Racism and the Economy: Focus on Entrepreneurship - June 2, 2021

Sixth Racism and the Economy event focuses on challenges, possibilities of entrepreneurship


Overcoming History: Entrepreneurs of Color Forced to Confront Constraints from the Past

By Jay Lindsay

Carmen Tapio is founder of the largest Black-owned business in Nebraska. Her credit score is a perfect 850. She's so respected in the local business community that she's been chosen as the incoming 2023 chair of the Greater Omaha Chamber of Commerce.

But when it came time to get a Paycheck Protection Program (PPP) loan processed for her business during the pandemic, she couldn't find a bank to agree to it—not even the institution she'd had a banking relationship with for 32 years.

"My loan would not be processed because I didn't have credit," Tapio said.

The reason? She said that three years earlier she was inexplicably denied a line of credit for her profitable teleservices business. That decision became crucial when she sought the PPP loan.

The persistent lack of access to adequate capital for minority business owners was a major theme Wednesday during the sixth installment of the Racism and the Economy virtual series, where Tapio was a guest speaker.

The session focused on entrepreneurship and barriers that small business owners of color face in this vital segment of the economy. Speakers talked of underdeveloped networking relationships and a low commitment by corporations and policymakers to ensuring that entrepreneurs of color get better access to viable supplier pipelines.

But time and again, they came back to history and the fact that small business owners of color have disproportionately been denied access to credit. That's made it difficult or impossible to build the wealth and economic standing needed to grow a sustainable business.

"History matters," said Atlanta Fed President Raphael Bostic. "Decisions that were made decades ago in some instances...can put real constraints on the ability of entrepreneurs of particular races from participating in the systems and the programs that are out there."

But the session's keynote speaker, Wichita State University historian Robert E. Weems Jr., said history also offers hope, particularly as people look past a pandemic in which business owners of color were hardest hit. History shows, for instance, that Black entrepreneurs have always been able to "make a way out of no way," he said.

"One would like to think, considering this historic demonstration of resiliency, that today's African American small businesses will find a way to move forward," Weems said.

President Harker: Structural barriers are limiting minority entrepreneurs

In taped opening remarks, Federal Reserve Bank of Philadelphia president Patrick Harker detailed the economic importance of entrepreneurs and small businesses, which he defined as companies with fewer than 500 employees.

He said those businesses collectively employ nearly 60 million people, about half the country's private workforce. More than 8 million small businesses are owned by racial minorities.

But he noted the impressive numbers can obscure obstacles that stymie entrepreneurship by racial and ethnic minorities. For instance, he said that a lack of banking relationships causes significant problems, which became clear during the distribution of PPP funds, when 83 percent of the loans went to white-owned businesses. Compare that to only 1.9 percent of the loans that went to Black business owners.

"It's clear that profound structural barriers are limiting minority entrepreneurs from accessing capital," he said.

Speakers: Change is needed to increase financing, fix flaws in systems

Victor Hwang of Right to Start, which promotes entrepreneurship, said the estimated $30,000 it costs to start a business is a big barrier, since nearly half the country lives paycheck-to-paycheck.

We need to figure out how to get money in the hands of would-be entrepreneurs, including entrepreneurs of color who are currently being rejected at higher rates for financing, he said.

"It's fundamentally not a level playing field," Hwang said. "If you don't have enough money to get yourself out of paycheck-to-paycheck mode, how do you even take a risk to build some independence and wealth for yourself?"

Entrepreneur Kelly Burton of the Black Innovation Alliance said it's essential to increase the numbers of firms of color who become suppliers of goods and services for corporations. On average, 10 percent of corporate spending goes towards "disadvantaged" business, according to Burton. Those deals can mean direct revenues for new businesses, which are critical when businesses are starting. But she said today's corporate efforts to increase "supplier diversity" are hugely flawed.

Most corporations don't devote even one full-time staff position to it, she said. Furthermore, she added that 70 percent of corporations rely on certifying entities to designate which businesses are "disadvantaged" and are eligible to be potential suppliers. But less than 1 percent of eligible businesses are certified. In the end, the businesses that need the help aren't even considered, Burton said.

"Where's the outrage?" she asked.

Entrepreneur Monika Mantilla of Altura Capital and Small Business Community Capital, stressed that corporations "must come together to build the architecture we need to fill the capital void." But she added better access to capital is really a collaborative effort.

"Our solutions need to bring together public, private, and nonprofit sectors," she said.

Businessman Sanjay Singh of the Alabama Capital Network said that it's still true today that who you know matters more than what you know when it comes to obtaining financing. He said that must change because it's too big a disadvantage for new entrepreneurs who don't have established networks and contacts.

"At the end of the day, nobody is looking for a favor," Singh said. "All I'm looking for is an honest and good chance to present my thoughts and ideas."

Dallas Fed president Robert Kaplan said he's convinced that community and business leaders are highly motivated to take actions to support entrepreneurs of color. He added that the Fed is in a good position to bring groups together to figure out how to get it done.

To Weems, past efforts have too often been built for the short term, like the "Black capitalism" push of the Nixon administration, which he said ended up being a temporary response to urban unrest. But he said it still produced some good ideas, and we can learn from history—including by building similar initiatives to last this time.

"There have to be some programs in place that are literally there for the long haul," he said.

The Racism and the Economy series is sponsored by all 12 Federal Reserve Banks. It was created to examine the effects of structural racism and to find ways to dismantle it. Past events have looked at the impact of racism in areas such as employment, education, housing, and the economics profession,. The next event, scheduled for July, will focus on criminal justice.