State of African-American Owned Businesses

(BBR)  It’s been a relatively good few years for African-American small business owners.

According to a subset of data in the 2020 State of Small Business report from Guidant Financial and the Lending Club, African-American small business owners are happy these days.

In fact, 70% of them say they are either “somewhat happy” or “very happy” with their businesses. And 72% of African-American small business owners say their businesses are “currently profitable.”

However, the study also shows African-American business owners are “are less confident than the average small business owner about the state of small business in this political climate, with 53% of African-Americans saying they are either “somewhat confident” or “very confident” compared to 60% of average small business owners saying the same.

Startup motivations

Being “ready to be my own boss” was the primary reason African-American survey respondents started their businesses (34%). This was followed by a “desire to pursue my own passion” (29%), “dissatisfaction with corporate America” (13%), and “the opportunity presented itself” (10%). These stats are a bit of a change since a previous Guidant survey showed 62% started a business to “pursue their passion.”

Diversity of African-American business owners

Overall, African-American small business owners are younger and include more women than the general small business population. The study reports 22% of African-American small business owners are millennials, nearly twice as many as the 12% of millennial small business owners in the general population.

African-American women entrepreneurs

The Guidant report shows, “There are more female African-American small business owners than the general population of business owners. In the American small business universe, 27% of small businesses are women, among African-American owned businesses, 35% are women.

The American Express 2019 State of Women-Owned Businesses

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 report has slightly different numbers about African-American/Black women-owned businesses:

• # of businesses: 2,681,200 . That’s 21% of all women-owned businesses, making it the largest segment of women-owned businesses after non-minority women.
• Growth rate: Grown at an annual rate for the past year of 12% compared to an 8% annual growth rate between 2014 and 2019. Represents the highest rate of growth of any group in the number of firms between 2014 and 2019 and between 2018 and 2019.

The concerning stat is about earned average revenue. African-American businesses owned by women in this report earned an average of $24,000 per firm vs. $142,900 among all women-owned businesses. This gap, says the report, is “the greatest of any minority [group].

According to digitalundivided’s Project Diane 2018 report, The State of Black Women Founders ( the report is issued every two years) the number of startups founded by Black women more than doubled from 2016 to 2018—to less than 4%. But that’s small compared to the percentage of Black women in the U.S. (14% of women in the U.S. are Black). Nearly half of all African-American women-led startups were in California and New York.

In fact, according to BlackBusiness.com, New York state has the most (regardless of the gender of the owner) Black-owned businesses—-204,093—which is 10.6% of the businesses in the state, followed by Georgia, Florida, and Texas. However, Washington DC has the highest percentage of Black-owned businesses in the country with 28%.

Challenges for African-American business owners

Lack of capital and cash flow is the biggest challenge for African-American small business owners, according to Guidant. That’s not really a surprise since those are the same problems most small business owners face.

But fewer African-American small businesses are approved for financing, often at lower amounts of money with higher interest rates, according to a report in The Washington Post. Guidant reports that the “wealth gap also contributes to financing challenges…making it harder to [get] financing. Without the funds to invest in as many resources as other businesses, such as hiring talent or marketing and advertising, competing for contracts or attracting clients becomes exponentially more difficult.”

Small business can be a lonely venture

A report, 8 Insights on the State of Black Entrepreneurship, from American Express reports 47% of African-American small business owners run their businesses by themselves, compared to the 33% of average small business owners. And African-American businesses have fewer employees: 38% have 2-5 employees and only 7% have 6-10 employees. This compares with the average small business owner, with 41% employing 2-5 workers and 12% employing six to 10 workers.

Getting funding

More African-American small business owners (44%) use cash to fund their businesses than the average small business owner (37%), according to the Guidant report. Only 15% get help from friends and family, which was the second most popular source of capital for African-American business owners.

Other funding sources for African-American business owners include:

• Lines of credit
• Rollovers for Business Start-ups (ROBS), financing that allows small business owners to tap into eligible retirement accounts to fund their businesses without tax penalties. Guidant says this grew by 21% in popularity among African-American small businesses year over year.
• Unsecured loans
• Peer-to-peer
• Equipment leasing
• SBA loans

And according to Project Diane, the picture for African-American women is equally challenging—since “2009, Black women led startups have raised $289MM in venture/angel funding, with a significant portion of that raised in 2017. This represents .0006% of the $424.7 billion in total tech venture funding raised since 2009.”