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Capital is the lifeblood of any business, as every entrepreneur knows. But for many Black small business owners, accessing capital can be a challenge. According to the Boston Foundation’s “The Color of the Capital Gap” report, published in November 2023, Boston’s Black small businesses face a $603 million annual funding gap due to structural barriers and the racial wealth gap. . Traditional loan requirements prevent small business owners from accessing capital and may even discourage them from seeking capital.
A new report from the UMass Donahue Institute, “Supporting Diverse Small Business Owners in Boston,” cites four themes in the challenges Black businesses face:
Systemic financial barriers. “Requirements for raising capital can prevent entrepreneurs from historically disadvantaged groups from growing and building wealth. Small businesses with modest but critical financing needs are particularly underserved,” according to the report. Betty Francisco, CEO of the Boston Impact Initiative (BII), states, “Barriers such as lender bias, limited access to family wealth, and a lack of well-developed networks of business contacts leave many Black entrepreneurs dependent on their own limited resources. as a form of bootstrapping and, as a result, overleveraging your personal credit, damaging your credit rating and sometimes becoming a victim of predatory lending.”
The racial wealth gap. One of the first sources of capital for many entrepreneurs is a network of friends and family. Donahue reports that “two-thirds of entrepreneurs use personal or family savings to start a business, and Black entrepreneurs are often at a disadvantage in this type of capital due to the racial wealth gap.” The main reason many survey participants said they believe BIPOC small business owners have a harder time accessing credit was a “lack of personal wealth or assets as collateral.”
Traditional loan requirements that prevent small businesses from accessing capital. One small business owner cited in the Donahue report said he didn’t think a city of Boston grant program was aimed at small businesses because they asked for so many things, including three years of tax returns, low debt levels, personal guarantees and strong credit ratings. A 20-year-old businessman who owns a flower shop reported: “I know I have potential. I know how to run a business… I can only qualify for five grand prizes. It’s very difficult for me now to have the working capital to take the next step.”
Discouragement due to past experiences and limited availability of resources. The Boston Foundation’s “Color of the Capital Gap” report states that 55% of white businesses report having major challenges accessing capital, while 88% of Latino businesses and 85% of Black businesses report having issues accessing capital. BIPOC businesses are denied financing at nearly twice the rate of white businesses. Additionally, when BIPOC businesses are able to raise capital, their loan amounts tend to be smaller than those of white borrowers. Small business loans made by Massachusetts banks in majority-white areas average $423,000, compared to just $255,000 in majority-black areas. As a result, 84% of funding requests from black small businesses had a shortfall, receiving less than the full amount requested. 62% of loan applications from black business owners were denied.
Black startups face an even more daunting challenge, with more than half (53%) of loans completely denied and just 0.6% of venture capital going to Black entrepreneurs. The collective result of these factors has led to an unmet annual demand for financing for Black small businesses, estimated at $603 million.
Local solutions are emerging. The Donahue report recommends focusing on developing entrepreneurs’ capacity to meet borrowing needs and reducing barriers to capital by expanding opportunities for specific companies that have promising business plans and deep community connections.
Francisco, from BII, believes that non-traditional credit products are a key component of the solution.
“Business owners are always looking for capital, but what type of capital is best for their business and where can they get that capital?” she says. “BII analyzes the entire spectrum of capital available to early-stage entrepreneurs. The BII explores the following: What is the need? What is the company’s growth potential? Is capital need a seasonal cash flow problem? BII structures flexible, non-dilutive loans at lower rates than other sources of capital.”
On March 28, BII and the Black Economic Council of Massachusetts (BECMA) announced a $325,000 investment in And Still We Rise (ASWR), a liberation-focused mental health and consulting practice that provides therapy, coaching, and services consultancy for individuals and organizations.
“Since 2018, when I founded the company, we have gone from just me to a team of almost 80 people. We now provide mental health services to more than 2,000 people in Massachusetts,” says Dr. Natasha Holmes, founder and CEO of ASWR.
Holmes tells his story of asking for a loan four times and being denied.
“I applied for a $20,000 loan from Bank of America four times and experienced block after block, being denied each time. As a clinical psychologist, I forgot the effect stress has on the body. I had migraines,” says Holmes.
“I understand why there are so few Black entrepreneurs in this space,” she adds. “In 2021, I was one of five Black-owned psychology practices in a resource group. Today I’m the only one still on the market. Access to capital wasn’t the only reason the others closed, but it was a big problem in each of them.”
With financing from BII and BECMA, “it looks like a totally different business.” Holmes says. “BII and BECMA gave me space to explain my business, which other creditors did not.”
BII refinanced ASWR’s high-cost loans into an income-based term loan. BECMA provided a line of credit to address cash flow issues. Now, ASWR is firmly in the black, with revenues in the millions of dollars.
Kamaal Jarrett, founder and owner of Hillside Harvest, maker of artisanal premium Jamaican sauces, is another success story.
“I wanted to create a brand that elevates the Caribbean expression in food, introducing people to unique flavors and recipes,” he says.
Jarrett successfully launched Hillside in 2018 using funds from his own savings. Along with success, however, came the need to build inventories, increase marketing, manage seasonal cash flows and hire part-time staff. In short, he needed access to capital. BII arrived on the scene with a flexible revenue-based product that met Jarrett’s cash needs without requiring ownership dilution. He is now focusing his attention on expanding the business and expanding operations.
