The facts are startling: Hispanic and black Americans have levels of wealth that are only one-tenth those of white Americans. There are many reasons why this is the case, but it is partly because they hold fewer business and financial assets. While white Americans hold one-third of their wealth in business and financial assets, Hispanics hold only 15 percent and blacks only eight percent in these types of assets.
African Americans and Latinos have been constrained by a variety of factors—including low levels of wealth, lower educational attainment, and discrimination—in building business assets. Yet as detailed in a new FIELD report, recent data indicate that those trends are changing, at least in part. The rate of new business formation by entrepreneurs of color now exceeds that of whites and of their growth in the labor market. However, while African Americans and Latinos are successfully creating new firms, they continue to face challenges in growing those firms.
In part, African Americans and Latinos are struggling to grow their firms because they have less wealth. Having less wealth makes it harder to access external capital. Having less equity also makes it more difficult for business owners to navigate cash flow challenges, which are common among young firms.
CDFI business lenders and venture capital funds play a critical role in helping entrepreneurs of color to grow their firms. Not only do CDFIs provide access to capital; they also provide it in ways that are vital to undercapitalized firms. Specifically, CDFI business lenders:
- Conduct outreach and provide services in a way that is culturally competent and appropriate.
- Underwrite and structure loans and investments so that they address the needs of borrowers with limited collateral and wealth and, in some cases, weaker credit histories.
- Provide business development services that can help entrepreneurs to avoid and weather cash flow challenges and to make smart choices regarding growth.
- Offer credit-building products and services (such as reporting to credit bureaus) that enable business borrowers to improve their credit scores and histories.
In addition to serving individual entrepreneurs, the CDFI industry must continue to be a voice for practices that address racial and ethnic inequality and for policies that eliminate discrimination and increase financial inclusion in our mainstream financial markets. As advocates for racial justice and equity, leaders in the CDFI industry should also speak out against practices—such as predatory or irresponsible lending practices—that strip wealth, often from people of color.
Organizations like CDFIs—that are driven by their missions and have demonstrated track records in serving entrepreneurs of color and others who are financially excluded—will be an essential part of any strategy to realize the promise that minority entrepreneurship holds for closing the racial wealth gap.
Read the full report, Bridging the Divide: How Business Ownership Can Help Close the Racial Wealth Gap.