Chicago Fed Insights

How To Meet the Post-Pandemic Needs of Detroit’s Black-Led Businesses

November 23, 2021

Long before the Covid-19 pandemic, Black-led businesses faced unequal access to capital that limited their ability to sustain themselves and grow.

But with Black-led businesses nationwide reportedly receiving a disproportionately lower share of Paycheck Protection Program (PPP) funding, especially at the first round of disbursement, the pandemic has cast a spotlight on the need for reforms to better support these important community institutions.

On November 17, business experts, funders, thought leaders, and advocates from Detroit’s  business community joined a Project Hometown event to discuss the needs of Black businesses and provide insights and suggestions on how policymakers, financial institutions, and business service intermediaries can provide the necessary infrastructure, support, and financing to help these businesses succeed.

Healthy small businesses are key to wealth-building in minority communities.

For decades, research has documented a wide and ­persistent wealth gap between Black and White households. Joseph Anderson—who in addition to serving as chairman of the board of directors for the Chicago Fed’s Detroit Branch and on the board of Business Leaders for Michigan is the CEO of TAG Holding—said policies to help Black-led businesses thrive is key to closing this gap.

“Healthy small businesses provide a key mechanism where wealth can be built and retained in Black and minority communities,” Anderson said in remarks at the start of the event.

“This is critical to economic development of neighborhoods and creating investment opportunities. Supporting the vibrancy of these businesses by ensuring that they have necessary financing and access to capital to build, expand, and sustain their businesses will provide both economic and social benefits.”

Detroit is home to a dynamic Black business landscape, but many businesses are low-revenue or home-based and face unique challenges.

Sharing preliminary results from a Chicago Fed Detroit Branch survey of Detroit’s Black business owners, Maude Toussaint-Comeau, senior economist and economic advisor in the Community Development and Policy Studies (CDPS) division at the Chicago Fed, echoed Anderson’s view that these businesses play a vital role in shaping their neighborhoods.

But with most businesses surveyed classifying as microenterprises with less than $25,000 in annual revenue, and a number of them reporting poor financial health or that they are operating at a loss, the results highlight unique pain points that need to be addressed.

Though in the preliminary survey results the majority of responding “survivor businesses” applied for and obtained pandemic-related emergency funding, primarily through local banks, little is known about the experience with pandemic funding of failed businesses that shuttered during the pandemic, noted Toussaint-Comeau. Respondents who didn’t apply for funding said they chose not to because they didn’t expect to qualify or found the process too confusing. And importantly, according to the preliminary results and consistent with low formal banking access by Black small businesses observed in previous research, very few businesses reported using external financing from banks in the three years prior to applying for pandemic-related funding.

The pandemic emphasized the need for readiness programs that help minority businesses seize available opportunities.

Speaking to why minority-led businesses may have struggled to obtain emergency financing, Paul Jones, business support network director with Invest Detroit, said there’s a clear need for readiness programs that ensure businesses are ready to receive capital and put it to productive use.

Stressing that capital shouldn’t be the only goal of these readiness programs, Jones said that we need “institutions that are helping the small businesses prepare for accessing capital and preparing to engage in all of the opportunities that should be coming their way,” including providing both technical support and helping to bridge cultural divides that hamper efforts by Black-led businesses to obtain funding.

There should be public, data-driven accountability for efforts to reform lending practices and create racial equity.

Dr. Ken Harris, CEO and National President of National Business League—a trade organization that advocates for Black-led businesses throughout the U.S.—noted that far too many have either closed their doors permanently or are on the brink of doing so, largely due to barriers that exclude them from pivoting and building the capacity required to succeed.

Noting the strong presence of Black-led businesses in Detroit, Harris said there’s major opportunity for financial institutions looking for promising ventures to invest in.

“Detroit is unlike any other place in the country,” Harris said. “If we are still struggling to lend to Black-owned firms with this type of population setting, then in my opinion it is either intentional or a complete failure of leadership.”

Banks have a massive “Black business opportunity,” but need to build trust with historically underserved communities.

In responding to the Chicago Fed Detroit Branch Black business survey, business owners shared the myriad of challenges they face when working with financial institutions. Specifically, many expressed a lack of knowledge as to sources of capital, limited relationships with lending institutions, and difficulties obtaining advantageous lending terms.

Maggie Ference, senior vice president at Huntington Bank, acknowledged these challenges and said it’s important that banks find ways to build trust with minority-led businesses.

“Black and Brown small businesses are not looking to banks for financing needs, while bank financing is often the cheapest option out there,” Ference said.

Ference said banks should work alongside community partners that have already built trust and can act as intermediaries to under-resourced communities. She also said banks should encourage financial education so that businesses have the legal, accounting, and professional help they need to make smart business decisions. 

“Relying on doing things the way that we've done is not going to get us to where we need to go,” said Ference.

To learn more about the funding challenges facing Detroit’s minority businesses, watch the full event.

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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