Closing the wealth gap for minority and women business owners

Minority- and women-owned businesses exist in every corner of the US, with new ones launching all the time. There are currently 12 million women-owned businesses employing over 10.1 million workers.¹ Minority-owned businesses are defined as a private business owned by a minimum of 51% members of a minority group or a public company with a minimum of 51% of minority group shareholders: There are currently over 9.2 million in the US, employing 8 million people and generating more than $1.8 trillion in revenue every year.^2,3

A mainstay of the US economy, minority- and women-owned businesses can bring significant benefits to local areas, such as:

• Innovative products and services.

• Economic uplift for local communities.

• Job creation, which could help reduce unemployment.

Yet, even with these benefits, historical discrimination against certain minority groups and women have created challenges for these entrepreneurs. Learning about common financial barriers and sustainable solutions to overcome them is an important step forward.

Challenges minority business owners face

Historically, a primary challenge for minority business owners has been insufficient working capital to keep their doors open long term. Several factors have diminished the working capital available to minority businesses, including:

• Greater instances of business loan declines.

• Approval for smaller loan amounts.

• Less collateral to obtain business loans.

• Fear of rejection, meaning business owners are less likely to apply for loans.

• Lack of social capital or network to help grow their business.

Challenges women business owners face

Similarly, women have a hard time obtaining capital, often due to gender stereotypes. In 2020, women-owned businesses accounted for less than 3% of venture capital funding.⁴ What’s more, women may lack confidence when it comes to securing or managing finances and project that hesitance onto their businesses. According to our research, women were the majority in two “less confident” financial profiles, but have a higher financial literacy than they think.⁵

If you’re a minority or women business owner, here are a few tips to help combat the obstacles you may face and keep your business running.

Protect yourself against risk with whole life and disability insurance

All businesses come with risk. You can be held liable for damages that your business inadvertently causes, such as accidents and cybersecurity breaches that expose customer data. If this happens, you may need to cover your expenses when business operations pause for a period, or pay for any damages incurred.

Research shows that only 46% of women in the US own life insurance, and 46% of Black Americans are underinsured.^6,7 But taking preventative steps to protect yourself — and your business — through general liability coverage can help to keep your business afloat when life throws you curveballs. Traditional whole life insurance is commonly known for protecting a policy owner’s family, but it can also play a critical role in helping to protect the policy owner’s business. As a permanent life insurance, it offers level premiums that has a cash value component.⁸ As you pay your monthly premium, part of your payments accrues as a cash asset, so on top of traditional death benefits, you may be able to use the cash values of your whole life insurance policy to cover certain significant business expenses.⁹

Other than liability risk, you also should consider protecting yourself from health and financial risks. For many people, being out of work due to an illness or injury means losing a steady paycheck. This is a huge risk for anyone, and research shows that certain racial or ethnic groups are more likely to develop a disability if they have preexisting health conditions.¹⁰ Missing work due to a disability can cause significant harm to your finances and widen the wealth gap. A disability insurance policy can help protect you and your family by providing income to help pay your bills if you can’t collect your normal paycheck.

Research funding for minority- or women-owned businesses

When it comes to your business and finances, it’s always a good idea to have a backup plan (or a few). Starting from the beginning, you should brainstorm multiple ways to obtain funding. These can range from your personal savings and credit options to grants, investors, and loans from friends and family. It’s helpful to have a variety of options rather than solely relying on a startup loan from a particular lender. Don’t forget, there are organizations whose purpose is to support minority business enterprises (MBE) and women-owned business enterprises (WBE). So, if you’re a woman and/or a minority, be sure to register your company to get access to more resources.

Once you’ve obtained funding, you need to maintain cash flow. Keeping track of your business cash flow, building a cash reserve to sustain you for three (or even better, six) months, following up diligently on past due receivables, and opening a line of credit with your financial institutions, are some recommendable ways to do so. Naturally, a business faces many ups and downs. But remember, if you’re bootstrapping your business, don’t over-rely on lines of credit or credit cards because if you ever default, your personal credit may likely get affected.

Apply to join a business incubator or accelerator

Joining an incubator or accelerator may be a surprising first suggestion for raising money for your company, but it highlights an overlooked lesson in business: do not go it alone. Accelerator programs are generally intense, short-term programs that boost entrepreneurs who already have a minimum viable product (MVP). In contrast, incubators often welcome founders who are just starting out, and may host them for a longer period of time.¹¹

Both incubators and accelerators usually offer opportunities to meet fellow entrepreneurs, as well as accomplished professionals who can share their experiences and give advice. Additionally, these programs are often connected to a network of potential investors, and may even be hosted by an investment company.

Network with experienced business owners

Incubators and accelerator programs aren’t the only place to network. As a business owner, you’re likely to encounter unforeseen challenges. You can strategically navigate those situations when you have the support of owners who are more seasoned, so they don’t slow you down. Networking with entrepreneurs with similar backgrounds can help you learn from their experiences and connect you to even more resources. For example, The Professional Women of Color Network (PWOCN) connects women business owners of color.

In addition, financial professionals typically have strong networks and can introduce you to other small businesses. This networking can help you find mentors, suppliers, colleagues, and other sources of social support.

Work with financial professionals to help build a financially healthy business

Financial professionals can be allies and valuable resources in helping women and minority business owners navigate financial challenges. They can provide entrepreneurs with access to insights on how to separate personal and business banking accounts, as well as information about grant programs, government contracting programs that set aside contract awards for minority-owned enterprises, and alternative funding options. They can also help prepare you to explain to investors how you plan on using the funds by developing a business plan, including analysis of the market conditions, competition, product, service differentiators, and financial outlook.

Financial professionals can also help protect your personal interests, like helping you plan for your own retirement and strategize how to hand off the business to the next generation or new owners. The key takeaway here is that women and minority business owners may want to consider working with financial professionals for individual transactional events while also forming deeper relationships with them. Building a relationship with a financial professional can be a critical step toward creating a financially heathy business for every entrepreneur — and an essential step to closing the wealth gap.