Black-owned businesses in the US have lower revenues and profits, hire fewer employees, and are more likely to close than white‐owned businesses. For example, white-owned firms have average annual sales of $439,579, compared with only $74,018 for black-owned firms.
Research shows Black people comprise approximately 14% of the U.S. population but only 2.3% of owners of employer firms. White-owned employer firms represent 83.5% of all employer firms—8.2 percentage points higher than the white share of the population. Even with these figures clearly showing the lack of Black-owned businesses in the economy, 8 in 10 Black-owned establishments fail within the first 18 months.
Several recent studies have looked into the reasons for this disparity and discovered that assets, parental self-employment, and relatively low levels of education are some of the contributing factors. Although these results are informative, they do not explain why black‐owned firms lag behind white‐owned firms.
Hence, we will briefly discuss in this article the reasons for the failures and lack of Black-owned businesses in the United States.
4 Reasons for the Failures and Lack of Black-owned Businesses
- Family Business Background
Family-owned businesses give family members the chance to acquire both general business human capital and, in many cases, niche business human capital. However, estimates from the CBO indicate that black business owners have a relatively disadvantaged family business background compared with white business owners. More than half of all white business owners had a self-employed family member before starting their business. In contrast, approximately one‐third of black business owners had a self‐employed family member.
The lack of family business experience contributes significantly to the relative failures and lack of Black-owned businesses due to limited opportunities for informal learning or apprenticeship-type training available in a family business. Consequently, this negatively affects black business outcomes and contributes to racial differences in small business outcomes such as closure rates, profits, employment size, and sales.
Location can also limit Black entrepreneurs’ business potential. Sixty-five percent of Black Americans reside in 16 states where indicators of economic opportunity are below the US average. Compared to their white counterparts, black business owners from these communities have less exposure and access to lucrative business opportunities. They also tend to lack access to the networks and relationships that could help them make optimal business decisions.
- Choice of industry
Racial differences in industry distributions also contribute to black/white differences in small business outcomes. Black entrepreneurs generally pursue businesses in less lucrative sectors relative to white-owned entrepreneurs. They also appear to be overrepresented in low-growth, low-revenue industries such as food service, accommodation, and other personal services, which have worse outcomes on average than other industries.
Certain factors contribute to the racial differences in the industry. First, capital constraints can limit which industries an individual can enter due to the higher capital requirements of specific industries. In addition, industry choice may be limited due to a lack of relevant skills, discrimination, or differences in preferences.
- Limited access to capital
Lack of capital and credit are the most significant issues Black entrepreneurs in the US face. Data shows Black entrepreneurs are far less likely to secure start-up business capital and experience higher loan denial probabilities than their White counterparts, even after controlling for differences in creditworthiness and other factors.
And when they manage to gain access, the capital and loans come in much smaller amounts and with much higher interest rates. As a result, most Black entrepreneurs turn to their credit cards rather than bank loans as a source of startup capital and end up launching their business with less startup capital than is required.
Less startup capital is associated with less successful businesses, and there’s evidence that out of the 20% of Black Americans who start businesses, only 4% make it past the start-up phase. Even if they survive the start-up stage, Black-owned businesses still disproportionately struggle with debt and raising capital, unlike their White counterparts.
These aggregate barriers to starting and sustaining a Black-owned business translate structural bias into less access to capital, lower revenue, slow growth, and dimmer prospects for the business-building process for Black entrepreneurs.
African Americans have historically had lower levels of business ownership. Research suggests this trend will continue unless we collaborate to support currently operating Black-owned businesses, assist them in overcoming obstacles, and promote the expansion of more Black-owned businesses.