By Michelle Hofstrand via flickr, CC BY-ND 2.0
America consistently hails the iconic entrepreneur: we perpetuate a lofty yet myopic standard of entrepreneurial success defined by trendy inventions, fast-paced growth, and billion dollar profits. But by painting this whitewashed picture of entrepreneurism, we delude ourselves about the reality of American business ownership.
Tiny, lower-revenue businesses are the norm for most entrepreneurs. Eighty percent of all firms and 79 percent of white-owned firms have no paid employees; a whopping 96 percent of Black-owned businesses have no paid employees. The truth is: most entrepreneurs’ firms don’t grow quickly, employ people, or earn much money. And, more importantly, entrepreneurial success has far less to do with exceptional skill than with one’s ability to weather repeated failure and financial loss. It starts with the cards you’re dealt—and the deck looks different for African-American entrepreneurs.
For many African-American entrepreneurs, the deck is stacked against them long before they even begin. Most entrepreneurs rely on personal savings and net worth to launch their enterprises. But last year’s Assets & Opportunity Scorecard revealed that the median net worth of white households in the U.S. ($110,637) is more than 15 times that of African-American households ($7,113). This severe imbalance means that African-American entrepreneurs are much more likely to start out drastically undercapitalized and less equipped to absorb the losses that most businesses experience in their earliest days.
The Cash Flow Question
When their businesses survive beyond startup, African-American entrepreneurs remain more exposed to financial risk than their white counterparts if and when they run into routine business problems down the road. Take cash flow difficulties, for instance: the inability to cover one’s business expenses with cash on hand. Difficulty managing cash flow was the most frequently reported challenge facing low- and moderate-income entrepreneurs in our In Search of Solid Ground study of 2014.
All entrepreneurs experience cash flow problems at some point, caused by things like low or inconsistent sales, emergencies or unexpected expenses, mismatched payment and receipt cycles, and difficulty making informed financial decisions. Taken alone, these challenges aren’t unusual or even inherently problematic. They become dangerous, though, when an entrepreneur can’t draw on their resources or abilities—whether on their own or within their wider social networks and systems—to prevent or address them.
On top of lacking sufficient wealth to draw on in the event of a cash flow gap, African-American entrepreneurs have a harder time getting loans that might help them weather such challenges. African-American entrepreneurs have relatively fewer illiquid assets like homes, land, equipment, or vehicles, which makes it harder to collateralize traditional loans, and many face further constraints due to damaged or nonexistent credit histories.
Discrimination in lending forces many to face higher loan denial rates and pay higher interest rates than white-owned businesses. Further, the disappearance of retail banks and long history of exploitation and exclusion by mainstream financial institutions has driven many African-American entrepreneurs to regard financial institutions in general with hesitation and distrust. These challenges and many others are results of a long history of racial discrimination affecting interpersonal relationships, institutions, and constraining social networks.
As a result, the slightest volatility in cash flow might put a sizable dent in a business’s potential revenues and threaten their household’s financial well-being. And Black-owned businesses don’t earn as much in average revenues as white-owned firms to begin with. Nationwide, the average revenues of white-owned firms ($641,742) are over eight times those of Black-owned firms ($73,226). It’s even worse in the South: in states like Mississippi and Georgia, white-owned firms’ average sales outpace those of Black-owned firms by 16 times and 13 times, respectively.
An entrepreneur’s revenues directly affect their ability to build equity—the value of their investments and retained earnings—in their business. This is what separates businesses that purely generate income from those that become valuable, transferrable assets for their owners.
Any attempt to resolve the vast Black-white wealth divide requires that we examine the underlying drivers of African-American entrepreneurs’ financial vulnerabilities—like cash flow difficulty—and explore ways to address them. To this end, Prosperity Now’s research, Unstacking the Deck: Toward Financial Resilience for African-American Entrepreneurs in the South, begins to dig deeper by telling the story from the perspective of practitioners who work closely with African-American entrepreneurs in the South, where we’ll talk with African-American entrepreneurs in Georgia, Mississippi, and North Carolina.
By helping us articulate why and how they experience cash flow difficulties and what would help weather them, we’ll move closer to solutions that unlock African-American entrepreneurs’ ability to build wealth through business ownership.
This post was co-authored by Lauren Williams of Prosperity Now, and a version of it originally appeared in The Huffington Post.
About the Author
Comments