Gaps in the Capital Ecosystem
If you’ve ever started a business, or spent time with entrepreneurs, one topic will inevitably come up when talking about the challenges of starting a business: access to capital. In March, the Innovation Team brought together City staff, entrepreneurs, technical assistance providers, and lenders to brainstorm how the City of Minneapolis could address gaps facing entrepreneurs of color in the capital ecosystem. The goal of the ideation workshop was to generate solutions to the following key gaps identified through the team’s research:
- The types of funding needs often addressed though “friends and family money”- low dollar loans, grants, and/or equity- are not being well met by traditional or alternative lenders.
- The underwriting criteria for debt products used by both traditional and alternative lenders – based largely on credit and collateral – doesn’t serve entrepreneurs of color who have low amounts of net wealth and few fixed assets.
- Entrepreneurs of color don’t have access to the informal sources of financial, knowledge, and social capital that are crucial in the start-up and early-stages of the business lifecycle.
Despite the inherent risks of starting a business, entrepreneurship is one of the most valuable tools to build wealth for individuals and their families, revitalize communities, and contribute to an overall healthier economy. While there are several factors that contribute to disparities between White-owned businesses and minority-owned businesses, the lack of access to capital has created complex and persistent barriers for people of color starting and growing businesses.
The ability to access the capital that’s needed when starting a business greatly impacts rates of business ownership and success. Some research shows that the gap in start-up capital is the largest single factor contributing to racial disparities in business closure rates, profits, employment, and sales. According to the Kauffman Foundation, two-thirds of entrepreneurs use their personal savings or money from friends and family for initial startup capital. However, households of color haven’t benefited from building wealth at the same rates as White households, so they often lack the personal and family assets that can be crucial to business success.
Since entrepreneurs of color don’t have the personal wealth or networks that are typically tapped by White entrepreneurs when starting businesses, they rely much more heavily on financial institutions for capital. Yet because of how financial institutions structure their debt products, and a history of discriminatory lending practices, entrepreneurs of color face significant challenges in obtaining the capital they need. Compared with nonminority firms, minority-owned firms are more likely to get denied loans, pay higher interest rates, and not to apply for loans at all. When they do receive loans, minority-owned firms receive 48 percent lower loan amounts on average.
These challenges require new ways of thinking and new approaches. Through a series of brainstorming activities, and building off the expertise and lived-experience of entrepreneurs and business support organizations, over 60 ideas were generated at the ideation workshop for how the City could address these gaps. Since the workshop, the Innovation Team has been working with City partners on several different tools the City could add to its toolkit to better support entrepreneurs in accessing the capital they need. Options on the table include a new revolving loan fund; a cohort-based program with wrap-around supports; and additional tools to help entrepreneurs access capital more simply and quickly.
Check out a full list of ideas that came out of the ideation workshop and read case studies of innovative programs and initiatives other cities are using to address capital gaps for entrepreneurs of color. To view the team’s research brief presented at the ideation workshop, click here.
If you have other ideas that could increase capital access for entrepreneurs of color in Minneapolis, email the Innovation Team at email@example.com.