The glass-half-empty view of starting a business is that it’s a tremendous challenge. It’s also risky. Half of small businesses do not survive their first five years. And the risks can get personal. Small Business Credit Survey (SBCS) data from the Federal Reserve show that once a business encounters financial challenges, the effects can spill over from the business into household finances. For young firms just starting, financial challenges are common. Many are unprofitable in their early years and earn smaller revenues than their established counterparts.
Of course, this is the pessimistic view on starting a business, and entrepreneurs are usually optimists.
From an optimistic viewpoint, half of businesses do survive at least five years. Many of these businesses start on shaky financial footing. It can take several years to turn a profit. Once the business establishes a steady clientele and builds the capacity to meet demand, it transitions from startup to growth mode.
More than half of Black-owned businesses are young firms
Firms owned by people of color are often very young and likely navigating the challenges associated with building a business. Data from the 2022 SBCS on employer firms, or those that have at least one employee other than the businesses’ owners, show that 57% of Black-owned firms, 42% of Hispanic-owned firms, and 40% of American Indian- or Alaskan Native-owned small businesses started in 2020 or later. In contrast, just 18% of white-owned firms started during the same period.
Small businesses launched during the pandemic era faced unusual start-up conditions
Gaps in access to financing
Gaps in access to financing by race and ethnicity are common among startups, but these gaps also apply to established businesses. The SBCS consistently shows that firms owned by people of color are less likely than white-owned firms to be approved for financing.
The 2023 Firms in Focus Chartbook on Firms by Race and Ethnicity of Ownership highlights data for more detailed race and ethnicity categories across employer firms of all ages. These include data on American Indian- or Alaskan Native-, Asian-, Black-, Hispanic-, and white-owned firms. The data and previous SBCS reports show white-owned firms are more likely than firms owned by people of color to be fully approved for financing.
In fact, about half of Black-owned firms (51%) said credit availability was a financial challenge facing their business, compared to a quarter of white-owned firms.
Many firms owned by people of color are startups seeking to expand. Approximately 67% and 63% of Black- and Hispanic-owned businesses that applied for financing, respectively, said they did so to expand, compared to 52% of white-owned businesses.
The cohort of startups of color in the 2022 SBCS launched in a pandemic-era economy with many financial and operational challenges. In the survey’s open-ended comments, while some respondents expressed satisfaction with the direction of their firms, many noted the hardships associated with accessing capital. Reflected one respondent, “It shouldn’t be this hard.”
For more research on small businesses, previous Reports on Firms Owned by People of Color, and chartbooks by business and owner characteristics, visit fedsmallbusiness.org.