Redlining, The Racial Wealth Gap, and Lack of Access to Capital

Between 2007 and 2017, minority-owned small businesses grew by 79%, about 10 times faster than the overall growth rate for U.S. small businesses during the same time frame. As the United States moves closer to becoming a minority-majority country between 2040 and 2050, more and more of the economic growth will depend on the expansion of minority businesses. But, despite leading a significant portion of the nation’s businesses, minority-owned firms are still having a much harder time accessing small business loans than their white counterparts. Minority-owned firms are much less likely to be approved for small business loans than white-owned firms. And, even if they do get approved, minority-owned firms are more likely to receive lower amounts and higher interest rates. 

The Racial Wealth Gap and a Lack of Lending

According to findings from the U.S. Department of Commerce Minority Business Development Agency, these discrepancies have made minority business owners more likely to not apply for small business loans, usually out of fear of rejection. It seems that the most common reason minority-owned firms are rejected for small business loans is a lower net worth and/or lack of assets. Wealth levels for Latinos and African-Americans are reportedly 11 to 16 times lower than for whites. Data recorded in 2016 found that white business owners start their businesses with an average of $106,720 in working capital compared to African-American-owned businesses, which are started with an average of just $35,205. Redlining, a federal government program that lasted for the late 1930 until 1968 created many of the wealth differential issues that plague the Black communities to this day. 

Banks Focus on Wealth

The racial wealth gap creates a lending environment where Banks are traditionally biased against applicants with less money to spare, partially because such applicants probably cannot offer collateral. The lower net worth of minority business owners suggests that they are less likely to own homes or other expensive assets the bank can sell if the applicant cannot pay off the debt. A lack of collateral or higher net worth often makes the bank so worried about being paid back that it is only willing to distribute small business loans that must be paid back as quickly as possible and are therefore insufficient for fostering significant growth. 

The Crowdfunding Solution

Crowdfunding in its many forms is a solution to the lack of capital issues that plagues Black-owned businesses and can contribute tremendously to decreasing the racial wealth gap that exists . The first question is what is crowdfunding and how does it work differently than the traditional financial system. Crowdfunding allows startups, small businesses, and small scale real estate developers to access capital from the crowd. There is no credit check or wealth requirements the only requirement is to have a solid business and marketing strategy and build an excited and engaged crowd. Crowdfunding turns the funding raising funnel upside down by allowing the business owner to provide all of the company information on a single platform where the masses can access the pitch deck, business plan and all of the relevant information to make the investment decision.


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