CHAPEL HILL – It’s clear the federal government prioritized supporting small businesses during the COVID-19 pandemic, despite issues in the rollout and implementation of federal programs like the Payroll Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL), found a new report from the Kenan Institute of Private Enterprise and the Entrepreneurship Center at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School.
But many black-owned businesses did not have access to funds made available through the Payroll Protection Program, and recent research has found that there is documented bias in lending and systemic reasons why black entrepreneurs may choose not to use traditional banks.
The COVID-19 pandemic disproportionately affected women and minority business owners, the report found, who already faced preexisting inequities in accessing adequate resources for their businesses prior to the onset of the global coronavirus pandemic.
The Office of the Advocate for Small Business Capital Formation’s Annual Report for Fiscal Year 2020 found that 26 percent of women-owned businesses, 26 percent of Asian American-owned businesses, 32 percent of Hispanic- and Latinx-owned businesses, and 41 percent of black-owned businesses were forced to shutter during the months between February 2020 and April 2020.
That was right at the time that the PPP was supposed to help business owners prevent closure by providing the necessary funds to meet payroll and keep the economy moving.
https://wraltechwire.com/2021/04/21/small-businesses-scrambling-for-help-as-jobs-go-unfilled/
The 2021 Trends in Entrepreneurship report from the Kenan Institute found that in the early days of the rollout of the PPP, funding did not necessarily go to the firms most in need of support, as black-owned businesses received loans that were approximately 50 percent lower than observationally similar white owned businesses, though this effect seems to have disappeared over time as additional changes to the program were implemented.
“These results speak to the disconnection that can occur between those who develop policy and the agents in charge of overseeing implementation,” write the report’s authors. Research also showed that black-owned businesses tended to receive less capital than they applied for from brick-and-mortar banks, and a higher percentage of black- and Hispanic-owned businesses utilized lenders based solely online, or looked for credit unions or community development financial institutions.
One finding that could assist policymakers and government officials as they continue to structure programs to support small businesses: the use of fintech services and companies seems to “grow the pie,” said Isil Erel, the David A. Rismiller Chair in Finance and the academic director of the Risk Institute at the Fisher College of Business of the Ohio State University.
“Traditional banks base their PPP originations on past relationships and are geographically constrained by their physical branch location,” said Erel. “However, fintech expanded access to the PPP program, especially to underserved areas with lower incomes and a larger share of the minority population.”
There are policy implications to this finding, said Erel, best summarized as allowing more fintech lenders to participate in fully or partially guaranteed government loan programs, whether the region or country is in crisis or not.
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With the passage of the American Rescue Plan, which included $28.6 billion of industry-focused grants and an additional $7.25 billion for the PPP, there are additional funds allocated for a lesser known program, the Shuttered Venue Operators Grant (SVOG) program which will provide more than $16 billion in economic relief to venue operators, performing arts centers, museums, and movie theaters, as well as other targeted industries.
“The SBA knows these venues are critical to America’s economy and understands how hard they’ve been impacted, as they were among the first to shutter,” said SBA Administrator Isabella Casillas Guzman, noting that the program was designed to provide a lifeline for these businesses.
In other policy changes that may impact entrepreneurship, the SEC announced changes to its definition of an accredited investor in August 2020, including the additional of spousal equivalents, broadening the entities that can qualify to include tribal governments, rural business investment companies, and other entities with $5 million in investments, and allowing other outside thresholds or licensure as a qualifier.
But those changes may not go far enough, argued Martha Legg Miller, the Director, Office of the Advocate for Small Business Capital Formation at the U.S. Securities and Exchange Commission. Among two other recommendations Miller and her office made to U.S. Congress, she advocated for increasing the diversity among investment decision-makers to facilitate greater equity, particularly shifting the historical patterns that have negatively affected women- and minority-led businesses, potentially through the formation of smaller funds investing in regional ecosystems.
Three-quarters of small business owners took on debt to offset COVID-19 losses
“Creating racial equity in the fourth industrial revolution is the best path to close the racial wealth gap for all Americans, especially Black, Latinx and Indigenous Americans,” said Rodney Sampson, Chairman & CEO, Opportunity Hub; General Partner, 100 Black Angels & Allies Fund; and Venture Partner, Draper Goren Holm. That’s especially pressing, because if trends continue without disruption, the median wealth of a black family is projected to be zero by 2053, found the report.
There are some positive trends, according to research from Harlem Capital, which has been tracking black and latinx founders who have raised more than $1 million in venture capital. The number of firms has grown for 117 in 2018 to 305 in 2020, but only about 1 percent of all venture capital funding went to black-owned startups in the United States in 2020, and racial bias is also indicated by research in how venture funds led by black individuals are viewed by investors: less favorably than similarly accomplished white-led firms.
Women-owned firms were also largely left out of the return of venture capital investment in the latter half of 2020, the report found, with women-owned startups receiving only a small portion of all capital invested, with 7 percent of capital at the seed stage, 4 percent in early-stage, and 1 percent of late-stage investment.
