3 Takeaways From Sandy Darity’s New Report On Racial Disparities When Entering Entrepreneurship

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Written by Ann Brown
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Black businesses have smaller start-up capital and generate less revenue, found a new study by William “Sandy” Darity, Jr. William “Sandy” Darity Jr. , Samuel DuBois Cook Professor of Public Policy at Duke University. Photo courtesy of Duke Sanford School of Public Policy.

Business is business, but not when it comes down to race. Although Blacks are almost twice as likely to start a business than their white peers, Black businesses have smaller start-up capital and generate less revenue as a whole, found a new study by renowned economist William “Sandy” Darity, Jr., published by Duke University.

The report, “Entering Entrepreneurship: Racial Disparities in the Pathways into Business Ownership,” found that Black-owned businesses “persistently lag behind their white counterparts, appear disproportionately less in high-revenue-earning industries, and fail at higher rates. In fact, even when comparing the same industries, black-owned businesses that do survive have fewer employees and smaller revenues than white-owned businesses.”

Show Them The Money

Black entrepreneurs have a lot more hurdles before starting a business, most of them financial. This is in large part due to the growing wealth gap between Blacks and whites. “Black business owners have fewer assets, lower wealth, and less disposable income to invest into the business than white business owners.”

A 2012 Survey of Business Owners found that 35.4 percent of all nonemployer businesses used less than $5,000 in start-up capital; only 17.9 percent of all employer businesses did likewise. And because of the difficulty in raising capital, Blacks tend to start non-employer businesses. 

“Furthermore, Black-owned employer businesses are 59 percent more likely to use start-up capital in the form of personal credit cards than are white-owned employer businesses,” stated the report.

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Blacks can rarely turn to banks for business loans, and when they are approved for credit, they often receive less than what they applied for. This is due to various reasons, such as fewer assets as well as long-standing discrimination.

“Racial bias and discrimination play roles at nearly every step of the process of obtaining a loan and this leads to a somewhat dangerous trend and interplay between the amount and type of financial capital Black Americans typically seek to the financial capital they get. Black Americans are often forced to rely more heavily on personal credit cards for financing a business. Consequently, this can deplete their assets even further by damaging their credit scores further and suppressing their business prospects,” the study found.

Shorter Life Span

White-owned firms also have longer survival rates than Black companies — “43.6 percent of all existing white-owned firms are 16 years or older, while only 27.1 percent of Black-owned firms are 16 years or older.” 

Bottom Line Blues

And when it comes to the bottom line, Black companies make less. 

“Most strikingly, across every age category, Black-owned employer businesses bring in less average revenue than white-owned firms originally established around the same time. Much of this disparity in the performance of different aged Black-and white-owned businesses can be attributed to aspects related to the initial stage of ownership; particularly related to racial differentials in prior wealth and access to capital,” stated the report.

All these challenges can be overcome, and the government may have to step in. In his conclusion, Darity wrote: “Our results suggest that tackling the racial business ownership disparity will require tackling the racial wealth disparity prior to increasing business ownership among Blacks. It points us toward public targeting of seed capital for Black entrepreneurs or major redistributive measures to build Black wealth in advance of accumulation that takes place due to business ownership.This could mean, in turn, adoption of general policies aimed at closing the racial wealth gap, which might include ‘baby bonds’ and/or, more direct and substantial, a program of reparations for Black Americans. In sum, policies focused on pathways into business ownership should consider how critical prior wealth can be for fostering a more equitable ecosystem for business.”