The State of Black Entrepreneurship

Entrepreneurship can help build communities and grow the overall economy. That’s because it creates new jobs and additional avenues of wealth.

But there is a racial entrepreneurship gap in the U.S. As a January 2022 Regional Economist article explained, Black entrepreneurs struggle with barriers not faced by white entrepreneurs. The article’s authors were St. Louis Fed Associate Economist Siddhartha Sanghi, St. Louis Fed Research Associate Maggie Isaacson and three co-authors—Barton H. Hamilton, Andrés Hincapié and Prasanthi Ramakrishnan.

“Black individuals are much less likely to be entrepreneurs than their white counterparts,” the authors wrote. “Part of the explanation is that, for centuries, Black Americans were prevented from becoming business owners through violence as well as racist regulations and unofficial rules.”

Racial Entrepreneurship Gap Widens with Age

Using statistics from the Panel Study of Income Dynamics (PSID) on Black and white individuals, the authors defined entrepreneurs as people who were wholly self-employed. They restricted the analysis to the age range between 25 and 58—excluding people who were retired or still students.

The authors found that 15% of white men were self-employed, compared with only 6% of Black men in the same age range—a 150% difference. They also discovered that the gap fluctuates over the age range, as detailed in the first figure.

“While white men were consistently more likely to be self-employed at all ages, the racial gap widened with age,” they wrote. “At age 25, white men were about 3.3 percentage points more likely to be self-employed than Black men; by age 58, this gap had widened to 12.1 percentage points, with 18.9% and 6.8% of white and Black men, respectively, being self-employed.”

Black and white women entrepreneurs had a similar gap. The authors found that 2.7% of Black women were self-employed, compared with 6.2% of white women—a 130% difference. The second figure details the proportion of white and Black women who identified as being self-employed.

“Overall, women in the PSID were less likely to be self-employed at all ages than their male counterparts,” the authors wrote. “At age 25, white women were only 0.6 percentage points more likely to be entrepreneurs than Black women of the same age. However, the female entrepreneurship gap widened quickly and considerably—by the time they were 35, white women were 4.2 percentage points more likely to be self-employed.”

What’s Causing the Entrepreneurship Gap?

Black entrepreneurs face many structural and individual challenges that result in the entrepreneurship gap. In the article, the authors outlined the economic reasons, since they could be measured with the data.

Their findings mirror similar facts about the wealth gap in the U.S. For example, 30% of Black households between ages 25 and 58 had zero or negative wealth compared with 13.8% of white households. As a result, Black entrepreneurs have more difficulty starting a business and obtaining financing.

Black entrepreneurs also face credit challenges. When examining firms with good credit scores, the 2021 Small Business Credit Survey (PDF) showed Black-owned firms were half as likely as white-owned firms to secure the financing they wanted, the authors noted.

“These financial barriers make it more difficult for Black individuals to start and scale up their businesses, compromising the profitability of their enterprises and raising the rate at which they close,” they wrote.

Evaluating Ways to Bridge the Gap

Recent research by Barton H. Hamilton, Andrés Hincapié, Prasanthi Ramakrishnan and Siddhartha Sanghi showed that the return on each dollar invested by Black entrepreneurs was lower than the return for white entrepreneurs and that Black businesses were particularly constrained in borrowing because of less wealth, according to the Regional Economist article.

In the article, the authors outlined several ways that could be effective in helping to close the entrepreneurship gap. These included improving the return on investment for Black businesses, providing more mentoring for Black entrepreneurs, and preventing discrimination in the lending process and strengthening relationships between the Black community and banks.

“Removing the barriers for Black entrepreneurs, while potentially difficult to implement, would encourage Black entrepreneurs and could have far-reaching consequences on inequality, social mobility, job creation and economic output,” the authors concluded.