Small Business Trends trumpeted this headline in 2018, “Wow! African American Small Business Ownership Up 400% in a Year.” At that time, 45 percent of small business owners were from minority ethnic categories. When compared to 2015, the growth was dramatically exponential.The most dramatic business ownership, however, came from the African American market segment, where these small business owners saw a dramatic increase between 2017 and 2018. By comparison, the volume of non-minority firms grew by only six percent.As we enter a new decade, what do the numbers look like for African American and other minority business owners in the United States? What are the challenges and opportunities for minority business owners over the next few years?
Statistics on Minority-Owned Businesses
Let’s lay some baselines, first, to settle on our definition of the minority-owned business. First, the U.S. Census Bureau defines the concept of minority-business ownership as having a 51 percent stake in an entrepreneurial venture and identifies as:
- African American
- Native American
- Hispanic American
- Asian American
Of these categories, African Americans own the smallest businesses of all of the minorities today. The New Pittsburgh Courier reports the following breakout by service category:
- Just over half of the businesses owned by African Americans are in service categories.
- 5% are in finance, insurance, or real estate.
- 11% are in retail trade.
- 1% are in the wholesale business.
- 9% are in transportation, communication, and utilities.
- 1% are manufacturing companies.
- 7% are construction.
- 2% are mining, forestry, fishing, or agriculture.
- 12% remain unclassified, according to the report.
The article said the three highest states with minority-owned businesses include: Washington, DC; Georgia; and Maryland. In Washington, DC minorities own 28 percent of all the businesses in the city.
In all of these categories, the growth of these businesses lags behind the number of employees they hire, which according to an article in Inc. is suggestive of many minority-owned business owners entering entrepreneurship as a solo venture and then failing to scale by adding employees.
Minorities own roughly 30 percent of American businesses, which employ more than seven million Americans and generate $1 trillion in revenues annually. These numbers have been steadily increasing over the last decade. Inc. suggests this growth has been fueled by “generally positive economic trends and to advances in the realms of education and access to capital.” With that said, the number of businesses owned by African Americans and other legal minority groups is on the rise. What is fueling the growth of these businesses today?
Factors Increasing Growth of Minority Businesses
Inc. reported on some of the favorable factors influencing the growth of minority businesses generally and black-owned businesses in particular. They cited factors such as affirmative action programs and general economic growth. They also found:
- Community support for the growth of these businesses, including the push by community banks and other lenders to provide small business funding and 401(k) funding.
- Increased networking enabling the growth of associations and organizations supporting these entrepreneurial ventures.
- Funding programs, from federal set-asides to state, local and federal agencies have all extended small business funding and legal or start-up expertise.
- Corporate initiatives push minority-supplier and MBE (Minority Business Enterprise) preferred-vendor programs. Corporations are increasingly buying from minority-owned businesses as part of diversity and inclusion initiatives.
- Urban revitalization is occurring, and minority business owners are taking advantage of the rebirth to put down roots. Federal and state initiatives also favor these areas and the businesses springing up within them.
- There is more opportunity to achieve higher education goals that prepare the minority business owners with the skills they need to stay competitive.
- Better access to small business funding as financial institutions continue to recognize the power of startup companies to fuel the nation’s economy. The emergence of alternative financing sources like 401(k) funding has made it less difficult to secure start-up or expansion funding. Agencies such as the Small Business Administration (SBA) have increased the availability of loans to minorities.
- Expansion into non-traditional and emerging industries. For example, minority business owners have favored small-scale service industries like restaurants or grocery stores. But today you’re just as likely to see these entrepreneurs in technology, finance, or manufacturing as a beauty parlor or dry cleaner.
While the outlook for minority-owned businesses looks favorable in the years ahead, there are challenges both unique to being an entrepreneur and also specific to being a minority-business owner of which potential minority business owners should take note.
Top Challenges of Minority Business Ownership in 2020
While the growth and outcomes of minority-owned companies have improved, we still have a long way to go. U.S. News & World Report says that the majority of American small businesses are still owned by Caucasian males. The same holds true for women-owned businesses that make up more than one-half of the entire U.S. population, but only 19.4 percent of businesses in the country.
Starting a small business is challenging for any entrepreneur, but particularly so for the minority business owner. Business2Community reports:
- Despite the gains over the past decade, minority business owners are still less likely to receive small business loans over their non-minority business counterparts. The problem is worse for those with less than $500,000 in gross receipts.
- The average amounts of small business loans are smaller for the minority-owned company. For a minority business with over $500,000 in gross revenue, the average loan approval was for $149,000. Non-minority business loans average $310,000. Interest rates are more often higher for a minority business.
- Many minority business owners assume rejection and fail to even pursue small business funding when starting a small business.
A small business report on the minority entrepreneurial landscape also paints a disturbing portrait of where these companies are being left behind:
- Minority firms earn just 48 percent of the revenue of non-minority firms and 44 percent of the profits.
- These businesses are not growing at the rate of the minority population.
- Minority owners primarily run minority firms, but minorities serve as the CEO of non-minority firms just 3 percent of the time.
Like all small businesses seeking entrepreneurial help, the minority-business owner needs three primary things to grow their business:
- Education and business management skills.
- Access to funding.
- Access to potential sales markets.
A report entitled “Helping Entrepreneurs of Color Grow their Business” pointed out some of the difficulties inherent all three areas:
Minorities are behind non-minorities in business management education. These professionals are under-represented in business schools. They are also less likely to have a self-employed relative as a role model for their own growth and mentorship.
Access to capital is an on-going problem. Minority-owned companies pay higher interest and get smaller loans than their non-minority counterparts. They are more likely to be denied credit when seeking small business funding. This means these firms must survive with substantially less capital than their counterparts, which limits their growth. Too, these entrepreneurs are more likely to require a US Small Business Administration (SBA) loan guarantee over their non-minority counterpart, even in a similar or the same type of business.
The report pointed out that government, hospital, university, and corporate contracts are important to the survival of most small companies. These contracts often generate a high revenue stream that accelerates the growth of small companies. But the report also points out, “Entrepreneurs of color struggle with gaining such market access, in spite of a range of government and private-sector supplier diversity and local procurement initiatives.”
Despite these challenges, there is some good news. There is an increased focus on supporting the small business and, in particular, the small and minority-owned venture. Many companies now have MBE-preferred programs that seek to award these lucrative big contracts to small minority-owned companies. The report cited that minority-owned firms now have a higher share of government contracts over non-minority firms. These are good signs, but the truth is the numbers of minority-owned businesses should be much higher.
The New Pittsburgh Courier says, “most agree that racism, discrimination, and predatory lending are all factors” contributing to the challenges minority-business owners face today. Two big areas of concern, reported by the Charleston Chronicle are that:
- While African Americans consist of 13 percent of the US population, they only own 7 percent of the businesses.
- Almost 1.9 million of the 2 million Black-owned businesses do not have paid employees. The article said if each of these companies could add one or two employees, it could be a solution to help any lingering unemployment issues in the African American community.
Clearly, inequities in funding continue to plague minority businesses. The Ewing Marion Kauffman Foundation studied the importance of startup capital can improve the profitability of small businesses. They found that entrepreneurs most often seek funding from three primary sources:
- Personal and family savings or 401(k) funding
- Bank business loans
- Personal credit cards
However, the different racial categories favor one type of funding over another. For example:
- Asian entrepreneurs look to their family and friends first before seeking any other type of small business funding.
- Caucasian entrepreneurs look to banks for their capital infusion.
- African American entrepreneurs use credit cards most often.
The study found that African American small business owners are nearly three times as likely as white entrepreneurs to report a negative impact from the lack of access and costs associated with additional funding for their business. The two primary reasons reported by the minority companies that considered funding but didn’t pursue it were that they didn’t want to accrue the debt and they didn’t think they’d be approved by the financial vendor.
Finding the Right Small Business Advisors
Minority-owned businesses play an important part in our nation’s economic growth. To help minority-owned businesses, financial advisors, lawyers, and business organizations must work hand-in-hand to network and provide the services these firms need.
The U.S. Census says minorities will be in the majority by 2050. New jobs, products, and growth in the economy will be heavily influenced and created by these firms. This alone should argue for increased opportunities and entrepreneurial help for these firms who will lead our country and economy in the near future.
Benetrends helps entrepreneurs obtain the funding needed to start a business. To find out more about our comprehensive suite of funding options, download Innovative Funding Strategies For Entrepreneurs today!