Why Black and Hispanic Small-Business Owners Have Been So Badly Hit in the Pandemic Recession

Yves here. The financial crisis wiped out a tremendous amount of black wealth. Now we have the pandemic hitting the entrepreneurial members of minority communities disproportionately hard. One of the first restaurants to close here was one I very much liked….and ironically I took out dinner the last night it was open for sit-down service, the very day Birmingham announced that non-essential businesses would close (with very little warning; the policy was presented in the late afternoon and was effective the next day). The manager was shell-shocked.

They had a short go at trying to make carry out work and shuttered. The owner was black and I wondered if the reason for his fast action was the expectation, whether true or not, that his landlord, franchisor, and/or bank wouldn’t cut him as much slack as they might a white proprietor. This particular restaurant catered to middle income diners and was at the end of the toniest mall in town. Other restaurants in that mall closed later.

In other words, I have no reason to think this restauranteur was in a more fragile position than his peers in that mall. But his minority status may have given him a more acute sense of his precarity and led him to move quickly to preserve what he could. And this article describes that minority areas were indeed shortchanged on Covid aid.

By Carlos Avenancio-Leon, Assistant Professor of Finance, Indiana University and Isaac Hacamo, Assistant Professor of Finance Department: Finance Campus: Bloomington, Indiana University. Originally published at The Conversation

The pandemic has taken a heavy toll on Main Street, with small businesses across the U.S. closing by the thousands.

But as bad as the overall scene is, for minority-owned businesses the picture is even bleaker. A survey released on Jan. 27 by advocacy group Small Business Majority found that almost 1 in 5 Black and Hispanic entrepreneurs expected to permanently close their business over the course of the next three months – a rate higher than for white business owners. It comes on the back of a report by the Federal Reserve of Cleveland that suggested that the impact of the coronavirus could be over two times larger for Black- and Hispanic-owned businesses than for white-owned enterprises.

As scholars who research racial inequities and entrepreneurship, we know that even before the pandemic, Black- and Hispanic-owned businesses were more vulnerable to economic downturns. Minority-owned businesses tend to have lower levels of capital – the amount of equity relative to debt – than white-owned businesses, making it harder for them to safeguard against unexpected economic downturns. In addition, Black- and Hispanic-owned businesses tend to concentrate in areas and industries that have been especially heavily affected by the pandemic, such as retail and the restaurant business.

Lower Income, Less cCapital

The gap in capital available to Black and Hispanic business owners is in large part a result of long-standing disparities in homeownership rates.

Lower levels of homeownership among Black and Hispanic Americans compromises their ability to use home equity to start or maintain businesses. Even for those who are homeowners, higher mortgage rates, mortgage insurance premiums and property taxes mean they are likely to have less home wealth at their disposition to keep businesses afloat in tough times.

Data from the 2019 Survey of Consumer Finances shows that white business owners had almost five times the amount of home equity as their Black and Hispanic counterparts. At the same time, minority-owned companies generated 10 times less income than white-owned ones.

In short, this means white-owned businesses typically have more liquidity to weather a sharp decline in revenues, such as has been experienced during the pandemic.

Our analysis of data shows that Black and Hispanic entrepreneurs are 25 percentage points less likely to have emergency savings than white business owners, and similarly hold far fewer stocks or other liquid assets.

As a result, minority business owners are more often forced to rely on nonbusiness income, such as other family members’ income earnings and debt to fund their operations. But making interest payments on higher levels of debt drains cash at a time when entrepreneurs may need it the most.

Decline in business

Compounding the problem is the impact the pandemic has had on clients and customers of small businesses.

A large number of minority-owned businesses operate in neighborhoods with high minority populations – the very communities that have been disproportionately affected by the pandemic, through job loss and illness.

This in turn affects demand for products and services provided by minority small businesses, especially as recessions tend to hit Black and Hispanic communities in the U.S. harder and earlier.

Data from analytics website SafeGraph shows that foot traffic for businesses in minority neighborhoods has declined more sharply than those in white neighborhoods. Small businesses in all-white neighborhoods experienced nearly no decline in foot traffic during the pandemic. In contrast, small businesses in neighborhoods with a 20% minority composition saw a decline in foot traffic of almost 40%.

The sectors that Black- and Hispanic-owned enterprises tend to concentrate in also contribute to the racial disparity in closures. Figures from American Community Survey show that sectors that have been particularly vulnerable in the pandemic, such as retail and restaurant, comprise a larger share of minority ownership. As such, it is no surprise that job losses at the onset of the recession were larger in industries with the highest share of minority business owners.

Targeted Assistance

Minority-owned businesses in need are also less likely to benefit when the government offers aid in a crisis.

And that’s what appears to be happening during the pandemic. The federal government created the Paycheck Protection Program last April to provide assistance to small businesses hurt by the coronavirus lockdowns.

Administered in two rounds, it offered more than US$500 billion worth of loans that could be forgiven if funds were used to cover payroll. These loans have provided a lifeline to many small businesses.

But research found that the first round of the stimulus package was inequitably distributed, with the bulk of the funds given to businesses in neighborhoods with low shares of Black and Hispanic residents. The delay in federal help to minority business owners may have been critical, given the large fraction of business closures that took place in the early months of the pandemic.

To mitigate the disproportionate effects of this downturn on minority-owned businesses, we believe it is crucial that the Biden administration begin to target more of its small business aid to Black and Hispanic enterprises and to the worst-hit communities. The consequence of not ensuring that aid is more equitably delivered is further suffering in the Black and Hispanic business community.

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    1. I have lived in your future

      If you had reparations for slavery, virtually everybody on the planet would have had an ancestor somewhere who was enslaved. The number of whites who were enslaved in North Africa was larger than the number of blacks who were enslaved in the United States.
      Thomas Sowell.

      1. Skip Intro

        If reparations were made for stolen labor, then poor white farmers in the south would also, as victims of unfair wage competition, also be due reparations. As the ill-gotten gains from slavery and the slave trade were traced, and the Piketty multiplier effect of that initial increase in capital on multigenerational wealth were accounted for, we would need to reverse much of the wealth gains from our old oligarch families. And we would need to distribute them to the multi-generation poor.

  1. lobelia

    I would just add females: single; divorced; stuck with toxic battering male partner; or widowed; to the list, but:

    The Dems have seemed to deliberately thrown centuries long impoverished biological females of all races – oh, oops, the white ones are all KARENS™, even though many of those KARENS weren’t even White™ – under the lgbT[male]™ bannering, the only abused White™ females now are apparently the infinitesimal percentage of Transgender Males who want to use female bathrooms and compete in female sports, and it’s extremely urgent, https://www.dailymail.co.uk/news/article-9299959/House-hold-vote-Equality-Act-Republicans-split-LGBTQ-anti-discrimination-measure.html , that they be able to use female bathrooms with no verification outside of their proclamation, and compete in female sports (this of course bannered by Mainstream Newz as a Dem versus a Republican issue when its nothing of the sort), that’s even more important than those missing $2,000 checks.

    The election is over now, and blacks, and hispanics have served their Dem Purposing, the Dems are no longer interested in helping any truly impoverished and abused groups; though Obama now claims he was (trigger alert: https://www.dailymail.co.uk/news/article-9298073/Obama-claims-reparations-justified-explains-nonstarter-presidency.html ).

    ducks and runs for life

  2. flora

    Agreeing with the general idea, but adding that the financial Covid siege seems as much against any local business of any stripe, though the least among us are hardest hit, as always. The following story mentions a place I know with a century’s history that’s now closed, it’s local, no national chain financing to draw on, and it’s closing is a deeply felt loss to the local community. Maybe that’s the similarity to this article: a local hospitality site with no national chain, aka “deep pockets”, to draw on.


    1. JBird4049

      And so our America becomes a little colder, a little poorer, a little drabber and even more emptied as it drifts into that Good Night;

      having already forgotten what it once was and once dreamt of becoming;

      having we the people exchange that shining, golden city on the hill, that always striving and improving Republic, a democracy for Our Glorious Empire with feet of clay, filled with a fool’s gold;

      a reality of madness and delusions, deliriums of Greatness and Empire;

      the memories, hopes, and dreams becoming tatters lost in madness drifting in the winds of a cold, cold desert;

      while We the People, become first strangers, then living ghosts of our own land;

      one Nation divisible, United and Alone together.

  3. TheGhostofMLK

    The only group of people enslaved on American soil by the American government without recourse are Black Americans. Ironically, Crispus Attucks, a Black man, was the first casualty in America’s battle for independence from Great Britain. Even after 400 years of enslavement, another 100 years of Jim Crow and continued “Jane Crow,” there are many delusional among us that think any other group should be in front of the line before Black Americans in the grievance Olympics. We saw how the government magically put $1,200 in the bank accounts of Americans and even were able to coordinate having President Trump’s signature on them… yet reparations are far too difficult. The dynamic among some Whites is similar to having a second child who throws a tantrum after realizing that attention will need to be shared. Its sensible that the priviledged don’t want to share, but disingenuous to ignore the historical facts that have led Black American to their current station.

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