February 18, 2022

In response to:

Question 3. Small Business, Entrepreneurship, and Innovation Policy: How can the federal government (or other entities) support innovation and entrepreneurship, particularly for small businesses and women-owned/minority-owned businesses, through better access to credit, capital and training?

The federal government can support innovation and entrepreneurship for minority-owned businesses through increased support for Community Development Financial Institutions, as discussed in further detail below.

Among small businesses, minority-owned small businesses are noteworthy because they create a significant share of the jobs in majority-minority neighborhoods nationwide.[1]   However, despite their prominent contributions, minority-owned businesses typically encounter constraints when attempting to secure access to capital from traditional financial institutions. Community Development Financial Institutions (CDFIs) can be a valuable source of financing and investment in community businesses – including small microenterprises, small businesses, and nonprofit organizations.  Research indicates Black- and Hispanic-owned firms applying to CDFIs were about 1.6 and 1.7 times greater, respectively, than that of similar white-owned businesses, indicating CDFIs are seen as a more viable option to this segment of business owners. [1]

In fulfilling their core mission, CDFIs are highly adept at providing affordable financial products and services to people and communities underserved by traditional financial institutions.  CDFIs are often well positioned to utilize relationships in the local community they serve and are frequently able to operate more nimbly than larger financial institutions, which is an attractive capability to businesses needing a more hands-on approach to become borrowers, or that lack application experience or networks at larger banks. However strong, strategic relationships and support are necessary for CDFIs to increase the flow of capital, credit, and technical assistance to minority-owned businesses.

–

Our specific recommendations on how the federal government and other entities can better support CDFIs are:

1. Federal lawmakers should earmark a portion of the CDFI Fund’s annual awards to CDFIs focused in the small-business lending sector. This focused increase will help improve the flow of financial and technical assistance to minority-owned businesses.  Greater financial support from the Fund will better position CDFI awardees to expand financial and entrepreneurship coaching and technical assistance and to help attract capital to meet the needs of many more minority-business owners.
   –
2. State agencies should be more inclusive of CDFIs in the administration and distribution of State Small Business Credit Initiative (SSBCI) funds, working with those focused on small-business lending to underserved communities. SSBCI dollars provide a key vehicle for states to try new products, to widen avenues for sidelined private capital to flow towards inclusive uses through crisis-tested CDFIs and other financial lenders, and to stand up new capital intermediaries that break out of the strictures of traditional small business debt and equity products. [2] In the round of SSBCI funding allocated in 2010, CDFIs accounted for just over 86 percent of the total number of SSBCI-supported loans and investments in Minnesota, followed by New York (86%), California (78%), Pennsylvania (60%), and Washington (59%) for SSBCI funding.  Each of these states were able to deploy over 75% of available funding and to well-rounded group of entrepreneurs. [3] Successfully deploying SSBCI funds and reaching a diversity of entrepreneurs will require states to harness the energies of local networks and intermediaries.
   –
3. In federally-run funds and programs, agencies should strongly encourage ongoing collaboration between Minority Deposit Institutions (MDIs) and small-business focused CDFIs with small-asset sizes. These entities working together could contribute to more extensive credit provisions for minority-owned businesses. Business credit needs frequently exceed the capacity of CDFIs operating in low-wealth neighborhoods, particularly given the greater resource demands that more extensive relationship-based lending combined with technical assistance to less experienced small business borrowers require.  Through these working relationships with larger financial institutions, small CDFIs may be able to extend their capacity and offer more loan products and services.

We are confident that impactful and sustainable solutions for minority-owned businesses can be achieved through intentional collaboration between federal lawmakers, state agencies, CDFIs, and MDIs – inclusive of the equitable distribution of funding to minority-owned CDFIs and MDIs.

Sources:

[1] de Zeeuw, M.G. & da Motta, V.E. (2021) Minority-owned enterprise and access to capital from Community Development Financial Institutions. Community Development Innovation Review, 15(1), 5-21. https://www.frbsf.org/community-development/files/minority-owned-enterprises-and-access-to-capital-from-community-development-financial-institutions.pdf

[2] Ian O’Grady, Colin Higgins and Bruce Katz, Localizing the State Small Business Credit Initiative, Drexel University. https://drexel.edu/nowak-lab/publications/reports/Localizing%20the%20State%20Small%20Business%20Credit%20Initiative/

[3] State Small Business Credit Initiative:  A Summary of States 2016 Annual Report.  https://home.treasury.gov/system/files/256/SSBCI-Summary-of-States-Annual-Report-2016_508-Compliant.pdf

–

Question 4. Child and Family Policy: How can people receive better support when starting a family or caring for their family, especially in terms of workforce participation?

Examples of this policy area include early childhood education, paid family leave and income support programs, tax policy (child tax credit, earned income tax credit), support for care economy.

Better support for people starting a family or caring for their family can be provided by addressing access, affordability, and quality gaps for early childhood education (ECE) to address longstanding inequities.

Leading economists estimate that for every $1 invested in high-quality ECE programs for disadvantaged children, there is a 13 percent annual return from better education and health outcomes for children, employment gains for parents, and greater economic productivity. But, it is appropriate and necessary to explicitly address racial equity to fully realize the impact that investments in ECE could have on the economy. If the United States were able to close the educational achievement gap between native-born white children and Black and Hispanic children, the U.S. economy could be 5.8 percent – or nearly $2.3 trillion – larger in 2050. [1]

While demand for ECE remains high, issues with limited availability, high costs, and inconsistent quality leave many children, particularly Black children, at a disadvantage during critical years of development and impact parents’ ability to participate in the workforce. It is imperative for our children, families, and businesses that we create a more equitable system for ECE that addresses these inequities.  We support addressing three critical issues that have contributed to the educational opportunity gap, particularly for Black children:

• Access – Parents should have flexible choices that can accomplish positive outcomes for their children, without destabilizing the current ECE system. Sustainable funding for ECE programs to help keep such programs operational should support the current mixed-delivery system: center-based, home-based, family child care, pre-K programs and Head Start.
• Affordability – Despite the fact that child care is often the second most expensive item for a family after rent [2], child care subsidy programs are consistently underfunded. For instance, only 15% of eligible children actually receive subsidies from the Child Care and Development Block Grant (CCDBG) [3], only 54% of eligible Black preschoolers are being served by Head Start preschool, and only 6% of eligible Black children are served in Early Head Start. [4]
• Quality – We need to strengthen job training and make wages competitive to employ and retain high quality ECE workers. Up to 98% of all occupations pay more than early childhood education jobs according to analyses by the Center for the Study of Child Care Employment at the University of California, Berkeley.  Early childhood educators across the country earn a median wage of $11.65 an hour, according to the 2020 Early Childhood Workforce Index from the Center for the Study of Child Care Employment (CSCCE) at the University of California at Berkeley.

This is a historic moment where global circumstances have shed a spotlight on the fragility of our child care and early learning systems and emphasized the need to pass comprehensive reforms.

Any legislation designed to address the challenges in our ECE system should require the collection and sharing of demographic data, including race and ethnicity. The collection, measurement, and analysis of data could aid in more accurate targeting of funds to address the heightened needs of children who have historically been disproportionately impacted by investment decisions that marginalized particular populations.

Eliminating racial disparities and improving outcomes for everyone is an imperative for the future health of the country’s economy and the strength of the future workforce.

Sources:

[1] Robert G. Lynch & Patrick Oakford, The Economic Benefits of Closing Educational Achievement Gaps (November 2014)

[2] Child Care Aware of America. (2018). The US and the High Cost of Child Care: 2018. https://info.childcareaware.org/hubfs/appendices%2010.19.18.pdf

[3] Nina Chien. (2021). FactSheet: Estimates of Child Care Eligibility & Receipt for Fiscal Year 2018. U.S. Department of Health and Human Services. https://aspe.hhs.gov/sites/default/files/2021-08/cy-2018-child-care-subsidy-eligibility.pdf

[4] Schohl, L. (2017). Head Start Is Missing the Population It’s Designed to Serve. The Center for Law and Social Policy. https://www.clasp.org/head-start-missing-population-it%E2%80%99s-designed-serve