Fed report: Entrepreneurs of color grow in number, still struggle to get financing

Despite their rising numbers, entrepreneurs of color are still much less likely than their white counterparts to get approved for financing, according to a new report issued by the 12 Federal Reserve Banks.

A few highlights from the 2023 Report on Startup Firms Owned by People of Color: Findings from the 2022 Small Business Credit Survey:

• Data from the US Census Bureau’s Current Population Survey show that since January 2020, the number of incorporated, self-employed workers of color rose by 13 percent. Over the same period, the number of incorporated, self-employed white workers fell by 6 percent.
• Compared to white-owned startups, startups owned by people of color are often smaller and in weaker financial condition. But even among startups deemed a low credit risk based on self-reported credit scores, entrepreneurs of color were more likely to be denied at least some of the financing they sought.
• Startups owned by people of color were significantly less likely than white-owned startups to have applied at a small bank, even when controlling for geography.
• Despite those challenges, startups owned by people of color were more likely than white-owned firms to say they planned to add employees over the next year.

Lenders consider factors other than company size and credit scores. More research is needed to understand the root cause of such disparities, according to the report’s authors, Lucas Misera of the Federal Reserve Bank of Cleveland and Emily Ryder Perlmeter of the Federal Reserve Bank of Dallas.

“Given that people of color are an increasingly large share of the self-employed, and that startups of color are more likely than their white-owned counterparts to indicate a desire to grow, a focus on closing these gaps will only become more important,” they wrote in the report.

Read the full analysis — The 2023 Report on Startup Firms Owned by People of Color: Findings from the 2022 Small Business Credit Survey.

See charts for more firms, not just startups — The 2023 Firms in Focus report includes charts for all survey respondents with at least one employee. Select “Race and ethnicity” for data on firms owned by people of color.

About the Small Business Credit Survey (SBCS)

The Small Business Credit Survey collects information about business performance, financing needs and choices, and borrowing experiences of firms with fewer than 500 employees. These firms represent 99.7% of all employers.

Responses to the SBCS provide insight into the dynamics behind lending trends affecting small businesses. The results are weighted to reflect the full population of small businesses in the United States. The SBCS is not a random sample; results should be analyzed with awareness of potential methodological biases.

The SBCS was fielded from September through November 2022 and yielded nearly 14,000 responses from all 50 states and the District of Columbia.