Bridging the Capital Access Gap

Bridging the Capital Access Gap: An Overview of the Small Business Financing Industry

Although entrepreneurship is often touted as an arena of equal opportunity, there are major systemic barriers to realizing this ideal – one being access to capital. ICIC and LISC came together for an in-depth look at the small business financing industry and ways that business owners can use this knowledge to gain access to additional avenues of capital.

The landscape of small business ownership in the United States does not reflect the demographic makeup of the nation. Although 12.6 percent of the U.S. population is Black, only 2.1 percent of small employer firms are Black-owned. Hispanic and Latino people are 16.9 percent of the population yet own only 5.6 percent of employer businesses. Additionally, women owned just 21 percent of small businesses in the US in 2021. In addition to being underrepresented among business owners, the financial situation of women and people of color who do own businesses is often worse than average. In 2020, 77 percent of Black-owned firms and 79 percent of Asian-owned small businesses characterized their financial situation as “fair” or “poor,” compared to the national average of 57 percent.

A preexisting landscape of wealth, income, credit, and asset inequality in the United States is an important reason for these differences in business ownership and success. A business owner’s financial situation and social networks matter deeply to the vitality of their business. As of 2020, 88 percent of firms used their owner’s credit score to take out a loan and 56 percent reported borrowing money from friends or family in the past five years for business purposes. Accordingly, financial discrimination that affects individuals and their communities also affects the businesses they own. Differing outcomes among small businesses partially reflect the racial wealth gap and the racial asset ownership gap, which have continued to expand steadily over the past ten years.

Although overall economic inequality sets up barriers to successful entrepreneurship for women and BIPOC business owners, discrimination within small business finance worsens the issue. Non-white business owners are 3 times more likely than white borrowers to be denied bank loans and, when approved, they have to pay higher interest rates. (In 2018, business owners of color paid an average interest rate of 7.8 percent, compare to 6.4 percent for white business owners. Mystery shopping experiments, which send matched pairs of borrowers who are identical in every respect except race to apply for loans, have consistently found evidence of racial discrimination by bank representatives in loan interviews. The lending industry not only amplifies existing inequalities but also does a poor job of enforcing anti-discrimination laws.

Racial and gender inequality in entrepreneurship result in a large gap in revenue throughout the life cycle of a small business. Minority-owned businesses earn around $100,000 per year less than average in their first two years and this gap increases to around $700,000 per year after 11 to 15 years of operation (data based on 2014 estimates). This feeds back into the widening divide in asset ownership and wealth between communities of color and the rest of the nation. Working toward an equitable future in which entrepreneurship is a tool for building generational wealth will require working to repair systems of exclusion in capital access and educating business owners about which forms of financing best suit their needs.

Download the full report to read the complete findings and recommendations.


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