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Ask the Expert

US Census Bureau data reveal that many firms owned by people of color started in 2020 or later. What do you make of this? What does it say about the pandemic years, and what might it mean for the future?

As appeared in the Cleveland Fed Digest’s Ask the Expert

The pandemic was a unique time because a lot of people in the traditional workforce were forced to pursue other options, and for workers who wanted to become entrepreneurs, it was a natural time to do that. The Fed’s Worker Voices project, which focused on the experiences of non-degreed job seekers and workers in lower-wage roles, including people of color, at the beginning of the COVID-19 pandemic, picked up on this: Individuals wanted to take control of their careers, build something in their communities, and start businesses that become wealth-generating tools.

Unfortunately people of color who started businesses tended to face more challenges.

We know through the Small Business Credit Survey (SBCS) that regardless of owner race or ethnicity, startups—defined as businesses that are two years old or less—tend to face more challenges and have a harder time accessing credit than older businesses. We also know from 2022 SBCS data that nonwhite startups founded during the pandemic were less likely than white-owned startups to receive funds through financial institutions or lenders, even though they were just as likely to apply.

In addition, the SBCS tells us that startups owned by people of color faced challenges through the pandemic that are intertwined with race and ethnicity in complex ways.

For example:

  • Black-owned firms regardless of age had a harder time accessing Paycheck Protection Program (PPP) funding in its initial rounds than other small businesses. One possible reason is that Black-owned businesses were less likely than white-owned businesses to have relationships with banks authorized to provide PPP loans.
  • Asian-owned firms were—and continue to be—disproportionally located on the west coast, where states had more stringent responses to the COVID-19 pandemic. Those responses often had negative impacts on small businesses.
  • Firms owned by people of color are more concentrated than white-owned firms in leisure, hospitality and other service sector fields that incurred expenses for personal protective equipment and had to navigate constraining protocols for in-person contact during the height of the pandemic.

I’ll be watching how these businesses grow and how they manage today’s challenges, including higher inflation and higher interest rates on debts they owe.

I’ll be especially interested in learning more about their access to credit.

One takeaway from the 2023 Report on Startup Firms Owned by People of Color is that startup firms owned by people of color were less likely to say they received funds from a financial institution or lender. They were less likely to be approved, even when applying as often as white-owned firms. Many of these businesses want to grow. Will they be able to get the financing they need to do so? What are the factors that enable and inhibit the flow of credit to these businesses?

Some of the information needed to help answer that question will be collected in the next iteration of the annual Small Business Credit Survey, which opens in September.