Black and Latinx Americans are becoming entrepreneurs at a growing rate, according to the figures from Gusto’s 2024 New Business Formation Report, a survey of more than 1,300 business owners who started their companies in 2023.
The report found six percent of entrepreneurs identified as Black or African American in 2023, twice the three percent rate in 2019. Further, 13 percent of entrepreneurs identified as Hispanic or Latinx, the highest rate in the three years of the survey and above the eight percent pre-pandemic rate.
Let’s dig into the numbers and drivers behind the expanding role of Black and Latinx entrepreneurs, the challenges they continue to face, and some potential routes to overcoming these hurdles.
Encouraging signs
Gusto’s findings track with entrepreneurship data from the U.S. Small Business Administration (SBA). The SBA reports that Black business ownership is increasing at the fastest pace in 30 years, and the share of Black households owning a business more than doubled between 2019 and 2022, from five percent to 11 percent. Similarly, Latinx business ownership is spreading at the speediest rate in at least a decade, rising from seven percent to ten percent between 2019 and 2022. Nearly 25 percent of all new entrepreneurs in 2021 were Latinx.
More SBA loan dollars are going to Black and Latinx entrepreneurs too. Since 2020, the share of the SBA’s loan portfolio involving minority-owned businesses has jumped from 23 percent to more than 32 percent. The number and dollar value of SBA-backed loans to Black-owned businesses has more than doubled, and loans to Latinx businesses reached a record-breaking $3 billion in 2023.
These aren’t the only signs of thriving among Black and Latinx entrepreneurs. For example, the Gusto study notes that Black or African American entrepreneurs have historically struggled to raise early-stage money from venture capital funds and other private investors. But the stinginess may be starting to ease. In 2023, 12 percent of Black or African American entrepreneurs who started a new business received a private capital investment, the highest rate of any group of new business owners, and up from only four percent in 2022.
The Stanford Graduate School of Business’s “2023 State of Latino Entrepreneurship,” released in March 2024, sheds more light on the current situation for Latinx founders. The researchers surveyed about 5,000 Latinx business owners and about 5,000 non-Hispanic white business owners. Each business generates at least $10,000 in annual revenues and employs at least one person besides the owner. The Latinx-owned businesses are growing faster than white-owned businesses and American businesses in general in terms of revenue, number of businesses, employees, and payroll.
What’s behind the higher entrepreneurship numbers?
Among other things, Gusto’s survey looked into the common motivations for entrepreneurs of color. While the desire for flexibility remains the top motivator for both Black and Latinx entrepreneurs, financial motivations play a much greater role for these new business owners than others. Sixty percent of Black entrepreneurs and 42 percent of Latinx entrepreneurs started a business because they wanted financial stability or to build an asset, compared to 37 percent of all respondents.
Other common motivators for Black entrepreneurs include:
- Wanting to be their own boss,
- Seeking the best avenue for their ideas, goods, and services, and
- Desiring to balance work and family life.
More than one in five Black adults in the United States say owning a business is essential to financial success.
For Latinx entrepreneurs, the top motivators include wanting to be their own boss, the opportunity for greater income/wealth building, and the ability to balance work and family. Some of these business leaders also may see entrepreneurship as a survival strategy due to a lack of other opportunities.
Continuing racial disparities
For all the promising news, a real racial gap in entrepreneurship remains stubbornly in place. This gap persists despite the fact that Black respondents are much more likely than white or other non-Hispanic respondents to indicate that they have ever considered starting a business, and Hispanics are also more likely than non-Hispanic respondents to have considered a business idea. They’re also much more likely to believe that their business idea has a better-than-average chance of surviving five years.
The racial gap in entrepreneurship can be traced back to a variety of structural and individual barriers, including significant nagging differences in the following.
Wealth
Less wealth obviously makes it more difficult to start and build a new business. Despite some improvements in recent years, though, Black and Latinx households lag far behind whites in wealth. In 2021, white households had a median net worth of $250,400. For Black households, the figure was $27,100, while the median net worth of Latinx households was $48,700. Black and Latinx households also trail whites in terms of the rates and sizes of inheritances.
Even when Black and Latinx entrepreneurs successfully launch new businesses, they don’t stand to gain as much wealth as their white counterparts. One study found that Black and Latinx business owners gained only a quarter of the wealth that other business owners gained during a five-year period.
Capital funding
While the Gusto report included some promising figures on funding access, it cautioned that there’s still much more work that needs to be done to support non-white entrepreneurs. For example, the data suggest that venture capital and other investors are less likely to write large checks to Black entrepreneurs than white entrepreneurs. In 2023, for example, 31 percent of Black or African American entrepreneurs started their business with more than $10,000, compared to 35 percent of white entrepreneurs.
The report also points to a disparity in access to loans. Black entrepreneurs are half as likely (four percent) to use private business loans to start their companies as white entrepreneurs (eight percent).
Blacks are less likely to apply for loans due to fear of denial than whites—and those fears aren’t misplaced. The Federal Reserve’s 2023 “Small Business Credit Study” of firms with fewer than 500 employees found that “older, larger, and white-owned firms were more likely than their counterparts to be fully approved for a loan, line of credit, or merchant cash advance in the 12 months prior to the survey.” Fifty-six percent of white owners were fully approved, versus 32 percent of Black owners and 32 percent of Latinx owners.
On the positive side, those figures mark an improvement from the 2021 “Small Business Credit Survey.” That survey showed that even among businesses with good credit scores, Black-owned firms were half as likely as white-owned firms to secure the financing they sought. But the difference still presents a serious impediment to would-be entrepreneurs.
It’s an impediment that shouldn’t be minimized. Black and Latinx business owners who receive all the external startup funding they seek generate three times more wealth than those who only receive partial funding. This isn’t the case for non-Black or -Latinx businesses, which enjoy roughly the same wealth growth regardless of whether they receive all of the external funding requested. The greater impact of access to funding on Black and Latinx entrepreneurs’ ability to grow wealth may be partly due to the fact they have access to fewer funding alternatives than their white counterparts, such as friends, family, and personal wealth.
Contracting opportunities
The federal government is the largest purchaser of goods and services in the world, so federal contracts can have a substantial effect on the success of a new or small business. And, as the government itself recognizes, Black and Latinx business owners are underrepresented in their share of federal procurement dollars, even relative to their low rates of ownership in the general economy.
Not surprisingly, diversity among contract recipients is higher when particular attention is paid to procuring goods from small businesses. The good news is that the federal government has taken proactive steps in recent years to move in this direction. For example, the Biden administration has raised the goal for the share of federal contract dollars going to “small disadvantaged businesses,” including firms owned by racial and ethnic minorities, from five percent of all procurement to 15 percent by 2025. The actual number was already up to about 10 percent by 2021.
Education
While certainly not a prerequisite to success as an entrepreneur, a post-high school education increases the odds. And whites still have the edge in college attendance and graduation, although it’s narrowing.
In 2022, 56 percent of white respondents attained an associate’s or higher degree, while 36 percent of Black respondents and 34 percent of Latinx earned one. In 2010, the gap between white and Black respondents was also 20 percentage points, but the difference between white and Latinx respondents was 29 percentage points.
The gaps were smaller for bachelor’s degrees or higher. In 2022, 45 percent (up from 39 percent in 2010) of white respondents held such degrees, versus 28 percent of Black respondents (19 percent in 2010) and 25 percent of Latinx respondents (13 percent in 2010). The progress is slow but real.
Access to resources
Higher education isn’t just about the academics, of course. It’s also about picking up effective communication, persuasion, and leadership skills—not to mention the valuable contacts that can be made.
Such networking is an indispensable resource for entrepreneurs and one of several that white entrepreneurs may take for granted, but Black and Latinx owners can find difficult to access. Similar resources include mentorship, deep talent pools, established markets, and third-party expertise. Despite their public profiles as self-made mavericks, only a few entrepreneurs succeed by truly going it alone.
How to boost minority-owned businesses
Governments, community organizations, and other members of the business ecosystem can all do more to empower Black and Latinx entrepreneurs going forward. Areas to start include:
- Expanded funding opportunities. This could include developing new approaches for providing access to capital, such as partnerships, smaller loans, innovative lending programs, and non-traditional methods of evaluating a borrower’s creditworthiness. Anti-discrimination measures may be necessary, too.
- Greater resources. Wider access to mentoring and coaching, incubator and accelerator programs, and targeted support could level the playing field for Black and Latinx entrepreneurs. As important as establishing these resources is spreading the word about them.
Some avenues for accomplishing both of these goals already exist, including:
Regulation crowdfunding: This relatively new SEC-approved method of financing lets a company raise up to $5 million through crowdfunding offerings in a 12-month period without being required to register the offering with the SEC. You can raise money by soliciting relatively small individual investments or contributions from a large number of people.
Community Development Financial Institutions (CDFI) Fund: Part of the U.S. Department of Treasury, the fund provides tailored resources, including technical assistance and programs that invest federal dollars alongside private sector capital. It doesn’t make direct loans but provides financing to credit unions, banks, loan funds, and venture capital funds that operate with a primary mission of serving low-income communities.
State Small Business Credit Initiative: This is another Treasury Department program. It’s designed to catalyze private capital in the form of loans to and investments in small businesses, especially in historically underserved communities and among entrepreneurs who may have otherwise lacked the necessary support to pursue their business ambitions.
Minority Business Development Agency (MBDA). Among other offerings, the agency provides a Capital Readiness Program to help minority and other underserved entrepreneurs grow and scale their businesses.
Grants.gov and the MBDA’s Federal Procurement Center: Both of these can help entrepreneurs identify possible contracting opportunities. The Federal Procurement Center is solely focused on federal contracting services. It works closely with “minority business enterprises” to promote their goods and services to the federal government and make connections with procurement officials and prime contractors. The SBA also has two federal contracting programs: the 8(a) Business Development program and the HUBZone program.
More information about trends in entrepreneurship
Black and Latinx founders aren’t the only ones driving the surge in entrepreneurship since 2020. Read all of the key findings from Gusto’s New Business Formation report in full in our blog post.
