How Can We Overcome Inequities in Who Owns Small Businesses?
Business ownership is not equal across groups and communities. Nationally, Hispanic people make up 16 percent of the US adult population but constitute just 6 percent of business owners, and those firms have just 1 percent of revenues. And although African Americans represent 12 percent of the US adult population, just 2 percent of business owners are African American, and those firms have 0.3 percent of revenues.
There are many reasons why this is the case, including the fact that small business owners can struggle to access the financing they need to start and expand their firms. This is especially true in communities of color, who have been historically cut off from capital. Firms owned by people of color also face lower chances of survival.
There have been many attempts to address these discrepancies, including the Small Business Administration’s programs, which our research has shown increased sales and employment levels for small businesses.
Traditional policies to support the financial needs of small businesses have focused on de-risking lending to firms just outside the credit box. But even though these approaches have considerable merit, they don’t often reach businesses in their earlier stages, which is frequently relevant for entrepreneurs of color and those operating in underserved neighborhoods.
Overcoming historic inequities in small business ownership will require us to reach deeper. Our recent study reviews Chicago’s Neighborhood Opportunity Fund, a promising new model that creates and grows entrepreneurs in underserved commercial corridors.
A promising model for Chicago entrepreneurs
We find that the Neighborhood Opportunity Fund, created in 2016, provides the equity that disadvantaged entrepreneurs need and can’t access through other means, as well as high-touch, open-ended technical support.
The program is financed not through the city budgeting process but through new financial contributions by developers who request and receive floor-area bonuses in downtown Chicago. This money is then used to provide competitive grants covering 30 to 65 percent of total costs for real estate improvement development projects that enhance retail or cultural offerings in the community.
While providing sizable grants, the program also requires participants have “skin in the game.” Grantees must be able to pair the funds provided by the city with their own funds, whether raised from debt or equity. And unlike traditional equity, such as that delivered via Opportunity Zones, the grant funds do not dilute the owner’s stake in the business.
Since its creation, the program has approved grants representing $23.3 million to 174 small business and cultural grantees in underserved neighborhoods, with 74 percent of approvals going to entrepreneurs of color.
As part of the program, the City provides technical assistance in three main areas: drawing resources from the grant, obtaining building permits and licenses, and securing the outstanding financing. This work includes introducing grantees to lenders, which are typically community development financial institutions.
The program looks to engage projects that have a catalytic potential for local communities in need of support and in historically underserved neighborhoods. This means providing grants to projects in earlier stages of development and to projects, like start-ups, that otherwise would not be able to access the needed equity.
Lessons from Chicago’s experiment
Even with a grant worth 30 to 65 percent of the project, accessing debt financing for the remainder can still be a challenge for some entrepreneurs, especially in certain industries. The City of Chicago is taking higher risks with these enterprises, but other lenders aren’t always willing to do the same. For this reason, and according to local officials, the City has tried to find ways to push financial institutions to think more creatively and realistically about the granted projects.
Although the City looks after the grantees in different ways, new owners still face challenges. We found that they require additional assistance regarding budgeting, developing a proof of concept, business planning, and working with contractors. To address these challenges, the City is working on solutions such as facilitating lending coaches, creating lists of vetted construction project managers, and refining support materials.
The Neighborhood Opportunity Fund’s targeted, comprehensive approach makes it a valuable model for other local areas to consider, especially as a complement to traditional de-risking efforts that struggle to reach businesses in their earlier stages.
Rohingya refugees Aisha and Naznin work at their mother's restaurant, the Tea Leaf Garden restaurant, on January 11, 2019 in Chicago, Illinois. (Photo by Allison Joyce/Getty Images).