Foundations can close the racial wealth gap by funding women of colour entrepreneurs

 

Catherine Berman

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Shavon Marley was working in sales while dreaming of starting a business in her hometown of Raleigh, North Carolina. Then in 2016 she was hit with a breast cancer diagnosis. Faced with a situation that might have derailed many others, Shavon used it for fuel to turn her dream into reality. During long hours of treatment in a hyperbaric oxygen chamber, she ruminated on the trucking business she and her husband imagined and tapped fellow patients for advice.

Her idea really took off when she connected with Scott Wolford of the Carolina Small Business Development Fund, a community development financial institution (CDFI) that helped her write a business plan, get a loan, and forecast her business’s future needs. In 2018, Marley Transport & Trucking pulled its first load, and since then the company has established itself across the state.

There are a lot of smart, ambitious, tenacious women like Shavon Marley out there. What’s different about Shavon’s story is that she secured a business loan that catalyzed her success.

Closing the racial wealth gap will bolster the economy
The barriers to lending for communities of colour are high: a new McKinsey study found that 30 per cent of black families in the US are underserved by banks, and 17 per cent are disconnected from banking opportunities.

Economic growth isn’t inclusive, either: Black families will earn up to $1 million less than white families in their lifetimes on average. Not only does this place a burden on black communities that persists through generations, the full economic impact is enormous—the racial wealth gap will cost between $1 and $1.5 trillion by 2028, or four to six per cent of US GDP, according to the study’s authors.

Entrepreneurship is an effective way to increase income for people of colour, and it’s a particularly powerful wealth-building tool for women of colour. However, these entrepreneurs face the greatest funding challenge: the dearth of loans to women combined with the fact that minority-owned businesses are less likely to be approved for small business loans and often receive lower amounts at higher interest rates. These inequities exact a huge opportunity cost, not only for individual women and their families, but for entire communities.

An immediate solution: CDFIs
CDFIs are designed to move money to Main Street businesses. There are over 1,000 of them across the US, they have always invested in financially underserved communities, and they have enormous unrealized potential for financial and impact returns. Often working in neighbourhoods overlooked by traditional banks, CDFIs provide capital and financial services where they’re needed most, funding small businesses, affordable housing, education and community infrastructure.

They’re a great fit for impact investors, but historically, most have found CDFIs inaccessible due to legal complexity, a lack of packaged products and lagging technology. Those barriers are now beginning to fall, enabling foundations and others to target place-based and thematic investment goals at scale.

One solution is the Wisdom Fund, a co-created product designed to provide affordable loans and free coaching for businesses led by women of colour and women in low-income communities. Developed by my firm, CNote, in collaboration with a group of CDFIs and a research team, the Wisdom Fund is also dedicated to discovering and solving for the roadblocks these entrepreneurs experience.

As Heather McCulloch notes in Closing the Women’s Wealth Gap, ‘Women of colour are doubly affected by the intersections of the racial and gender wealth gaps. They are less likely to have access to affordable financial products and services, business capital, and resources to save for retirement than white men and white women.’

Foundations can close the funding gap
Only about nine per cent of grantmaking from foundations goes into communities of colour in the US, according to the Philanthropic Initiative for Racial Equity, which adds a philanthropy gap to the lending gap. Foundations can start to address those imbalances by providing grants for business technical assistance, using program-related investment (PRI) or mission-related investment (MRI) funds to support loan loss reserves or debt investments, and funding research on success factors for women entrepreneurs.

Perhaps the most powerful action foundations can take to support women-of-colour entrepreneurs is to serve as guarantors for new programs that invest in them. This would encourage more investors to step into the ring and increase the universe of funding—without foundations having to move any money unless necessary to cover losses. And even that risk can be mitigated by bringing in several foundations to provide guarantees for a single program.

Growing a business is transformative for the business owner and her community. More women of colour should have that experience—and more foundations should fund it.

Catherine Berman is CEO and Co-Founder of CNote


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