Chicago Fed Insights

Improving Access to Capital for Detroit’s Minority Business Owners

March 9, 2021

Minority-led businesses in Detroit—especially small businesses and microenterprises—face significant barriers in accessing capital. While these obstacles and other inequities facing people of color are longstanding in Detroit, the pandemic has worsened conditions, with many businesses either closed or on the verge of closure. To identify concrete actions to help these businesses access capital, the Chicago Fed hosted a virtual event on March 4, 2021, “Supporting Detroit Minority Businesses: Access to Capital and Lessons Learned.” This event, the latest in the Chicago Fed’s Project Hometown series, brought together business leaders, community organizations, and researchers to discuss the availability of finance and capital to predominantly Black-owned businesses in Detroit.

Rick Mattoon, vice president and regional executive of the Chicago Fed’s Detroit Branch, opened the event by explaining that many small businesses and microenterprises in Detroit, particularly minority-run ones, face unequal access to capital. Mattoon remarked that “these firms often make up the very fabric of their neighborhoods, support local employment, and promote wealth accumulation in their communities.”

Joseph Anderson, chairman and CEO of TAG Holdings and chairman of the board of the Detroit Branch of the Federal Reserve Bank of Chicago, moderated the event. Anderson discussed that Black-owned small businesses have long faced weaker traditional banking relationships, and their lack of connections made it significantly harder for them to access the early rounds of Paycheck Protection Program (PPP) funding. “Given that the channel for distributing PPP was largely defined by providing incentives for banks to fund their existing clients, unbanked or underbanked businesses were largely shut out of the original distributions,” Anderson said.

Extensive studies have found that Black households have significantly lower savings and accumulated wealth than White households, Anderson explained. Promoting small Black businesses in Detroit through greater access to capital provides a key opportunity to build Black household wealth, support local neighborhoods, and create investment opportunities, he added. In addition to obtaining capital, these businesses need access to markets, the ability to develop supply chain relationships, and technical support to help with management challenges and pivoting under changing market conditions, he remarked.

Dr. Kenneth Harris, president and CEO of the National Business League, said that historically Detroit has experienced extreme racial inequities. The city’s Black population is largely excluded from the financial capital marketplace, and distrust of financial institutions is rooted in historical experience, he said. Michelle Sourie Robinson, president and CEO of the Michigan Minority Supplier Development Council, reiterated that the hesitance among Black businesses to work with banks is “steeped in centuries of mistrust.” Minority businesses are still being excluded from the banking industry today, more than a half century after the passing of the Civil Rights Act, Harris said. As a result of the mistrust, Black businesses are often unbanked, putting their savings “under the mattress,” relying on borrowing from friends and family, and otherwise operating outside of the traditional banking system, he explained. Anderson added that unfair policies such as redlining and predatory lending have made Black communities wary of both government and financial institutions. Sandy Pierce, senior vice president for Huntington Bancshares and member of the Chicago Fed’s Detroit Branch board of directors, reaffirmed that there is a “trust gap.” Robinson added that this mistrust is reinforced by that fact that Black businesses are often unfairly given lower loan amounts and charged higher rates of interest, and disparities can also be seen in their exclusion from early PPP funding.

Blacks represent 80% of Detroit’s population, Harris reported, and almost 80% of the city’s businesses are Black-owned. Most minority businesses in Detroit are microenterprises, with the majority having revenues between $100,000 and $150,000 or less annually, said Pamela Lewis, executive director of the New Economy Initiative (NEI). Most of these Black businesses do not have access to professional advisors and banking relationships, she added. Robinson explained that “minority-owned businesses are twice as likely to report that the cost of capital is prohibitive to the growth of their business.” As a result, the Detroit community suffers in terms of reduced growth potential, lower employment, and reduced opportunities for wealth building, she said. Pierce reported a grim statistic that 60% of the businesses that have closed because of the pandemic will never reopen.

In February 2021, Huntington held numerous community-needs listening sessions to better understand the requirements of minority and women-owned businesses, and from this experience “we found out how deep some of these issues were,” Pierce said. While her bank has taken steps to remove barriers for many businesses using a micro loan program, “it is not enough,” she added. Pierce recommended improving communications to better inform Black businesses about the services available from financial institutions, and she expressed the importance of developing partnerships with intermediaries that minority business owners trust. Also, to close the resource gap that exists, banks, nonprofits, charitable foundations, and regulatory agencies need to coordinate efforts to share information more effectively with business owners and help them achieve company sustainability, she said. Beyond taking coordinated action, she added that it is necessary to measure the results and share the information transparently.

Robinson reported that nationally only 2% of minority businesses gross over $1 million annually, and she remarked that “in order to solve this capital access issue and support minority businesses, we must all take a different approach and really understand that the systems as they are today will continue to stifle growth.” Lewis emphasized the importance of having “trusted connectors” in the community (for example, community development and faith-based organizations) to help minority businesses find the resources that they need. Looking into how lending programs are designed is also important because many of these programs focus on larger small businesses, which are not as applicable for many of Detroit’s microenterprises, she said. In addition to the grant capital that has been provided by the philanthropic community, Lewis questioned if state dollars could be used to invest in microbusinesses much like they have invested in venture- and innovation-led companies. She also pointed out that financing should match the needs of the various business segments because “how you support a large minority-owned manufacturing supply company is very different than how you support a small service business in a neighborhood.” Moreover, Lewis recommended mentoring on the part of trusted community members to provide technical assistance to small businesses, for example, to assist them with the loan process and business plans.

To provide expanded capital access, Harris suggested a “complete institutional and structural change” in the approach to lending to minority businesses. Developing partnerships, providing technical assistance, and focusing on supporting entrepreneurship ventures to promote a “sustainable ecosystem,” are all essential, he said. Banks should be held accountable for not serving the most vulnerable and excluded populations with respect to capital access, he added. Given the changing demographics in this country, Harris noted that Black businesses will become an increasingly large and important client base in the years ahead. Pierce recommended that pushing for appropriate policies at the state and federal level is another avenue worth pursuing to improve access to capital for minority businesses.

Robinson concluded that it is time to take action to address the capital access inequities, “without excuse.” In wrapping up the event, Anderson said that this conversation will continue in order to promote a coordinated effort to put specific plans and solutions in place.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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