to the report, lenders not only discouraged Black business owners from applying for a loan but encouraged white business owners in similar situations to apply for one or more loan products. This unconscious — or in some cases, conscious — bias that favors white business owners over their Black counterparts shows the stark disparity in experience when trying to access financing as a minority.
The initial round of PPP loans unfairly excluded America’s smallest and most vulnerable businesses yet benefitted large-scale organizations. The White House acknowledged in its statement that family-owned Main Street businesses, women-owned and people-of-color-owned businesses were most likely to be unable to access PPP due to unrealistic amounts of paperwork or flaws in the program structure. Further, the initiative exacerbated the issue of inequality in accessing financing — for example, alienating anyone with a delinquent student loan history or noncitizens.
So how can this colossal systemic barrier — where even those who enforce it may or may not be conscious of their bias — be overcome?
A number of solutions have emerged over the years to break down barriers to accessing financing. These tech-fuelled platforms enable minority business owners to access financing for a range of functions. Many are funded by peer-to-peer investors, and the chance of bias is eliminated because algorithms handle the risk assessment, not humans. Take the newly rolled-out Facebook Receivables Program, for example, which provides invoice financing up to $25 million to diverse and minority-owned suppliers via invoice financing platforms (like my own company).
Initiatives like this enable minority-led businesses to receive cash faster through the ability to sell invoices, meaning they can access capital otherwise tied up in lengthy payment terms. For minority-owned businesses with lower amounts of cash flow, the ability to access capital faster can mean the difference between staying operational and closing down. Eligibility for the program is measured via an integrated risk assessment system that sources and processes granular financial data to gauge risk with up to 95% accuracy, and because this risk assessment is data-led, the risk of human bias impeding the approval of financing is negated entirely.
While access to financing can be a huge challenge for minority-owned businesses, another is access to sources of knowledge and experience, also known as social capital. Without access to individuals like advisors, peers, colleagues or other business owners, many minority-owned businesses are at a disadvantage, especially when needing advice or support on the specific challenges they face.
Again, technology has eased these barriers somewhat. Clubhouse, one of the most recent social networks, is fostering network-building and the transfer of knowledge through panels specifically created to help minority-owned businesses find each other and share their experiences and knowledge. Additionally, for business owners — minority or not — who want to share their knowledge with minority-led businesses, the Small Business Administration and other organizational and educational bodies operate a number of mentorship programs. For those interested in sharing their knowledge, it only takes a quick search to find a plethora of opportunities to do so.
It’s through programs like these, and through implementing the right technologies that remove the biased human element from financing, that barriers for minority-led businesses can be addressed. Ideally, as more and more minorities are able to use technology to engage with one another to share their business knowledge and experience, and as data-led approval processes are implemented across the spectrum of financial services, these barriers will be broken down entirely.
Payson Johnston is the CEO and Co-Founder of invoice auction marketplace Crowdz, helping SMEs get paid faster and access invoice finance.