Investing in Black-Owned Businesses

Small business is one of the big economic engines in the U.S., with nearly half of all workers employed by one of the approximately 32 million small companies nationwide.

And while the Covid-19 pandemic has caused economic turmoil, including the closure of many businesses and massive job losses, it has also sparked a small business boom, particularly in Black communities across the nation. 

Yet Black-owned businesses face unique challenges with funding and survival rates. While 20% of Black Americans reportedly start businesses, only 4% survive past the start-up phase. Just as important, Black entrepreneurs experience a big funding gap and start their businesses with a median $35,000 compared to a median $107,000 for white entrepreneurs, according to a report from McKinsey & Company, the consulting firm.

As we celebrate Black History Month, we examine the strength of Black entrepreneurship and offer some ideas for how to support Black-owned businesses.

The pandemic and small business

Covid-19 has contributed to a boom in small business creation generally. Massive layoffs may have forced more U.S. consumers to consider starting their own businesses out of necessity to earn money. Simultaneously, increased money from various stimulus payments, unemployment, and severance packages have provided more people with means to launch new companies. In fact, from March 2020 to June 2021, a record number of Americans started businesses, with 440,000 people starting their own ventures in June 2021 alone.

In 2020, the percentage of businesses created out of necessity, meaning created by an out-of-work person, increased to 30% from 19% in 2019, according to the New York Times.

Throughout the pandemic, unemployment has affected Black Americans more than any other racial group. The unemployment rate among Black Americans stood at 9.2% in June 2021, compared to 5.9% for all Americans. And yet, the number of Black-owned businesses increased 38% since February, while the number of white and Asian-American entrepreneurs fell 3% and 2%, respectively. Latinx-owned businesses increased 15%. 

Black-owned businesses in the U.S.

There are approximately 135,000 Black-owned businesses in the U.S., according to the U.S. Census Bureau. These businesses employ about 1.3 million people, and have total annual receipts of about $133.740 billion annually. About one third of Black-owned companies operate in the health care and social services sectors, according to the Census Bureau. 

Other sectors where Black-owned businesses tend to concentrate include professional, scientific, and technical services, administrative support, construction, transportation and warehousing, according to the McKinsey report. 

On a more local level, Georgia is home to more Black-owned businesses than any other state, and New York City is the U.S. city with the most Black entrepreneurs.

The funding gap for Black-owned businesses in the U.S.

While Black Americans account for 14.2% of the U.S. population, Black-owned companies make up 2.2% of the 5.7 million employer businesses, which are companies that employ more than one person, according to a study by the think tank Brookings.

Source: Brookings, 2020

If the number of Black-led businesses were proportional to the number of Black Americans, these companies would bring in higher revenue and provide more employment opportunities for Black workers, according to Brookings. 

But a lack of proper funding and other systemic issues may prevent this growth from happening. Many entrepreneurs rely on real estate collateral to fund their businesses, but homes in Black neighborhoods are reportedly undervalued by $156 billion. This undervaluation is due in part to the lingering effects of redlining, which is the illegal practice of denying mortgages to people, usually people of color, from certain neighborhoods. Today, Black homeowners are four times more likely to live in a formerly redlined neighborhood than a neighborhood outside of those lines. 

Additionally, white business owners are twice as likely as Black and Latinx business owners to get full approval for financing from financial institutions and elsewhere. That trend has reportedly continued during the pandemic. In 43% of cases, white entrepreneurs received more favorable treatment than Black entrepreneurs did from lenders, when applying for the Paycheck Protection Program (PPP), according to a study by the National Community Reinvest Coalition (NCRC). The PPP was enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small businesses.

Investing in Black entrepreneurs 

Currently, some Black-led businesses trying to get off the ground rely on funding from non-profit organizations, private investors, or crowdfunding platforms. The Small Business Administration (SBA) also offers resources, including training, development, and funding specifically for minority-owned businesses. 

In some cases, when you invest in companies through a crowdfunding platform, you can get a small piece of ownership in the company, which can be valuable if the company goes public or gets acquired. Seed at the Table, for example, is a crowdfunding service that was founded by people of color, and allows accredited and non-accredited investors to connect with Black-led start-ups and gain equity in them through investing. Non-accredited investors, who are people who don’t meet income or wealth guidelines outlined by the Securities and Exchange Commission (SEC) face restrictions on what they can invest in, and are limited to certain types of securities. Accredited investors, on the other hand, meet certain criteria set by the SEC, and can take on riskier investments. 

Other ways to get involved 

For those investors who’d rather put their money in the stock market, you might research which public companies are supporting Black-led businesses or have diversity and inclusion policies that you support. Additionally, you can look into ESG ETFs that specifically hold investments in black-owned business or support racial justice.

If you’re an entrepreneur yourself, you might also want to invest your time or talents instead of your money. Consider volunteering for mentorship programs, or hiring Black-led businesses for supplies and services you need. 

Stash can help you build a solid financial foundation, whether you want to invest, or save towards starting a business of your own. You can invest in stocks, bonds, and exchange-traded funds on Stash with just $1.

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