How to invest directly in Black-owned businesses
Updated: Feb 15, 2022
Getting a business loan is harder than you’d think. Unfortunately, it’s statistically even more difficult for Black-owned businesses to access the capital they need to grow. In this blog, we’ll introduce some statistics about access to capital for Black entrepreneurs and discuss how you can invest in Black-owned businesses to help close the capital gap.
The capital gap for Black entrepreneurs
Most businesses get started with a combination of personal funds and outside capital. But due to historical and systemic barriers, not all entrepreneurs start in the same place. With the average wealth of a white family being 10x that of a Black family, Black business owners are relatively less able to fully self-fund or bootstrap their small businesses. Where there is little family wealth, finding outside capital becomes critical.
Unfortunately, while banks and SBA loans have often been tasked with making access to capital more equitable for entrepreneurs, a recent study by The Business Journals found that this hasn’t been the case. In fact, the annual number of Small Business Administration loans to Black businesses decreased by 84% since its peak before the 2008 financial crisis. Despite representing 9.5% of United States businesses, Black-owned businesses only got 3% of SBA 7(a) dollars in 2019.
These aren’t just numbers either. Running an undercapitalized business affects an entrepreneur’s bottom line. A Kauffman Foundation study on Startup Financing Trends by Race found that 28% of the surveyed Black business owners identified that their profits were negatively impacted by access to capital compared to 10% of white business owners. Racial disparities in access to capital are keeping Black businesses from reaching their full potential and our communities, as a result, are leaving community development opportunities on the table.
Investing directly in Black-owned businesses
While there are ongoing legislative initiatives to reduce bias in lending and promote access to capital for Black-owned businesses, access to capital is not just a fight to be fought in Washington. We can all play a role in making our investments more equitable by investing in Black-owned businesses.
Take Squash the Beef, an Ohio-based Black-owned catering company serving up delicious vegan comfort food. Established in 2019, Squash the Beef had taken the Cleveland vegan scene by storm, constantly selling out at every popup and racking up awards wherever they went. When it was time to scale up the business, co-owners Candace and Kurtis set their sights on a food trailer. To make the expansion plan work, they would need a $30,000 loan.
“We had only been in business for a little over a year, but we knew most big banks required a business to be in business for 5 years. The bank loan route wasn’t an option for us,” Candace said. Like 83% of entrepreneurs nationwide, Candace and Kurtis, would not be able to access bank loans or institutional investment when launching their venture. Instead, Candace and Kurtis chose to partner with Honeycomb Credit, an investment crowdfunding platform where community members can lend to local businesses they believe in.
After being approved by Honeycomb’s credit analysis process, Squash the Beef published its investment campaign page and began sharing this investment opportunity with the community. Longtime customers, Cleveland residents, and members of the Honeycomb network reviewed the campaign and considered making Squash the Beef a part of their investment portfolio. Within 30 days, Squash the Beef had crowdfunded a $30,000 loan from 78 investors.
When asked about the importance of investing in Black-owned businesses, Candace put the issue of entrepreneurial justice in a historical perspective: “Historically, Black-owned businesses have been denied loans because they were Black. Black entrepreneurs are not new, but we've had our business communities overturned again and again. Read about Tulsa, the destruction of Black Wall Street. [For all these reasons], we don't have the generational wealth that non-Black-owned businesses have.”
On the topic of investing, Candace asks that investors think about where they invest and who their investments are going to. “It’s imperative for investors to think about all the businesses they’re missing out on. When you invest in a Black company, you’re investing in a whole community.”
Putting our money where our heart is
Investment crowdfunding has made it possible for us to support Black-owned businesses, not just as consumers, but also as investors. In a time when large national banks are pulling back on small business lending, I believe it’s up to us as individuals to fund the diverse, thriving local businesses our communities deserve.
Invest in local businesses on Honeycomb. Learn more here.