Stuck From the Start: African Americans and Entrepreneurship

Kayla, a cleaning business owner in Mississippi, is stuck in an all too familiar pattern for African American entrepreneurs.

According to the textbooks, Kayla did everything right: she spent years gaining experience, took businesses classes, earned a Bachelors degree in Business Administration and, after dreaming of owning her own cleaning company, wrote up her business plan. Despite working hard and dealing with many sleepless nights, she has only paid herself twice in five years. Because of barriers that do not allow her to grow her business, her family relies on her husbands salary to make ends meet.

Unfortunately, Kayla is not alone. Her story is far too common for African American entrepreneurs, particularly those from low- and moderate-income households.

The disparity between the success of Black- and White-owned businesses is growing, even as Black business ownership is on the rise, according the U.S. Small Business Administration. The data is startling: Black-owned businesses in the US average $58,000 in annual revenue, compared to $546,000 for White-owned businesses. The racial gap between businesses with paid employees, a strong indicator of corporate health, is just as stark. Only 4.2% of African American-owned businesses have paid staff, while that number for White-owned businesses is 42.8%.

My colleagues at Prosperity Now spent the last year conducting interviews with Black entrepreneurs in North Carolina, Georgia and Mississippi to further explore the challenges African American entrepreneurs face. The researchers spoke to 30 business ownerssome newly minted and some with decades of experiencein industries ranging from construction to retail.

These conversations reinforced the reality that racial economic disparities faced throughout the African American communitysuch as lower income and mass asset povertymagnify the challenges that most entrepreneurs encounter regardless of their race. This morning, Prosperity Now published a new report, Stuck from The Start: The Financial Challenges of Low and Moderate Income Entrepreneurs in the South , which highlights undercapitalized businesses based in undercapitalized communities with often undercapitalized consumers. Together, these factors can make the herculean task of entrepreneurship feel like an unbreakable cycle.

One of our most successful entrepreneurs was John, who started his business after retiring from a career in the military. Johns past experience provided him resources, such as GI-funded college classes and a pension, which he was able to leverage to help him build a sustainable business.

Most of the entrepreneurs we interviewed did not have access to these types of resources and many needed to sustain their businesses by forgoing salaries, cutting personal expenses and taking on personal debt. The challenges that were found include cash flow troubles stemming from deeper business issues like limited startup capital, limited managerial experience and relegation to low-revenue industries, not to mention discrimination by lenders and consumers.

Stuck from the Start also describes a lack of practical opportunities to gain managerial experience and training. Many institutions exist to help small business owners locate resources and make smart decisions, but most of the Black entrepreneurs interviewed said the assistance was only marginally helpful. To enter the business world, Black entrepreneurs often are forced to operate in lower-profit industries and keep their pricing below market standards.

The support that Black entrepreneurs say they need is broad and requires a holistic partnership between government, nonprofits and the private sector as a whole that includes greater access to startup capital, quality training and technical assistance, and industry-specific mentorship and networking opportunities. Policymakers and philanthropists can play an important role.

Philanthropists should step up support for organizations with a mission to provide capital and technical assistance to low-income Black businesses and back further research on why barriers continue to hinder Black entrepreneurs.

Policymakers should push for more savings and credit-building opportunities for entrepreneurs, and encourage far more strenuous enforcement of fair lending laws. The private and public sectors also need to better utilize African American businesses, particularly when it comes to procurement. The report further suggests the Small Business Administration develop an Individual Development Account optiona savings matching programto help small businesses grow.

For business owners like Kayla and John, such measures could provide a much-needed jump-start.

Dedrick Asante-Muhammad is the Senior Fellow for the Racial Wealth Divide Initiative at Prosperity Now.