NEWS

When It Comes To Business, Small Is Beautiful

May 13, 2022

Luz leads Accion Opportunity Fund , the nation’s leading nonprofit providing small businesses with access to capital, networks and coaching.

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After a decades-long decline in American entrepreneurship, small business creation is on the rise in the U.S. The vast majority of these businesses are sole proprietorships and microbusinesses—the smallest of the small—which offer immense opportunities for women and entrepreneurs of color to build wealth on their own terms.

Microbusinesses with fewer than five employees, including the owner, account, based on one estimate, for 92% of all businesses in the U.S. When it comes to Black- and Latino-owned businesses, over 90% do not have other employees aside from the owner. But make no mistake: These small businesses punch above their weight, impacting both households and our economy in an outsized way.

While the last two years have wreaked havoc on existing small businesses, many new businesses sprung from the crisis. According to the Kauffman Foundation, the rate of new entrepreneurs was higher in both 2020 and 2021 than in pre-pandemic 2019. Last summer, the number of self-employed Americans reached its highest point since the 2008 financial crisis. Individuals who lost jobs or were dissatisfied with opportunities in the labor market have increasingly turned to entrepreneurship. Additionally, lockdowns and remote work trends have furnished new avenues for small business innovation. According to research by GoDaddy, 2.8 million more online microbusinesses were created in 2020 versus 2019.

Crucially, America’s new entrepreneurs are increasingly diverse. Between 1996 and 2020, the share of new Latina/o and Asian-American entrepreneurs has more than doubled and the share of Black entrepreneurs has also increased substantially—while the share of new white entrepreneurs declined by about 22%. Unsurprisingly, the online microbusinesses mentioned above were primarily concentrated among women (57% of new microbusiness startups, according to one survey), many of whom urgently needed flexible hours to contend with childcare responsibilities. Starting an online microbusiness has also been growing in popularity with Black entrepreneurs, whose communities were hit disproportionately hard by the pandemic.

What do these budding entrepreneurs hope to get out of microbusiness ownership? Small business ownership is a proven path to building household wealth and financial security.

It makes sense, then, that small business ownership is an increasingly attractive choice for millions of Americans from marginalized communities looking to improve their financial well-being. While celebrating this renewal of micro-entrepreneurship, it’s vital to recognize that not everyone dives into business ownership with a goal to scale, become a unicorn, have an initial public offering or grow to employ hundreds or thousands of employees. For many, having control over income, schedule and business choices, as well as stability for themselves and their families, are their ultimate goals.

The question, then, is: Given the outsized potential of micro-entrepreneurship to spur economic growth and close racial wealth gaps, how can we encourage more of it?

One of the most important levers, especially in new business creation, is access to affordable capital. According to the Aspen Institute, “(b)usinesses started and owned by entrepreneurs of color tend to be smaller and in less profitable industries, because of the effects of systemic inequality and racism. These entrepreneurs cannot rely on personal or familial wealth…[and] when they do apply for financing, they tend to be looking for smaller amounts of capital.” However, underwriting smaller loans is generally not profitable for banks. As a result, entrepreneurs in the U.S. faced an $87 billion annual market gap for loans less than $100,000 going into the pandemic. Predatory lenders can step into this gap offering higher interest rates that can trap borrowers in a cycle of debt.

We need more government, philanthropic and corporate partnerships with Community Development Financial Institutions (CDFIs) to leverage low-cost, patient capital to reach underserved entrepreneurs of color. Vice President Kamala Harris recently helped launch the Greater Washington Partnership, a civic alliance of business and community leaders that has committed $4.7 billion to support communities of color in D.C. and surrounding areas, including $617 million invested in CDFIs that will enable entrepreneurs of color to access much-needed capital. A longitudinal study of Accion Opportunity Fund clients found that access to affordable capital fueled business growth: more than half of the business owners say they increased profits and nearly 40% added employees.

We can also smooth micro-entrepreneurs’ pathways to success by providing targeted business advisory training. Small businesses are not one-size-fits-all—some are looking for growth and others for stability, some are seeking to innovate while others seek to solidify. Skills development and coaching are vital for new business owners and should be tailored to help each overcome the unique challenges and opportunities enabled by their business’ size, goals and growth trajectory.

For example, the FedEx E-Commerce Learning Lab, which my company partners with, is a five-month program designed for women and entrepreneurs of color who are looking to grow their business through online sales for the first time. Selected participants get access to workshops, one-on-one coaching and order fulfillment for their first online marketplace shop.

While today’s small business renaissance was born out of necessity, it offers the chance to address decades of inequity and widening racial wealth gaps. Each microbusiness is like a brick; with the right mortar, we can build a strong foundation for a new, inclusive economy.

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