We believe in the American Dream: If you work hard, you can build a successful business. However, because of the Covid-19 crisis, many small businesses are struggling to realize that dream, despite their importance to their communities. Businesses owned by people of color and women are most likely to be struggling.
A little-known investment vehicle can change that, and give investors a good return.
Racial and Gender Economic Injustice
Money is a crucial ingredient for company growth. Undercapitalized companies have lower sales and profits, generate fewer jobs, and are more likely to fail. Evidence finds that diverse and women entrepreneurs are dissuaded from applying for credit, are approved less often, and pay more for credit. "Not only were these businesses hit hardest during the pandemic, but they also received the least amount of federal aid," said Cat Berman, CEO at CNote. The company has a technology platform that institutions and individuals can use to invest in underserved communities via Community Development Finance Institutions (CDFIs) while generating competitive returns.
With low levels of cash reserves—small businesses typically have just around 27 days and restaurants average 17 days—many won't survive. "I think that this is going to be maybe 20%, even 30% of small businesses [that] could fail even in a good scenario," said Karen Mills on Yahoo Finance's The Final Round. Mills is currently a Senior Fellow at the Harvard Business School and a former head of the Small Business Administration under Barack Obama. The firms most at risk of closing are owned by Blacks, Hispanics, immigrants, and women, according to The Impact of Covid-19 on Small Business Owners: Evidence of Early Stage Losses from the April 2020 Current Population Survey.
CDFIs provide a lifeline to small businesses that have a harder time getting funding. These include companies owned by people of color, women, immigrants, and people in rural areas or low- to moderate-income communities. CDFIs have a proven history of funding businesses that have been impacted by disasters, such as hurricanes, and during recessionary periods, such as the 2007-2009 financial crisis. CDFIs are now working to close the funding gaps small firms face in the wake of the coronavirus pandemic.
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