Small business owners have suffered devastating losses due to the COVID pandemic, forcing many to permanently close, relocate, or quickly pivot their business model or move online. As the culture-keepers of our community and backbone of the U.S. economy who employ nearly 50 percent of the nation’s workforce, small business owners need support.
In response to these realities, under the Coronavirus Aid, Relief, and Economic Security Act (CARES), the Small Business Administration has expanded programs, such as the Paycheck Protection Program (PPP), to support struggling business. Yet, financing and technical assistance were unattainable and insufficient for many Black and Brown business owners.
With uncertainty surrounding the economic recovery, the federal government has an opportunity to implement policies that rebuild and strengthen the small business sector, identifying and directing resources to business owners most in need and connecting women, rural, and minority entrepreneurs – those hardest hit by the pandemic – with urgent, low-cost capital.
PCV’s recently released, expansive discussion paper – Meeting The Moment — examines how impact investing policy can be used to help private capital address inequality and support COVID-19 recovery efforts in the U.S.
While inequities amongst small businesses were exposed early on during the pandemic, the rising challenges of funding allocation and established wealth-building opportunities were microscopic. As part of the economic recovery for small business owners of color, we provided three policy ideas that will increase access to capital, promote employee ownership through employer-sponsored funds, and revision amongst the demographic data collection and reporting standards on small business lending. These policy ideas can mainstream impact investing and create a durable ecosystem for small businesses of color.
1. Allocate Federal Funds to Support Black Entrepreneurs and Business Owners
This will provide more access to capital and technical assistance for Black-owned small businesses and more robust data on the state of Black entrepreneurship, helping identify critical barriers and opportunities to strengthen public-private investment initiatives.
While scaling existing sources of capital, the U.S. can mirror a program launched in Canada — the Black Entrepreneurship Program (BEP) — by building off of three of BEP’s successful initiatives supporting Black and Brown businesses through technical assistance and capital access. These initiatives consist of a 1) National Ecosystem Fund, to help Black business owners access capital, mentorship, financial planning, and other specialty training, a 2) Black Entrepreneurship Loan Fund, issuing loans up to $190,000, and a 3) Black Entrepreneurship Knowledge Hub, led by the Black community, business organizations, and educational institutions to collect data on Black entrepreneurship, including barriers and successes.
By designating a federal program similar to BEP that includes leveraging capital from impact investors and private financial institutions, a similar initiative can be housed under the CDFI Fund or within the SBA, federal entities with infrastructure for facilitating broad national initiatives through state-level organizations and locally-based lenders and technical assistance providers.
2. Invest in Social Enterprises through Employer-Sponsored Funds like France’s 90/10 Solidarity Fund
This will increase capital supply for impact investments, including social enterprises creating affordable housing, quality jobs, clean energy solutions, and other socially and environmentally beneficial outputs. Social enterprises owned and staffed by people of color will also be sustained.
To address inequality and promote significant investment in social enterprises, the U.S. could open a new pathway for funding social enterprises and fund the small business sector’s recovery. This process will have individuals electing to designate a portion of their retirement assets to be placed in investment vehicles like CNOTE, a platform that channels investment into CDFIs lending to small businesses. In France, a similar process, the 90/10 Solidarity Fund mechanism, was successfully implemented and advanced in 2001. It allowed companies in France to require that employees have the option to invest in at least one social enterprise through their voluntary retirement account.
3. Revise Demographic Data Collection and Reporting Standards on Small Business Lending
This will provide more accurate and holistic data on the state of women and minority small business owners’ access to capital. It will also increase more capital to target women and minority small business owners.
Financial burdens, unemployment inflation, and racial inequalities were elevated during the pandemic. Under the Consumer Credit Protection Act (CCPA), the Equal Credit Opportunity Act (ECOA) enacted in 1974 prohibits discrimination by lenders and creditors during the evaluation of a loan application. Specifically, ECOA prevents the use of the applicant’s sex, race, color, and religion to determine their creditworthiness. While intended to protect against discrimination in lending, ECOA has not closed the gap in access to capital for entrepreneurs of color. As observed by Opportunity Fund, unintended consequences may have been induced due to the lack of data on loan applicants.
In the next proposed provision of the 2010 Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) can outline rules that provide necessary guidance for financial institutions that consists of the solicited public comments from September 2020, which would move forward with issuing guidance on the regulation in compliance with the law, while ensuring data reporting requirements are not onerous for lenders.