The report finds minority business owners rely on personal funds more than traditional funding.
The Winthrop Rockefeller Foundation started a conversation about equitable access to capital last week with the launch of a new webinar series, Grow AR Own. The conversation continues tonight with a virtual discussion focused on how Arkansas would change if we increased access to capital for Black, Latinx and women business owners.
The question stems from a new report released during last week’s webinar that found in the last three years, minority business owners in Arkansas applied for lending at a disproportionately lower rate than white business owners, but were denied lending at a higher rate. Precise Data Consulting prepared the report for the Winthrop Rockefeller Foundation and Winrock International.
Entrepreneurs of color perceive that traditional banks do not support them or cater to their business needs, according to the study, and they rely on personal funds more than financing to start and grow their businesses. In Arkansas, nearly 75 percent of minority entrepreneurs depend on personal funds to start their businesses, compared to 55 percent of white entrepreneurs. Relying heavily on personal funding puts business owners of color at a disadvantage, principal researcher Julia Chears-Young said.
“When they start off a business with the type of capital that they need, then they’re able to grow and sustain those businesses a lot quicker than those who have to rely on personal funds or rely on still working a full-time job in order to fund their business,” she said.
Small business owners, particularly women, people of color and other underserved populations face significant barriers to accessing capital from banks and other traditional resources. Between 2015 and 2019, Arkansas small businesses received nearly $1 billion in financing through the Small Business Administration 7(a) program. Only 1.2 percent of these investments supported Black-owned businesses, and 1.8 percent supported Hispanic-owned businesses.
“The disparity in government capital support and traditional banking support during the COVID-19 pandemic has only exacerbated the inequities,” WRF CEO Sherece West-Scantlebury said.
The disparities in access to capital have increased as the Paycheck Protection Program has relied on the existing system of financial institutions, a system that has traditionally excluded a disproportionate number of people of color and women who are unbanked or underbanked, West-Scantlebury said. The only capital available to the smallest businesses is often accompanied by “exorbitant interest rates and confusing payment terms.”
“We absolutely must ensure that long-term, equitable responsible capital is available to enable small businesses to thrive and survive in Arkansas,” she said.
Nontraditional lenders like Community Development Financial Institutions that “uniquely lend to communities left behind by traditional banks” are a key part of this, she said. However, none of the minority study participants reported that a CDFI assisted them in the application process.
Seventy-one percent of white business owners received help from a banking institution, while 68 percent of minority business owners reported no one assisted them in the application process. During focus groups organized for the study, many minority business owners expressed discontent with traditional banks “perpetuating a cold, intimidating culture.”
“Some of them aren’t feeling supported by these institutions so they don’t even bother to go into them for assistance,” Cheers-Young said.
For business owners who did apply for funding, where they applied varied by race. No white entrepreneurs applied at national banks, while 37 percent of entrepreneurs did. Meanwhile, 59 percent of white business owners applied at regional banks, while only 32 percent of business owners of color reported doing so.
“It was very interesting that white business owners applied for lending at regional banks at a higher rate than minority business owners or business owners of color, but business owners of color applied at national institutions at a higher rate than white business owners,” Chears-Young said.
An additional challenge for small business owners in Arkansas is having little or no knowledge about government contracting. Half of small business owners are unaware they can compete for government contracts or are uncertain of the process, according to the report.
To address some of these issues, Chears-Young recommends supporting large-scale campaigns and initiatives that focus on generating awareness, and marketing the available state-based programs and resources accessible to entrepreneurs. The report also suggests advocating for policy change and regulations that promote the growth of startups and small businesses through fewer taxes and penalties, equitable regulations, and low-interest financing.
Creating equitable access to capital for entrepreneurs of color is a systemic challenge that will take targeted measures to address, West-Scantlebury said.
“This system was not intended to work on behalf of women and Black and Brown folks and it does not, so there needs to be some intentionality to ensuring that it does so that Arkansas small businesses can thrive in the future,” she said.