Insights into the world of small business lending and development
How the Racial Wealth Gap Hurts Small Business Owners of Color
This post originally appeared on Opportunity Finance Network’s CDFI Connect blog.
The homeownership rate in the second quarter of 2016 for white households was 71.5 percent, compared to 41.7 for black households and 51.2 percent for all other races. Homeownership is the primary driver of wealth for American families, yet a significant portion of non-white families do not have this crucial asset. This wealth divide is starkly highlighted in a recent report, The Ever Growing Gap, which shows that it would take 228 years, at the current rate of growth, for black families to accumulate the level of wealth that white families have. For Latino families, it would take 84 years.
At the same time, the Small Business Administration’s research shows minority business owners are disproportionately denied financing even when controlling for factors such as business credit scores and personal wealth. The Minority Business Development Agency’s research finds that minority business owners are denied loans at nearly three times the rate of non-minority owners.
How do these two disparities relate to each other, and why does this connection further disadvantage small business owners of color that seek financing for their business?
Small business owners that lack sufficient collateral for a small business loan will often use the equity in their home to get the financing they need. According to Barlow Research, a market research firm based in Minneapolis, nearly 25% of small business owners borrow against the value of their homes to help finance their business.
Small business owners of color are already at a disadvantage when it comes to accessing capital for their business, and having one less option—an option that almost a quarter of small business owners rely on for financing—makes the capital barrier to starting or a growing a business even more difficult to overcome.
For many families in the U.S., the racial wealth gap does more than dictate their financial security and ability to own a home—it can hinder their ability to build businesses and create jobs for themselves and their communities.
OFN launched Venturize to play a role in helping small business owners connect to smart solutions for financing for their business. Venturize helps small businesses compare loan options and learn about the borrowing process. But this is a drop in the bucket. The hard work of fair and responsible financing is left to community banks, community development financial institutions (CDFIs) and other mission-driven organizations that support small businesses. They provide financial solutions when others cannot, and work with small business owners of color and other underserved business owners to help develop their financial management skills.