by Tk Matsabu, Research Fellow
As the U.S. battles the uphill journey of economic recovery during the COVID-19 pandemic, minority businesses face additional barriers to recovering from the economic and financial impact: lack of access to federal government loan assistance. A survey of minority businesses conducted by Global Strategy Group, found that only 12 percent of minority business owners received federal assistance – even after the second round of payments were distributed. And in an April report by the Center for Responsible Lending found that 90 percent of minority owned businesses “stand close to no chance of receiving a PPP loan through a mainstream bank or credit union.”
COVID-19 is putting the issue of financial inclusion in the spotlight. Due to discriminatory lending practices by traditional banking institutions and a history of structural redlining wherein banks refused to lend to communities of color, minority businesses already struggle to access loans. By using banks to distribute CARES Act financial aid to small businesses, minority entities lost out as many lenders stuck to only serving their existing customers.
Exclusion from COVID-19 financial assistance is having a devastating impact on minority small business and will make economic recovery for communities of color more strenuous. In addition to the fact that minority populations are disproportionately dying from COVID-19 at higher rates, research from the National Bureau of Economic Research found that 41 percent of black businesses have been destroyed since February. For context, the overall number of small business owners has declined 35% in the same period.
While Congress included language urging lenders to prioritize women-owned, minority, and rural businesses in the CARES Act, a report by the SBA’s Inspector General revealed that the SBA did not take efforts to comply with that stipulation. As a result, the report states, “These borrowers, including rural, minority and women owned businesses, may not have received the loans as intended.” Federal government assistance also prioritized businesses that had employees, highlighting another setback as most minority businesses tend to be sole proprietorships.
A 2016 study by the Stanford Institute for Economic Policy Research revealed that only 1 percent of small minority businesses receive a bank loan in their first year of operation compared with 7 percent of their white counterparts. “Black-owned businesses continue to rely on family loans to a greater degree than white-owned firms in the three years following the firm’s founding,” commented the researchers. “This suggests that access to formal debt channels remains limited for minorities.”
Community Development Finance Institutions (CDFIs) cater to unbanked minority populations, sourcing funding from charitable donations and government. However, only 78 of 950 CDFIs are allowed to distribute government COVID-19 aid as many of them remain unapproved by the Small Business Administration (SBA) to administer loans. No guidance was given by the SBA to these community institutions on how to participate, and the approval process renders CDFIs unable to capitalize on the emergency loan program.
Local non-profits and economic development organizations focused on uplifting disadvantaged minorities are stepping in to fill the gap. For example, in Buffalo New York, the Westminster Economic Development Initiative in partnership with NeighborWorks Buffalo created the Neighborly Fund which is distributing over $200 000 grants to minorities. The initiative tapped into the corporate social responsibility unit of KeyBank to help distribute the funds.
Local governments are recognizing the need to prioritize minority businesses in local economic recovery. For example, in St Louis Missouri where the George Floyd Protests erupted, the St Louis County Executive has established an Economic Rescue Team, comprised of local economic development, health, education, and business leaders to advise on how the county can be more efficient in supporting COVID-19 economic recovery. The task team includes a working group solely dedicated to advisory on how to support minority and immigrant-owned businesses.