These Are The Best and Worst States For Entrepreneurs Of Color

A recent study by Lendio has highlighted the extent to which location can impact the success of Black and Latine-owned businesses, ranking the best and worst states for minority-owned companies to succeed.  

The POC-owned business boom

U.S. entrepreneurship is more diverse than ever, with people of color owning 1 in 5, or 1.2 million, of the nation’s businesses in 2020.

Black and Latine Americans are also the fastest-growing group of entrepreneurs but continue to face challenges such as limited access to venture capital funding and a lack of networks and mentorship programs, all while facing discrimination and systemic biases.

Latino-owned businesses are only half as likely as their counterparts to receive the funding they apply for, and fewer than 1 in 20 Black-owned companies survive the startup stage.

To explore the impact of location on business success, Lendio analyzed seven metrics, such as small business ownership and overall income equality. They also examined the use of the Community Reinvestment Act and Community Advantage loans, which are targeted to small businesses in underserved communities.

The best states for minority entrepreneurs 

The study found that Hawaii is the .1 best state for minority entrepreneurs. It has a high rate of minority business ownership (51.3%), job growth, and low-income inequality. Still, the number of Community Advantage loan approvals remained low, indicating a need for more support for POC business owners.

The Mid-Atlantic dominated the top five, with Maryland, Maine, Delaware, and New Jersey ranking second to fifth.

Maryland had a 10.3% jump in Community Advantage loan approvals from 2021-2022 (beating every state but New York), and Maine has a Black-white unemployment rate ratio lower than most other states.

Larger states such as Florida, California, and Texas ranked in the top 10 with high minority business ownership rates and a lower unemployment rate gap between Black and white workers.

The worst states for minority entrepreneurs

The state of Montanna ranked last and was the toughest for minorities to succeed, with only 3.7% of businesses operated by people of color. However, Montana offers higher Community Reinvestment Act loans than most other states, potentially pointing to more investment opportunities for minority entrepreneurs. 

North Dakota, West Virginia, Wisconsin, and Mississippi also scored low; each saw declines in the number of Community Advantage loans approved in their states from 2021-2022, along with low minority business ownership rates.

What explains these findings? 

Unsurprisingly, the proportion of businesses owned by people of color depends partly on the demographic makeup of each state. Hawaii is the most diverse state, with 72.9% of the population being racial/ethnic minorities, while Montana is one of the least diverse, with a population of 16.2%.

The overall economic environment in a state can also impact and indicate why the level of opportunity for minority business owners may be higher or lower. Lendio measured income inequality using the Gini index and compared Black and white unemployment rates, revealing longstanding racial gaps in unemployment. 

Lastly, lending and access to capital is crucial for small business owners, particularly minority entrepreneurs. 

Data shows that 52% of white entrepreneurs are fully approved for financing compared to 27% of Black applicants.

The National Minority Supplier Development Council states that 40% of Black business owners don’t apply for financing because they expect rejection.