An Uphill Battle: COVID-19’s Outsized Toll on Minority-Owned Firms

Exploring Possible Explanations for Why Minority-Owned Firms Face Greater Impact

Pre-COVID Conditions

Prior to March, there was reason to suspect that minority-owned firms might be ill-equipped to survive a severe economic downturn. Two recent Federal Reserve studies have highlighted the disadvantaged financial position of minority-owned firms. The Federal Reserve Bank of Atlanta’s Small Business Credit Survey 2019 Report on Minority-Owned Firms indicated that, on average, minority-owned small businesses had lower revenues than nonminority-owned firms.⁴ As figure 2 shows, for Black-owned firms, the disparity is largest. Nearly half (45 percent) of Black-owned firms reported earning $100,000 or less annually; in contrast, only 18 percent of white-owned firms reported yearly revenues of less than $100,000.

A subsequent study from the Federal Reserve Bank of New York showed that minority-owned small businesses were substantially more likely than their nonminority counterparts to report financial distress.⁵ The authors of the study categorized the 2019 Small Business Credit Survey respondent firms as financially “at risk” or “distressed” using data on the firms’ financial challenges, profitability, and business funding. The authors calculated that, in 2019, despite only 29 percent of all small businesses being either financially at risk or distressed, 58 percent and 49 percent of Black and Hispanic firms, respectively, fell into these categories (figure 3). The firms recorded as being at risk or distressed were significantly more likely to report that they would tap into the owner’s personal funds or have to close their business in response to a two-month revenue loss. These findings also suggest that the financial stresses facing minority-owned business owners might soon extend beyond the firms and into the owners’ personal finances if they use personal funds to keep their businesses open.

Industry-Level Impact

Business outcomes across industries provide insights on differences in outcomes by race. Many sources do not segment data by race of firm owners, but analyzing industries with traditionally high minority representation can offer some evidence of the pandemic’s outsized impact on minority-owned businesses.

Businesses in sectors of the economy in which workers are required to operate near customers or other workers have been more exposed to state-mandated shutdowns and the health-related consequences of the virus. A study from the Federal Reserve Bank of Philadelphia identifies six of the hardest-hit industries within the US economy; of the six, four are either sectors or subsectors with above-average minority representation.⁶ Figure 4 displays the industries with the most minority representation, with those listed as the hardest-hit in the study bolded. In all, approximately 22 percent of all minority-owned businesses fall into these high-risk industries as opposed to 13 percent of nonminority-owned firms.⁷

Similarly, a study published by the National Bureau of Economic Research, which analyzed a March survey of small businesses, provided early evidence that industries with high shares of minority firms were facing significant disruptions as a result of the pandemic. The survey asked businesses how long they could survive if COVID-19 disrupted the economy for one, four, or six months, and the authors reported results by industry. The findings indicate a more significant impact in industries that have higher shares of minority business ownership. Figure 5 categorizes the industries into high- and low-minority share industries according to 2012 Survey of Business Owners data. This exercise reveals that firms in sectors with high minority representation are less likely to expect their businesses to survive a prolonged pandemic.⁸

The findings are further supported by data from the US Census Bureau’s Small Business Pulse Survey, which suggests that early concerns among industries with the highest concentration of minority-owned firms have materialized in the form of significant financial strain. On average, these industries have been more likely than the national average to report a “large negative effect” from the pandemic as well as missed payments on loans and operational expenses such as rent and payroll.⁹ The financial impact reported by these firms raises concerns surrounding their ability to weather sustained effects from the crisis.

Limited PPP Access

The early stages of the Paycheck Protection Program (PPP)—the $650-billion fund intended to help small businesses support their employees and survive the initial financial shock of the pandemic—were addled with confusion and frustration, particularly among minority business owners.^10,11,12 While these issues weren’t limited to minority-owned firms, data suggest that these firms may have experienced outsized effects.

One reason minority-owned firms may have struggled to access PPP loans is rooted in the relationships these firms have with financial intermediaries. Upon the launch of this program, applications for PPP funds could be submitted only through previously approved SBA lenders—primarily banks. Many banks required PPP seekers to have a deposit account or an outstanding loan with the lender in order to have their applications processed. However, many minority-owned firms lack relationships with traditional banks.^13,14 Data from the 2016 Small Business Credit Survey and Federal Reserve Banks show that Black-owned businesses are half as likely as white-owned firms to report borrowing from a bank in the past five years.¹⁵ Overall, minority-owned firms are considerably more likely to use community development financial institutions (CDFIs), credit unions, and nonbank online lenders, many of which were either not certified to be an SBA lender or were low-volume SBA lenders.¹⁶ Through the end of May, CDFIs, minority depository institutions (MDIs), and credit unions collectively accounted for less than 4 percent of PPP loan volume. Though the federal government took steps in the second round of PPP funding to increase access through less traditional credit channels, issues surrounding access to the program early on may have left some minority-owned firms in a disadvantaged position during the critical early days of the crisis.¹⁷

Amid reported confusion surrounding the rollout of the PPP program, limited capacity to serve clients at some bank branches may have contributed to PPP access issues, particularly for minority-owned firms. On average, states with the most bank branches per small business have had the largest number of PPP approvals relative to the small business population. North Dakota is a key example of how an abundance of bank branches translated into more PPP approvals: North Dakota has the second-most bank branches per small business of any state and also had the most PPP approvals per small business through May 30 (figure 6).¹⁸ A Washington Post article explored the state’s success in capturing PPP funding, noting that North Dakota firms leveraged close relationships with branches to understand the processes associated with applying for the PPP and achieving loan forgiveness.¹⁹ North Dakota, however, has among the fewest minority-owned firms per business of any state, and most minority firms are located in states with few bank branches relative to the population of small businesses.²⁰ California and New York, both of which have relatively few bank branches per small business but have high concentrations of minority firms, were among the states with the fewest PPP loan approvals relative to the number of small businesses.

A combination of several factors may offer an explanation for why the COVID-19 pandemic has impacted minority-owned firms with greater severity than nonminority-owned firms and could continue to do so as concerns around the virus persist. While 2019 Small Business Credit Survey data show minority-owned firms may have been less prepared to weather an economic downturn prior to the pandemic, the concentration of minority-owned firms in industries most impacted by shutdowns and complications surrounding the PPP rollout likely exacerbated issues for those businesses.

Why the Success of Minority-Owned Firms Is Important

Sustained financial impact from COVID-19 on minority-owned firms would not just deeply affect workers and minority households but also the broader US economy. Minority-owned employer firms support almost 9 million jobs across the United States, and their role in the economy continues to grow. Between 2014 and 2016, the number of minority-owned small businesses increased 11 percent. During the same period, the number of nonminority firms increased by only 1 percent.²¹

Business ownership also serves as an important source of wealth for minority households. A study by the Association for Enterprise Opportunity shows that over three different five-year intervals, individuals who opted for self-employment experienced a growth in wealth four times larger than those who did not seek self-employment.²² For Black households, whose median wealth is one-tenth that of the median white household, business ownership may be an important step toward closing the wealth gap.^23,24

Lastly, if COVID-19 sparks a swell of permanent minority business closures, starting new firms in communities that lost businesses could prove difficult. Research from the Kauffman Foundation highlights that startup funding is more difficult to obtain for minority-owned firms; more than 70 percent of new Black, Hispanic, and Asian firms rely on personal funds and family savings to start their businesses, but white entrepreneurs are the most likely of any race to secure a business loan from a bank to start their businesses.²⁵

Implications for Policy

The COVID-19 pandemic continues to underscore the importance of detailed data in helping policymakers reach timely decisions in support of minority-owned businesses. Existing data on small businesses offer insights on key differences between minority- and nonminority-owned firms in areas such as business performance and credit access, revealing disparities that suggest that minority-owned firms are less financially secure and more exposed to the effects of an economic downturn than nonminority-owned firms. Unfortunately, many sources of small business data—including some that measure the impact of the pandemic—fail to offer details on differences across race and ethnicity, making it difficult to accurately assess the impact of an event such as the COVID-19 pandemic on some of the country’s most vulnerable businesses. Given that minority- and nonminority-owned firms face different sets of challenges and outcomes, better data on small businesses with respect to the owners’ demographic characteristics would be an important step in more clearly understanding the needs of these businesses so that policymakers can address them.

The pandemic has also highlighted the importance of nontraditional lenders such as CDFIs, MDIs, and credit unions. To the extent that gaps remain in access to funding through bank channels, policymakers could provide additional support to minority-owned businesses by focusing efforts on institutions that serve those firms. In prepandemic times, nontraditional credit sources distributed a fraction of the financing that traditional banks did, though they serve as an important source of small-dollar loans and often offer technical assistance to help small businesses, which may not have the in-house expertise of larger firms, navigate financial challenges. Providing more funding to organizations that primarily serve minority-owned firms could allow such organizations to scale up their services and build a more resilient network of minority-owned businesses nationwide. These steps would strengthen the foundation of minority-owned businesses, positioning them to recover from the current economic downturn and preparing them to weather future crises.