Small Business Owner Race, Liquidity, and Survival

The contributions of the small businesses sector to the U.S. economy are often noted in periods of economic growth, and the fragility of the sector is a core focus of policy in an economic downturn. The sector is important not only because of its contributions to job growth, real economic activity, innovation, and economic dynamism, but also because of the impact it makes on the financial lives of the 30 million families whose household income and wealth is tied to the success or failure of the businesses they own. Black and Hispanic Americans comprise a substantial and growing share of small business owners. A view of the financial performance of the firms they own is critical to understanding the extent to which the sector can deliver broad-based growth during an expansion, or where to focus policy attention and resources during a downturn. However, little recent data exists on differences in financial performance by owner race. This report attempts to fill this gap by leveraging voter registration data from Florida, Georgia, and Louisiana to create a sample of nearly 150,000 small businesses with self-identified owner race. We use this new data asset to inform differences in small business financial outcomes and survival by owner race from 2013 to 2019. Based on a cohort of firms founded from 2013 through 2014 and their financial outcomes during the first several years, we find that Black- and Hispanic-owned firms are well-represented among a segment of dynamic firms with organic growth but underrepresented among firms using external financing. We also find that Black- and Hispanic-owned businesses face challenges of lower revenues, profit margins, and cash liquidity. Firms with Black owners, particularly owners under the age of 35, were the most likely to exit in the first three years. However, firm exits can be better explained by revenue levels and cash liquidity: firms with comparable revenues and cash reserves are predicted to have similar exit probabilities, regardless of owner race