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Minority-owned businesses have faced discriminatory lending practices for generations. What have banks, lenders and investors done to address this inequality?
The nation’s financial systems have long presented an uneven playing field for minority-owned businesses seeking the funding needed to grow. In recent years, social movements and the COVID-19 pandemic have led many financial institutions to reexamine diversity and inclusion, pledge support and create programs to address inequity.
In this article, we look at some of these efforts — as well as nontraditional financing alternatives — and their effect on future lending practices for minority-owned companies.
As the Civil War drew to a close in 1865, the United States government chartered the Freedman’s Savings and Trust Company to help formerly enslaved Blacks get on sound financial footing. Mismanagement and 1873’s financial panic caused the bank to close in 1874, leaving over 60,000 depositors with losses totaling nearly $3 million (around $78 million by today’s standards). This event, followed by decades of discriminatory lending practices such as redlining, left a legacy of mistrust among Black and other minority communities.
Today, minorities continue struggling to access the capital needed to run and grow a business — even before the disproportionate impacts of COVID-19. In the pandemic’s first months, only 12% of minority-owned businesses applying for Paycheck Protection Program (PPP) loans received the support they needed, while 41% received none at all. From February to April 2020, there was a 41% decline in the number of Black-owned businesses and a 32% decline for Latinx owners, while white entrepreneurs experienced only a 17% decline.
According to the 2021 Small Business Credit Survey, 81% of Black-owned businesses do not have their financing needs met, period. They are also the least likely to obtain the full amount of financing they apply for, with 21% of applicants receiving zero financing. Even Black-owned businesses with high credit scores are half as likely as their white counterparts to receive nonemergency financing. The survey also found that the leading reason Black-owned businesses do not apply for financing is that they believe they will be declined.
In other words, those businesses that need capital the most find it the hardest to secure.
May 25, 2020, defined a turning point for racial injustice in the US. Soon after the deaths of Ahmaud Arbery, Breonna Taylor and others, a viral video showed George Floyd’s death at the hands of Minneapolis police. As Americans of all ethnicities and backgrounds protested to demand racial justice, companies responded by condemning racism and vowing to do more to combat it.
Among them were banks and venture capital firms pledging their support for minority businesses and communities. Some programs that emerged during the movement include:
Bank of America’s $1.25 billion, five-year commitment to help local communities address economic and racial inequity. Since the program’s launch in June 2020, the bank has invested in several initiatives, such as equity capital investments in minority institutions, minority upskilling programs and aid for Native American communities. In August 2022, the bank started a trial program to make first-time mortgages more accessible for minorities.
Wells Fargo’s Open for Business Fund, through which approximately $400 million in PPP processing fees will help support nonprofits serving small businesses, especially those owned by minorities. Since July 2020, the fund has provided more than $50 million to nonprofits and grants to community development initiatives supporting minority-owned businesses.
Citi’s Action for Racial Equity. By the end of 2023, Citi aims to invest over $1 billion in homeownership opportunities, procurement opportunities, depository institutions and more for people of color.
JPMorgan Chase & Co.’s $30 billion, five-year program to close the racial wealth gap. As of February 2022, the company has committed more than $13 billion, primarily focusing on affordable housing for minority communities.
Citi, JPMorgan and Bank of America’s commitment to lower charges to Black and other minority-owned businesses that use supply chain finance programs.
While leading banks have pledged billions, minority-owned institutions have played an important role in supporting businesses in their communities. For example, OneUnited Bank, the largest Black-owned bank in the US, doubled its customer base in the aftermath of racial justice protests in 2020. The business prioritized PPP loans to sole-proprietorship businesses — a category overwhelmingly composed of minority owners — in response to COVID-19. It also allocates a majority (91%) of its loans in minority census tracts, compared to 31% for other lenders.
Unfortunately, the number of Black-owned banks has dwindled in recent decades, and the few that remain are undercapitalized. When large corporations and financial institutions invest in Black-owned banks, the odds are greater of wealth flowing through the Black community. According to Kevin Cohee, OneUnited’s CEO, there’s one simple way for Americans to support Black wealth creation: “Bank Black, even if you’re white.”
Minorities are even more underrepresented in the venture capital (VC) industry. Deloitte’s 2020 VC Human Capital Survey found that only 3% of VC investment partners are Black, while nearly 80% are white. In the last few years, several Black-led and minority-focused VC funds have emerged, such as Jumpstart Nova, the Peachtree Minority Venture Fund and the Impact America Fund.
Alternative financing providers are also stepping up to address funding inequality. In 2023, C2FO and the Schultz Family Foundation’s Entrepreneurs Equity Fund partnered to offer $100 million in support of small and diverse-owned businesses. C2FO will offer revolving lines of credit to improve working capital access for underrepresented entrepreneurs. As a more inclusive alternative to traditional loans, the program determines credit limits based on a company’s sales rather than years in business, last year’s financials or last month’s AR aging report. Learn more about the program and loan application process.
“Providing working capital to help diverse businesses meet customer demand and scale has enormous potential to be a powerful economic catalyst for the country as a whole and historically marginalized communities in particular.”
Here are several resources, including businesses and funding programs, supporting minority financing:
Venture capital firms
Government programs and grant opportunities
At the height of the pandemic, The Lemon Ad Stand had just landed its largest contract ever — but balked at the customer’s 90-day invoice payment terms. The minority-owned, full-service digital agency, which specializes in web and app development, content strategy and social media, needed more reliable cash flow to survive. Rather than trying to secure financing, the business decided to take advantage of C2FO’s Early Payment program offered by the new customer.
The Lemon Ad Stand received its first invoice payment within a week and started seeing the value of offering invoice discounts in exchange for reliable working capital and long-term growth. In what could have been a devastating financial situation for the business, The Lemon Ad Stand was able to thrive with a nontraditional working capital solution through one of the hardest economic periods in recent years.
Fintech innovations, such as digital lenders and early payment platforms, have emerged to address accessibility gaps that many small to mid-sized businesses face with traditional financing. This presents more opportunities for minority-owned businesses struggling to secure working capital.
Minority-owned businesses can also become certified as diverse suppliers to access more opportunities. If your business qualifies, the designation could help you win business from corporate buyers that want to increase their diverse spending or improve your eligibility for minority-focused funds. If your business is already certified, actively participating in training and development programs, networking or volunteering at events and connecting with other diverse suppliers will all help you make the most of your certification.
Financial institutions have improved how they address inequity since 2020, but they still have a long way to go. William Towns, an adjunct lecturer of social impact at Northwestern University’s Kellogg School of Management, argues that lending institutions need to rethink how they measure creditworthiness, focusing on applicants’ credit and payment histories. BLCK VC’s co-founder Frederik Groce says that better relationships with banking officers can help Black entrepreneurs build capital and confidence.
Board and executive diversity are also key factors in helping minority-owned businesses get the funding they need. More diverse leadership will give financial institutions a broader perspective of the needs and inequalities within the communities they serve, fostering the development of more inclusive financing practices. Achieving this won’t be easy in corporate cultures where high-paying positions are normally filled through referral networks. Boards will have to be active in searching for and supporting minority candidates.
As Derek Penn, author of “Diary of a Black Man on Wall Street,” said in regard to 2022 figures on Wall Street diversity: “The targets for Black representation provided by these firms [are] great, but it has to be an effort that is spearheaded from the top, and people below the corner office must be held accountable.”
If you’re certified as a diverse supplier but not seeing the benefits you expected, here are three success secrets for your business.
This article was updated October 3, 2022, and originally published December 7, 2020.
In this article:
Alex Donnelly, C2FO’s COO for the Americas, told a UN audience how C2FO’s approach could benefit sustainability efforts.
C2FO's ERGs are part of a commitment to creating a safe and welcoming environment for all employees.
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