There are approximately 1 million minority-owned firms and 1.1 million women-owned firms (b) in the United States that are employer firms. Business ownership is considered as one of the paths to building wealth for people of color and also provides employment opportunities in the community thus improving the local economy. Major challenges have always existed for minority-owned firms compared to their non-minority counterparts, the key being reduced access to capital, lack of knowledge and reduced market access due to limited or no networking and support systems. All of these factors contribute to lower market share and sales receipts for people of color owned businesses compared to their non-minority counterparts. The current covid pandemic adds to the financial stress for these businesses. Post pandemic survey results reveals that only 2% of minority-owned firms report their current financial health in excellent condition while 37% has stated that they are in fair or poor financial condition.
Approval rate for loans during pandemic
While 71% of white owned firms received approval for some kind of loan post pandemic, only 48% of people of color-owned businesses received approval. Low credit score and insufficient collateral are the top two reasons cited for credit challenges and lower loan approval rates for businesses owned by minorities.
Minority-owned firms have been more successful in obtaining loans from smaller banks compared to large banks. Studies also indicate that those who has fairly good relationship with their local bankers have been highly successful in obtaining loans including their PPP and EIDL compared to those who never had any relationship.
Personal Financial Challenges for the business owner
61% of the survey respondent (a) said that they either did not draw or took reduced salary to cope with business performance challenges due to the pandemic. 64% had used personal funds to pay for business expenses. Temporary closures, reduced operations and government mandates are cited as the primary reasons that has adversely affected their business performances.
Recovery and road ahead for small businesses
36% of people of color owned businesses are positive about returning back to their pre pandemic sales numbers by second half of 2021 or by 2022 while 16% of the firms do not expect to survive the pandemic. Because minority-owned firms are used to fighting challenges they have quickly adapted to the new playing field by either modifying their services or adding newer in demand services and offerings that they believe would help them get back to their pre-pandemic sales numbers.
(a) Federal Reserve Banks, 2020 Small Business Credit Survey https://www.fedsmallbusiness.org/survey/2021/2021-report-on-firms-owned-by-people-of-color
(b) 2019 Annual Business Survey (ABS)