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Race Matters in Funding Small Businesses

"... disparities at startup follow through the operational life of the firm, and they’re not disappearing.”
"... disparities at startup follow through the operational life of the firm, and they’re not disappearing.”Photograph by John Fedele/Getty Images

Black and Hispanic entrepreneurs start their businesses with less money than whites. Minority businesses rely more on the owner’s personal wealth than on outside lenders or investors. These companies are less likely to apply for bank loans for fear of getting turned down. When they do seek credit, black and Hispanic business owners are less likely to be approved than whites, even after controlling for characteristics like credit score or the type of business. The differences persist for years after companies are founded.

These findings, from a new research paper commissioned by the Small Business Administration’s Office of Advocacy, add to the growing body of evidence that the playing field for entrepreneurs is tilted depending on the color of their skin. “These disparities at startup follow through the operational life of the firm, and they’re not disappearing,” says author Alicia Robb, senior fellow at the Kauffman Foundation. Robb used data from the Kauffman Firm Survey, which followed about 5,000 companies started in 2004 over several years.