Today in the US, a typical white family has nearly ten times more wealth than a typical Black family, reflecting the cumulative effects of inequality and discrimination over many generations. To make matters worse, that gap is widening, not narrowing. One of the best ways to close that gap is to grow Black-owned businesses, because those businesses not only generate wealth for their owners, but also bring jobs and economic vitality to Black communities. How are those businesses faring?
The short answer is: not well. According to Census Bureau data, there was only modest growth in the number of Black-owned employer businesses (those with more than one employee) as a percentage of all employer businesses over the past several decades.
Black-Owned Businesses as a Percentage of All Businesses
And, as the above chart shows, even that limited progress was dramatically reversed during the Great Recession, wiping away all gains made since the 1970s. Moreover, there’s evidence that those losses have been further compounded by the pandemic. A study by the National Bureau of Economic Research found that 41 percent of Black-owned businesses—some 440,000 of them—shut down between February and April 2020, compared to just 17 percent of white-owned businesses.
Meanwhile, there has been little progress in getting new Black entrepreneurs into and through the pipeline to create new Black-owned businesses. Kauffman Foundation data suggest that the number of new Black entrepreneurs as a percentage of all new entrepreneurs has remained fairly constant for the past couple decades (and for Black men, for the past 100 years), while the failure rate for Black entrepreneurs has remained twice that of whites.
New Black Entrepreneurs as a Percentage of All New Entrepreneurs
Moreover, the vast majority of new Black entrepreneurs that do stay in business never hire any additional employees. Typically, 95 percent of Black-owned businesses remain non-employer businesses, compared to 78 percent of white-owned businesses.
That hasn’t always been the case. During the 1920’s, what some consider to be the “Golden Era” of Black business, there were thriving Black business districts in cities all across the country. Tulsa’s “Black Wall Street” is just one of countless examples. During this period, Black consumers spent an estimated one-third of their disposable income at Black businesses, whereas today it’s around 2 percent. However, much of the success of these Black-owned businesses was due to Jim Crow laws that made Black consumers a protected market. We clearly don’t want to recreate those conditions.
Another important era was the 1960s, when the Civil Rights Movement spawned efforts to grow Black-owned businesses in an effort to expand opportunity and to revitalize low-income communities. That led to the creation of Community Development Corporations (CDCs), whose numbers later expanded dramatically as foundations and the federal government increased their support. However, during the 1970s, the focus of most CDCs shifted to housing and real estate development and has largely remained there.
Also in response to the Civil Rights Movement, the Nixon administration promoted “affirmative action” for Black-owned businesses and created what later became the Minority Business Development Agency (MBDA). The MBDA has had some success in helping Black-owned businesses gain greater access to federal contracts. However, the agency’s efforts have been hamstrung by Supreme Court decisions limiting affirmative action, and by limited funding, which has fallen steadily over the past several decades. In addition, the MBDA has ended up narrowly focusing on businesses with revenues of at least $1 million annually, in high-growth areas, or with rapid growth potential in such areas as technology and bio-medicine. There are currently calls to revamp the MBDA and substantially increase its funding to address these shortcomings.
But even if these federal programs had been wildly successful, they would have been no match for much larger forces at work in the Black community over the past several decades. One has been urban renewal, which wiped out entire Black neighborhoods with highway construction and downtown development projects. Altogether, at least 550 square miles of US cities were razed by urban renewal projects in the 1950s and 1960s. By 1963, an estimated 39,399 businesses had been displaced, and over a third of them shut down entirely. Meanwhile, urban renewal efforts continued for another 11 years.
Another force has been desegregation, which proved to be mixed blessing for Black-owned businesses. When white businesses began to actively seek Black customers, who had pent up demand for what they considered to be superior white goods and services, Black-owned businesses, unable to penetrate the white market, were left with a shrinking customer base.
In addition, as white businesses began to actively recruit Black employees, Black-owned businesses were left with a shrinking talent pool. For example, during the 1990s, as mainstream insurance companies lured away top talent from Black-owned insurance companies, the number of Black-owned insurance companies, once a mainstay of Black Wall Streets across America, fell by 68 percent.
A third force at work, abetted by federal inaction, has been increasing market concentration, which has hurt all independent businesses, but has disproportionately hurt Black-owned businesses. As large retailers and financial institutions have come to comprise an ever-bigger slice of the national economy, the possibility of starting and maintaining an independent business has dropped significantly. Black-owned businesses have been particularly vulnerable to competition from major retail chains, which have often acquired them or driven them out of business. To make matters worse, Black-owned retail businesses have been particularly hard hit during the pandemic.
And last, but by no means least, have been discriminatory lending practices. Black entrepreneurs face much more stringent requirements to receive bank loans, they are turned down at more than twice the rate of their white counterparts, and when they do get loans, they are typically required to pay higher interest rates and receive smaller amounts. That pattern came into stark relief during the pandemic, when it was reported that white businesses were twice as likely as black-owned businesses to receive Paycheck Protection Program (PPP) loans, despite similar application profiles.
These lending practices can’t be easily explained by any objective differences between Black and white business owners. In fact, a recent Census Bureau study found that Black business owners report even stronger motivations for starting a business and higher aspirations for their business to grow, and have more advanced degrees, than white business owners. Similarly, a Gallup assessment found no statistical differences between Black and white entrepreneurs in key characteristics that predict success, such as appetite for risk, creativity, and determination.
The absence of Black-owned businesses clearly doesn’t stem from a lack of will or determination or capacity on the part of Black entrepreneurs. What, then, will it take to grow more Black-owned businesses capable of closing the racial wealth gap?
A number of organizations have concluded that the key is to focus on creating and supporting more high-growth Black-owned businesses, particularly in the innovation economy. Those businesses not only create the most wealth for their owners, but also create the most and best jobs for the Black community. Other organizations are focused on helping existing Black-owned small businesses break into local supply chains of large corporations and anchor institutions, filling gaps in the regional economy.
These two segments of the Black business community clearly have the most potential for wealth creation. However, they currently represent only a very small slice of the Black business community, which has been shrinking over all for the past several years.
In addition, the businesses in these two segments require the longest lead times to come to fruition. Research by the National Bureau of Economic Research found that the founders of successful, high-growth businesses tend to be much older and more experienced than the average entrepreneur, with the success rate of those businesses rising dramatically with the age of the founder. Similarly, experience suggests that the businesses with the most potential to break into local supply chains tend to be well-established in their particular market.
If Black-owned businesses are to realize their full potential to close the racial wealth gap, there will need to be a lot more Black founders in the pipeline gaining experience and a lot more Black-owned businesses in the pipeline getting well-established, along with a lot more new Black entrepreneurs coming along behind them learning how to start and run a business.
I’ve come to the conclusion that this will require revitalizing Black business districts, which have historically been the wellspring and training ground for Black-owned businesses, as well as the supplier of role models and mentors so vital to the success of new Black entrepreneurs. The demise of Black business districts over the past century has removed critical middle rungs from the ladder that Black entrepreneurs must climb to grow successful and rewarding businesses.
Rebuilding Black business districts will require a large-scale, sustained, multi-generational effort. More Marshall Plan than microlending. Federal economic recovery planning and funds can help jump start this process, but ongoing support from local governments will be needed to sustain funding and to reform policies and systems that get in the way.
If successful, these revitalization efforts could usher in a new “Golden Era” for Black-owned businesses, one in which thriving Black business districts not only bring jobs and economic vitality to Black communities but also serve as engines of growth for regional economies.
Pete Carlson is president of Regional Growth Strategies and a board member of Forward Cities, a national nonprofit equipping communities and regions to grow and sustain more equitable entrepreneurial ecosystems.