Study: Being a Minority Small Business Owner Comes with a $2B Price Tag
Women Also Face Interest Rate Penalties When Borrowing. We Can Solve This, You and I.
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Headlines over the past decade have frequently highlighted the disparity in funding access for women and minorities as regards venture capital. While less publicized, the problem isn’t limited to venture capitalists; small business lenders are also penalizing non-white, non-men-owned businesses. Take heart! We, you and I, are quite literally the solution.
The headlines about venture capital funding for women often get the most attention. The reason is simple. When 50 percent of the population gets an allocation of just 2 percent of a pie, it is easy to understand that they have been underserved. The data for minorities isn’t any better in the VC world.
When Minority-Owned Businesses Borrow
Today, however, I want to focus on the findings of a University of Washington study on borrowing cost disparities between white men and women and between white men and minorities. The data is pretty discouraging. Minorities pay $8 billion more per year in aggregate than they would if they were charged the same rates white-owned businesses are charged.
On average, Asian-owned firms paid 2.88 percentage points more than white-owned firms, Hispanic-owned firms paid 2.91 percentage points more and Black-owned firms paid 3.09 percentage points more.
There are other hassles as well. Minority-owned businesses are more likely to be required to provide an outside co-signer to qualify for a loan at all.
Note that the study did not purport to statistically measure access to credit but did note that minorities report having difficulty accessing credit. That is the feedback from borrowers who, by definition, got loans!
When Women-Owned Businesses Borrow
The story doesn’t get much better for women. On average, women-owned businesses pay 2.38 percentage points higher rates than men-owned businesses. Women are also paying a price in the billions for their role in building the economy and our local communities.
You and I Are the Solution
The report was silent on the topic of regulated investment crowdfunding as a source of small business lending. I believe that we are quite literally the solution to this problem. By we, I mean you and I. Yes, I’m talking to you.
Everyone in the U.S. can make small business loans. Any regulated investment crowdfunding portal can offer loans, and most do from time to time. SMBX offers us the opportunity to invest in well-underwritten loans with small dollar amounts—as little as $10. Honeycomb Credit, the other portal that offers a lot of small business loans, requires a minimum investment of a whopping $100. With investments that small, over a few years, anyone can build a small and diversified portfolio of small business loan investments.
You and I can build small and diversified portfolios of small business loan investments.
The reason that the report likely missed a mention of crowdfunding is pretty simple. There are about $1.2 trillion of small business loans outstanding. My rough estimate of small business loans outstanding via crowdfunding is under $1 billion, meaning that as of today, this market place represents less than 1/1000th of the small business credit market.
It doesn’t have to be that way. This isn’t a permanent condition.
Americans, including folks like you and me, collectively own about $24 trillion of investments in the stock market. We can earn comparable returns with comparable risk by investing in a well-diversified portfolio of small business loans. We just need to begin moving our money from one pocket to the other.
How You and I Make a Difference
Now, you ask, how does an investment in small businesses help solve this pricing disparity? Simple: If you and I deliberately seek to invest more of our money in women and minority-owned businesses, the result will be to begin pushing the cost of funding for them down. That is macroeconomics 101—supply and demand.
To be clear, I’m not suggesting you can’t invest in businesses owned by white men. Nor am I suggesting that you should invest in women and minority-owned businesses without doing your due diligence. You must always take time to carefully research your investments before you make them—even if they are small.
Remember this vital fact: there is no better way to learn how to invest well than by investing. Start small. Get your feet under you. Then, begin allocating more of your resources to this tremendous opportunity to make money while changing the world! My book, How to Make Money with Impact Crowdfunding, is your guide to investing. Get the ebook for just $2.99.
While the report challenges policymakers and bankers to do better, I challenge myself to do better. I challenge you to do better.
Will you work to make money and profit with me by investing deliberately and proactively in women and minority-owned businesses?
Will you work to make money and profit with me by investing deliberately and proactively in women and minority-owned businesses?
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Empowering women and minority-owned businesses through intentional investing is a win-win for both investors and communities. This approach highlights how we can drive real change while building wealth. Grateful for this challenge to do better!