There have been a lot of opinions and platitudes that have come out over the past week to discuss the killing of George Floyd, and the ensuing protests.  Systemic racism exists, and since we are devoted to developing a healthy entrepreneurship ecosystem in Hendricks County, we wanted to see if (and how) it showed up in small business data.  With this in mind I dove into several studies and looked at the numbers and found that we have to do better.  Minority-owned businesses (specifically Hispanic or black-owned), while starting at a similar rate, just do not grow at the same rate of their nonminority peers.  I welcome discussions on this topic and all of the information included in this post, but mostly I wanted to share the data that I found, so at least you could see it with your own eyes.

There is no doubt that small businesses of all sort face challenges.  Most are owner-operated firms with no other employees (nonemployer), so the business owner has to wear multiple hats and put out all the fires themselves.  Small Business owners and entrepreneurs also have additional stresses which can lead to depression, especially in times like these when you bring in all kinds of uncertainty into the mix.  Now, imagine if you add lower home values, lower credit approval rates, entrenched biases and discrimination to the mix.  This is the reality that many minority business owners face every day, and can be a huge reason their businesses do not grow at the rate of their nonminority peers.

We will examine this disparity in a 3-part series.  The first part, which we will be reviewing today, will go over the data, so we can see that a disparity exists.  Part 2 will look at some of the reasons for the disparity that result from years of systemic racism and why it matters.  Finally, Part 3 will look at some of the resources available to combat these issues, and what we can do to help.

Racial Disparity by the Numbers

In 2012 8 million minority-owned businesses contributed $1.38 trillion in revenue and 7.2 million jobs to the economy.  Also, from 2007 to 2012, which encompassed the great recession, a net 2 million minority-owned businesses were created while a net 1 million nonminority-owned businesses closed.  This increase was driven by a 34% increase in Black/African American business ownership and a 46% increase in Hispanic-owned businesses.

While those stats show a positive trend in minority business ownership, when we look further into the data we see that there is still room to grow.

When we dive into the numbers we see that even though minority-owned businesses are on the rise, they still do not represent their full share of the population.  For instance, while minorities made up 37% of the US population in 2012, they only made up 29% of all businesses and the numbers for the black community are 12.6% of the population and only 9.5% of all businesses.  The data for Indiana is not much better.  Black/African Americans made up 10% of the working age population in Indiana in 2012, but only had a 7% share of all businesses, and only a 1% share of all Indiana employer businesses.

If these trends continue, we could reach parity in business ownership levels in relation to population.

When we dive even deeper into the numbers we find a large disparity in the average number of employees and the average of sales for each business.  For another example, let’s take a look again at black/African American owned businesses.  While this cohort made up 9.5% of all businesses in 2012 they only made up 1.7% of all employment and 1.3% of all sales.  For Hispanic-owned businesses the numbers are 12.2% of all businesses, 4.0% of all sales and 4.2% of all employment, which is a bit closer to parity.  When you compare those numbers with the fact that nonminority-owned businesses made up 71% of all businesses but 88% of all sales and 86.5% of all employment you begin to get a picture of just how big the disparity is.

Now, lets take a look at sales receipts per firm from 2012.  For our black/African American business owner friends, we see that their average gross receipts were $58,000 while Hispanic-owned businesses were about 2.5 times greater ($143,000) and nonminority owned businesses were more than 9 times greater ($546,000).  These numbers are mitigated a bit when you take out  nonemployer firms.  When this is done, you see that the average sales are $948,000 for black/African American-owned firms, while Hispanic-owned firms are 1.5 times greater ($1.3 million), and nonminority-owned firms are  2.5 times greater ($2.3 million).

One reason for the huge discrepancy in the gross receipts per firm can be pointed back to the average employees per firm.  For nonminority-owned businesses, ~22% firms are employer firms compared with 8.7% of all Hispanic-owned firms and just a mere 4.2% of all black/African American-owned firms.

I know, I know, so much data.  I am sorry as no one really wants to see this many numbers, but I am trying to share the information.

Credit Disparity

Please bear with me a little while longer as we discuss credit, which is probably where the most eye-opening data exists.

In the Federal Reserve Board’s 2016 Small Business Credit Survey we move forward 4 years in time and look at the results from over 12,000 small businesses.  This data points us to the fact that black-owned firms were less profitable, had lower funding approval rates (by 19%), and received a smaller percentage of the requested amount than their whited-owned business counterparts.  Another shocking stat was that 40% of nonapplicant black-owned firms did not even apply for financing because they were discouraged, and those that did apply usually steered clear of small banks, but instead opted to apply at CDFIs (community development financial institutions) or online lenders.

In a report from 2016, The Ewing Marion Kauffman Foundation dove into some more credit data from the 2014 Annual Survey of Entrepreneurs to give us some more insights.  This data shows us that the more minority-owned businesses faced negative impacts on their profits from the cost of capital or access to financial capital, as compared to their nonminority peers (16% vs 10%).  As we dive deeper, we find that the profits of black entrepreneurs were even more negatively impacted.   For this group, their profits were 3x more likely to be negatively impacted by access to capital and 2x more likely to be negatively impacted by the cost of capital than their white peers.

There is a boatload of data out there that continues to confirm these disparities, but I will save you the boredom of reading any more of it.  If you would like to read for yourselves, you can check out the links below:

2016 FED Small Business Survey

Minority Business Ownership:  Data from the 2012 Survey of Business Owners

Businesses owned by women and minorities have grown. Will COVID-19 undo that?

Startup Financing Trends by Race:  How Access to Capital Impacts Profitability

THE STATE OF MINORITY BUSINESS ENTERPRISES:  An Overview of the 2012 Survey of Business Owners

Entering Entrepreneurship: Racial Disparities in the Pathways into Business Ownership

We will examine some of the reasons these disparities exist in Part 2 of this series.

I understand that some may disagree with the information from this post, but I just wanted to show some data and start a discussion.

 

John C. Anderson

Level Two Inc – Executive Director

 

 

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