Why some black-owned U.S. businesses are hardest hit by coronavirus shutdowns

WASHINGTON/NEW YORK (Reuters) – After 15 years working as a hair stylist in other people’s salons, Gary Connell opened his “Healthy Hair” studio in Montgomery County, Maryland in early March, sinking his savings into a two-chair shop in a busy mall.

It hadn’t even been up and running for a full month when stay-at-home orders were issued because of the novel coronavirus, shutting down the mall.

Connell, 57, went two months with no income before Maryland loosened restrictions in early June, allowing him to take a limited number of clients. He couldn’t access the federal government’s small business loan program, or get unemployment insurance.

His situation isn’t unusual.

U.S. black-owned small businesses are highly concentrated in retail, restaurants and other service industries most affected by shutdowns and social distancing. Their owners typically have had fewer resources to fall back on and a tough time getting aid, research shows.

Economists are sounding alarms that coronavirus-related damage may be permanent. “A lot of these business owners that are shut down right now are not going to come back,” said Robert Fairlie, an economics professor at the University of California, Santa Cruz who wrote a paper about the pandemic’s impact on small businesses.

The number of black businesses owners in the United States dropped by 41% between February and April to 640,000, compared to a 17% drop in the number of white business owners, Fairlie’s analysis shows.

FEWER BUSINESSES, FEWER RESOURCES

U.S. small businesses are where U.S. jobs are created, Federal Reserve chairman Jerome Powell said during congressional testimony on Tuesday, and any wave of insolvencies would weigh on the economy for years. “That’s all the more so true of minority businesses because of the important role they play in our economy and in their communities,” he said.

Black business owners are under-represented, making up about 7% of the 15 million small business owners who were working in February before the coronavirus pandemic hit, compared to more than 13% of the U.S. population in 2019, Census data (here) show.

Black-owned businesses also had fewer resources to fall back on when the pandemic struck; some 21% were financially “distressed” at the end of 2019 based on their profitability, credit score and earnings, compared to just 5% of white-owned businesses, according to a Federal Reserve survey (here).

Distressed firms were more likely to use the owner’s personal funds, take on debt or close or sell the business if they faced two months without revenue, the Fed study (here) found.

Minority-owned businesses were less likely to borrow from banks, with only 23% of black-owned businesses having turned to a bank for a loan in the last five years, compared to 46% of white-owned businesses, the survey showed.

Long-standing wealth disparities leave black entrepreneurs with fewer funds to fall back on during the downturn. The typical black family had a net worth of $17,150 in 2016, a tenth of the $171,000 held by white families, according to the Brookings Institution (here).

“That’s just not enough money to survive a pandemic when you’re trying to run a business and you have to pay rent, maybe you’re renting equipment,” said Fairlie. “You have a lot of costs that don’t just stop during a pandemic.”

Government programs such as the $660 billion Paycheck Protection Program (PPP), haven’t always been helpful.

Only 12% of black and Latino-owned businesses that sought assistance from the federal government received the amount they requested, and 41% were denied, according to a survey by UnidosUS and Color of Change (here).

The government has not collected or released data on PPP loan acceptance overall.

“The challenges that black-owned business and business owners of color face are not new but they have been exacerbated by this crisis,” said Tom Feltner, a director of research at the Center for Responsible Lending.

UPSIDE DOWN

Sage Ali, co-owner of Washington, D.C.’s U-Street restaurant Ben’s Chili Bowl, said the family-owned company had been poised to have its best year yet after opening a new location in a casino in Baltimore in March, and being featured in United Airline’s in-flight magazine.

The restaurant’s sales dropped as much as 85% in the coronavirus crisis and it failed to get a PPP loan initially, but it did in the second round. “It’s not a lot of money and there are a lot of bills other than payroll and our business is still down more than 50% for sure,” Ali said.

Many of the restaurant’s workers have been too fearful to return to work, and a Virginia location closed altogether, after the nearby area became what Ali called “a ghost town.”

“We’re struggling. Imagine small black-owned businesses that don’t have as much time in the game and don’t have as much recognition, and it’s got to be more challenging,” Ali said.

Hair salon owner Connell said he and his wife, a personal trainer who was also out of work, faced technical problems every time they tried to apply for unemployment benefits, as have millions of others.

“Everything feels upside down right now,” Connell said.

More consumers have been supporting black-owned businesses in the weeks after George Floyd, an unarmed black man, was killed in police custody, sparking protests over racism and police brutality.

But lack of capital means some firms are struggling to meet the demand.

Every time Donica Johns, 48, founder of the plant-based skin care brand Natural Mixologist, replenishes her most popular face masks and facial serums, the items sell out within days.

Johns, who lives in New Orleans, has not been able to restock as quickly as she would like, because she doesn’t have the capital reserves to order more ingredients.

As her company’s only employee, she decided not to apply for a PPP loan, but said she could benefit more from a flexible loan to help her rebuild inventory.

“It’s just so hard to get the capital we need,” said Johns. “When you’re strapped for cash it’s a very difficult balancing act.”