It is generally believed that small business ownership is not only a means of achieving financial stability and building wealth, but also a means of closing the racial wealth gap. It is well known that small businesses are a major component of the financial well-being of the small business owner (Gentry and Hubbard 2004), but it is not at all clear from the current evidence that small business ownership alone bridges the wealth gap. In fact, recent studies have shown that small black and Latino-owned businesses have lower revenues, profits, and cash margins (Farrell, Wheat, Mac 2020; Fairlie and Robb 2008); are more likely to close and have fewer employees (Fairlie and Robb 2008); And they have less access to credit (Federal Reserve System 2017) than small white-owned businesses. Adequate revenue and profits, the ability to hire employees, and access to credit are some of the key components of a wealth-generating small business, and the racial disparities between them suggest that small business ownership may not bridge the gap.
This brief examines the liquid wealth of the typical small business owner, and shows that there is no meaningful narrowing of the gap in the liquid wealth available to black, Latinx and white small business owners. Other studies have found that black business owners have higher wealth than non-business owners (Association for Enterprise Opportunity 2017), and that the transfer of wealth among black business owners is similar to white business owners (Bradford 2014). This brief shows that among a sample of business owners, the gap persisted during the first few years of company ownership.
Although there is much to learn to fully understand how small business ownership and wealth interact, this brief measures the liquid wealth of typical small business owners over the first four years of their business operations, with a particular focus on measuring the differences between black, Latino, and white small business owners.
Small business assets represent a meaningful share of the total assets of small business owners, and make up more than 40 percent of the typical owner’s financial assets (Gentry and Hubbard 2004). In previous work, the JPMorgan Chase Institute has highlighted the importance of cash by examining small business deposit accounts, and in June 2020 released a report showing how small business results vary based on the race of small business owners.
- Black and Latino-owned companies are well represented among organically growing companies, but underrepresented among externally funded companies.
- Black and Latino-owned businesses face challenges of declining revenue, profit margins, and cash flow. Previous JPMorgan Chase research showed that each of these factors, especially cash, are important factors in predicting small business exits.
- Companies with black owners, particularly owners under 35, were the most likely to exit in the first three years. In the first three years of operation, exit rates for black and Latino-owned small businesses were 2-6 percentage points higher than for white small businesses. However, if businesses continue through the fourth year, exit rates among small business owners in each ethnic group are similar.
- Black and Latino-owned businesses with similar revenues and cash reserves are just as likely to survive as white-owned businesses. Higher business cash reserves, measured as typical balances divided by typical cash outflows, are associated with similar exit rates for small, white businesses.
- Racial gaps in small business outcomes are evident across cities, even in cities with large black or Hispanic populations.
- Finding One: Small business owners’ liquid wealth levels increase modestly over the first four years.
- Finding two: The typical white business owner has more than 2.5 times the liquid wealth of the typical black business owner in each of the first four years.
Encouraging small business startups alone may not close the liquid wealth gap, and policies that support small businesses should take into account the differences in the liquid wealth available to small business owners. Typical black and Latino households own 32 and 67 percent of the liquid wealth of a typical white household, respectively (Farrell et al 2020). It is not surprising, then, that black, Latino, and white small business owners start their businesses with very different levels of liquid wealth. These differences persisted during the first four years of business ownership, even among a sample of successful small business owners.
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the quote: Small Business Owned by Black, Latinx, and Liquid Wealth (2021, June 11) Retrieved June 12, 2021 from https://phys.org/news/2021-06-black-latinx-owned-small-businesses-l Liquid.html
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