4 minute read 15 May 2020
Smiling businesswoman

Why minority entrepreneurs need equitable relief

By Lee Henderson

Americas EY Private Leader; Executive Sponsor, EY Entrepreneurs Access Network

Fervent supporter of young entrepreneurs and their businesses. Connector of the entrepreneurial ecosystem. Self-proclaimed sports fanatic.

4 minute read 15 May 2020

In many cases, minority entrepreneurs face COVID-19 challenges with fewer resources than their counterparts.

Minorities are being disproportionately affected by the coronavirus pandemic, with skyrocketing unemployment and rates of infection and death that exceed other groups. Unemployment for black Americans is now at 17% and at 19% for Latinos. Counties with higher black populations account for more than half of all COVID-19 cases and almost 60% of deaths, although black Americans account for just 13% of the U.S. population.1

And that’s not all. Another impact of the pandemic on minorities is similarly disturbing — many minority-owned businesses are struggling to survive against very difficult odds. At this critical time, the importance of providing support to minority entrepreneurs can’t be overstated. Over the last 10 years, minority business enterprises accounted for more than 50% of the 2 million new businesses started in the United States, and they created 4.7 million jobs.2 These businesses are critical to their local communities and to the broader American economy.

The initial $349 billion fund for the Paycheck Protection Program (PPP) was criticized by some for favoring larger businesses with traditional banking relationships. If true, this trend can disadvantage many minority business owners, who often must work outside of the mainstream financial system and regularly lack access to capital available to others. The second round of funding added an additional $310 billion.

While we don’t have a final accounting of how those loans are being allocated, we must remain vigilant and adjust future relief programs as necessary. To ensure government aid reaches minority business owners, financial institutions and policymakers need to focus on access, cooperation and education.

To improve parity, increase access

A recent Federal Reserve study found that black-owned, Latino-owned and very small businesses were half as likely to get financing from banks than white-owned firms and those with higher revenue, according to a recent article in The Wall Street Journal.3

The gap in access to funds has significant ramifications. According to the Kauffman Foundation, black entrepreneurs, for example, were almost three times as likely as whites to have profitability hurt by lack of access to capital, and they were more than twice as likely as whites to have profits negatively impacted by the cost of capital.4

With many entrepreneurs and smaller business owners in a dire situation, lenders and policymakers must ensure all borrowers receive equal consideration. Lenders must report on government aid lending to minority-owned businesses relative to their overall lending. This reporting could also include data on loan applicants as well as outcomes broken out along racial and ethnic lines.

Cooperation helps to bridge the gap

Recognizing the structural barriers that minority-owned businesses face, lenders and FinTech companies are stepping up to help. Online platforms make the loan application process easier and less dependent on existing banking relationships. Fundera, for example, offers a single, common loan application that allows borrowers to access multiple SBA lenders at the same time.

Larger banks are now helping smaller, community-based financial institutions reach more minority entrepreneurs by lending money that can be targeted to these business owners.

Financial services organizations such as Goldman Sachs are also prioritizing aid to businesses impacted by the pandemic. The company has committed $250 million to provide emergency loans to small businesses and $25 million in grants to community development financial institutions to help them make loans expeditiously.

This kind of broad cooperation among federal and state governments, banks, community finance partners, FinTechs and other businesses increases the likelihood that more desperately needed funds will make their way into the hands of struggling business owners.

Education and awareness are key

With the swift rollout of the first round of PPP funding and the follow-on of the second round, the need for broad public education about the program may not have been immediately apparent. Now, it has become clear that more and better communication is needed. To start, organizations from local chambers of commerce that serve minority-owned businesses to community development financial institutions must prioritize getting the word out about forthcoming government loans and other federal programs.

Further, lenders, policymakers and others should make certain the government aid application process and loan-forgiveness stipulations are clear, transparent and accessible. To that end, they may need to translate documents into multiple languages and make the information available through different channels.

Programs like the PPP have the potential to provide critical assistance to minority entrepreneurs who might otherwise face losing their businesses. The important task now is to ensure that the banking and financial system doesn’t perpetuate inequality. Public and private organizations across the business, financial and community ecosystem must work together to bring equality and fairness to all loan programs. The urgency of this effort is underscored by April unemployment numbers that show the disproportionate effect on minority communities.

Until we receive a full accounting of how the latest $310 billion has been allocated, it will be hard to know which of these efforts have been successful. Equally important, we must continually assess and improve the process for continued relief efforts.

Without equitable treatment, the future of many minority businesses — and millions of jobs — hangs in the balance.

Summary

Stimulus programs have the potential to provide critical assistance to minority entrepreneurs who might otherwise face losing their businesses. The important task now is to ensure that financial institutions and policymakers need focus on access, cooperation and education.

About this article

By Lee Henderson

Americas EY Private Leader; Executive Sponsor, EY Entrepreneurs Access Network

Fervent supporter of young entrepreneurs and their businesses. Connector of the entrepreneurial ecosystem. Self-proclaimed sports fanatic.