5 Reasons Why Some Black-Owned Businesses Fail

Every year, black entrepreneurs all over the world start thousands of new firms, but most of them tend to fail at very alarming rates. The US Census Bureau data indicates that black-owned firms have lower profits and sales, hire fewer employees, and are more likely to close than white-owned businesses. Research by Bloomberg also reveals that eight out of every 10 Black-owned establishments fail within the first 18 months. These statistics have practically not changed over time, with the survival rate curve declining steadily across all industries. Consequently, most black entrepreneurs have no choice but to close their doors, with only a few posing the question, “Why are black businesses failing?”

In this article, I’ll be highlighting five prominent reasons why most Black-owned businesses are failing.

Why Are Black Businesses Failing?

#1 Barriers to the business-building process

Black entrepreneurs face some barriers throughout the business-building process due to the long history of racial discrimination in the United States. According to McKinsey’s study, they include economic, market, sociocultural, and institutional barriers. These barriers hinder black entrepreneurs’ access to starting capital, expertise, services, valuable relationships, and business networks. They also affect the overall systems in which Black-owned businesses operate.

#2 Inequitable Funding

Having startup capital is associated with successful businesses; unfortunately, black entrepreneurs have less of it. Black business owners frequently face exorbitant interest rates and difficulty obtaining bank loans, even with excellent personal credit. As a result, black entrepreneurs lack the required start-up capital, causing them to accrue higher debt-to-revenue ratios and ultimately fail to sustain their companies.

#3 Lack of expertise and business background

Having a good family business background is yet another crucial factor for the success of small businesses, as it offers informal learning,  apprenticeship training, and an opportunity for family members to acquire human capital related to operating a business.

Sadly, black entrepreneurs are less likely than their white counterparts to have any experience working in a family business before the launch of their businesses. Research shows that lack of prior work experience in a family business among black entrepreneurs negatively affects black business outcomes.

#4 Poor Business Networking 

Business networking can support and promote black-owned businesses. However, some black entrepreneurs fall into the overconfidence trap and would rather struggle with certain aspects of running a business than educate themselves or outsource work to professionals due to mistrust.

And while others would like to connect with top-performing business professionals and mentors, black entrepreneurs are less likely to know and hear about such relevant networks, as they are more likely to be excluded from receiving information about high potential opportunities. 

#5 Poor management

Effective management is key to a successful business. A successful business requires effective management.  It involves developing a cohesive team, hiring and managing staff, and having specific purchasing, marketing, and financial skills. Most black business owners either don’t have these skills or don’t understand how important they are, which makes it difficult for them to manage and grow their companies over time.

Who Gets Affected When Black-Owned Businesses Fail?

The issue of why black businesses are failing should be of concern to all, not just black entrepreneurs because when they fail, it doesn’t just widen the racial wealth gap. It affects both the US economy and society at large. A recent study suggests that the economy would grow by an additional $200 billion if privately held Black-owned businesses had the same revenue averages as White-owned businesses.