Nearly half a million closures
There were more than 1 million black-owned businesses in the U.S. at the beginning of February, according to research from the University of California at Santa Cruz, which drew from Census survey estimates. By mid-April, 440,000 black business owners had shuttered their company for good — a 41% plunge. By comparison, 17% of white-owned businesses closed during the same period, the UC Santa Cruz research shows.
Several factors explain the high rate of closures of black-owned businesses. Perhaps most important, many lack access to bank credit, making it harder to survive financial emergencies. Many are micro-enterprises, providing a livelihood to a sole proprietor or a few employees at most. Profit margins are thin, while owners' financial savings are often meager, making them vulnerable to sudden downturns.
Surveys also show that the vast majority of black business owners who applied for emergency relief after the virus struck through the Paycheck Protection Program were denied a loan. Selmon said she applied for a $50,000 PPP loan shortly after the program was launched, but the funds were exhausted before her loan could be approved. An analysis by the Center for Responsible Lending found that 95% of black-owned business were shut out of the small business initiative.
Challenges for African-American business owners
Lack of capital and cash flow is the biggest challenge for African-American small business owners, according to Guidant. That’s not really a surprise since those are the same problems most small business owners face.
But fewer African-American small businesses are approved for financing, often at lower amounts of money with higher interest rates, according to a report in The Washington Post. Guidant reports that the “wealth gap also contributes to financing challenges…making it harder to [get] financing. Without the funds to invest in as many resources as other businesses, such as hiring talent or marketing and advertising, competing for contracts or attracting clients becomes exponentially more difficult.”
Small business can be a lonely venture
A report, 8 Insights on the State of Black Entrepreneurship, from American Express reports 47% of African-American small business owners run their businesses by themselves, compared to the 33% of average small business owners. And African-American businesses have fewer employees: 38% have 2-5 employees and only 7% have 6-10 employees. This compares with the average small business owner, with 41% employing 2-5 workers and 12% employing six to 10 workers.
More African-American small business owners (44%) use cash to fund their businesses than the average small business owner (37%), according to the Guidant report. Only 15% get help from friends and family, which was the second most popular source of capital for African-American business owners.
And according to Project Diane, the picture for African-American women is equally challenging—since “2009, Black women led startups have raised $289MM in venture/angel funding, with a significant portion of that raised in 2017. This represents .0006% of the $424.7 billion in total tech venture funding raised since 2009.”
UC Santa Cruz professor Robert Fairlie said many black owners will face considerable obstacles resurrecting their business after the pandemic eases, citing the huge wealth gap between black and white Americans. Many African-American households lack the financial resources required to rebuild, such as bank savings, access to a home equity line of credit, or the ability to borrow from family and friends, he explained.