I remember the day nearly 40 years ago when my uncle opened his restaurant, La Gran Parada, in Providence, R.I. Most immigrants I knew, including my own parents, worked multiple jobs or long hours in low-wage, non-union factory jobs. But in that restaurant, I first witnessed the power of owning your own business.
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Over the years, as the restaurant grew from a few tables to a full-service enterprise that included a catering company, my uncle — who has since passed away — built intergenerational wealth, sent his grandkids to college, and eventually passed La Gran Parada down to his son, who owns it to this day.
My uncle is an all-too rare success story. New small-business applications hit an all-time high for the third year in a row in 2023. But, if historical rates apply, half of those will shut down within five years. Some will close for valid business reasons, such as low market demand or strong competition. But others will fail simply because they lacked access to affordable financing, digital tools, or business advisors that could help them succeed.
The outlook is even worse for businesses owned by people of color. Black- and Hispanic-owned businesses are more likely to close after their first year, in part because these entrepreneurs are more than twice as likely to be denied funding compared with their white counterparts. But when these businesses have more equitable revenue and cash reserves, that gap disappears.
Unprecedented investments by the federal government, such as the Inflation Reduction Act and the CHIPS and Science Act, could reduce these failure rates by connecting small businesses to affordable capital and coaching on how to finance and expand their business. But there’s a significant obstacle: Nonprofit lenders and small-business assistance groups lack the capacity to take full advantage of such opportunities.
The Real Need
To help these businesses succeed and build a more inclusive economy, philanthropy can make complementary investments in small-business training providers and community development financial institutions, CDFIs — nonprofit lenders that provide affordable capital to underserved communities. Unfortunately, in my experience, many well-meaning funders focus on one-off programs, such as grants for diverse entrepreneurs, when the bigger opportunity for impact lies in addressing broader gaps in small-business support.
Critically, organizations that offer small-business capital and expertise are not connected to each other, making it difficult for entrepreneurs to navigate available resources. And because these providers are under-resourced, they can’t expand their reach and help small businesses take advantage of historic federal funding. For example, just 13 percent of the $8.2 billion allocated so far through the State Small Business Credit Initiative for entrepreneur support programs has actually reached small businesses.
CDFIs are committed to delivering this money to Main Street, but often lack the personnel, technology, and marketing tools to quickly move money out the door. Philanthropy can mitigate these challenges and help ensure funds flow quickly, effectively, and equitably by focusing on four key areas.
Technology infrastructure. Many CDFIs don’t have the resources to invest in modern technology and often rely on spreadsheets and other outdated tools to manage their loan balances. Flexible philanthropic funding will allow community lenders to adapt automated loan portfolio software and other technologies to process and manage loans quicker.
For example, programs such as Community Reinvestment Fund USA’s CRF Connect make it easier for CDFIs to track their loan pipelines and link small-business owners to financial products. The program also connects CDFIs to a peer network of other community lenders where they can refer customers and share best practices.
As of August 2024, CRF Connect had facilitated nearly $600 million in loans and helped connect more than 148,000 businesses with capital or technical assistance, according to data it provided to Mastercard Strive USA, which is a funder of the program and where I’m on the leadership team.
In addition to investing in technology programs of this kind, philanthropy can help transform the broader digital capacity of CDFIs by funding the adoption of tools such as artificial intelligence and predictive analytics that can help them vet applications and match financial products to individual customer needs.
One-stop shops. Information hubs are needed across the country to help entrepreneurs simplify the process of starting and expanding a small business. This isn’t only about providing financial help. Navigating challenges such as getting business permits and collecting market data is difficult for all first-time entrepreneurs and even more so for immigrants and underserved entrepreneurs who may not have access to established networks or formal business training.
Nonprofit services such as Next Street’s NYC Funds Finder help small businesses easily find coaches that can assist them with these tasks, while also linking them to responsible lenders. The service is integrated directly into the local government system so that entrepreneurs don’t have to bounce around to different agencies or resources.
Most communities don’t have this type of resource, creating an opportunity for grant makers. Community foundations in particular can play a pivotal role in funding similar one-stop shops and facilitating relationships between government agencies and nonprofits.
Digital training. Access to the digital economy is a necessity in today’s competitive business environment. But many underserved and very small businesses lack even the basic computer skills, let alone social media know-how, to create a digital presence.
Addressing this problem is complicated, but solutions exist. The nonprofit NEST, for example, which supports artisan entrepreneurs, provides training on how to create and maintain a presence on e-commerce platforms such as Etsy. Accion Opportunity Fund, which supports small businesses through affordable loans, education, resources, and networks, offers a five-month immersive learning experience for diverse entrepreneurs to build or expand their e-commerce expertise.
These programs can have an enormous impact. For instance, nearly one million small-business owners use Accion Opportunity Fund’s online learning tools each year. But there are too few such services to reach the millions more entrepreneurs looking to start or expand their business. Philanthropy can help by investing in existing programs and creating new ones focused on emerging platforms, such as how to incorporate A.I. into marketing and other business practices.
Bridge building. Grant makers should use their convening power to help those in the small-business support arena come together and learn from each other.
For instance, the Initiative for Inclusive Entrepreneurship at the Milken Institute is coordinating lenders and business support organizations involved in the State Small Business Credit Initiative to share their experiences and resources. The goal is to ensure these groups can consistently and efficiently get affordable capital and services into the hands of small-business owners, especially entrepreneurs of color. Foundations can develop similar efforts, facilitating collaboration and knowledge-sharing between these disconnected entities.
The federal government is responding to the enormous growth in entrepreneurship with enormous investments, but it can’t continue this support indefinitely. Philanthropy and the private sector can build on federal support to ensure many more small-business owners succeed. In the process they can help create wealth that lifts families and communities for generations.