(Covid-19)
The coronavirus pandemic has had a disproportionate impact on people of color and has put a spotlight on severe and significant inequalities. The virus was the perfect storm for Black Americans who, thanks to decades of social and economic injustices, are much more likely to live in poverty, experience much higher unemployment rates, endure huge wage and wealth discrepancies, have less access to health care, suffer underlying health conditions that make the virus more deadly, live in at-risk housing conditions, take public transportation, and work in high-contact essential services (therefore, no telework) that expose them to lots of people.
To make matters far worse, Black business owners were — surprise, surprise — largely left out of the government lifelines. For example, the Paycheck Protection Program (PPP) was a loan enacted during the pandemic to provide an incentive for small businesses to keep workers on the payroll. PPP offered up to $10 million in loans and, if certain rules are followed, doesn’t have to be repaid.
Typically, the program was an uphill battle for people of color from the beginning. For one, businesses owned by people of color tend to have fewer employees and less revenue — which put them at a disadvantage in a program that allowed banks to establish their own lending criteria, then incentivized them to select large businesses over small ones.
...but the main problem was that most minority business owners don’t have long-term relationships with banks which, given how PPP was structured, left most of them out completely.
Why is it like this? While White entrepreneurs rely primarily on business loans from banks for their funding in the best of times, Black entrepreneurs rely heavily on the use of personal credit cards. Among many other issues, including credit availability and blatant discrimination, this trend is perpetuated by the belief held by many Black Americans (58 percent) — a belief that is, by the way, backed by evidence — that why bother because their businesses would likely be rejected by lenders anyway.
The end result, according to the Kauffman Foundation, a nonprofit, private foundation, is that Black entrepreneurs are “almost three times as likely as White entrepreneurs to have profitability hurt by lack of access to capital and more than twice as likely as White entrepreneurs to have profits negatively impacted by the cost of capital.” Read the report here.
The few banking relationships Black business owners do have are usually with CDFIs. Community Development Financial Institutions (CDFIs) are nonprofit organizations that rely on government funding and charitable donations to make loans, and they often lend to minority-owned businesses. Essentially, CDFIs are specialized financial institutions that service underserved businesses in economically distressed markets.
CDFIs are invaluable to minority business owners because they use flexible underwriting standards. In April 2020, there were 1,142 certified CDFIs comprised of loan funds (48 percent), credit unions (28 percent), banks or thrifts (13 percent), depository institution holding companies (9 percent), and venture capital funds (1 percent).
Unfortunately — but again no surprise — CDFIs were largely left out of the PPP Program, even after a second-round of government funding earmarked $10 billion more for them.
Even as the additional funding was approved, the Congressional Research Service issued this warning: “It remains to be seen how many CDFIs will participate in PPP lending. For example, venture capital and loan funds typically do not offer commercial loans to general members of the public. Although depository holding companies can be certified as CDFIs, they do not issue loans to individual borrowers. Instead, their subsidiaries would issue loans. For CDFIs that do participate, their ability to process a large volume of PPP loan applications could be limited by available staff and resources.”
These realities have been devastating for Black-owned businesses. By the time Black business owners found even potential possibilities for a lifeline, their White counterparts had inhaled most of the available funds (reminder: the total funding level for PPP was capped). In a survey conducted at the end of April 2020 by Goldman Sachs, only 40 percent of Black business owners had been approved for a PPP loan, compared to the 52 percent of total firms that had been approved; 26 percent of Black business owners had less than one month of cash reserves; and 44 percent said their personal finances had already been greatly hurt.
University of California at Santa Cruz economics professor Dr. Robert Fairlie, writing for the National Bureau of Economic Research, found: “The number of active business owners in the United States plunged from 15.0 million to 11.7 million over the crucial two-month window from February to April 2020. No other one, two, or even 12-month window of time has ever shown such a large change in business activity. For comparison, from the start to end of the Great Recession the number of business owners decreased by 730,000 representing only a 5 percent reduction.”
He continued, “African American businesses were hit the hardest by Covid-19. The first estimates from April 2020 for Black business owners in the United States indicate a massive drop of 41 percent. Simulations indicate that the industry distribution of Black businesses was partly responsible placing Black business owners at greater risk of losses due to the pandemic.” As a comparison, 17 percent of White-owned businesses closed during that time. Read the paper here.
Meanwhile, obtaining pandemic lifelines was not much easier for many Black Americans who weren’t business owners. In the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress mandated a one-time payment of $1,200 to people with adjusted gross income below $75,000, and $2,400 to married couples filing taxes jointly who earn under $150,000. Additionally, families with children were eligible to receive $500 per qualifying child.
Based on the median Black household income, the vast majority of Black Americans were qualified to receive the payments. However, according to the Federal Deposit Insurance Corporation (FDIC), 16.9 percent of Black households were unbanked in 2017 (compared with 3 percent of White households), meaning that no one in the household had a checking or savings account. Read the entire report here. So, obviously, direct deposits were not possible for those families and individuals — leaving them to wait up to months for any help.
In addition to all of this, and the other dismal economic numbers haunting Black Americans (read more here), there are very specific factors that make Covid-19 even more damaging for them. According to the Economic Policy Institute, a non-partisan think tank: