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Being a small business in search of financing is no easy task, especially for LGBTQ owners. According to a 2022 report from the Movement Advancement Project and the Center for LGBTQ Economic Advancement & Research (CLEAR), LGBTQ-owned businesses face higher rejection rates compared to their non-LGBTQ counterparts when applying for funding.
In light of tightening lending standards, LGBTQ small businesses are at an even greater risk of falling behind, warns Spencer Watson, President and Executive Director of CLEAR. Watson emphasizes that economic conditions, such as higher interest rates and the collapse of smaller community banks, have disproportionately negative effects on the LGBTQ community.
This concern about the economy and lending conditions is not exclusive to LGBTQ entrepreneurs. Small business owners, overall, express skepticism about future business conditions, citing issues such as inflation, supply chain disruptions, and labor shortages. Holly Wade, Executive Director of the National Federation of Independent Business’ Research Center, highlights these challenges and the concerns surrounding the health of the banking system.
However, data reveals the disparity in financing opportunities for LGBTQ small business owners. In 2021, 46% of LGBTQ-owned businesses reported not receiving any of the financing they applied for, according to the MAP/CLEAR report. In comparison, only 35% of non-LGBTQ businesses faced rejection when applying for funding. Most of the sought-after financing was through Covid relief programs.
Watson explains that these LGBTQ-owned businesses were often smaller in size, younger, and had smaller revenues, making them more vulnerable to additional financial pressures. The analysis of the 2022 Federal Reserve’s small business credit survey also supports these findings.
While LGBTQ small business owners remain optimistic, they continue to face a wider range of financial challenges compared to their non-LGBTQ counterparts. Watson reveals that about 60% of LGBTQ small business owners reported difficulties affording operating expenses over the past year. Most of these businesses identify as LGBTQ-owned, but their services are not necessarily oriented towards or specifically serving the LGBTQ community.
Gavin Escolar
Courtesy: Gavin Escolar
Gavin Escolar, the owner of The Chaga Company in San Francisco, shares his struggles in finding financing for his small business. Escolar, a 47-year-old gay man, initially started his business in 2018 using personal savings and credit cards. While he hasn’t faced loan rejections, he has only been offered high-interest bridge loans as a temporary solution until a lower-interest small business loan becomes available.
Escolar currently relies on loans from Square and PayPal while searching for the right financing options to pay off his credit card debt, purchase inventory, and invest in marketing. He believes that there is a need for more education on accessing appropriate financing and building business credit.
Forging her own path
Sarah Scala
Source: Sarah Scala
Sarah Scala, the founder of Sarah Scala Consulting, faced the challenge of starting her business without going into debt. She utilized her personal savings and sought external funding opportunities, including grants from the Massachusetts Growth Capital Corporation for digital marketing and capital expenses. Scala emphasizes the importance of seeking support from associations like SCORE and the Massachusetts LGBT Chamber of Commerce to navigate the funding landscape.
Discrimination at play
Spencer Watson highlights the presence of anti-LGBTQ bias and discrimination during the loan process for LGBTQ small businesses. Lenders may deny loans or impose higher costs based on the applicants’ LGBTQ identity, particularly for those who are highly visible within the LGBTQ community. Discrimination can also occur if creditors fail to understand the market opportunities for LGBTQ-serving establishments. Additionally, businesses with an explicit LGBTQ focus may face challenges due to Small Business Administration guidelines.
However, Watson commends the recent rule from the Consumer Financial Protection Bureau that enhances transparency in small business lending by including demographic information. This data collection has the potential to combat discrimination and create a more inclusive lending market for all small businesses.
Watson emphasizes the significance of supporting small businesses owned by marginalized communities, as they not only benefit the owners but also create inclusive spaces and opportunities within their communities.
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