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As any businessperson knows, capital is the lifeblood of any business. But for many small business owners of color, access to capital can be a challenge. According to the Boston Foundation's “Capital Gap of Color” report released in November 2023, small businesses of color in Boston face a $603 million annual funding gap due to structural barriers and racial wealth disparities. Traditional lending requirements can prevent small business owners from accessing capital or even discourage them from seeking it.
A new report from the University of Massachusetts Donahue Institute, “Supporting Boston's Diverse Small Business Owners,” identifies four themes as challenges facing businesses of color:
Systemic financial barriers. “Capital access requirements can prevent business owners from historically disadvantaged groups from growing and building wealth. Small businesses have modest but important financing needs and are particularly underserved,” the report states. Betty Francisco, CEO of the Boston Impact Initiative (BII), said, “Barriers such as lender bias, limited access to family assets, and under-established business connections lead many Black entrepreneurs to rely on their own limited resources in a form of bootstrapping, which results in them overborrowing personal credit, damaging their credit ratings, and sometimes falling prey to predatory lending.”
Racial wealth gap. For many entrepreneurs, one of their first sources of funding is their network of friends and family. Donahue reports that “two-thirds of entrepreneurs use personal or family savings to start their businesses, and racial wealth disparities often put entrepreneurs of color at a disadvantage when it comes to this type of funding.” Many survey participants said the top reason BIPOC small business owners find it harder to get loans is “a lack of personal assets or assets to use as collateral.”
Legacy lending requirements that prevent small businesses from accessing capital. Small business owners quoted in the Donahue report said they felt Boston's grant program wasn't suitable for small businesses because it required too many conditions, including three years of tax returns, low debt levels, personal guarantees and good credit ratings. “I know I have potential. I know how to run a business,” said one florist who has run a flower shop for 20 years. “I can only get $5,000 at most. It's really hard now to get the working capital to take the next step.”
Discouragement from past experiences and limited available resources. According to the Boston Foundation’s “Color in Capital Gap” report, 55% of white businesses report significant challenges in raising capital, while 88% of Latino businesses and 85% of Black businesses report struggling to raise capital. BIPOC businesses are denied loans at nearly twice the rate of white businesses. Furthermore, when BIPOC businesses are successful in raising capital, they tend to receive smaller loan amounts than white borrowers. Small business loans from Massachusetts banks average $423,000 in majority-white neighborhoods, compared to just $255,000 in majority-people-of-color neighborhoods. As a result, 84% of Black small business loan applications are underfunded and receive less than the full amount requested. 62% of loan applications by Black business owners are rejected.
Startups of color face even greater challenges, with more than half (53%) being denied financing outright and only 0.6% of venture capital going to Black entrepreneurs. The combined result of these factors is an estimated $603 million in unmet capital needs for small businesses of color annually.
Local solutions are emerging. The Donahue report recommends a focus on building entrepreneurs' ability to meet loan requirements and reducing barriers to capital by expanding opportunities for eligible companies with promising business plans and deep community ties.
BII’s Francisco believes non-traditional lending products are a key part of the solution.
“Entrepreneurs 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 reviews the full spectrum of capital available to early-stage entrepreneurs. BII considers: What are your needs? What is the growth potential of your company? Are your capital needs a seasonal cash flow issue? BII structures non-dilutive, flexible loans at lower interest 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 business that provides therapy, coaching and consulting services to individuals and organizations.
“Since 2018, when I founded the company, we've grown from just myself to a team of nearly 80 people and now provide mental health services to over 2,000 people across Massachusetts,” says Dr. Natasha Holmes, Founder and CEO of ASWR.
Holmes recounts the story of when he applied for a loan and was rejected four times.
“I applied for $20,000 in loans from Bank of America four times and experienced obstacle after obstacle of being rejected every time. As a clinical psychologist, I had forgotten what stress does to the body. I suffered from migraines,” Holmes says.
“It explains why there are so few entrepreneurs of color in this space,” she added. “In 2021, I was one of five Black-owned psychologist clinics in the resource group, and today I'm the only one still open. Access to capital wasn't the only reason other clinics closed, but it was a major issue for all of our clinics.”
With the financial backing of BII and BECMA, “it feels like a totally different business,” Holmes says. “BII and BECMA gave me the space to explain my business that other lenders didn't have.”
BII refinanced ASWR's high-cost loans into revenue-based term loans. BECMA provided a line of credit to address cash flow issues. Today, ASWR is generating millions of dollars in revenue and is steadily profitable.
Kamal Jarrett, founder and owner of Hillside Harvest, a maker of premium, artisanal Jamaican sauces, is another success story.
“I wanted to create a brand that would elevate the expression of Caribbean cuisine by introducing people to unique flavors and recipes,” he says.
Jarrett launched Hillside in 2018, funded with his own savings, and it was a success. But with success came the need to increase inventory, increase marketing, manage seasonal cash flow, and hire part-time staff. That meant he needed access to capital. BII offered Jarrett a flexible, revenue-based product with no ownership dilution to meet his cash needs. Now he's focused on scaling his business and expanding his operations.
