Racial Equity

Why Business Ownership Matters in Closing the Racial Wealth Gap

November 10, 2015  • Joyce Klein

FIELD at the Aspen Institute and the Asset Funders Network released a report, called “Narrowing the Racial Wealth Gap through Business Ownership,” on funding strategies to strengthen Latino and African American owned businesses. Below, FIELD Director Joyce Klein explains how increasing business ownership among minorities can narrow wealth disparities.

Much of the recent coverage of the widening inequality gap in the US has focused on the growing disparity in incomes, independent of race factors. But looking across racial lines in the US, the differences in wealth are stark. The Federal Reserve Board of St. Louis has done important work analyzing the balance sheets and wealth of US households. In 2013, it found that the net worth of Latino families was one-tenth that of non-Latino white households—and the net worth of African Americans was even lower.

Digging deeper, the research found that one reason for the gap in wealth levels among African Americans and Latinos was that they held dramatically lower levels of business and financial assets—assets instrumental to providing greater diversification and higher rates of growth over time.

African American and Latino families hold fewer of these types of assets because they have historically been less likely to start businesses. Research by Robert Fairlie noted the chicken-and-egg nature of this outcome when he documented that the lower levels of assets owned by Latinos and African Americans are a partial cause of the business creation gap, because they lack savings, or home equity, to help finance their businesses. The good news is that the most recent available data suggest this trend has reversed, and that the growth rates in the number of African American and Latino owned firms are now much higher than those of other racial and ethnic groups. However, these firms still have lower survival and growth rates than white-owned firms, posing a challenge for asset accumulation. Research on the cause of these disparities identifies three key factors:

  1. Lack of access to capital.
  2. Lower-levels of education and experience, including experience that comes from having family members who have been self-employed.
  3. A greater tendency to be located in areas and markets that yield lower growth, and in particular, to focus on doing business within their own ethnic markets rather than the community at large.

All sectors of our society can play a role in addressing the barriers that inhibit African Americans and Latinos from building wealth through business ownership. As detailed in a recent strategy guide FIELD developed for the Asset Funders Network, philanthropy can play an important role by funding community-based efforts to provide capital and expertise to African American and Latino-owned firms, as well as to worker-owned cooperatives that can extend the benefits of business ownership to individuals who don’t see themselves as solo entrepreneurs. Funders can also contribute by commissioning research that digs more deeply into the reasons why minority-owned firms may not grow, and whether and how that business growth translates into stronger household balance sheets, so that program and policy interventions can be strengthened.

The private sector has a role to play in providing financing, and helping Latino and African American owned firms to access new and more lucrative markets. This is in its self-interest, as Latinos and African Americans (and their new firms) are among the most rapidly growing markets in the country. However, meeting the needs of these firms may require a deeper understanding of the factors that have inhibited access in the past, and the redesign of products and processes to address those barriers. And, in the case of financial products, it will be important that new offerings be designed responsibly. Efforts to broaden access should not result in the types of wealth-stripping financial products that we’ve seen in payday lending, and among some sub-prime mortgages—products that have been disproportionately targeted to non-white borrowers.

Government will also be key. Its procurement, financing and grant programs continue to be crucial tools for minority-owned firms that seek growth. The Small Business Administration is rightly focused on reversing the post-recession drop in lending to African Americans and Latinos within its major small business financing programs (note: this decline has not happened in the SBA’s Microloan program, which continues to serve very high percentages of minority clients).

And the Minority Business Development Agency will soon be convening researchers to identify what the latest research is telling us about the growth and needs of minority-owned firms. In addition to those important efforts, the Consumer Finance Protection Bureau will need to move forward in implementing its charge to collect small business lending data that will provide better insights into who is receiving credit, and how. And it will also be important to continue to enforce laws that target discrimination in lending, as African American and Latino business owners are still less likely to have their loan applications approved, even when controlling for credit score and the type of business.

The agenda is big, but so is the potential payoff. Greater wealth, and greater access to wealth in those communities that feel most alienated from our economic system, are central to our nation’s prosperity and stability, and to the promise of opportunity that we hold dear.