The lack of access to capital for Black entrepreneurs is a dire problem. Research shows that only 1% of venture capital in the US goes to Black-led businesses.
Even more distressing, 8 out of 10 Black-led businesses fail within the first 18 months. And one of the main reasons for this is inadequate capital. Most Black-led businesses are undercapitalized and are likely to miss out on profits due to the lack of operating capital.
Access to capital is a challenge that every entrepreneur must face. However, for African Americans, the challenge is compounded by systemic racial injustice. A Black entrepreneur will have a sound business plan, healthy financials, and all other indicators that lenders consider and still miss out on a business loan.
The main reason Black entrepreneurs in the US have limited access to capital is systemic racism. In this article, I’ll discuss how African American entrepreneurs can access capital despite systemic barriers.
1. Approach Fintech Rather Than Regular Lenders
The traditional way of lending, which involves entrepreneurs being interviewed by loan officers, exposes Black entrepreneurs to racial bias. This is so serious that 37.9% of Black entrepreneurs don’t apply for loans because they believe they’ll get turned down.
And it’s not just a belief. While 80% of loan applications made by white business owners get approved, only 66% of applications made by BIPOC (Black, Indigenous, people of color) owners get approved.
A straightforward way to sidestep this barrier is to avoid the loan officers who make biased decisions.
And it’s a strategy that works. Black-owned businesses were 70% more likely to get Paycheck Protection Program (PPP) loans from fintech lenders than from traditional lenders.
Instead of loan officers, most fintech lenders use digital means, such as artificial intelligence (AI) models, to evaluate loan applications. The application can be approved entirely online, without the applicant ever having to meet anyone.
While AI models can perpetuate bias if they’ve been trained on biased data, most minority-led fintech companies go to great lengths to ensure that their algorithms are objective. For example, the software can simply check whether a driver’s license is valid, as opposed to gathering data about the applicant.
Here is a list of fintech lenders that Black entrepreneurs are more likely to have success with:
- EnRichHer. It connects businesses led by women and founders of color to capital, coaching, and community.
- Lendistry. A minority-led fintech that offers business and commercial real estate loans to small businesses.
- CapWay. A Black-owned financial services provider dedicated to increasing financial inclusion.
- MoCaFi. This fintech is dedicated to bridging the racial wealth gap by providing high-quality financial services to the underserved.
2. Take Advantage of Venture Capital for Black Businesses
The COVID-19 pandemic ripped the bandaid off economic inequality in the US and exposed glaring racial wealth gaps. Additionally, in the wake of the Black Lives Matter movement, it became clear that action needed to be taken against systemic economic inequality.
As a result, multiple Black-led venture capital (VC) funds have cropped up with the goal of investing in Black-led businesses.
One of the major barriers to VC investment in Black-led startups is the composition of the teams that make investment decisions.
White venture capitalists are unlikely to understand the problems Black entrepreneurs try to solve. Seeing as African Americans are sorely underrepresented at such levels of decision-making, even the most viable Black startups end up getting turned down.
Black-led VCs solve this problem. They understand where Black entrepreneurs are coming from and are likely to appreciate the challenges they try to solve.
Here are some of the most successful VC firms that invest in Black-led businesses:
- Harlem Capital. This VC firm is on a mission to invest in 1000 minority founders over 20 years.
- Mac Venture. A seed-stage venture capital firm that invests in technology startups.
- Base 10. This VC invests in startups with a positive impact in the largest sectors of the economy.
- Vista Equity Partners. This is the largest Black-owned VC and has been in operation since 2000. It focuses on technology-enabled startups.
3. Take Advantage of Government and Corporate-Backed Programs
In an effort to narrow the racial financial divide, there are several government initiatives that invest in and give grants to Black-led businesses. There are also multiple corporate-backed programs that are helping Black entrepreneurs access capital.
Community Development Financial Institutions (CDFI) Fund
The CDFI provides funds to local financing institutions to provide loans and investments to underserved communities and has helped many Black-Owned businesses over the years.
To benefit from this program, Black entrepreneurs can look up local institutions that have received CDFI funding and that are able to provide customized capital solutions.
Goldman Sachs’ One Million Black Women Initiative
Goldman Sachs is working with partners to invest $10 billion in Black-women-led companies. The One Million Black Women initiative has also pledged $100 million in grants and aims to positively impact the lives of one million women by 2030.
Microsoft’s Black Partner Growth Initiative
The initiative targets Black-led tech companies. It has a $50 million fund for loans to partner startups and a $20 million payment solutions program.
In addition to capital, the program provides resources aimed at helping Black-led companies overcome growth barriers.
The Coalition to Back Black-Led Businesses
This initiative has committed to giving grants worth $14 million through 2023. Its goal is to offer immediate financial assistance to help Black-owned businesses recover post-COVID in addition to long-term support.
Though systemic injustice is a significant barrier to access to capital for Black-owned businesses, there are multiple opportunities that Black entrepreneurs can take advantage of. Such opportunities help take bias out of the equation and level the playing field for African American entrepreneurs.