Jun 24, 2020

Minority-Owned Businesses Taking a Hard Hit From COVID-19

It may take years to fully understand the lasting effects of the coronavirus pandemic on local and global economies. However, there have already been preliminary studies on the impact of COVID-19 on various communities and industries throughout the country.

From these reports, it has become abundantly clear that minority-owned businesses have been hit statistically harder than their counterparts. The disproportionate rate at which minority-owned businesses have been affected by the pandemic likely means a longer and more challenging road to recovery for these entrepreneurs.

Minority-Owned Businesses Were Already at a Disadvantage

Even before the coronavirus pandemic, minority-owned businesses (defined as having at least 51% Black, Native American, Hispanic, or Asian American ownership) were disadvantaged when it came to capital funding, contract bidding, and other developmental opportunities. 

While minority-owned businesses currently account for roughly 30% of American businesses and more than $1 trillion in annual revenue, these owners still face discrimination when it comes to acquiring business loans.

The average minority business loan amount is $149,000, compared to $310,000 for non-minority owners. Also, minority entrepreneurs often see higher interest rates than non-minority business owners. These funding discrepancies make it more difficult for minority businesses to scale efficiently.

Fewer Minority-Owned Businesses Benefited From the CARES Act

To mitigate the effects of the coronavirus pandemic, Congress passed the Paycheck Protection Program (PPP) as part of the CARES Act. The PPP was specifically created to provide small businesses with a potentially forgivable loan to cover payroll and other operating expenses.

However, the original $349 billion allocated to the program was claimed within a matter of days, and the additional rounds of funding went just as quickly. The PPP came under fire because brands like Ruth’s Chris Steak House, which many consider a national chain rather than a collection of small businesses, claimed money from the program that would otherwise genuinely help local companies. Many of these large corporations eventually returned the loans, but the delays caused by these actions left many small business owners hanging out to dry.

In the wake of PPP allocations, experts have found that Black and Latino business owners were disproportionately likely to get rejected for funding or to qualify only for a portion of their expected funds. One survey of 500 small business owners by the Global Strategy Group found only 12% received what they asked for, while 26% said they only received a fraction of what they requested.  

The lack of immediate funding for minority-owned small businesses undoubtedly left many owners struggling to retain talent and continue operating. These entrepreneurs who faced delays and additional hurdles before receiving their PPP loans lost the opportunity to use that money to weather the toughest time of the pandemic and are now digging out of an even deeper hole.

Closed Businesses Hurt Community Buying Power

PPP funding and other small business financial support have the power to keep communities afloat during the pandemic. If an employee is still getting paid (even if they are on furlough or the business they work for isn’t open), they can still cover essential costs like rent, car payments, internet expenses, and other needs. 

If they are paid well, then they can even stimulate the economy. These working Americans can order from local restaurants and buy from small businesses. While most communities took a hit during the COVID-19 pandemic, many businesses were able to stay open because of the support from customers. 

However, without PPP funding or with limited loan approval, minority-owned companies couldn’t afford to pay their staff—who are typically minorities, too. This compounding effect can perpetuate further financial disparity among minority groups.

Robert Fairlie, an economics professor at the University of California at Santa Cruz, tells the Washington Post that minority-owned businesses tend to create jobs from the owner’s ethnic or racial group. “We’re just going to see further increases in inequality that has been so hard to change,” Fairlie says. 

Minority-owned companies that received PPP funding are still at risk of going out of business as their communities rebuild. If they are located in more economically disenfranchised areas, they might not have the customer base to support staying open as other businesses close around them. 

Minority-Owned Businesses Are More Likely to Be Involved in Their Communities

During a period when most people are focused on personal health and financial well-being, minority-owned businesses have gone above and beyond (regardless of their financial situations) to protect their communities. 

In a survey by McKinsey & Company, 27% of respondents “added new services to support the community and employees during the crisis.” That number jumped to 40% for minority-owned businesses. 

These services range from offering free delivery to help stay-at-home efforts, adjusting hours for elderly shoppers, or offering complimentary services for those who need them. 

This survey shows how essential minority-owned businesses are to the neighborhoods they serve. These updated services help essential workers and vulnerable populations (like the elderly or people with weakened immune systems). Many people don’t have alternative options if these businesses close. 

The fact is, patterns of systematic racism will continue to hold back minority-owned businesses. A lack of outreach into communities about PPP funding led to fewer applications, causing the CARES Act funding to dry up before these business owners could claim it. 

Those who received funds often received less than they needed or faced longer-than-normal delays, causing layoffs or cutbacks. Store closures trickle into the community and limit spending power, further impacting the profits of various nearby businesses. 

These realities are why equality is important in business and communities. If you don’t find ways to support vulnerable people and business owners, the effects of crises—like the coronavirus pandemic—can cause disproportionate and lasting destruction.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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