The 2021 Report on Firms Owned by People of Color, part of a series of reports from a national survey of small businesses conducted by the 12 Federal Reserve Banks, found that Black- and Latino-owned firms that applied for non-emergency financing were less than half as likely as white-owned firms to be fully approved. This was the case even when the Black-owned, Latino-owned, and white-owned firms were all categorized as presenting a low credit risk.
- Among Latino-owned firms with a low credit risk, 25% received all the non-emergency financing they sought, nearly half the rate of white-owned firms with a low credit risk, 48% of which received all the financing they sought.
- Low-credit risk businesses with Black and Latino owners were approved for full financing at nearly the same rate as high/medium credit risk white-owned firms.
- Black-owned firms with one or more employees were five times as likely as white-owned firms with one or more employees to get none of the Paycheck Protection Program funding they sought.
The report released today is based on the Federal Reserve Banks' Small Business Credit Survey, an annual survey of small business owners that was fielded in September and October of 2020. It is a deeper look at the same dataset that served as the basis for the Small Business Credit Survey: 2021 Report on Employer Firms released February 3, 2021. The report collected data about both traditional financing and emergency assistance funding, including loans provided through the Paycheck Protection Program. Unless otherwise specified below, the data in this release are about non-emergency credit.
The survey yielded 9,693 responses from a nationwide sample of small employer firms with anywhere from one to 499 employees, and another 4,531 responses from non-employer firms. The data is for firms that were currently operating at the time of the survey; it does not include permanently closed businesses.
Among the other key findings of the 2021 Report on Firms Owned by People of Color:
- Businesses owned by people of color were more likely than white-owned businesses to report reducing operations or temporarily closing during the pandemic.
- Ninety-three percent of Asian-owned firms, 86% of Black-owned firms and 85% of Latino-owned firms reported sales declines due to the pandemic, compared with 79% of white-owned firms.
- More than 60% of firms owned by people of color that did not apply for funding in the prior 12 months needed funds but chose not to apply, compared to 44% of white-owned firms.
- Thirteen percent of Black-owned firms received all the financing they sought in the 12 months prior to the survey, compared to 40% of white-owned firms. Forty-six percent of Black-owned firms that applied for financing received none of the financing they sought, the largest share of any group.
- On average, Black-owned firms completed more financing applications than other applicant firms; 15% had filled out six or more, compared to 10% for whites.
- Among non-employer firms, Black-owned firms were the most likely to report they sought financing in the prior 12 months. But among non-employer firms that applied for financing, Black-owned firms were least likely to receive any of the financing they sought.
- Among non-employer firms, those with white owners were twice as likely as those with Black owners to receive all the PPP funding they sought.
- Black-owned non-employer firms that applied for PPP loans were twice as likely as white-owned firms to get none of the funding they sought.
Black-owned Firms: Turning to Friends and Family
Black business owners were more likely to use personal funds and more likely to borrow money from a spouse, family or friends than any other group. Black business owners were also more likely to work a second job than any other group.
Roughly 38% of Black business owners borrowed money from a spouse or other family or friends, while 25% worked a second job, and 74% of Black business owners used their personal funds; 48% of Black-owned firms believe credit availability will be a challenge as a result of the pandemic.
Only 43% of Black-owned firms received all the PPP funding they sought, the lowest share of any group. Of other small businesses seeking PPP funding, 61% of Latino-owned firms received all the PPP funding they sought, for Asian-owned firms received 68%, and white-owned firms got 79%.
One in five Black-owned firms that applied for PPP funding received nothing; this was a higher proportion than any other group. The proportion was 8% for Latino-owned businesses, 3% for Asian-owned businesses and 4% for white-owned businesses.
Approximately 65% of Black-owned firms have less than $50,000 in debt or no debt, a larger proportion with low debt levels than any other group. In comparison, 40% of white business owners had $50,000 in debt or no debt outstanding.
Asian-owned Firms: A Worrisome Outlook
Asian owners are more likely to own businesses in the leisure and hospitality sector than any other group. More Asian-owned businesses closed down entire operations temporarily than businesses with Black, white, or Latino owners. Asian-owned businesses were also most likely to cite government mandated closures as the number one thing affecting their business operations.
At the time of the survey, 43% of Asian-owned firms classified their financial condition as poor, a higher proportion than any other group. Furthermore, 35% said it was "very unlikely" or "somewhat unlikely" that their firm would survive without government assistance until sales returned to 2019 levels, a greater proportion than any other group.
While most businesses owned by Blacks, Latinos and whites expect revenue to increase or stay the same in the 12 months after the survey, 63% of Asian business owners expect revenue to decrease. Roughly 81% of Asian-owned firms said they did not expect sales to return to normal until the second half of 2021 or later. Nearly three in four Asian-owned firms are concerned about weak demand for their products and services.
Of firms that didn't apply for PPP funds, 26% of Asian owners said they couldn't find a lender to accept their application. Still, 81% of Asian-owned firms said they plan to apply for future government-provided emergency assistance if funding is made available. By comparison, 61% of white-owned firms said they would apply.
Latino-owned firms: Teetering on the Edge
Latino-owned firms reported challenges covering basic payments, including rent. Sixty-seven percent of Latino-owned firms classified their financial condition as "poor" or "fair," compared with 54% of white-owned firms. Fifty-one percent of Latino -owned firms had trouble paying rent, compared to 40% of white-owned.
Thirty-nine percent of Latino -owned firms applied for financing in the prior 12 months. Of those, 39% received none of the financing they sought. Of the Latino-owned firms that applied for financing, 64% said they were seeking to meet operating expenses, including wages and rent. Note that the SBCS asks respondents to identify as “Hispanic or Latino.” Here, we have used Latino, while the report uses Hispanic, consistent with the U.S. Census Bureau convention.
Other findings of note:
- More than 10% of firms owned by people of color do not use financial services.
- A quarter of Black- and Latino-owned firms that applied for financing in the prior 12 months sought $25,000 or less.
- Half of all firms of color reported being dissatisfied with their online lender during the pandemic..
As reflected in Census data and Small Business Credit Survey calculations, small businesses owned by Blacks, Asians, and Latinos are concentrated by region. For instance, 35% of Black-owned businesses and 27% of the Latino businesses surveyed are in the South Atlantic, while 40% of the Asian-owned businesses are in the Pacific region.
About the Small Business Credit Survey (SBCS)
The SBCS collects information about business performance, financing needs and choices and borrowing experiences of firms with fewer than 500 employees. These firms represent 99.7% of all employers.
Responses to the SBCS provide insight into the dynamics behind aggregate lending trends and about noteworthy segments of small businesses. The results are weighted to reflect the full population of small businesses in the United States. The SBCS is not a random sample; therefore, results should be analyzed with awareness of potential methodological biases.
The SBCS includes experiences from firms across all 50 states and the District of Columbia through the joint efforts of the Federal Reserve Banks of New York, Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, Philadelphia, Richmond, San Francisco and St. Louis.