The State of Minority-Owned Businesses: African American Entrepreneurs
It’s been a relatively good few years for African American small business owners. According to a subset of data in the 2020 State of Small Business survey from Guidant Financial and the Small Business Trends Alliance (SBTA), African American small business owners are happy these days. In fact, 70% of them say they are either “somewhat happy” or “very happy” with their businesses. And 72% of African American small business owners say their businesses are “currently profitable.”
However, the study also shows African American business owners are “less confident than the average small business owner about the state of small business in this political climate, with 53% of African Americans saying they are either “somewhat confident” or “very confident” compared to 60% of average small business owners saying the same.
Startup motivations
Being “ready to be my own boss” was the primary reason African American survey respondents started their businesses (34%). This was followed by a “wanted to pursue my passion” (29%); “dissatisfaction with corporate America” (13%); and the "opportunity presented itself” (10%). These stats are a bit of a change since a previous Guidant survey showed 62% started a business to “pursue their passion.”
Diversity of African American business owners
Overall, African American small business owners are younger and include more women than the general small business population. The study reports 22% of African American small business owners are millennials, nearly twice as many than the 12% of millennial small business owners in the general population.
African American women entrepreneurs
According to the Guidant report, 27% of all small businesses are owned by women; among African American owned businesses, 35% are owned by women.
The American Express 2019 State of Women-Owned Businesses report has slightly different numbers for African American/black women-owned businesses:
- Number of businesses: 2,681,200—that’s 21% of all women-owned businesses, making it the largest segment of women-owned businesses after non-minority women.
- Growth rate: Businesses grew 12% between 2018 and 2019, compared to an 8% annual growth rate between 2014 and 2019.
The concerning stat is about earned average revenue. African American businesses owned by women in this report earned an average $24,000 per firm vs. $142,900 among all women-owned businesses. This gap, says the report, is “the greatest of any minority [group]."
According to digitalundivided’s ProjectDiane2018 report, "The State of Black Women Founders" (the report is issued every two years), the number of startups led by black women more than doubled from 2016 to 2017, but black women who represent 14% of the U.S. population of women run less than 4% of startups that received VC funding. Nearly half of all African American women-led startups were in California and New York.
In fact, according to BlackBusiness.com, New York state has the most (regardless of gender of owner) black-owned businesses—204,093—which is 10.6% of all businesses in the state; this is followed by Georgia, Florida, and Texas. Washington, D.C., however, has the highest percentage of black-owned businesses in the country at 28%.
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Challenges for African American business owners
Lack of capital and cash flow is the biggest challenge for African American small business owners, according to Guidant. That’s not really a surprise since those are the same problems most small business owners face.
But fewer African American small businesses are approved for financing (61%) compared to white-owned businesses (80%), and they tend to seek lower amounts of money and at higher interest rates, according to the 2016 Small Business Credit Survey by the Federal Reserve System.
Guidant reports that “wealth gap also contributes to financing challenges … making it harder to [get] financing." In addition, "without the funds to invest in as many resources as other businesses, such as hiring talent or marketing and advertising, competing for contracts or attracting clients becomes exponentially more difficult.”
Getting funding
More African American small business owners (44%) use cash to fund their businesses than the average small business owner (37%), according to the Guidant report. Only 15% get help from friends and family, which was the second most popular source of capital for African American business owners.
Other funding sources for African American business owners include:
- Lines of credit
- Rollovers for Business Startups (ROBS), financing that allows small businesses owners to tap into eligible retirement accounts to fund their businesses without tax penalties. Guidant says this grew by 21% in popularity among African American small businesses year over year.
- Unsecured loans
- Peer-to-peer
- Equipment leasing
- SBA loans
And according to ProjectDiane, the picture for African American women is equally challenging: "Since 2009, black women–led startups have raised $289 million in venture/angel funding, with a significant portion of that raised in 2017"—a very small fraction of the nearly $424.7 billion in tech venture funding raised since 2009.
