Black-owned businesses can help close the racial wealth gap. US needs more of them, study says.

Creating and supporting more Black-owned businesses is one step to reducing the racial wealth gap in the US, according to a new study.

Around 70% of Americans work for small businesses that employ people in their communities. And while Black-owned businesses drive the highest percentage increases in employees, revenue, and payroll, according to a Brookings study, they make up only 2.7% of employers, even though Black Americans are 14.4% of the population.

"Small businesses create jobs and hire locally, and because we don’t have the volume of Black-owned businesses, we’re missing out on reducing the racial wealth gap," Dwight Hutchins, a key architect of the new report, "Gather Against the Gap," told Yahoo Finance.

Although the number of Black-owned employer businesses grew from 2017 to 2021, the overall share remained disproportionately low relative to their share of the US population.

More Black-owned businesses would mean more Black-held jobs, researchers say, which would go a long way toward closing the economic gap in which the average white household owns $215,000 more wealth than the average Black household.

Historical barriers to Black-owned businesses

The history of Black businesses in the US is rife with violence and racism.

After slavery, Jim Crow segregation laws meant white businesses could refuse Black customers.

This spurred the growth of Black-owned businesses like banks, law firms, medical practices, salons, grocery stores, gas stations, newspapers, and more in small towns and cities throughout the country. Collective economics within Black communities created wealth.

The success of Black-owned businesses fueled more hatred and violence.

In what was known as the Red Summers of 1917-1919, many of these businesses in Washington, D.C., Chicago, St. Louis, Houston, Tulsa, and Omaha were decimated during mob violence and racial terrorism.

In the decades that followed, many Black-owned businesses closed due to racially biased eminent domain proceedings, with the government taking land in Black business districts like Bruce’s Beach in Los Angeles and Beale Street in Memphis.

Despite past and current attacks against Black-owned businesses, they continue to play an important role in the American economy.

For example, hip-hop is an industry with an economic impact of some $16 billion and has launched Black-owned businesses in music, film, fashion, and advertising for creatives that curated the culture.

Today, Black-owned businesses span a range of industries, with healthcare social assistance services being the most common.

In 2021, Black-owned businesses provided jobs for around 1.4 million workers with annual payrolls estimated at $53.6 billion, according to a Pew Research study. However, many Black-owned businesses tend to be smaller businesses with two-thirds having fewer than 10 employees.

Corporate partnerships and impact investments

In 2021, in the thick of the pandemic, most businesses hired fewer people, but Black- and Hispanic-owned businesses increased their number of employees, according to Brookings.

But their growth is hindered by a lack of access to capital.

Only 1.2% of venture capital funding goes to Black entrepreneurs, according to Crunchbase, which collects data on early stage startups, with Black women founders receiving just 0.27% of funding.

Hutchins’ research asserts that corporations can proactively take a role in fostering the growth of Black-owned businesses when they: reimagine procurement by choosing suppliers from underserved communities, expand impact investments in underserved communities, and promote impact investing as a viable investment theme for private equity.

"This is not taking jobs away from anyone, but adding jobs to the economy by bringing more participants to the economic ecosystems," said Hutchins, who is also managing director and senior partner at Boston Consulting Group and a senior fellow at Northwestern’s Kellogg School of Management.

In that scenario, he said, everyone makes more money.

One example of corporate partnership and impact investing is Audible and Equal Space in Newark, N.J.

Equal Space is a "sharespace" created with multicultural business owners in mind that provides resources for startups and coaching for tech companies. Audible, the audiobook giant owned by Amazon (AMZN), is partnering with it to bring a growing tech ecosystem that could transform Newark.

"Audible had been doing a significant amount of investment in all of the disparate elements of the ecosystem, bringing people together in dialogue on what we really needed," Citi Medina, co-founder of Equal Space, told Yahoo Finance. "When Audible or a big tech company steps into a city or an ecosystem, the swirling opportunities and companies that will start to come around it just because it's there, it just happens naturally."

These partnerships work best when corporations align themselves with businesses that are part of the communities they serve.

"Audible is proud to feature Equal Space in the latest cohort of pioneering startups joining our Business Attraction Program, a scalable model that can be adopted by other companies seeking to make a tangible impact in the cities they call home," Aisha Glover, head of Urban Innovation at Audible, told Yahoo Finance. "Given EqualSpace’s track record of attracting multicultural founders, we are able to advance expansion opportunities for high-growth entrepreneurs."

Equal Space are the founders of Newark’s Small Business Week and Tech Week, the partnership with Audible was a natural fit.

The investment in Equal Space is also an investment in the city of Newark for Audible. Its Innovation Cathedral, which provides paid student internships and employs residents, "further anchors the growing innovation corridor in Newark and is yet another powerful symbol of our commitment to the city," Glover said.

For Equal Space, it means startups can thrive and empower the communities they serve, creating a climate for more businesses to move in.

"How we develop an ecosystem is more than just giving … capital because the soil still has to be rich for the startups and companies to grow," Medina said. "They have to become a part of the fabric of the city."

Ronda Lee is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government.Follow her on X @writesronda

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