Best And Worst States For Minority Entrepreneurs

Jun 12, 2023 • 10+ min read
Minority small business owners having a meeting
Table of Contents

      The number of businesses owned by Black, Hispanic and Asian Americans has climbed to record highs – reaching about 1.2 million in 2020, up more than 50% compared to 2007. 

      This is welcome news given research shows that workforce diversity is good not only for the companies’ bottom line but also for the economy at large.  More than half of the 2 million new businesses started in the U.S. over the past 10 years were launched by minorities, creating 4.7 million jobs. 

      But America has much more work to do in terms of empowering minority entrepreneurs. People of color own only 20% of U.S. businesses despite making up roughly 40% of the population. This contributes to income inequality.

      In general, being an entrepreneur is tough, but many minority entrepreneurs face an even steeper climb on the path to success for myriad reasons. They have limited access to startup funding, lack networks and mentorship programs, and face discrimination and systemic biases. 

      Given these hurdles – and the fact that 20% of all new businesses fail within the first year – it’s critical that minority entrepreneurs set up shop in as favorable a location as possible. 

      How The Rankings Were Determined:

      Lendio analyzed seven metrics to determine the best and worst states for minority entrepreneurs, taking into account factors such as access to small business loans, business ownership rates and overall income equality.

      The findings reveal that bigger states and those in the Mid-Atlantic, such as Maryland, Delaware and Virginia, tend to score better, but that all states have areas for improvement – highlighting the need for more equitable opportunities for entrepreneurs of color across the U.S.

      Study Summary: 

      • Hawaii No. 1 Best State for Minority Entrepreneurs: Driven by its high rate of minority business ownership (51.3%), job growth (40%) and lower level of income inequality.
      • Minorities Thrive in Large States: The three largest states – Florida, California and Texas – all ranked in the top 10. After Hawaii, they have the highest minority business ownership rates in the country, and lower unemployment rate gaps between Black and white workers.
      • Montana Toughest State for Minorities to Succeed: Montana ranked last, given just 3.4% of businesses are operated by people of color. In an effort to correct this, Montana has allocated more small business funding per capita through the Community Reinvestment Act (CRA) – which requires banks to offer lending and investment services to underserved communities – than most other states.

      Best And Worst States

      In No. 1 Hawaii, 51.3% of businesses are owned by people of color – a higher rate than any other state. These companies saw 40% job growth from 2019-2021, and more than half of all startups under two years old are run by minorities. Even so, the number of Community Advantage loan approvals remained flat from 2021-2022, indicating there’s more work to do to ensure entrepreneurs of color in the Aloha State have the resources they need to succeed.

      East Coast states Maryland, Maine, Delaware and New Jersey round out the top five best places for minority entrepreneurs. Maryland saw a 10.3% jump in Community Advantage loan approvals from 2021-2022, beating every state except New York, which ranked 20th overall. And while No. 3 Maine has one of the lowest minority business ownership rates, at just 3.2%, it is seeing strong job growth at those firms, and the Black-white unemployment rate ratio is lower than in most other states.

      At the other end of the spectrum, Montana ranked as the worst state for minority entrepreneurs. The number of jobs at minority business enterprises fell by 61% from 2019-2021, while just 4.1% of new businesses are owned by people of color. Even so, the state offers an average of $582 per capita in Community Reinvestment Act loans for businesses with revenues of $1 million or less, higher than most other states.

      North Dakota, West Virginia, Wisconsin and Mississippi also scored poorly. Each of them saw declines in the number of Community Advantage loans approved in their state from 2021-2022, as well as low minority business ownership rates. Notably, though, No. 48 Wisconsin has a lower Gini index score than most other states (0.4464), indicating the Badger State has lower levels of income inequality overall.

      Business Environment

      Minorities’ participation and success in the business sector can be indicative of increased access to capital, business support programs and entrepreneurial networks.

      The rate of minority-owned businesses in the U.S., for example, ranges from 51.3% in Hawaii to just 2.8% in South Dakota, in part reflecting the states’ demographics. When it comes to new business creation, Hawaii again takes the No. 1 slot, with 54.6% of startups under two years old owned by minorities, compared with 4.1% in Montana. Notably, Hawaii is the most diverse state (79.2% of the population are racial/ethnic minorities), while Montana is one of the least diverse (16.2%).

      Overall, designated minority business enterprises saw a 22% revenue increase between 2019 and 2021, and they employed about 865,000 people, according to the National Minority Supplier Development Council.

      Economic Environment

      The overall economic environment in a state also offers clues as to the level of opportunity for minority business owners. Income inequality, for example, is measured using the Gini index; a score of 0 would indicate perfect equality, while a score of 1 indicates total inequality. In the U.S., the Gini index was 0.494 in 2021, up 1.2% from the year before and the first annual increase in a decade.

      Meanwhile, unemployment rate ratios can reflect structural issues within the labor market that disproportionately affect people of color. At the national level, the Black-white ratio was 2.1-to-1 in the fourth quarter of 2022, meaning Black Americans were more than twice as likely to be unemployed as white people. That’s compared with a Hispanic-white unemployment ratio of 1.4-to-1.

      There are also longstanding racial gaps when it comes to underemployment, defined as the share of the labor force that is 1) unemployed, 2) working part time but would like to work more or 3) recently gave up job-seeking but would prefer to work. According to the Economic Policy Institute, the underemployed rate was 10.4% among Black adults, 9.4% among Hispanics and 5.5% among white people in January 2023.

      Lending environment

      Access to capital is crucial for any small business owner, but it is particularly important for minority entrepreneurs who may struggle to secure startup funding or loans from traditional financial institutions. The lending gap – which can also come in the form of unequal lending terms and underinvestment – hinders minority entrepreneurs’ ability to start, invest in and scale their businesses.

      The data speaks for itself: 52% of white entrepreneurs are fully approved for financing, compared with 35% of Asians, 28% of Hispanics and 27% of Black applicants. In fact, 40% of Black business owners don’t even apply for financing because they expect they’ll be rejected, according to the National Minority Supplier Development Council.

      Minority entrepreneurs may face challenges in obtaining loans or credit from traditional financial institutions, but there are some policies and programs from the Small Business Administration that aim to bridge the funding gap and support entrepreneurship in underrepresented communities.

      The Community Reinvestment Act, for example, requires banks to offer lending and investment services to underserved communities, and regulators are considering substantial reform that would make race and ethnicity an explicit focus. Our analysis of CRA loans per capita – $351 on average across the states – examines how well banks are currently supporting underserved business leaders, though it doesn’t address minority business leaders specifically. North Dakota ranked the best on this metric, with $675 in CRA loans per capita, while New Mexico came in last with $205.

      Meanwhile, Community Advantage loans are targeted for small businesses in underserved markets, including opportunity zones and low- and moderate-income areas. Overall, 45% of these loans go to racial and ethnic minorities, compared with roughly 30% of 7(a) and 504 loans, which are other common loans for small business owners. New York saw a 10% increase in the number of Community Advantage loan approvals from 2021-2022 – higher than any other state – while Montana saw a 40.4% decline, the biggest drop.


      Not all business owners have equal opportunities to succeed. In particular, minority entrepreneurs face barriers in accessing the capital they need to start and grow their businesses – even in the top-ranked states. With this report, we aim to raise awareness about the need to level the playing field for minority entrepreneurs. 

      Specifically, we recommend the following within the lending industry:

      • Greater use of automation throughout the qualification process: Automation not only expands access to capital for more small businesses by reducing costs for lenders but also reduces discrimination and bias. For example, a paper by the National Bureau of Economic Research found that after traditional banks automated their processes, lending to Black-owned firms increased.
      • Alternative underwriting solutions: Many small businesses are cash-only making it difficult to build up the business credit necessary to meet traditional loan qualification requirements. Lendio’s technology mines customer deposit data instead of relying exclusively on credit score to pre-qualify customers for a loan. This approach is supported by a paper from the Bank for International Settlements that found that the alternative data used by two FinTech companies was able to better predict future loan performance than traditional methods, especially in areas with high unemployment.
      • We're pleased to see progress toward more resources for underserved groups, like the recent announcement from Treasury Dept and Vice President Harris in April of over $1.73 billion in grants for Community Development Financial Institutions (CDFIs) across the country.


      We used the most recent data for these seven metrics below to determine the best and worst states for minority entrepreneurs. We used a Z-score distribution to scale each metric relative to the mean across all 50 states and Washington, D.C., and capped outliers at 2. We multiplied some Z-scores by -1, given a higher score was negatively associated with being above the national average. A state’s overall ranking was calculated using its average Z-score across the seven metrics. Eleven states were missing data on minority-owned startups, so the remaining six metrics were averaged to determine their overall scores. Here’s a closer look at the metrics we used:

      Lending environment

      Business environment

      Economic environment

      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

      Share Article:

      Business insights right to your inbox

      Subscribe to our weekly newsletter for industry news and business strategies and tips

      Subscribe to the newsletter

      Subscribe to our weekly newsletter for industry news and business strategies and tips.