Written by Gary L. Cunningham, President & CEO of Prosperity Now
COVID-19 has ripped through the American economy like a tornado, leaving financial havoc in its wake. The racial economic divide has long been suppressed in the nation’s equal opportunity narrative. The dual crises — social unrest and COVID-19 — mean the full story can be censored no longer.
But out of chaos comes opportunity. We have a chance to build a new economy — one that serves all Americans. We should avoid the urge to just reassemble all the old pieces, and instead, truly build an inclusive economy that gives every one of us a chance to prosper.
Take small businesses, the engines of growth in employment and wealth in communities where people of color live. They are the frontline casualties of the pandemic. Where the Great Recession reduced the number of small businesses by 5%, COVID-19 has already walloped 22% of them — including 41% of Black-owned businesses — and economists fear even more won’t survive.
That’s the kind of setback to the economy that we can’t allow if there’s any prospect of closing the racial wealth divide.
As is often the case in times of crisis, big businesses elbowed their way to the front of the line when the federal government began to hand out pandemic-inspired assistance. While there’s no question that many of them deserve support, we shouldn’t overlook small businesses, which account for 48% of private-sector jobs nationwide.
Entrepreneurs operating closer to the ground in communities where people of color live can have a remarkable multiplier effect in saving jobs and preserving the economic security of families.
Black business owners have 12 times more wealth and a higher level of wealth mobility than Black wage earners. They also are more likely than whites to hire Black people.
Most of these businesses fall into what is known as the “Missing Middle”: they are too large for microfinance, too small or risky for traditional bank lending and lack the potential sought by venture capitalists (only 1% of venture capital went to African American and Latinx entrepreneurs in 2016, despite the rapid growth rate of business owners who are people of color).
These businesses often populate the manufacturing, retail and service sectors. Too often, they can’t get the capital they need to expand, compete and sustain themselves in challenging economic times.
Before the pandemic, the American economy was in startup mode, as businesses that are less than five years old created nearly all the net new jobs, even in economic downturns. More than half of all American startups valued at $1 billion or more were founded by at least one immigrant, and immigrants are twice as likely as native-born Americans to start a business.
As we survey the economy’s winners and losers, these are trends we want to revive and encourage.
A study by the Kauffman Foundation titled “Start Us Up: America’s New Business Plan” outlines a four-pronged strategy to promote entrepreneurship. The report describes the constructive role that each stakeholder can play in promoting entrepreneurs. The premise is that anyone with a good idea should have access to opportunity, funding, knowledge and support so their dream can become a reality.
Access to opportunity includes leveling the playing field for entrepreneurs so they can compete with existing ventures, and slashing red tape, which is often cited as an impediment to business development.
Entrepreneurs — and especially entrepreneurs who are people of color — also need access to capital for periods long enough for business development in underserved communities, many of which aren’t near either American coast.
Policymakers can make a difference by connecting business owners with experienced or knowledgeable people who can show them the ropes and teach them skills they will need to survive in the sector.
Finally, rules and regulations can be an impediment to entrepreneurs. Policymakers should eliminate those that discourage risk-taking so that budding entrepreneurs dare to leave stable jobs and salaries to become leaders in innovation.
Still, there’s no substitute for the kind of aid that the federal government has been making available to tide businesses over as they absorb the shocks inflicted by the pandemic.
One of the most effective vehicles for distributing capital and supporting promising entrepreneurs is the system of Community Development Financial Institutions (CDFIs), nonprofit lenders that operate in all 50 states and the District of Columbia and are dedicated to delivering responsible, affordable loans to low-income, low-wealth people and communities.
CDFIs have played an important role in shoring up capital for business owners who are people of color, and there’s significant capacity for expansion.
Saving minority-owned small businesses will cushion the inevitable economic blow that people of color will suffer because of COVID-19. That would make for a stronger economy, benefiting us all.