Government Programs Are Shortchanging Minority-Owned Small Businesses. DAFs Can Help.

There’s an old adage that when America catches a cold, African Americans get pneumonia. The Covid-19 outbreak lays bare the devastating truth of that expression. Institutional racism in health care, public health, economic policy, and criminal justice has left African Americans more vulnerable to the virus and more likely to die after becoming infected. Similarly, the pandemic is widening the racial wealth gap at an alarming rate.

Most recently, this deadly mix was ignited by the horrendous death of George Floyd at the hands of Minneapolis police officers, sparking protests nationwide and revealing the deep pain and economic deprivation facing black people.

Before Covid-19 hit, 2020 was already projected to be an economically challenging year for people of color, with median African American and Latino household wealth estimated to drop 18 percent and 12 percent, respectively, from 2013. Now, minority-owned businesses, which account for 30 percent of all U.S. businesses, are being decimated by the pandemic’s economic impact, with little relief in sight. In neighborhoods that are majority black, 90 percent of small businesses had just 15 days or less of cash reserves before the pandemic, compared with 50 percent for businesses in majority-white communities, according to the JPMorgan Institute.

The Paycheck Protection Program, passed by Congress this spring and administered by the Small Business Administration, is failing to provide help to the most underserved communities. This is largely because the program’s funds are distributed through SBA-approved banks, credit unions, and lenders, posing significant obstacles for businesses owned by people of color, which have historically been denied access to credit. The result is that 95 percent of African American-owned businesses, 91 percent of Latino-owned businesses, 91 percent of Native Hawaiian- or Pacific Islander-owned businesses, and 75 percent of Asian-owned businesses are unlikely to receive loans from the program, according to the Center for Responsible Lending.

This should come as no surprise. The program has merely perpetuated existing conditions racialized though its primary program for financing small businesses. In 2019, only 32 percent of loans went to businesses owned by people of color, including 6 percent to Latinos, 3 percent to African Americans, and less than 1 percent to American Indians.

$121 Billion Available

To survive, these businesses need grants and long-term capital, not loans. Fortunately, $121.4 billion is sitting on the books, hosted in thousands of donor-advised funds across the United States. These funds could quickly be mobilized through nonprofit organizations that serve small minority businesses, including community-development financial institutions, small-business-support organizations, and community lenders. The money could be put to use immediately to cover loss of revenue, help bridge payments, and maintain payroll during the pandemic.

While the Paycheck Protection Program relies on big banks and existing government infrastructure to provide support to small businesses, donor-advised funds can have a more immediate impact by moving capital through local nonprofit institutions, which have direct relationships with businesses and have long served as their lifelines when they were unable to get the attention and support of mainstream banks.

I’ve seen how this can work firsthand. My organization recently madesmall rapid-response grants of $25,000 to $50,000 to nonprofit groups such as CommonWealth Kitchen, a social enterprise in Boston’s predominately African American Dorchester neighborhood. The organization has incubated more than 50 community food businesses, including wholesalers, food trucks, and caterers. CommonWealth Kitchen is currently purchasing unused food inventory from its members to help with immediate cash-flow needs and working with these businesses to prepare and distribute 10,000 free meals per week, ensuring that families have healthy food options during this crisis. The need is particularly acute in the greater Boston region, where the median African American household net worth is $8, compared with $247,500 for white households — the highest racial wealth disparity in the country.

Donor-advised funds should also consider investing in community-development financial institutions, which are providing direct relief for local businesses. For example, in response to Covid-19, ICA Fund Good Jobs, in Oakland, Calif., created the Rapid Response Liquidity Fund,a zero-interest loan program that provides emergency capital and expert guidance to small businesses facing financial and job losses. Recently, ICA surveyed 13 small businesses within its portfolio, finding these businesses collectively generate more than $23 million in annual revenue and more than 200 full-time and 120 part-time jobs in the Oakland area. Now, all those jobs are at risk.

By using donor-advised funds to support organizations such as CommonWealth Kitchen and ICA, donors can ensure that flexible capital quickly reaches a range of at-risk businesses. There is no shortage of these extraordinary organizations that are in the best position to deploy charitable contributions where they are needed most.

Bodegas, hairstylists, local retailers, and eateries function as the backbone of our communities and local economies. But these minority and neighborhood small businesses are shortchanged by federal programs. In times like these, small businesses that are hard hit by the Covid-19 fallout need capital to move quickly, with minimal bureaucratic hurdles and few strings attached. Donor-advised funds are in the best position to provide just that.