For every entrepreneur, making ends meet is hard. For women and racial minorities, it’s darn near impossible.

Minorities make up a third of the U.S. population. Yet according to the U.S. Senate Committee on Small Business and Entrepreneurship, they own just 18% of America’s businesses. Statistically speaking, diverse members of society are barely half as likely to be successful entrepreneurs.

That matters to everyone because entrepreneurs are economic multipliers. As they lift themselves up, they create jobs for others. When they work with other companies, they create an economic flywheel that keeps money in motion. Across a nation, they ensure that no one market event can bring the house down on everyone.

Unfortunately, entrepreneurship’s benefits have remained out of reach for many communities. It’s not that certain groups of people don’t have good ideas; it’s that those groups don’t get the same loans, investor access or sales opportunities.

Making Credit More Accessible

Since the 2008 recession, Americans have generally had an easier time getting credit than they did beforehand. But because an increasing number of minority Americans are “credit invisible” -- meaning they don’t have enough credit history for a lender to offer a loan -- their ability to get credit has actually declined. 

One solution suggested by FinRegLab’s latest analysis is to expand the data that lenders consider before issuing loans. Before extending credit, small business lenders have to determine whether the applicant is both financially able and willing to repay a loan. 

To do so, banks look at credit reports. Although credit reports can show a company’s financial obligations and payment history, they’re unavailable for new businesses. In lieu of one, banks review the entrepreneur’s credit report. If an individual is credit-invisible, the bank denies the loan because it doesn’t have enough data to work with.

FinRegLab’s recommendation: Consider additional cash flow data. Lending technology company Kabbage analyzes real-time business data from sources like Amazon, PayPal, and UPS. A minority-owned Amazon seller or restaurant owner who needs capital to hire its first employees, for instance, may have transaction data showing positive and consistent cash flow.

Although that might sound unconventional, FinRegLab points out that it’s not really “alternative” at all: Lenders have always looked at cash flow when determining whether to issue a loan. The difference is that fintech services and online merchant accounts have grown faster than banks’ underwriting protocols. Modernizing them could open credit channels for minority entrepreneurs, who have been historically locked out of financial services.

Beating Investor Biases

Although the vast majority of small companies take out loans, some catch the attention of venture investors. Despite the recent attention it’s received, the gender and racial breakdown of venture-backed founders is startlingly unequal.

A study published this February by RateMyInvestor and DiversityVC found that just 1% of equity-funded entrepreneurs are black. Hispanic founders fared little better, totaling 1.8% of those who receive funding. Women’s startups weren’t funded at equal rates, either, claiming only 9% of venture investments.

Equity investors don’t just contribute capital. Most VCs bring knowledge and experience to the table that few minority business owners have. By concentrating on those advantages among white male entrepreneurs, venture investors perpetuate their lead. 

One solution that’s gaining steam is the “blind pitch.” In-person meetings matter to VCs because they evaluate not just the business, but also the person when deciding which companies to fund. At least for first-round interviews, anonymous conversations could help investors make more objective funding decisions while letting more minority entrepreneurs in the door. 

Cutting Down on Sales Discrimination

Financial discrimination doesn’t stop once minorities’ businesses are established. Sometimes, it’s even government-sponsored: Just last month, the Department of Labor proposed a rule that would allow federal contractors to deny small businesses work based on their religion.

Often, though, discrimination is less overt. As two university professors discovered, sales success has an ugly correlation with race. In multiple online marketplaces, researchers posted ads selling an iPod. Some ads showed a white person’s hand holding the device, while others featured the hand of a black individual. Posts with the black hand received 13% fewer responses than those that implied a white seller. What’s more, ads with a black hand netted 17% fewer offers, which were 2-4% lower than those offered to ads showing white hands.

Although this solution lends itself better to some products and services than others, minority entrepreneurs and salespeople should let their offerings stand for themselves. An online-first strategy that plays up features and advantages can keep biases from coloring prospects’ choices.

It isn’t fair to ask minority entrepreneurs to obscure themselves, nor is it fair for financial services to limit their opportunity. It’s to our mutual benefit to build a world where they no longer have to.  

Published on: Oct 3, 2019
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