By Frank Knapp Jr. and Derek Peebles – In September of 2019, long before anyone had ever heard of the coronavirus, The Republican Party’s only Black U.S. Senator, Tim Scott (R-SC) announced that he had introduced the Enhancing Entrepreneurship for the 21st Century Act along with Democratic Senator Amy Klobuchar.
The Act called for federal research into the reasons why the nation was at a 40-year low in new business startups. The legislation did not pass but it has been reintroduced this year.
While our organizations support this legislation, we already know a major impediment to starting a business—access to capital.
While getting a startup business loan is a problem regardless of the entrepreneur’s race, the pandemic has shown why the issue is even more of a crisis for Blacks.
Black businesses were overwhelmingly left out of the first $349 billion in federal PPP loans through banks. The reason is largely attributed to Black businesses not having good banking relationships.
Clearly, if existing Black business owners do not have good relationships with bank lenders, then the problem is even more severe for Black entrepreneurs who would like to start a small business.
Add to this the fact that there are 68% fewer banks nationwide than there were in 1980, then it is easy to understand why it is so difficult for Black entrepreneurs to get a startup business loan even when the loan request is very small.
On average local small business start with only $10,000 in capital and micro businesses only need as little as $3,000 in financing.
However, banks see a small business startup loan as risky in the first place and a $10,000 or less loan is not very profitable even if it is a success. And if the entrepreneur is Black, Hispanic or a woman or is seeks to start a business in an underserved community; banks are not the answer.
This access to capital problem is a threat to our overall economy because all net new jobs in the country come from businesses less than five years old with four or fewer employees. If the country is not creating these small businesses, we our hurting our future economic growth.
This is even a bigger crisis for our rural and underserved communities. The lack of startup loans to entrepreneurs of color or women means that these local communities that have the biggest economic needs for small businesses will continue to suffer.