The contributions small businesses make to the community-as well as to the global economy-should not be understated. According to the World Bank (2020), small businesses account for more than 95% of registered firms worldwide and 50% to 60% of global employment. Small businesses create jobs, supply opportunities to achieve financial independence, and are often seen as driving innovation. Many iconic companies and successful entrepreneurs had their start as small businesses – think Microsoft, Starbucks, Etsy and many others.
In the past year, small businesses overall have been among the worst-hit by COVID-19. While some sectors—travel and tourism for instance—have been more negatively impacted than others, data also show that certain groups of small business owners—independent of business activity—have been hit harder than others.
A May 2020 paper by Stanford Professor Robert Fairlie assesses the impacts of the pandemic on small businesses in the United States using Bureau of Labor Statistics (BLS) Current Population Survey (CPS) data. Between February and April 2020, nearly all industries experienced the largest drop in business ownership on record, as the number of active business owners in the United States fell by 22 percent (a total of about 3 million business owners). However, it was clear that Black businesses were hit especially hard-experiencing a 41 percent drop-more than twice the percent of white-owned businesses, which decreased by 17 percent. The number of Latinx business owners fell by 32 percent and Asian business owners by 26 percent. Women-owned businesses were also disproportionately hit, dropping by 25 percent during this period, 5 percentage points more than male-owned businesses.
This is a worrying continuation of an already concerning trend. Even before the pandemic, Black business owners were under-represented, making up only about 7 percent of the U.S. 15 million small business owners, compared to making up more than 13 percent of the U.S. population in 2019, according to the U.S. Census Bureau. Black-owned small businesses in the US are highly concentrated in retail, restaurants, and other service industries which have been among the most affected by shutdowns and social distancing. Black Americans owned 124,004 firms in 2017 with 32.0% (39,714) of these firms in the healthcare and social services industry. About half of Black-owned microbusinesses (firms with 5 or fewer employees) were in three sectors: Other Services, Health Care and Social Assistance, and Administrative and Support Services.
In the wake of the COVID-19 pandemic, 43 percent of small businesses indicate that they only have enough money to last six months, and less than half of small businesses have any online business according to a MetLife/U.S. Chamber of Commerce study. A 2020 Visa study of small business owners in eight countries revealed that their greatest concerns were (1) not having the same revenue as they did before COVID-19 (52%); (2) attracting new customers (46%); and (3) having to reduce wages or salaries (22%). These concerns are even more pressing for business owners that have traditionally had even more challenges overcoming these very concerns.
Even before the pandemic, diverse-owned businesses were less likely to borrow from banks. A survey by the twelve Federal Reserve banks (2020) shows that only 23 percent of Black-owned businesses, compared to 46 percent of white-owned businesses, have received a bank loan in the last five years. The Federal Reserve Bank of New York (2020) cites structural barriers that influence their Black and Latinx-owned firms’ financial health, for example, these firms are more likely to report higher credit risk ratings than white-owned firms. A study by Bone et al (2017), shows that banks were twice as likely to offer white entrepreneurs as Black entrepreneurs help with their small business loan applications. This study found that bankers were three times more likely to invite follow-up appointments with white borrowers than better-qualified Black borrowers.
Why is this important? For one, Black Americans are overall experiencing a disproportionate share of the pandemic’s disruption has and have experienced greater levels of morbidity and mortality as well as unemployment and bankruptcy, making the imperative to seek societal solutions to alleviate their plight ever more urgent. Additionally, these businesses bring important benefits to the community. According to a May 2020 McKinsey study, for example, minority-owned businesses are more likely than the average to support their community and employees.