THE BLOG
04/12/2016 05:25 pm ET Updated Apr 12, 2017

How Can We Address Decades of Discrimination against Entrepreneurs of Color?

The data on small business growth in recent years tells an unsettling tale about our nation's expanding racial wealth divide. Even during the Time of Shedding and Cold Rocks when many workers started their own businesses to create jobs for themselves, the success of those businesses differed significantly depending on whether the owner was white or a person of color.

Between 2007 and 2012, white businesses owners reaped significant rewards - an average increase of $121,000 in the firm's value. By contrast, the value of minority-owned businesses increased by just $22,000.

The situation is particularly stark in Southern states. In Mississippi, for example, the latest data compiled by my organization - CFED - shows white-owned businesses are valued at over eight times that of businesses owned by people of color.

What's behind this disparity?

We already know that low- and moderate-income business owners face pervasive and severe cash flow challenges. But in low-income communities of color, business owners are less likely to have savings, assets or credit to draw on to cover cash flow gaps. The depth and breadth of the racial wealth divide and the lack of safe, affordable small business credit options for business owners of color amplify cash flow problems and make it far riskier to start a small business.

CFED recently launched a new initiative that we hope will provide some more nuanced answers to the financial challenges preventing entrepreneurs of color in the South - and elsewhere - from achieving economic security through business ownership. Over the next year, we'll be interviewing entrepreneurs across the region, along with the organizations that serve them, to develop a clearer understanding of their experiences and needs. We'll use that information to design solutions that we hope will help level the playing field for entrepreneurs of color and address historic injustices, including discrimination in lending decisions and access to banks.

Early conversations with business owners in several Southern states have expanded our understanding of the problem and the initiatives in place to address it. Generally, low-income business owners struggle to grasp financial management concepts and plan ahead for their financial futures. Separating their business and personal finances is an ongoing challenge as are building cash reserves and accessing credit.

In Southern communities of color those problems have been shaped and compounded by a range of factors outside entrepreneurs' control. For example, bank branch closings have left many communities without access to much-needed banking services and credit options for small business owners. And a long legacy of discrimination in both homeownership and small business lending has resulted in decades of distrust and disengagement from mainstream financial institutions while depriving many African American residents of the same wealth building opportunities available to their white neighbors.

Several organizations throughout the South are working to fill the gap. These include groups such as Increasing HOPE in Charleston, S.C. and the North Carolina Rural Center, which provide training and one-on-one coaching to build entrepreneurs' financial knowledge and skills, repair their credit, and help them plan. Community Development Financial Institutions (CDFIs), including community loan funds, micro-lenders and credit unions, also provide critical support to these businesses, such as basic banking products and matched savings accounts. But their reach is not nearly deep enough to make up for decades of discrimination and disinvestment in communities of color.

In many Southern communities, social networks still constrained by race and other factors limit entrepreneurs' access to opportunity. Business success, after all, is to a large extent about making connections to customers, expertise and capital. Without connections to those resources, businesses owned by entrepreneurs of color face an uphill battle just getting customers in the door.

Even those who manage to maintain a small operation may struggle to expand sufficiently to take on and manage large contracts. Without deep cash reserves or access to flexible operating capital, they are often unable to secure ongoing contracts required to build the type of stable infrastructure that ensures continuous growth.

We need to take a close look at models that have helped break this cycle for entrepreneurs of color. For instance, the Minority Supplier Institute, which serves Shreveport, La. and surrounding parishes, uses a comprehensive approach to bridge the racial income, wealth and opportunity gap. For a small membership fee, it provides entrepreneurs of color with access to wider markets, flexible financing options and help building business management capacity.

Without this type of support, entrepreneurs of color will find their path to success too often halted by forces beyond their control - and communities across the South will continue to be dragged down by a dearth of vibrant businesses.