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Minority-Owned Small Businesses Face Increased Inequities during COVID-19

by The Neighborhood Entrepreneur Law Project July 22, 2020

The article was written by the Neighborhood Entrepreneur Law Project’s Legal Intern Cassandra Pereda.

Businesses across the United States have been financially impacted by COVID-19. Many businesses have had to close their doors or have seen decreased revenue since March, when COVID-19 cases started to increase throughout the U.S. Although all types of businesses and people have been affected, the worst impacted have been minority-owned small businesses.

The pandemic has exacerbated the historical inequalities that impact people of color. For instance, a national analysis of minority-owned small businesses estimated that between February and April 2020, 41 percent of Black-owned businesses, 32 percent of Latinx-owned businesses, and 26 percent of Asian-American-owned businesses closed either temporarily or permanently, compared to 17 percent of white-owned businesses that closed, highlighting, the disparate impact COVID-19 has had on small minority-owned businesses.

COVID-19 has disproportionately affected minority-owned small businesses because they often face underlying issues, such as poor financial health, that make it harder for them to run and maintain a business during a pandemic. Prior to the pandemic, in an assessment of the financial health of companies, the Federal Reserve Bank reported that “minority-owned small businesses were significantly more likely to show signs of limited financial health—by factors such as profitability, credit scores, and propensity to use retained earnings as a primary funding source.” These minority-owned businesses were twice as likely to be classified as “at risk” or “distressed” than nonminority-owned small businesses. Distressed businesses are three times more likely than healthy businesses to close because of a two-month revenue shock; such as the one caused by the pandemic. Furthermore, according to McKinsey’s US Small Business Pulse Survey: 58 percent of minority-owned small businesses are “extremely” or “very concerned” about the future financial viability of their business.

Further, many minority-owned small businesses are in industries more susceptible to the disruption caused by the pandemic. For instance, service industries, including accommodation, food services, and retail have been highly disrupted. These services typically require physical proximity to others and are less likely to be delivered remotely. The inability to deliver such services remotely makes it difficult, or even impossible, for these businesses to survive during the pandemic.

Based on the aforementioned data, minority-owned small businesses have been and continue to be highly vulnerable during the pandemic; they need help from the private, public, and social sectors. Such assistance has to address the long-term needs of minority-owned businesses to ensure their longevity and success. The public sector, through the Paycheck Protection Program (PPP) has provided some relief to small businesses and their employees. However, an April 6th report from the Center for Responsible Lending found that roughly 95% of Black-owned businesses, 91% of Latinx-owned businesses, 91% of Native Hawaiian or Pacific-Island-owned businesses, and 75% of Asian-owned businesses “stand close to no chance of receiving a PPP loan through a mainstream bank or credit union.” This is the case because minority-owned businesses are less likely to have a relationship with lending banks, their owners may not have access to financial and legal expertise, or their payrolls are not as large as other businesses, making them less of a priority for lenders, particularly at the outset of the PPP.

The immediate relief some of the minority-owned small businesses have received, in the form of grants and loans, have allowed them to pay utility bills, rent, and their employees; a short-term response which in some cases has allowed the businesses to avoid bankruptcy. However, this has not been the case for all and does not provide a long-term solution to help these businesses prosper. For long-term solutions, there has to be recognition of the inequalities faced by minority small business owners, such as the pre-existing racial wealth and health gaps that are now exacerbated by COVID-19. The racial wealth gap highlights that Whites on average have 10 times more wealth than Blacks; while the racial health gap highlights that every city in America has a life expectancy gap between people of color and white people that ranges from 10 to 30 years. These are people that live 5 minutes apart.

To address the gaps that make minority-owned small business most vulnerable to failure during the pandemic longer-term solutions have to be implemented by public and private sectors. These solutions can include “creating better business ecosystems, increasing access to funding, improving the availability of business and financial advice and developing deeper peer networks for minority entrepreneurs.” For instance, the banking infrastructure must change so that banks are not biased against lending to minority small business owners. It has been suggested that existing banking relationships and higher market shares of community banks are more important factors for the sustainability of small businesses, than is the magnitude of COVID-19s impact on the businesses.

Another way to help small business owners achieve long-term sustainability is through services that organizations such as our own City Bar Justice Center’s Neighborhood Entrepreneur Law Project (NELP) CV-19 Clinic have, and continue to, provide. Through the clinic, small business owners impacted by COVID-19 receive free legal consultations on topics including how to negotiate with creditors or landlords, and information on eligibility for available funding.

COVID-19 exacerbated pre-existing challenges faced by minority-owned small businesses, such as not having established relationships with lending banks, not having access to financial and legal expertise, or being confronted with the wealth and health gaps that their white-owned small business counterparts are less likely to face. Resources are available for minority-owned small businesses, but there needs to be a better understanding of the challenges faced by minority entrepreneurs and their businesses, in order to address those inequities. Doing so will improve the sustainability of minority-owned small businesses, which are a vital part of the US economy, and help to create a more equitable society.

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