Findings

The contributions of the small businesses sector to the U.S. economy are often noted in periods of economic growth, and the fragility of the sector is a core focus of policy in an economic downturn. Black-owned businesses and Hispanic-owned businesses comprise a substantial and growing share of the sector, and understanding racial gaps in small business outcomes is an important part of formulating policies. It’s also critical to understanding the extent to which the sector can deliver broad-based growth during an expansion, or where to focus policy attention and resources during a downturn, yet little recent data exists on differences in financial performance and small business survival by owner race.

This report attempts to fill this gap by leveraging voter registration data from Florida, Georgia, and Louisiana to create a sample of nearly 150,000 small businesses with self-identified owner race. We use this new data asset to inform differences in small business financial outcomes – revenues, profit margins, and cash liquidity – and small business survival by owner race from 2013 to 2019.

Our findings suggest that Black-owned businesses and Hispanic-owned businesses may be disproportionally affected during economic downturns, such as the one resulting from the 2020 COVID-19 pandemic, though support to these businesses through liquid assets and access to markets could materially support their survival. Moreover, while these findings highlight racial gaps in small business outcomes and suggest that opportunity for the sector to deliver substantial wealth creation to Black and Hispanic families may be limited, policies that target smaller small businesses, businesses with younger owners, and businesses owned by women may best support broad-based growth during a recovery.

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Black- and Hispanic-owned businesses are well-represented among firms that grow organically, but underrepresented among firms with external financing.

Owner race by small business segment

Bar graph describes about owner race by small business segment

Bar chart showing small business owner race by small business segment. Twenty-eight percent of the firms in this cohort were founded by Hispanic owners, while 13 percent were founded by Black owners. The composition of the organic growth segment is similar, indicating that Black- and Hispanic-owned businesses are well-represented in this dynamic segment. However, both Black- and Hispanic-owned businesses are underrepresented in the financed growth segment.

Source: JPMorgan Chase Institute

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Black- and Hispanic-owned businesses face challenges of lower revenues, profit margins, and cash liquidity.

Median revenues for small businesses in the 2013-2014 cohort, by owner race

Bar graph describes about median revenues for small businesses in the 2013-2014 cohort, by owner race

Bar chart showing the median revenues for the 2013 and 2014 cohort of small businesses we studied. the median Black-owned firm earned $39,000 in revenues during its first year, 59 percent less than the $94,000 in first-year revenues of a typical White-owned firm. Small businesses founded by Hispanic owners earned $74,000 in revenues, or 21% less than the median for White-owned firms.

Source: JPMorgan Chase Institute

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Firms with Black owners, particularly owners under the age of 35, were the most likely to exit in the first three years.

Share of firms exiting in the following year, by owner race and age group

Graph describes about share of firms exiting in the following year, by owner race and age group

Line graph showing the exit rates of firms with owners under 35. Over 22% of small businesses with Black owners under 35 exited in after the first year, compared to 15% of Hispanic-owned firms and less than 13% of White-owned firms. The difference narrowed by the third year, but convergence did not continue in the fourth year.

Source: JPMorgan Chase Institute

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Black- and Hispanic-owned businesses with comparable revenues and cash reserves are just as likely to survive as White-owned businesses.

Shares of firms in year 3 exiting in the following year

Bar graph describes about shares of firms in year 3 exiting in the following year

Bar graph showing the observed exit rates for firms in their third year. Black- and Hispanic-owned firms were less likely to survive than their White-owned counterparts even after controlling for industry and cit

Source: JPMorgan Chase Institute

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Racial gaps in small business outcomes are evident across cities, even in cities with large Black or Hispanic populations.

Median cash buffer days of small businesses in 2019, by owner race

Bar graph describes about median cash buffer days of small businesses in 2019, by owner race

Bar graph showing median cash buffer days of firms by owner race operating in 2019 across six metropolitan areas: Atlanta, Baton Rouge, Miami, New Orleans, Orlando, and Tampa. Typical Black-owned firms held 9 to 12 cash buffer days, while typical Hispanic-owned firms held 11 to 14 days. White-owned firms held substantially more in cash reserves, enough to cover 17 to 21 days of outflows in the event of revenue disruptions.

Source: JPMorgan Chase Institute

Authors

Chi Mac

Business Research Director

Chris Wheat

Director of Business Research, JPMorganChase Institute

Diana Farrell

Founding and Former President & CEO