In February of 2023, Small Business Administrator, Isabella Guzman, warned that the lack of capital access for minority-owned small businesses is costing the U.S. economy hundreds of billions of dollars in lost economic output (1)
During the 2023 fiscal year, the Federal Government, issued 63,000 SBA loans to small businesses with proceeds totaling just shy of $34 billion.
SBA loans for minority and women owned businesses was disappointing(2)
- 19 percent of people in the U.S. are Hispanic/Latino and Hispanic/Latino business owners only received 8.5 percent of the money distributed from 7(a) loans and 10.3 percent of 504 loans
- 13 percent of people in the U.S. are Black and only 8 percent of 7(a) loans and 3.6 percent of 504 loans went to Black applicants
- 42 percent of businesses are women-owned and just under one-third of these loans went to businesses with female ownership
The gap in funding for minority-owned businesses, including those owned by women, can stem from various factors:
- Built-In Bias: Unconscious biases in the lending process can lead to unequal treatment. Lenders might unknowingly favor businesses owned by individuals who fit their notions of a successful entrepreneur, which can disadvantage minority-owned enterprises.
- Limited Access to Networks and Resources: Often, minority entrepreneurs have limited access to networks that are crucial for securing funding. They often lack connections to investors, mentors, or established networks that can open doors to financial opportunities.
- Credit and Collateral Challenges: Many minority entrepreneurs face challenges in establishing credit or providing sufficient collateral. This can be due to historical funding gaps, limited family wealth, or lack of access to traditional bank funding.
- Industry and Market Dynamics: Certain industries with a larger percentage of minorities, such as restaurants/catering, might be perceived as riskier, leading to less investment in minority-owned businesses operating in those sectors.
- Under Representation in Decision-Making Roles: The lack of diversity among decision-makers in funding organizations or financial institutions can influence the dole out of resources, unintentionally disadvantaging minority-owned businesses.
- Size and Scalability: Investors often look for businesses with potential for rapid growth and scalability. Minority-owned businesses may be operating in sectors or niches perceived as less able to grow rapidly, impacting their attractiveness to investors.
- Lack of Mentorship and Guidance: Access to mentorship and guidance is crucial for business growth. Minority entrepreneurs might have fewer opportunities for mentorship, which can affect their ability to navigate the complex landscape of securing funding.
Addressing the issues creating the funding gap requires a combination of solutions:
- increased access to funding networks
- education on business finance
- diversity in decision-maker roles
- intentional efforts to eliminate biases
- creating targeted funding programs to support minority-owned businesses.
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(1) https://thehill.com/business/3847115-sba-chief-minority-owned-businesses-growing-but-still-lack-access-to-capital/#:~:text=Small%20Business%20Administrator%20Isabella%20Guzman%20warned%20on%20Tuesday,hundreds%20of%20billions%20of%20dollars%20in%20economic%20output.