Could Or Should Small Business Financing Be Tracked By Race?

Over the past year and a half, more than $1 trillion of government money flooded directly into the SBA and, through it, to the banking system, to support small business owners as part of the CARES Act funding and the more recent American Recovery Plan Act. An additional $150 billion went to local governments, many of which opted to distribute grants to small businesses as well. The bipartisan infrastructure bill includes still more financing for startups and small businesses.

But the flood of money highlights key problems in the system for small business financing, including finance provided by or subsidized by the government. Black-owned businesses were twice as likely to close than white-owned businesses during the pandemic, in part because government financing did not reach them quickly, according to a 2020 New York Fed report. Asian-owned and Hispanic-owned businesses were also more vulnerable during the pandemic.

Now, a growing chorus of people is calling for measures that would track government funding, using race as one of the measures, to entrepreneurs, small businesses and innovation, with an eye toward righting what seems to be a broken system.

Those speaking out include local small business owners themselves, like Syovata Edari, who owns a Madison, Wisconsin-based chocolate shop, CocoVaa Chocolatier. (See related story: How One Black Founder Quit being a Token).

“I shouldn’t have had to fight for it or call anybody out,” she said. “There should have been somebody in there advocating for me.” 

This month, a group of Democratic Representatives and Senators introduced legislation calling for the Congressional Budget Office to score proposed legislation on how it would affect different groups of people in the United States. “In 2019, prior to the onset of the coronavirus pandemic, the median wealth of White families was $188,200, while the median wealth of Black families was only $24,100 and the median wealth of Hispanic families only $36,100,” noted the representatives, including Reps. Ro Khanna (D-CA) and Dean Phillips (D-MN) in the U.S. House of Representatives and Sens. Elizabeth Warren (D-MA) and Michael Bennet (D-CO) in the Senate. The legislation is unlikely to pass without bipartisan support.

But it was followed by a call from the Brookings Institute for Congress to prioritize an innovation budget that includes more people of color. The SBA oversees key parts of the country’s innovation financing system.

“The nation’s unbalanced innovation investments have been reinforcing preexisting spatial and demographic disparities,” outline its writers, led by senior fellow and policy director Mark Muro. “This amounts to a structural distortion of the nation’s innovation ecosystem, with real costs to individual people and the economy.”

The responses now reflect the problems that emerged anecdotally in the distribution of government aid — and the fact that there was no way even to evaluate how big the problems were or are. Over the years, SBA administrators have called for more funding to establish better data systems.

No requirements to track demographics

The federal government did not require states’ localities to track demographics, according to multiple representatives for entities that received funds. The lack of oversight also created a breeding ground for fraud, which took more loans away from those needing it the most. The Project on Government Oversight investigation found that about $246 million of PPP funding went to accused fraudsters.

The demographic data that was collected is unreliable, said Philip Mattera, the research director at Good Jobs First, which tracked much of the CARES Act funding throughout the pandemic. In the case of the PPP loan data released by the SBA, Good Jobs First decided not to include it’s demographic data in their database because there were just too many responses left empty to get an accurate picture, he said. The program didn’t even track jobs saved, he said.

“If you’re trying to judge the success or failure of that program, you would really need that information, and it doesn’t exist in the public domain.”

The definition of race

In the United States, federal and state governments have been wrestling for centuries with how to collect demographic data and whether and how to use it to qualify people for government programs. The Small Business Administration has long had lending programs for disadvantaged business owners. The structure of the program emphasizes race and sex over economic disadvantage: You can qualify, for instance, up to $350,000 a year in income if you are a woman or person of color. Many government programs rely on self-reports to determine qualified applicants: In other words, you can say you are a person of color, and you’ll be believed.

The way people see their own race and sex, and the way society perceives race and sex, are both evolving now, perhaps even more rapidly than in the past. “Measuring who we are racially is getting more complex,” said Dr. Allison Plyer, chief demographer at The Data Center in Louisiana and former chair of the U.S. Census Bureau Scientific Advisory Community.

One sign of that: the number of people who checked the “White and” box on the most recent Census shot up, far exceeding the number of biracial children born in the last decade, she said.

Philosophical concerns aside, here are four possible data-driven ways to manage prioritizing distribution of grants and loans to small business owners who are disadvantaged:

• After-the-fact enforcement. In the case of the PPP program, this is essentially the route the government took, accepting that some fraud would occur.  “This is a perfectly valid way of going about it,” said Plyer, pointing out that intrusive bureaucracy — such as happened after Hurricane Katrina in Louisiana — can hamper recoveries for years.
• Given that a high level of government support for small business and startups is likely to continue, and race is an increasingly pressing social question, the SBA (or other government agencies) could engage in more rigorous application processes, to include interviews.
• The SBA, or another arm of the government charged with aiding small businesses, could have access to the U.S. Census Bureau data sets, which include Social Security numbers. Its data are self-reported but rigorously collected.
• Prioritize based on size. Given that the smallest businesses (often single-person businesses) are owned disproportionately by women and people of color, aid programs that honed ways of reaching them would de facto reach groups disadvantaged by race.

Up against entrenched systems

Technology is both an ally and an enemy in the push to make change. Banks that partner with the government may rely on algorithms that define credit-worthy in ways that are rooted in racist systems. Much of the SBA’s funding went to larger-sized, yet-still-small businesses, which tend to be owned by white men and that had long standing relationships with banks. Private and charter schools received $5.6 billion of funding that was not available to public schools. Very small businesses missed out on the funding intended for them — a group that’s a majority women and people of color.  

“There is no systematic racism separate from our algorithmic contributions, from the hidden network of algorithmic deployments that regularly collapse on those who are already most vulnerable,” writes Mozilla fellow Deborah Raji in an article published in MIT Technology review. 

In the case of CocoVaa Chocolatier, the Wisconsin-based founder was able to access funding through a local organization, Dane Buy Local. But it took time. The nonprofit distributed about $29 million of public COVID relief funding to small businesses for Dane County. In the largest round last year, which was over $10 million, the nonprofit was able to provide funding for about 90% of the applicants, its director Colin Murray said. In return the nonprofit received nearly $385,000 in compensation from the county, a county representative confirmed.

The county did track the demographics of the people who received the funds —  about 25% of the funds distributed by Dane Buy Local went to minority owners, which is on par with the county’s population. For the first round, which distributed $10.7 million, that meant 7% went to Black owners, 8% Latino owners, 6% Asian owners and 1% American Indian owners, according to data from the county.

Murray said Edari was denied at first because her application was incomplete. Dane Buy Local granted Edari $4,500 for her chocolatier in that first round after Murray asked her to reapply. She also received another $9,500 grant in its most recent round. But it’s about more than just the money.

“I don’t understand why she’s upset — she received not one, but two checks in round one. She received one for CocoVaa, and she received one for her legal business,” Murray said.

Edari is frustrated and exhausted at an overall system that she believes is working against her. “I think maybe they thought if they give me that money, it’ll shut me up,” she said. “But I had no idea what the rubric was. Nobody’s answering any questions.”

Squashed efforts

The effort to grapple with the lack of inclusion in the system is running into significant roadblocks. The Biden administration has created new programs designed to prioritize underrepresented groups with public money. But many of these efforts were halted after receiving a wave of challengers. 

For instance, the Restaurant Revitalization Fund, a $28.6 billion program run by the SBA that prioritized women and people of color for the first 21 days. Restaurants owned at least 51% by women, people of color, or a veteran qualified for this round. 

Three lawsuits challenged the constitutionality of the program. White restaurant owners feared the funding would run out before the 21 days were up. As a result, more than 2,950 minority owners who were promised funding did not receive it. 

Edari was one of those owners. She was slated to receive a $50,000 check from the fund, which she planned to use to hire some help. But because of the lawsuits she will no longer receive the money. 

About $18 billion of the fund went to the prioritized underrepresented entrepreneurs. The rest went to the non-priority groups.

Another constitutional challenge

A similar story played out late last year in Oregon, when the state government rolled out a program that allotted 4.5% of the state’s CARES Act funds ($62 million) to Black Oregonians. But the program, the Oregon Care Fund, halted operations temporarily after two companies — a logging company and a coffee shop– challenged the constitutionality of serving one race. The program eventually began funding Black business owners, but still faces litigation for being unconstitutional, brought by the Mexican-American coffee shop owner Maria Garcia.

Madison-based Cook it Forward, an advocacy branch of Rule No One Hospitality, announced this month that they will be donating to the women, people of color and veteran business owners who were promised the funds and never received them. The donations will come from restaurant owners who did receive Restaurant Revitalization Funding and opt to contribute a portion, as well as other donors who want to match those contributions. 

CocoVaa will be one of the first to receive the funding, the announcement outlines. As of Aug. 24, Edari still has not received it, she said.