How to actually help America’s minority-owned businesses

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a senior fellow at the Brookings Institution. She led the small business government contracting review for the Biden-Harris presidential transition team

It took a movement that galvanised the nation — the call for racial equity triggered by the murder of George Floyd — for corporate America to make major new commitments to building wealth in Black communities. These include education and health initiatives, but mostly take the form of financial products such as loans and equity investments.

Every year, Fortune 500 companies award trillions in domestic business contracts — yet there is little transparency in how much of that goes to minority-owned businesses. As a nation, we are comfortable discussing access to capital and issuing debt, but not awarding wealth in the form of contracts.

Until last April, I led government contracting and business development at the Small Business Administration, supporting both functions across the federal government, the world’s biggest purchaser. That unique vantage point — combined with years of working as an entrepreneur — left me with new insights into what it will take to expand access to wealth. It starts with an honest question: who is getting the contract? 

For the first time in history, the US government has an answer. In December 2021, the SBA released data on how much business the federal government annually awarded to Black, Latino or Hispanic, Asian American and tribally owned small businesses.

The figure was stark but not surprising: out of a $560bn contracting budget in fiscal year 2020 for which small businesses could compete, the government awarded just over 1.6 per cent (or $9bn) to Black-owned small businesses, and a little under 1.8 per cent (about $10bn) to Latino- or Hispanic-owned companies. By comparison, Black and Latino or Hispanic Americans represented roughly 30 per cent of the US population that year. 

We need this level of transparency now more than ever — and not just in relation to government contracts, but also those awarded by major companies.

One reason why is the concerted challenges in the courts to the very concept of disadvantage and the viable mechanisms for addressing it.  

Last July, a federal district judge threw out a half-century of precedent over what constitutes disadvantage in a part of the SBA’s business development programme that has its roots in the civil rights movement. World Wide Technology, Thompson Hospitality and the Elocen Group are all examples of successful companies that began as small businesses that won federal contracts under this programme.

Lost in the debate over what constitutes disadvantage is a simple fact: how often legacy companies, which have a deep bench of relationships and capital, are unconsciously favoured by purchasers over smaller businesses. I have witnessed this myself.

Fortunately, we have precedent for increased transparency in other important financial transactions. Since 1975, the Home Mortgage Disclosure Act has required banks to report mortgage lending by race and ethnicity, and the Consumer Financial Protection Bureau recently issued a rule that requires lenders to disclose demographic data on loans issued to small businesses. If institutions are required to disaggregate issued debt by race, they can do the same for awarded wealth — in contracts. 

The ripple effects of such a move would be far-reaching. In the federal government, for example, this data transparency led to us putting congressionally mandated contracting goals in the key performance indicators of senior buyers. We also began to track new entrants and business owners. And we partnered with agencies to ensure small businesses had an on-ramp to members-only, lucrative federal contract vehicles.

Corporate America has been happy to spotlight the capital commitments it has made to the Black community since 2020. Now it is time for it to make its wealth creation data transparent and accessible to the public.