To create an equitable economy, grant makers should address the financial and training hurdles that cause so many entrepreneurs to fail.
I remember the day nearly 40 years ago when my uncle opened his restaurant, La Gran Parada, in Providence, R.I. Most immigrants I knew, including my own parents, worked multiple jobs or long hours in low-wage, non-union factory jobs. But in that restaurant, I first witnessed the power of owning your own business.
Over the years, as the restaurant grew from a few tables to a full-service enterprise that included a catering company, my uncle — who has since passed away — built intergenerational wealth, sent his grandkids to college, and eventually passed La Gran Parada down to his son, who owns it to this day.
My uncle is an all-too rare success story. New small-business applications hit an all-time high for the third year in a row in 2023. But, if historical rates apply, half of those will shut down within five years. Some will close for valid business reasons, such as low market demand or strong competition. But others will fail simply because they lacked access to affordable financing, digital tools, or business advisors that could help them succeed.
The outlook is even worse for businesses owned by people of color. Black- and Hispanic-owned businesses are more likely to close after their first year, in part because these entrepreneurs are more than twice as likely to be denied funding compared with their white counterparts. But when these businesses have more equitable revenue and cash reserves, that gap disappears.
Unprecedented investments by the federal government, such as the Inflation Reduction Act and the CHIPS and Science Act, could reduce these failure rates by connecting small businesses to affordable capital and coaching on how to finance and expand their business. But there’s a significant obstacle: Nonprofit lenders and small-business assistance groups lack the capacity to take full advantage of such opportunities.
To help these businesses succeed and build a more inclusive economy, philanthropy can make complementary investments in small-business training providers and community development financial institutions, CDFIs — nonprofit lenders that provide affordable capital to underserved communities. Unfortunately, in my experience, many well-meaning funders focus on one-off programs, such as grants for diverse entrepreneurs, when the bigger opportunity for impact lies in addressing broader gaps in small-business support.
Critically, organizations that offer small-business capital and expertise are not connected to each other, making it difficult for entrepreneurs to navigate available resources. And because these providers are under-resourced, they can’t expand their reach and help small businesses take advantage of historic federal funding. For example, just 13 percent of the $8.2 billion allocated so far through the State Small Business Credit Initiative for entrepreneur support programs has actually reached small businesses.
CDFIs are committed to delivering this money to Main Street, but often lack the personnel, technology, and marketing tools to quickly move money out the door. Philanthropy can mitigate these challenges and help ensure funds flow quickly, effectively, and equitably by focusing on four key areas.
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By Sandy Fernandez / Courtesy of The Chronicle of Philanthropy
