Let’s fight for financial inclusion among U.S. businesses: The what, the why, and the how.
The U.S. has had a long history of minority discrimination. But social inequity is not just an American problem; it's a recurring issue in every culturally diverse population. Research, based on strong scientific and psychological grounds, suggests that prejudice is a fundamental component of human nature.
Jim Sidanius, an American psychologist and academic, argued that humans naturally prefer drawing ingroup-outgroup boundaries based on arbitrary differences such as race, language, sexuality, religion, nationality, or gender. With such boundaries drawn, people will naturally discriminate across them.
But let’s not go down the rabbit hole of the roots of discrimination for now. The point we are making is that discrimination is everywhere. And we’re not trying to excuse it by calling it human nature. On the contrary, this article sheds light on the injustices of inequity in business, specifically when it comes to funding. More importantly, we will show you the part you can play as a B2B entrepreneur in promoting financial inclusion.
Who is a minority? The term "minority" means a group of people with distinct characteristics who are fewer compared to other members of a population. Historically, people of color identifying as Black American, Hispanic/Latino, Native American, Asian American, or mixed race have been considered minorities.
However, the modern definition of minority extends to every group of people that feels socially marginalized or disadvantaged in one way or another. "Minority" is now a broad spectrum of groups seeking recognition, acceptance, inclusion, or appreciation in various aspects of society.
Let’s look at the four main categories of financially disadvantaged minority-owned businesses:
Commercial lending data from the Federal Reserve shows that businesses owned by Black Americans, Indigenous Americans, and people of color (BIPOC) receive less business funding and less often than their White-owned counterparts. The lending stats suggest that BIPOC-owned businesses are less likely to get approved for loans or get the requested amount. Furthermore, Black entrepreneurs often pay higher interest on loans than White entrepreneurs.
There are no good reasons Black or BIPOC-owned businesses should be considered high-risk borrowers, even when operating in the same industry or niche as White-owned businesses. This discrimination is so widespread (among banks, credit unions, and online lenders) that many BIPOC business owners feel discouraged from applying for funding. Consequently, these businesses are more likely to report poor financial performance.
As of 2019, 46% of all U.S. businesses were at least 51% owned, operated, and controlled by one or more women. And according to the U.S. Census Bureau, the female population slightly outnumbers that of males. So technically, women do not fit the original definition of minority, yet they are discriminated against in social and business settings.
For ages, commerce has been a male-dominated space with little tolerance for female entrepreneurs. Thankfully, the 1988 H.R. 5050: Women’s Business Ownership Act helped break this misogyny. Before then, women couldn’t even apply for commercial loans in their own name.
However, the gender gap in business funding is still vast. In a 2016 study, the Federal Reserve Banks of New York and Kansas City found that women-owned businesses were more likely to face financial difficulties due to unfair gender bias in commercial financing. For instance, women-founded start-ups received only 2.4% of venture capital dollars invested in 2021.
Although LBGTQ+ communities are gradually gaining acceptance in the States and worldwide, there's still a strong social stigma surrounding these groups. This stigma is seen in the financial industry too.
Research data shows that about 46% of LGBTQ+-owned businesses did not receive any funding they applied for in 2021, compared to only 35% of non-LGBTQ+ firms that were denied funding. Additionally, a majority of LGBTQ+-owned businesses that applied for COVID-19 relief via the Paycheck Protection Program received less than they requested or nothing at all.
Like businesswomen, LBGTQ+ entrepreneurs rely on the 1974 Equal Credit Opportunity Act (ECOA), which bans funding discrimination based on gender or marital status, for financial inclusion. In March 2021, President Joe Biden instructed the Consumer Federal Protection Bureau to extend the ECOA to ban financial discrimination based on sexual orientation and sexual identity. This protection is a welcome recourse in the fight for financial equity among LGBTQ+ communities in the country.
According to the 2021 National Survey of Military-Affiliated Entrepreneurs, a majority of veterans venture into business after leaving service. Entrepreneurship gives many veterans a sense of purpose after the military. However, many of these veterans are first-time entrepreneurs and face numerous challenges when starting and running their businesses. The top challenge is access to capital. During the survey, most veteran entrepreneurs said “lack of financing” was a major hindrance to business.
Another study by the U.S. Small Business Administration (SBA) and the Federal Reserve Bank of New York found that while the demand for funding was similar for veteran and nonveteran-owned businesses, funding approval was 10% lower for veteran-owned businesses. The report attributes this discrepancy to the tendency of veteran entrepreneurs to request too little cash, have insufficient credit history or collateral, or have a poor understanding of the borrowing process.
There’s an undeniable funding gap between minority-owned businesses and White male-owned businesses. To try and bridge this gap, several business welfare groups and government agencies provide grants and commercial loans exclusively for funding minority-owned businesses. Here are a few examples of such initiatives:
The U.S. Census Bureau’s latest estimates indicate that about 20% of employer firms are owned by minorities, 21.4% by women, and 5.6% by veterans. In total, there are nearly 3 million businesses among these disadvantaged groups, making up a significant portion of the U.S. SMB community.
These businesses are vital to the national economy too. NMSDC-certified MBEs bring in $261 billion in revenue and $130 billion in taxes annually. They also create thousands of jobs every year that support countless American households.
Clearly, discriminating against these businesses is detrimental to the national economy. For instance, analysts calculate that the U.S. has lost $16 trillion to racial discrimination against African Americans alone.
The minority support initiatives we’ve mentioned above are all well and good, but more must be done to uplift disadvantaged business communities. Besides, many minority-based funding programs are arguably discriminative, especially regarding what businesses qualify for funding. So, these are not dependable capital sources for most minorities.
Fortunately, private companies are taking it upon themselves to eradicate financial discrimination. And you too can play a vital part in this.
At Loanspark, we know that inequity has no place in the financial industry or the business environment at large. We believe that all entrepreneurs, regardless of ethnicity, identity, culture, gender, skin color, sexual orientation, background, or religion, deserve equal financial opportunities. To that end, we advocate for easy access to capital by enabling B2B companies to directly fund their business customers.
Loanspark partners with non-financial and financial companies to develop and manage commercial products for businesses that otherwise have difficulty accessing conventional funding. We provide the expertise, resources, and digital platform to support our clients’ lending initiatives. Our Business Lending as a Service lets you uplift disadvantaged businesses in your community without investing in fintech tools, banking licenses, or financial talent.
It's upon all of us to end financial injustices in business. Every effort toward financial sustainability counts. Make a stand for financial inclusion and equity with Loanspark today.