Boston – A new report from the Boston Foundation and Boston Indicators in conjunction with the Coalition for an Equitable Economy traces how systemic and interpersonal racism has held back Greater Boston’s entrepreneurs of color – and outlines a bold set of ideas for government, civic leaders, and financial institutions to work together to increase access to capital.
The report, The Color of the Capital Gap: Increasing Capital Access for Entrepreneurs of Color in Massachusetts, traces the historic lack of capital access for Black, Latino and Asian business owners - a result of a wide range of factors that have limited wealth accumulation and excluded entrepreneurs of color from many programs.
“Capital is the lifeblood of business - for hiring, facility rental, R&D, marketing, research and daily operations,” said Orlando Watkins, Vice President for Programs at the Boston Foundation. “We have a moral responsibility to address this inequity, and as we know firsthand through programs like the Business Equity Fund, when we support Black, Latino and Asian businesses, we generate powerful economic and community benefits.”
The report highlights both historical and current determinants of capital access disparities. Historical programs such as redlining that have limited the ability for families of color to buy homes and accumulate wealth also mean business owners from those families cannot invest that wealth to start businesses. As a result, entrepreneurs of color have less capital, and a growing body of research shows they are more likely to get less favorable treatment from small business loan officers. Putting these elements together creates a cycle - businesses with less capital and less access to financing are less likely to become profitable and more likely to fail, further eroding wealth and perpetuating the inequity.
The pandemic has made the unmet demand for capital, which was already estimated at $574 million or more annually in Massachusetts, even worse. Black and Latino business owners are far less likely than white owners to receive needed debt financing, less likely to have networks and banking connections to more easily secure capital, and less likely to apply for or receive funding from the Paycheck Protection Program.
“Black and Latino businesses often start from a significant financing disadvantage, with less capital on hand and less debt capital access, and the data show they are virtually cut out of the equity investment space entirely compared with Asian and white peers,” said Trevor Mattos, Research Manager at Boston Indicators, the research hub of the Boston Foundation, who co-authored the report.
In the face of challenges - a four-pronged approach for impact
The multiple issues at play in the racial disparities in capital access provide opportunities to address the problem on multiple fronts. The second part of the report highlights four general areas of impact, potentially using the unprecedented levels of federal and state recovery funding related to COVID relief efforts – including an estimated $136 million from the federal State Small Business Credit Initiative – to jumpstart solutions. Local solutions laid out in the report include:
- Increasing access to small business loans: Options might includecreating a statewide credit enhancement fund to guarantee small business loans, which would increase lenders’ willingness to lend to firms with riskier credit profiles and those that have fewer assets to use as collateral (these are often entrepreneurs of color). The state should provide grants to mission-driven funds like CDFIs to increase their capacity to make loans and provide technical assistance to entrepreneurs. A state public bank could also be established to house a portion of state revenues and partner with local financial institutions to make or guarantee a large portfolio of small business loans.
- Increasing access to equity investments, grants and alternative financing structures: Funding options like equity, grants, and alternative structures like crowdfunding and revenue-based financing can help fill gaps in capital access. Opportunities could include a state venture development fund to make equity investments in entrepreneurs of color, local economy preservation funds to save struggling local businesses that could otherwise thrive post-pandemic, or direct grant funding to provide new entrepreneurs with critical startup capital and help close racial gaps in rates of entrepreneurship. Lastly, a fund dedicated to innovative capital structures like revenue-based financing could invest in entrepreneurs of color whose firms tend to be smaller, have slimmer profit margins, and lack the growth profile of businesses best suited for equity.
- Regulating of the small business financing sector: State regulators can play roles at multiple levels to ensure that the small business financing sector better serves entrepreneurs of color, from direct investigation and enforcement techniques to expanding performance evaluations and data reporting under the Community Reinvestment Act to include race and ethnicity data.
- Increasing diversity in capital allocation roles and funding for capital providers owned and/or operated by people of color: A lack of racial and ethnic diversity among bank executives and equity investors contributes to the unequal treatment of entrepreneurs of color seeking out capital supports. Prioritizing diversity and improving data collection in the small business financing sector could shine a further spotlight on the sector. Investors and grantmakers can also increase their support by making equity investments in capital providers already owned and operated by people of color.
“There is no single solution to capital access issues,” said Matt Brewster, Principal of P2 Advisors, co-author of the report. “But each dimension of the problem also has several ways it can be addressed – using both short-term and long-term solutions to close the capital access gap.”
“The time is now for action,” said Karen Kelleher, Executive Director of LISC Boston and a co-chair of the Coalition for an Equitable Economy. “We live in an era when the inequities of many systems are in the spotlight, and when there are unprecedented federal and state resources available to address the harm the pandemic has disproportionately done to communities of color. If our leaders fail to act now, it’s a willfully lost opportunity.”
And Corean Reynolds, Program Officer for Equity and Inclusion at the Boston Foundation, noted, “These are smart, driven innovators and entrepreneurs with ideas and often proven business models. We owe them the access and opportunity to succeed, so they can become the community job creators and forces for growth they’re ready to be.”