Why COVID-19 Has a More Negative Impact on Minority-Owned Small Businesses

May 13, 2021  |  Marcus Rothaar

Minority-owned businesses have been disproportionately impacted by the COVID-19 pandemic, with higher rates of business closures and slower rates of recovery. At the onset of the pandemic, research from Robert Fairlie at the University of California, Santa Cruz estimated the number of active small business owners dropped by 22 percent between February and April 2020. Black-owned businesses were impacted most severely, with a 41 percent drop. Latinx and Asian business owners declined by 32 percent and 26 percent, respectively. During the same timeframe, the number of white business owners dropped by 17 percent.

This racial disparity persisted as COVID-19 continued to impact small businesses for the remainder of 2020. When Raddon surveyed 1,200 small businesses in September 2020, minority-owned businesses showed signs of being more negatively impacted by COVID-19, reflected in taking actions such as temporarily closing the business, laying off employees, and reducing employee hours or benefits.

 

A Federal Reserve Bank of New York brief highlights some of the potential reasons for and causes of these differences, specifically among Black-owned businesses. A geographic concentration of Black-owned businesses in communities that experienced higher incidence rates of COVID-19 cases is one root cause. This harsh reality helps explain some other revealing findings from the Raddon survey, with minority owners generally expressing lower levels of optimism and more concerns about COVID-19:

  • 37 percent of minority business owners are extremely concerned about COVID-19, compared to 26 percent of nonminority business owners
  • Minority business owners are more likely to indicate their concern about COVID-19 has increased since the start of the pandemic, 60 percent versus 44 percent
  • 40 percent of minority owners expect their community to be in an economic downturn for a significant period of time, compared to 33 percent of nonminority owners
  • As shown in the chart below, minority business owners are more likely to have a wide variety of concerns related to the pandemic’s impact on their business

Another critical conclusion of the Federal Reserve Bank of New York’s brief was that “weaker cash positions, weaker bank relationships and preexisting funding gaps left Black firms with little cushion entering the crisis: even the healthiest Black firms were financially disadvantaged at the onset of COVID-19.” Drawing on prepandemic data, the Fed notes that Black-owned businesses are denied for loans more frequently than others, even when controlling for the financial health of the business. This funding gap is highlighted in the chart below showing financially healthy Black-owned businesses being less likely to obtain bank financing, and therefore more likely to have to rely on other sources of funding when financing needs arise.

The funding gap is even more bleak considering only 42 percent of Black-owned businesses entered the crisis in a financially stable state as measured by a mix of profitability, creditworthiness, and earnings. In comparison, 73 percent of white-owned businesses were considered healthy or stable heading into 2020 using the Fed’s same criteria.

This is reflected in the Raddon survey as well, with only 45 percent of minority-owned businesses describing their credit rating as excellent, compared to 63 percent of nonminority-owned businesses. Thirty-nine percent of minority-owned businesses also told Raddon that their firm’s financial situation was preventing them from applying for a loan that they might otherwise have applied for. Only 12 percent of nonminority-owned businesses shared the same sentiment. The Raddon findings also paint a clear picture of a need for additional funding, with 80 percent of minority-owned businesses anticipating financing needs in the coming year, compared to 50 percent of nonminority-owned businesses.

The frustration and stress of needing financing but unsure of whether the business will be able to obtain that financing is also expressed in the sentiment statements shown in the chart below. Minority-owned businesses are significantly more likely to be pessimistic about the current lending environment and the borrowing process.

The sentiment of thinking it is easier to obtain financing through an online lender has translated to actual actions that small businesses have taken. Our Raddon survey finds that 39 percent of minority-owned businesses have sought financing from an online lender that is not a traditional financial institution, compared to only 10 percent of nonminority-owned businesses.

When presented in this context, it’s no surprise that business survivability is more of a challenge for minority-owned businesses. In the Raddon survey, minority-owned businesses tended to be younger, with only 35 percent having been in operation for more than 10 years. In contrast, nonminority-owned businesses are more likely to be more established and older businesses, with two in three (65 percent) having been around for at least 10 years.

How You Can Make a Difference

2020 brought a renewed spotlight on racial inequality in America, with COVID-19 disproportionately impacting Black Americans along with the civil unrest triggered by the murder of George Floyd. While racial inequality is a complex and complicated problem, that doesn’t excuse any individual or business from trying to be part of the solution. Financial institutions are in a unique position to be a catalyst for change given their ability to directly impact the financial lives of both consumers and businesses. While by no means an all-inclusive list, here is a small starting point of things for financial institutions to consider:

Evaluate your lending programs and processes. Are there unintentional biases in place that are preventing Black and other minority consumers or business owners from seeking financing with your institution? What tracking metrics can you put in place to support initiatives aimed at increasing capital availability to minority-owned businesses?

While not solving the root of the problem, strengthening the capabilities of your institution’s online and mobile banking tools can better serve consumers or business owners who may be hesitant to open an account or apply for a loan in-person for fear of being discriminated against, or any other reason. The Raddon survey showed that minority business owners were less likely to prefer applying for a loan in-person (46 percent) compared to nonminority owners (60 percent). Minority owners were also more likely to be existing users of mobile banking (70 percent versus 55 percent) and remote deposit capture (58 percent versus 43 percent.)

Look for opportunities to partner with local organizations that provide guidance and support to minority-owned businesses.

Are there geographic barriers or other limitations in place making it more difficult for minority customers and businesses to gain access to your financial institution’s products and services?

Depending on the demographics of your markets, expand your multilingual staff and/or offer multiple language options in your online and mobile banking platforms to better serve the diversity of your markets. 

Identify ways to innovate your products and services in ways that can have more of a direct impact on closing America’s existing wealth gap, which is even more pronounced between Black and white households. This wealth gap is one of the foundational reasons why minority-owned businesses are disadvantaged at every stage of the business life cycle. Focus on designing products that build wealth and encourage savings, with an emphasis on financial literacy and education.

Use your institution’s platform and position as a community influencer to not only condemn racism, but to take actions that show your organization’s commitment to diversity and inclusion.

The last point on corporate stewardship is a personal one for us at Raddon. As part of Fiserv, we’re proud of the actions our company has taken as part of our Forward Together Plan focused on diversity and inclusion. One component of this plan is the Back2Business program, which is designed to help small, minority-owned businesses affected by COVID-19. With an investment of $50 million going toward initiatives such as grants to minority-owned businesses, along with investments in the ecosystem of community organizations serving these businesses, we’re proud to be able to support small businesses with our resources, technology and solutions. With Raddon once being a small business ourselves, it’s even more rewarding to be in a position to partner with small businesses during these challenging times.

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