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Although we’ve seen a rise in Black-owned businesses in recent years, there’s still a major disparity when it comes to Black entrepreneurship rates compared to that of whites. To be specific, as of 2017, Black or African Americans owned 2.2% of the 5.7 million employer businesses in the United States. And while there are many factors that can be attributed to this figure, commercial banks play a huge role.
“A lot of it is that there really aren’t these mechanisms in place for a lot of Black-owned businesses,” said Dr. Tiffiany Howard, a political science professor at the University of Nevada, Los Angeles. “They will start and then, within that five to seven-year mark, the business fails. That’s where we’re seeing a lot of Black businesses kind of just like tap out and they don’t succeed because you need so many things for a business to work. You need proper mentorship, the proper funding, startup capital, growth capital, then you need to have social capital, which is the community support. The Black community is generally loyal, but its really hard to get that word out. You have to have all these components in place and African-American businesses don’t usually have those resources.”
In partnership with Bank of America and the Congressional Black Caucus Foundation, Dr. Howard led a study titled Banks and the Black Community. One thing that the study explored was the level of scrutiny faced by Black business entrepreneurs who applied for business loans in comparison to their white counterparts.
“As an academic and someone who teaches in the classroom, we’re always challenged to always kind of be objective but sometimes you have to call it what it is and just say its racism. It’s preconceived notions. It’s stereotypes,” Dr. Howard told MadameNoire. “When you go into a bank and you’re like, ‘I’m a professional. I have credit. I’m obviously here because I pre-qualified or have a pre-approval from somewhere and I found the house or I am a successful graduate and I have about $40,000 in cash and I know that I probably could secure a loan up to about $750,000,’ the people who are in those spaces just don’t believe you. They are looking for a reason to deny you the loan.”
Many institutions are reluctant to bet on Black-owned businesses because they believe that they are more prone to failure.
“The assumption that African-American businesses are a bad investment is the problem right there. You come in, they automatically assume you’re going to fail within this five to seven-year period,” Dr. Howard went on. “They really don’t want to take this chance and so they’re looking for every excuse and reason not to give you a loan even though you’ll find that African-American business owners, in comparison to white business owners, have better credit and better financial profiles, but they will still be denied the loan that the white business owner would get and that’s the problem.”
As with many racial disparities that exist within the United States, Jim Crow also plays a role in all of this.
“Jim Crow has a legacy psychologically but also in practical matters. Wealth is generational and so if you put all of your wealth into your business and your home, and both have been burned down and you move somewhere else and you have absolutely nothing, then you have children that you have nothing to give to them,” Howard added. “African-Americans have not really had a proper opportunity to grow, accumulate, and inherit wealth.”
In addition to automating the lending process to minimize the chances of the approvals and denials being tainted by human bias, Dr. Howard and her research team recommend that banks invest in Community Development Financial Institutions and Historically Black Colleges and Universities.
“The partnership that I have at Bank of America is still ongoing. I mean they really are really serious and committed to helping Black businesses. They came to me and commissioned this report like we wanna know what we can do,” Dr. Howard explained. “One of the easiest things they can do is go to HBCUs. We know that even though they don’t graduate the majority of Black students, the majority of students there are Black so you know who’s going to be going to the schools. A lot of them already have some type of entrepreneurial center so invest in those entrepreneurial centers.”
Further, as a community, we can continue to buy Black.
“As far as what we can do, we can just make a commitment to buy Black-owned,” said Howard. “That’s one of the things that I do as often as I can. I think that’s one of the easiest ways in which we can help give back and help improve the situation little by little.”