Black-Owned Businesses at Disadvantage with Access to Capital
- Apr 19, 2017
- 5 min read
My research on Minority-owned small businesses found that there are disparities in the amounts of capital small Black businesses receive as opposed to White small businesses.
According to the Small Business Administration(SBA) Lending Statistics for Major Programs, 28% of SBA loans go to minority-owned businesses but only 2% of SBA minority loans go to Black-owned businesses. (See Table 1) There are clear disparities in who is receiving loans from SBA. The defense that SBA takes is that the problem lies with the bank, which they don’t regulate. The question is why are small Black businesses left out of the funding and loans for their businesses?
Although minority businesses are increasing, they still face the challenge of access to capital which is hindering business growth. According to Forbes.com, Black-owned small businesses are the most likely to experience higher borrowing costs, receive smaller loans and see their loan applications rejected.
According to an SBA report, minority-owned businesses have a harder time securing loans compared to White small businesses.
There is the argument that Black small businesses don’t have the financial health and established relationships with banks in order to lock down a loan.
When I visited The Small Business Development Center (SBDC) at Florida A&M University (FAMU), I spoke with the Associate Director, Aundra’ McGlockton. McGlockton believes we have to take care of our financial health before we can compare disparities.
“It starts early on where we think the things we do financially don’t have consequences,” said McGlockton. Later on when we try to start a business or get a loan those things you haven’t taken care of reappear.”
There are four main factors to consider when trying to secure a loan. First and foremost, a decent credit score is needed. Banks analyze personal and business credit scores to make their decisions and set interest rates. The second factor needed is money to put down on what you borrow. The standard amount to put down is 20% of the loan’s amount.
Next, collateral is needed to secure a loan. In case the loan is not repaid, physical property, investments, etc. guarantee the bank with something to fall back on. The amount a bank will lend depends on the value of your assets. Lastly, banks need to see an ability to repay the loans with future income. Most banks want to see income at least 1.3 times the amount of the service you have monthly, according to McGlockton.
McGlockton admits that the disparities exist in terms of when it comes to financial institutions’ grading.
“There are decisions made sometimes that lead people to think that just because someone is African American, they won’t repay the loan,” said McGlockton. “It’s so important for the government and elected officials to make sure credit institutions are standing behind the laws of the country stating that there should be no discrimination.”
McGlockton’s best advice to Black entrepreneurs is to not put all your eggs in one basket. “Getting a loan is like getting a car, you shop around.” McGlockton also urges Black entrepreneurs to come to a neutral party, such as the SBDC at FAMU to receive preliminary advisement and help with securing a loan. “Here at the SBDC, we’ll make sure you are up to standard and match you with a bank that we think is more suited for you to get a loan through,” said McGlockton.
With the difficulty of securing a loan through the SBA, Black entrepreneurs in Tallahassee have found lending alternatives that are not biased and challenging.
Alison Adejokun, owner of “Tokun”, a shop that sells Women’s clothing and accessories knows the difficulty of applying for a loan through the SBA. “A traditional business loan, when you’re just starting, is out of touch because when applying they ask how long you’ve been in business,” said Adejokun. “That’s the challenge because you’re just starting out and they want to see good credit and collateral.”
Adejokun has run into many financial obstacles since starting her business 3 years ago. “I did run into some challenges where I made money on the jewelry but I found out that selling just jewelry didn’t give me much wiggle room to make a profit,” said Adejokun. “I was maintaining but didn’t have enough to buy more merchandise.”
Adejokun has found a non-biased, flexible way of receiving a loan for her business. “I operate from Square Capital. They reached out to me and asked if I needed capital and I took it,” said Adejokun. “The process of getting capital is streamlined so they just look at the history of your business and don’t ask any other questions.”
Square Capital was launched in 2014 to offer cash advances/loans to businesses using credit card payments for businesses who need cash fast and may not qualify for a loan from a bank. Merchants receive a full payment with an agreed upon percentage of future sales as a fee. The breakdown of how it works (See Table 2).
Square takes 13% of Adejokun’s every day sales and Adejokun says she almost forgets that she’s even paying back a loan. “I would recommend Square Capital because the payment plan is friendlier and they also monitor my business growth and in one year my sales have increased by 586%,” said Adejokun.
Jasmine Leslie, the owner of Sworlz Dessert Art Bar also takes advantage of Square Capital. Sworlz is also a fairly new business started in 2014 and currently located at Governor’s Square Mall in Tallahassee, FL. Leslie runs into financial obstacles often and Square Capital has helped relieve financial burdens.
“Every time I run into financial struggles, it is a struggle,” said Leslie. “There are ups and downs which is the reality of business but it’s still the financial hurdles that stop you from operating at full capacity.”
When searching for outside funding, Leslie already knew that traditional lending was out. “Traditional lending is pretty much nonexistent so I have reached out to credit card lenders,” said Leslie. Leslie uses American Express Small Business Loan Financing Program through Square. Leslie also pays back on her loans every day conveniently.
“They don’t check credit or anything. It is just based upon your transaction history with Square,” said Leslie. Leslie highly recommends Square because it understands entrepreneurs like her that started out with nothing. “People in my generation know about Square as an alternative to get loans,” said Leslie. “Young people like myself don’t have assets and much collateral. Square has provided us with the opportunity to grow and expand the business with quick loans. “
When it comes to other disadvantages unique to Black businesses that might contribute to lack of funding, both small business owners agree that not being knowledgeable about business is a downfall.
“A lot of people going into business aren’t totally educated. There are particular things they ask for when seeking funding and you need to know your numbers.”
The future of securing loans for small startup businesses that might be too small for banks but are still in need of funding to grow is with Square Capital. With its’ convenient repayment option and fast turnaround time, it makes a lot of businesses interested. According to Square Capital, it extended more than $400 million on 70,000 loans with 90% of their users accepting a second loan offer.
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