Vulnerability for Black-owned businesses during COVID-19 crisis, NY Fed reports

Black-owned U.S. businesses have failed at a disproportionately higher rate than those owned by whites during the coronavirus epidemic possibly because they were in poorer financial shape, less prepared to tap federal aid and faced longer closures, the New York Federal Reserve said on Tuesday.

Many Black-owned businesses were already in a tough financial spot when the crisis hit and were less equipped to outlast the prolonged business closures seen in areas with high infection rates, the New York Fed said in a report.

Trez V. Pugh, III, owner of Sip and Savor coffee house puts up businesswoman Keeana Barber’s “Black Owned Business” sign at his Bronzeville location. Image credit Amber Marie Green/Provided

“These firms had weaker financial cushions, weaker bank relationships, and pre-existing funding gaps prior to the pandemic,” Claire Kramer Mills, assistant vice president at the New York Fed and one of the authors of the study, said in a statement.

“COVID-19 has exacerbated these issues and businesses in the hardest-hit communities have witnessed huge disparities in access to federal relief funds and a higher rate of business closures.”

The study followed earlier research by Robert Fairlie, an economics professor at the University of California, Santa Cruz, who found that the total number of Black business owners declined by 41% between February and April, compared to a 17% drop in the number of white business owners.

The New York Fed study released on Tuesday pointed to a 2019 study that found only 42% of Black-owned companies were “financially” healthy as of last year, based on their credit score, profitability and accumulation of net income, versus 73% of white-owned businesses, according to the New York Fed. Those financial struggles may have made some of the Black firms less comfortable seeking out loans during the epidemic, Mills and her fellow researchers noted.

Image credit Metro Parent

Black businesses were overall less prepared to tap small business aid quickly through the U.S. government’s Paycheck Protection Program, which offered loans that could be forgiven, because many did not have strong banking relationships, the report found.

Less than a quarter of Black-owned firms with employees had recently borrowed from a bank, according to a 2019 study by the New York Fed. And fintech firms, including online lenders which Black businesses are more likely to tap for funding, were not authorized to issue PPP loans until late in the first round of funding, the report noted.

PPP loans were distributed at lower rates to the areas that were most affected by the virus, the New York Fed found. Some counties with a high concentration of Black-owned businesses received loans at rates below the national average of 17.7%. For example, only 7% of firms in the Bronx, New York, received PPP loans, as well as 11.3% of firms in Queens and 12.2% of firms in Prince George’s County, Maryland.

“This tells us that a more targeted geographic focus on the hardest-hit and most underserved places is needed,” Mills said.

Image credit WCAX

Black business ownership has taken a sharp hit during the crisis, especially in areas that were harder hit by the virus early on and faced longer business closures. In the eight states with the largest numbers of Black owners, all but two - California and Florida - saw a net decline in Black business ownership between February and June. Ohio and New York saw the most severe business closures.

Several states saw a pickup in business activity in May and June as some areas began to reopen, but the states that re-opened later, including New York, California and Illinois, continued to see a drop in the number of Black business owners.

Source: Reuters

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