Closing the Credit Gap: Access to Capital for Black Entrepreneurs
Black-owned businesses are growing rapidly, but access to capital remains one of the biggest barriers to long-term success. From historic inequities in lending to modern funding gaps, Black entrepreneurs continue to navigate an uneven financial landscape while building resilient businesses.
Black-owned businesses are growing in number and exploding with revenue, according to the U.S. Census Bureau’s Annual Business Survey. Black entrepreneurs cited greater financial independence as a primary reason for being business owners. Despite these facts, Black businesses still make up a small share of the overall small business population. One large factor is access to capital for Black entrepreneurs.
Barriers to Accessing Capital as a Black Entrepreneur
Racial Inequities in Access to Credit
As is true for many systems in the United States, research shows that Black entrepreneurs have historically received less financial support than their White counterparts; half of Black-owned businesses have unmet funding needs, compared with just 34% of White-owned businesses. For those who did seek financing, only 7% of Black entrepreneurs received all they needed compared with 11% of White entrepreneurs. In addition, Black-owned start-ups receive only about 1% of venture capital each year. As a result, many Black entrepreneurs end up funding their businesses with personal savings, further reducing their “financial stability” in a bank’s eyes.
Historical Barriers to Financial Support
Systemic barriers to financial support for Black families and business owners not only change the availability of funds, but they also change an individual’s willingness to even take a risk with financial institutions. For many Black entrepreneurs, trusting banks and financial institutions can be a bigger gamble than trying to find different sources of funding.
In a 2023 survey of 180 Black-owned businesses, 72% said they were debt averse. The two most common reasons why? Historical mistrust of the banking system and uncertainty about the logistics of the loan process. Both of these barriers to taking on debt and accessing financial support come from historical underrepresentation at the financial table.
Tips for Securing Financial Resources for Black Businesses
Despite historic barriers to accessing credit and securing funding for small businesses, Black entrepreneurs have continued to enter the global marketplace at a rapid clip. For those business owners looking to improve business credit or increase the odds of securing funding, here are important tips and first steps.
Create a Solid Business Plan
A robust business plan is essential for accessing capital. Loan terms will vary depending on your need for the money. A business plan will outline whether your request is for start-up costs, daily operating expenses, or business scaling. Your business vision and roadmap for success are also key parts of a good business plan. The research and effort you put into this component can help secure a loan, and it is often overlooked when new entrepreneurs hit the ground running.
Look for Industry-Specific Funding
In many cases, certain industries have access to loans designed to support entrepreneurs in those fields. Check with large financial institutions and national organizations to see which areas are in high demand. If your business is adjacent to one of these categories, update your business plan to include keywords and performance goals that will match that industry’s standards.
Partner with Other Organizations
Closing the credit gap is often easier when individual businesses partner with community organizations or other entrepreneurs. Local churches and clubs can offer vital resources that can help you reduce overhead and present a more favorable financial picture to banks and credit companies. Space, equipment, supplies, and volunteer hours are some of the most common resources available from community organizations.
Start with Smaller Steps
Many financial institutions and organizations offer a range of loan options for small business owners. Everyone from local credit unions to international financial corporations has divisions that work directly with small businesses. As a business owner, it can be easier to qualify for a small loan amount and work your way up to a larger sum after demonstrating your company’s viability. Organizations like Ascendus and the NAACP work specifically with minority entrepreneurs to provide access to capital in amounts starting at just $500.
Consider Funding Beyond Loans
While loans from credit unions, banks, or other financing institutions are the most common way for business owners to secure funding, there are alternatives that can help close gaps and build a financial portfolio.
Apply for Grants
Grant funding is competitive, but it also allows Black business owners to secure funding that aligns with the company’s vision and mission. While loans must be repaid, grants do not (though many come with additional requirements, such as reporting and community involvement). Writing grant applications can be tedious and time-consuming, but having a solid business plan as a starting point makes the process easier. Check this Forbes list of grants geared toward Black-owned business owners for a place to start.
Research Business Credit Cards
Business credit cards can offer a good path to closing the credit gap for Black entrepreneurs. While credit cards won’t offer as much capital as loans, they can be a consistent way to build your credit score and demonstrate smart financial planning. Demonstrating a history of on-time payments and responsible business spending can help secure a loan in the future.
Invest in Mentorship and Education
Getting financial education and mentorship is one of the best ways to improve access to capital for Black entrepreneurs. Many financial institutions can take advantage of clients who don’t have extensive training in management, marketing, or business planning. Local and national organizations offer training courses at a range of prices. The U.S. Small Business Administration has training, counseling, and resource options for minority-owned businesses across the country. By completing courses and finding mentors, your next loan application process will be less stressful and more successful.
