Community Why Equitable Access to Capital is Essential for Growth

by Sherrell Dorsey | December 17, 2021

Dependable business lending — or access to capital — is essential to the growth of businesses.

And yet Black businesses track behind white ones in terms of access to business loans to help launch their operation; the Small Business Administration Office of Advocacy stated in a 2018 report, based on a 2014 Census survey, that just 15.2% of Black business owners relied on this source of financing.

The same survey found that more than a quarter of Black businesses don’t apply for business loans and, of those, nearly 60% said they did so because they thought they’d be turned down.

This lack of investment by lenders in Black businesses has wide revenue implications. According to a September 2020 Citi report, providing fair and equitable lending to Black entrepreneurs over the past 20 years might have resulted in the creation of an additional $13 trillion in business revenue and potentially created 6.1 million jobs per year.

Today, efforts to improve lending to Black-owned businesses are trending in the same direction as venture capital firms targeting new tech-enabled Black startups. By making lending and funding more accessible, business growth for Black businesses could create new wealth opportunities.

The banks behind Black business

When many banks failed at the height of the Great Depression in the 1930s, Jessie H. Mitchell raised funds from local Black businessmen to stand up Industrial Bank, Washington, D.C.’s only Black-owned bank at the time.

According to the DC Preservation League, Industrial Bank “contributed to the growth of Washington’s Black middle class by offering mortgages and business lending and by hiring African Americans when white banks refused to do so well into the mid-20th century.”

Black-owned banks like Industrial — which today fall under the federal designation MDI, or Minority Depository Institution — have been key in turning the tide, lending to Black people who have been locked out from capital opportunities with other institutions.

Following in his grandfather and father’s footsteps, Doyle Mitchell Jr. has served as president and CEO of Industrial Bank since 1984.

“Most of the 4,000 business clients we have are small businesses, many mom-and-pops, and then you've got others that range between $1 million and $10 million a year in revenue,” explains Mitchell, who goes on to note that about 90% of Industrial Bank’s customers are Black and have had a long history of leveraging bank services to finance their first house or car.

As businesses were forced to shut down across the country as a measure of protection against the coronavirus, government support skipped over more vulnerable business populations early on. According to several analyses, the majority of the first wave of SBA Paycheck Protection Program dollars, earmarked to help businesses from going under, went to white-owned businesses.

Mitchell says that, despite the loss of over 41% of Black-owned businesses during the pandemic, in 2020 Industrial Bank still managed to lend upwards of $25 million in business and commercial real estate loans to its business customers, and over $29 million in home mortgages between its D.C., Baltimore, MD, and Newark, NJ, branch locations.

But many Black MDIs themselves have also faced a troubling financial outlook in recent years. Since 2001, their ranks have shrunk by more than half, and as of the end of 2020, only 20 remain in operation. Much like other Black businesses, barriers to capital to sustain and grow their operations puts them at risk.

A couple is congratulated at a bank

Meaningful commitment to MDI growth

However, greater connectivity to the financial services system — enabled and supported by other institutions — can have a powerful bolstering effect on MDIs. 

In September 2020, Citi made a $100 million commitment in support of MDI growth and revenue generation as part of a larger Action for Racial Equity commitment. As of November 2021, Citi has already delivered close to $40 million in equity investments to ten MDIs across the U.S., strengthening their ability to serve racially diverse and underserved households and entrepreneurs.

Meanwhile, nearly $20 million out of a total $50 million commitment in affordable housing loan participation opportunities for MDIs has already been outlaid by Citi — funds that help Black banks generate revenue and build their capacity to invest in larger transactions. Citi is working closely with Industrial Bank on several U.S. Treasury contracts, which created an important new revenue stream for this Black MDI.  While Industrial initially is serving as a sub-contractor on these contracts, the longer term goal is to mentor Industrial so it develops sufficient internal capabilities to directly become a Financial Agent of the U.S. Department of Treasury.

Another MDI that Citi has partnered with is Optus Bank based in Columbia, SC. Founded in 1921 as Victory Savings Bank by a group of Black business leaders in the community, the name may have changed, but the mission — to help all people build wealth and improve their lives, regardless of their background or situation — remains today. “We started something that is impacting positively the lives of millions of people today because we had the courage. We had the political courage. We had the courage within our careers, within our domain that we control to step out and say, we need Optus Bank to thrive…. Citi invested twice in our bank, actually, and that's a huge commitment,” says Dominik Mjartan, President and CEO of Optus.

This commitment is critical in narrowing inequities, Mjartan explains, “I do believe there are banks like Citi and others that have invested to build and complete the financial ecosystem. And they believe, just like I do, that Optus Bank and other Black-owned banks or mission-driven banks are a viable part of that ecosystem, with the ultimate goal of closing the racial wealth gap.”

In September 2020, Citi made a $100 million commitment in support of MDI growth and revenue generation as part of a larger Action for Racial Equity commitment.
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Equitable venture capital

Other forms of financing have also been historically discriminatory — and venture capital is no exception. Less than 3% of all venture capital dollars went to Black founders in 2020, with VC firms historically favoring white and male founders. “Pattern matching,” where venture capitalists have traditionally invested in the same archetypes, has persisted for decades.

But these trends have been slowly shifting as access to capital becomes democratized across racial groups and geographies. And the pandemic and subsequent racial uprisings sparked institutional investors and traditional venture capital firms to direct more funding to invest in Black founders.

“Investors need to understand that instead of applying the same expectations that they have for the stereotypical founder who's 22 and came up with something in his dorm room, not everyone's going to fit that profile,” says Rashmi Pendse, a Senior Vice President within the Citi Impact Fund.

In January 2020, Citi established the Citi Impact Fund, a social impact investment initiative targeting companies focused on sustainability, workforce development, and other physical and social infrastructure solutions. A particular area of focus was increasing investments in women and minority-led companies.

Later that year in September, Citi made a $50 million capital commitment of its $200 million in equity capital specifically for Black founders. Since then, nine of the first 24 investments by the Citi Impact Fund were directed to Black founders, accounting for 40% of the Fund’s portfolio and 20% of the Fund’s total equity invested to date.

Others at the table working to capitalize Black founders and business owners include Black-led venture firms like Lightship Capital, Backstage Capital, Black VC and Panoramic Ventures. 

“We have received amazing support from individuals and foundations in the Midwest, and large tech firms on the coasts,” says Brian Brackeen, co-founder of Cincinnati, Ohio-based Lightship Capital.

Brackeen believes that community foundations can play a critical role in economic justice to help close racial wealth gaps by making investments in Black-led firms well-positioned to help Black entrepreneurs grow and scale. 

Having raised over $50 million for the fund in 2020, Lightship Capital has made more than 10 investments into people-of-color-led companies thus far, including the cooking oil filtration pod company FreshFry, led by Black founders in the Midwest.

Options for capital empower Black business owner success. A move toward removing barriers by banks, institutions, and investors, could spark a new era of opportunity for both businesses and communities.

A woman participates in a meeting with coworkers
Sherrell Dorsey

is founder, and CEO of The Plug, the go-to business media and insights platform examining the Black innovation economy. You can view more of her work at