Small businesses are a job creation engine and a pathway to economic mobility. Over the past ten years, small business has accounted for 55% of the net new job creation. Getting a new business off the ground or expanding it can be a financial challenge, particularly for entrepreneurs of color, women, veterans, and Native Americans.
The challenges these entrepreneurs seeking financing face are well documented. To close that gap, the federal government has turned to a public-private partnership to ensure money from a $10 billion dollar fund is getting shared equitably across the country, with 40% going to business owners in underserved communities.
Here are some of the facts.
”Underserved small businesses have traditionally faced barriers in accessing credit, capital, and other tools needed to grow. They are often located in inner cities and rural areas, and often include people of color, women, veterans, tribal groups, and others,” notes Michigan-based NEI (New Economy Initiative).
“Older, larger, and white-owned firms were more likely than their counterparts to be fully approved for a loan, line of credit, or merchant cash advance in the 12 months prior to the survey,” according to the latest Small Business Credit Survey (SBCS).
The National Bureau of Economic Research finds there are “large disparities between Black- and white-owned startups in access to financing, both in the initial year of founding as well as in subsequent years.”
The Initiative for Inclusive Entrepreneurship
Out of these disparities was born the Initiative for Inclusive Entrepreneurship (IIE), a public-private program designed to ensure that 40% of the U.S. Department of Treasury’s State Small Business Credit Initiative (SSBCI) fund reaches businesses owned by socially and economically disadvantaged individuals.
First announced in 2022, a 18-month pilot was incubated by Hyphen, a national public-private partnership accelerator.
“Small businesses are the heartbeat of our economy. And within small businesses, entrepreneurship is one of the most effective ways to generate wealth in this country,” says Archana Sahgal, president and founder of Hyphen.
“Entrepreneurs of color are more likely to be denied credit. They’re more likely to pay higher interest loans. They’re less likely to apply for loans because of their fear of being denied. And so, to a certain extent, entrepreneurs of color are effectively being locked out of the best, most effective ways for wealth in this country,” she adds.
She says, “[The U.S.] Department of Treasury was able to move resources to the state administrators as fast as possible. Treasury did a phenomenal job of vetting the applications [from states and tribal nations], making the decisions, and getting the money out.”
Notes Sahgal, “Partnering with the SSBCI administrators in each of our states is critical because they also have an incredible platform in order to get out the word.”
According to the latest report from the Treasury Department, more than 50 states, territories, and Washington, D.C. are deploying overall funds from SSBCI.
The Role of Public-Private Partnership
With the pilot period led by Hyphen ending, the Milken Institute is now serving as IIE’s new home. “Our work focuses on three different areas – health, finance, and philanthropy,” explains Troy Duffie, director of financial markets with the Milken Institute.
“We really use finance as a force for good and we look for various ways to do that. The program I’m focused on is called inclusive capitalism. It’s heavily focused on asset management, this belief that if you can change the asset management industry, you can change the world. So much of our life is invisibly affected by the asset management industry.”
Duffie gets more specific about the challenges for entrepreneurs of color, “I would say that it’s not access to capital that’s the problem. It’s access to the right kind of capital.
“There’s access to a ton of capital that’s predatory, that eats into opportunities for growth that have unreasonable terms or unreasonable rates. And so really bringing down the cost of capital with SSBCI as an opportunity, and people really understanding the opportunity to get involved with federal dollars for federal contracting is something that we think is a huge opportunity.”
Duffie adds there is $10 million in capital from philanthropy in addition to the funding that was committed by the federal government. “The second-best time to plant a tree is today. Clearly the best time was yesterday.
“There are things that have been put in place for decades, but often what happens when decisions are made in a faraway place, it doesn’t always reach the people that it should reach or it reaches them inefficiently, or by the time it does, the program is timed out.”
‘Indigenous opportunities have really been historically marginalized’
Beginning in the pilot phase at Hyphen, the Initiative for Inclusive Entrepreneurship was able to attract a large number of private partners, including Aspen Institute’s Business Ownership Initiative, Founders First Capital Partners, JumpStart, Next Street, Nowak Metro Finance Lab, Scale Link, as well as Mission Driven Finance (MDF).
“Mission Driven Finance is an impact asset management firm. We design, develop, and manage private investment vehicles to create a more inclusive economy,” explains Lauren Gratton, the organization’s co-founder and chief community officer.
“Communities of color are not monolithic,” notes Gratton. “The majority of our funds have been supporting low- and moderate-income entrepreneurs, workers and communities of color, entrepreneurs of color, Native-owned businesses, Black-owned businesses – all sorts of strategies to actually support inclusive entrepreneurship and inclusive workforce development.”
She continues, “There are 574 federally recognized tribes. There are billions of dollars that Native-owned businesses generate in revenue for their communities and they hire from their communities each year.
“But they get less than 0.004% of venture capital financing and they have less than 2% of SBA guaranteed loans. That’s 2021 data. But this is not proportionate to the space that Indigenous people have proportionately in our demographics.”
Gratton points out, “Actually 86% of tribes do not have a financial institution within their borders. So, it is the vast, vast majority that don’t have this access and need to then work through lots of other mechanics.”
Mission Driven Finance created the Indigenous Futures Fund to “speed up the flow of capital to Indigenous entrepreneurs and Tribal enterprises. The fund also intends to boost the capacity of Native Community Development Financial Institutions (CDFIs) and other Native financial intermediaries.”
U.S. Treasury has approved SSBCI applications for up to $415 million to support more than 220 Tribes through the SSBCI Capital Program for small businesses and Tribal enterprises. To date, the Indigenous Futures Fund has provided grants to Affiliated Tribes of Northwest Indians (ATNI-EDC) and Change Labs to support their capacity in implementing the Navajo Small Business Credit Initiative.
“Indigenous opportunities have really been historically marginalized and left behind in the realm of small businesses,” says Hyphen’s Sahgal. “Indigenous entrepreneurs are grappling with the enduring aftermath of inadequate government investment.
“MDF is so clear on the vision. It’s almost all people of color that are on the team and led by Indigenous folks, as well. So, it’s not just folks parachuting into communities. If we strategically direct SSBCI dollars into Indigenous communities, we can unlock their true potential.”
Looking Forward
Milken’s Duffie says, “IIE is a really special platform, and I would say probably the first time that you have this many kinds of businesses that are coming together to solve a problem. You have Main Street businesses, supply chain businesses, and tribal businesses.
“Dealing with the ecosystem, that network has a tremendous opportunity to really have compound effects in a much faster way than we would normally see.”
Sahgal adds, “There’s so many obstacles that people of color in this country face time and time again. But the grit, resilience, and hustle these entrepreneurs [show] in order to navigate and then emerge with the capital that they need to expand their small businesses, it can transform this country.”
