Access to Capital for Philadelphia’s Diverse Business Owners

While Black and Latino(a) residents account for more than half of Philadelphia’s population, they own less than 10 percent of local small businesses with employees—a greater disparity than in many peer cities. Nationally, the level of growth among Black-owned and Latino(a)-owned businesses is at an all-time high.¹ The next mayor of Philadelphia should seize this moment and support the city’s entrepreneurs and small business owners in ways that proactively and boldly address the racial disparities in the economy.

A major obstacle to thriving Black, Indigenous, and People of Color (BIPOC)-owned businesses in Philadelphia is access to capital. This lack of access to affordable, flexible, and timely financing creates barriers to asset- and wealth-building. This is especially true in the city’s most disadvantaged neighborhoods, further perpetuating the existing racial wealth gap. New city leaders can activate powerful, untapped economic assets that exist within Philadelphia, delivering enhanced vibrancy and resilience for the small business community; increased local job creation; new connections between local small businesses and high-growth sectors; and a business community positioned for more equitable growth.

Philadelphia has a strong, yet disjointed, community of economic development organizations, private sector capital providers, community development financial institutions (CDFIs), community-based non-profits, corporations, anchor institutions, and philanthropies that can be leveraged for impact.
To make real progress, the next mayor of Philadelphia must:

• Set a bold and unifying vision with a city-wide call to action for equitable small business growth
• Seed capital innovations and business engagement with dedicated and targeted public investment
• Attract and pool new private investment and philanthropic capital

In alignment with the comprehensive recommendations developed through the Philadelphia Equitable Entrepreneurial Ecosystem Assessment and Strategy (Ecosystem Assessment), the goals for Philadelphia should be to:

• Build local assets and wealth in North, West, and Southwest Philadelphia
• Activate new equity and equity-like capital for BIPOC entrepreneurs at different stages
• Develop and fund innovative and more flexible small business debt products

Philadelphia has done the research and knows what must come next. But it won’t happen on the scale that’s required without strong leadership from the new mayor.

The Ecosystem Assessment, completed in 2021, identified that “Black and Latino(a) Philadelphians account for 44 percent and 17 percent of the city’s population, but only own 5 percent and 4 percent of all small employer businesses, respectively. Moreover, Black, Latino(a), and Asian-owned businesses generate less revenue and…concentrate in low-wage industries.”² While disparities exist across the US, a 2020 Center City District report found that Philadelphia has lower business density across all racial and ethnic groups in comparison to peer cities, with those disparities being particularly great for Black and Latino(a) businesses.³

Mayoral leadership is crucial in aligning a compelling, collective vision and generating new resources to support equitable development. But it is only part of the solution. Philanthropic and corporate funders must be ready to invest alongside the public sector, and economic development organizations, CDFI lenders, and venture capital partners will be the vehicles to develop and deliver capital. Finally, the buy-in of other political actors in and out of government must be leveraged, so that small businesses can get the assistance they need.

To demonstrate vision and leadership‭, ‬Philadelphia’s next mayor should‭:‬

Launch the Equitable Capital Roundtable
The Equitable Capital Roundtable would bring together local and national investors committed to accelerate capital access for diverse business owners in Philadelphia. Through the roundtable‭, ‬the mayor can inspire a collective vision for‭ small business capital innovation and lay out targets for total capital investment during their term‭. ‬The roundtable would establish ambitious multi-year targets for investments and outcomes in small business growth for Black‭, ‬Latino(a‭), and Asian communities‭.    

In addition to political leaders‭, ‬the leadership group should include established and emerging funders and investors‭, ‬as well as‭ ‬BIPOC-business owners with lived experience in seeking growth capital at all business stages‭. ‬It should take advantage of existing networks‭, ‬such as The Collective‭, ‬the Greater Philadelphia Financial Services Leadership Coalition‭, ‬and Philadelphia Anchors‭ ‬for Growth and Equity‭, ‬and bring them together to align strategies and resources‭.‬

The mayor’s leadership can ensure strong interconnection and collaboration between the small business community‭, ‬the ecosystem support organizations‭, ‬and capital providers—‬a prerequisite for success since many of the tools to address the problems are not directly or fully under city control‭. ‬

Convene the local ecosystem
Key organizations include Philadelphia’s designated city-wide economic development organizations‭ (‬Commerce Department‭; ‬Philadelphia Industrial Development Corporation‭)‬‭, ‬the Commonwealth of Pennsylvania‭ (‬Governor’s Office of Transformation and Opportunity‭; ‬Department of Community and Economic Development‭), ‬Benjamin Franklin Technology Partners‭, ‬the Pennsylvania CDFI Network‭, ‬commercial banks‭, ‬local foundations‭, ‬and other capital providers‭.‬

Spotlight opportunities for national‭ ‬and local investors
Building on recent convenings by ImpactPHL and Drexel University’s Nowak Metro Finance Lab‭, ‬the mayor and the Equitable Capital Roundtable leadership should host an annual investment summit bringing together diverse founders with innovative capital providers‭, ‬both from within the city/region and nationally‭. ‬Engaging local BIPOC entrepreneurs and attracting new investors‭ ‭(‬from places such as New York‭, ‬Atlanta‭, ‬Detroit‭, ‬and Los Angeles‭) ‬would lift up Philadelphia’s ambitions and vision‭, ‬while creating strong‭ peer-to-peer exchange‭. ‬This event could draw from and leverage existing national networks including Mission Investors Exchange‭, ‬International Economic Development Council‭, ‬Opportunity Finance Network‭, ‬Rise of The Rest‭, ‬and SOCAP‭.‬

City leaders should undertake data analysis‭, ‬invest in community engagement‭, ‬and use new public funding to advance commercial property ownership and development by BIPOC-led businesses‭, ‬developers‭, ‬and non-profits‭. ‬This can drive asset‭- ‬and wealth-building‭ ‬opportunities for entrepreneurs and these communities‭. ‬

At a national level‭, ‬a recent Brookings report noted that Black households have a rate of commercial property ownership that is‭ ‬less than half of white households‭, ‬and that the value of their holdings is roughly 10‭ ‬percent of the commercial property owned‭ ‬by white households‭.‬⁴‭ ‬These disparities limit the ability of Black business owners to grow their businesses and wealth and to provide Black residents‭ ‬with control over the development of their communities‭. ‬The Brookings data shows a similarly stark disparity between Hispanic and white households‭.‬⁵

To address this inequity at the local level, and support asset and wealth creation in communities that have been historically disinvested, Philadelphia leaders can:

Use a data-informed and community-driven approach to identify specific neighborhoods and corridors to make targeted investments that will have a meaningful and visible impact.

Partner with trusted local CDCs and‭ business-serving organizations to help prioritize BIPOC-led‭ (‬for-profit or non-profit‭) ‬development projects and BIPOC-owned small businesses in need of capital‭. ‬Fund permanent staff with strong financial and technical expertise‮—‬including in commercial real‭ ‬estate transactions‮—‬with community-based partners to work directly with local business owners and developers on project pipeline and capital readiness‭. ‬Engage with community and local leaders in finding projects and businesses to invest in and helping them get started‭, ‬including local workforce and supply chain opportunities‭, ‬so that these projects provide broader community benefit‭. ‬

Target existing local initiatives‭, ‬such as PIDC’s Commercial Mortgage Loan and the Commerce Department’s InStore program‭, ‬focused on helping BIPOC-owned businesses purchase or improve commercial real estate in these neighborhoods‭. ‬Enhance these programs with new grant funding to provide down-payment and closing cost assistance for commercial real estate acquisition‭.‬

To activate new capital for early stage BIPOC entrepreneurs‭, ‬the city and its economic development organizations should identify‭ ‬one or more operating partners‭; ‬provide seed funding‭; ‬and engage private funders around flexible capital products like redeemable equity‭, ‬as well as additional small business grants‭, ‬coupled with advisory support‭. ‬Doing so will address the racial wealth gap and ensure that local entrepreneurs have the necessary financing and capabilities to start up and sustain their business ventures‭. ‬

Based on Philadelphia’s identified need for‭ pre-seed and seed funds to better serve BIPOC entrepreneurs‭, ‬redeemable equity products‭,‬⁷‭ ‬as outlined in the recently released Innovative Finance Playbook‭,‬⁸‭ ‬could serve early-stage businesses with high growth potential and could be seeded with initial public and philanthropic investment‭. ‬Redeemable equity allows founders to buy back the equity stake in their company from investors over time to retain long-term ownership‭, ‬control‭, ‬and wealth generation‭. ‬Another benefit is matching the repayment schedule with the actual business and revenue growth‭. ‬Alternative equity structures that require no ownership or control change in the business can also be considered‭. ‬

Other cities and states have cultivated and activated local angel networks of successful business leaders in the region willing‭ ‬to invest in high-growth‭, ‬diverse-owned businesses‭. ‬City leaders should engage equity‭- ‬and equity-like investors‭, ‬to create angel funds and/or pre-venture seed funds for early stage BIPOC entrepreneurs‭.‬

Entrepreneurs in local-serving or lower growth potential sectors need early-stage capital as‭ well‭. ‬Through its economic development and‭ CDFI partners‭, ‬the city and philanthropic funders could pool capital and provide small grants to BIPOC entrepreneurs who are planning to start‭ a new business‭.‬

The city should provide grant funding through PIDC for more flexible small business debt products, addressing racial bias in lending and expanding access-to-capital products with more flexible underwriting standards, such as not requiring collateral, and favorable terms, such as no prepayment penalties. Additionally, the city can use its persuasive powers to influence private funders to do the same. These products should provide accessible market alternatives to high-cost debt that often comes with misleading terms or hidden fees.

The need for such products is clear. New Growth Innovation Network has highlighted how racialized definitions of risk continue to hamper capital flows:¹¹

• Racially perceived “creditworthiness”
  Black and Latino(a) borrowers are denied access to credit more often than white borrowers, even when controlling for income, requested loan amounts, and neighborhoods.¹² Black-owned businesses are far less likely to receive loans in their founding year than white businesses, are denied loans more often than their white peers, and pay higher interest rates when they do get loans, etc.
• Sampling bias 
  BIPOC-owned businesses are disproportionately underrepresented in high-growth sectors and are over-represented in micro-business, impacting the perceived returns potential in BIPOC-led entities—thereby causing them to be overlooked for investment.¹³
• Faulty Data 
  Most credit scoring agencies do not incorporate payments of rent, utilities, and phone bills, but rather, rely on higher-value debt-based transactions like car ownership and homeownership. This underestimates credit worthiness of lower income households.¹⁴

In addition to offering its own funding products to better serve Philadelphia’s BIPOC business community‭, ‬city leaders can‭: ‬

Use the established city-wide economic development partnership of the Commerce Department and PIDC to capitalize and manage a first-loss fund or loan guarantee pool for Philadelphia-based CDFIs‭, ‬which can be seeded by an initial public investment and matched by philanthropic and corporate funders‭. ‬A guarantee pool would allow local CDFIs to increase the flexibility of their underwriting criteria to better serve low-wealth entrepreneurs‭, ‬in alignment‭ with emerging best practices such as the Underwriting for Racial Justice initiative of Beneficial State Foundation‭.‬¹⁵

To effectively reach and serve more businesses‭, ‬local economic development organizations and CDFI lenders need more operating capacity‭. ‬Currently‭, ‬there is no long-term commitment of local tax resources to support economic development and small business growth‭; other sectors‭, ‬such as affordable housing‭ or the hospitality and tourism industry‭, ‬receive‭ such support‭. ‬

There is a growing commercial market for‭ revenue-based financing products for small businesses and growth businesses‭. ‬These‭ shared-risk and shared-reward products are aligned with the needs of small business owners and entrepreneurs in the growth stage‭ ‬and could add significant value in Philadelphia‭. ‬The city could identify one or more operating partners‭, ‬provide seed funding‭, ‬and engage private funders around developing and deploying these products‭.‬

Entrepreneurs must be aware of the financing options available and be ready to take advantage of them‭. ‬The city could bring together business inspire organizations across Philadelphia and support a collaborative philanthropic effort to raise capital to jointly invest in a customized virtual learning option and online navigation resource for businesses‭, ‬helping them more readily navigate and access technical assistance and support focused on capital access‭.‬

The next mayor has a historic opportunity to improve the city’s entrepreneurial ecosystem by delivering transformative capital access for all business owners‭, ‬especially Black‭, ‬Hispanic or Latino(a‭), ‬and Asian entrepreneurs who have experienced systemic barriers‭. ‬This will increase economic growth for the city‭, ‬reduce inequality in Philadelphia‭, ‬and enhance quality of life for all Philadelphia residents‭. ‬

Sources and Uses of Funds‭ ‬‭  ‬
The strategies to address disparities outlined in this report will require substantial new public and private investment‭. ‬The following is a preliminary guide to funding types‭, ‬sources‭, ‬and uses‭. ‬

Community development financial institutions‭ (‬CDFIs‭) ‬provide access to financial products and services for local residents and businesses‭. ‬CDFIs can be banks‭, ‬credit unions‭, ‬loan funds‭, ‬microloan funds‭, ‬or venture capital providers‭. ‬

Redeemable equity‭ ‬in an investment in which the company agrees to buy back or redeem investors’‭ ‬shares over time through dividends tied to revenues or free cash flow‭.    ‬

Pre-seed funds‭ ‬are the earliest investments‭, ‬providing entrepreneurs with the money to get their ideas off the ground‭. ‬

Seed funds‭ ‬are the first of four funding stages required for a startup to become an established business‭. ‬Funding usually comes from investors in exchange for a stake in the company or a share of the profits of a product‭.‬

Equity-like‭ ‬funding can be offered to small businesses in a variety of ways‭, ‬including direct grants that do not require repayment by the business owner‭; ‬forgivable loans repaid only if‭ ‬
the business does not meet certain conditions set up front‭; ‬loans with features like interest-only periods‭, ‬longer repayment periods and more flexible repayment options‭; ‬and other models defined here‭, ‬such as redeemable equity or revenue-based financing‭.‬

Angel networks‭ ‬are groups of high-net-worth individuals who provide financial backing for small startups or entrepreneurs‭, ‬typically in exchange for ownership equity in the company‭. ‬

Angel funds‭ ‬are the funds that angel investors provide‭. ‬This may be a one-time investment to help the business get off the ground‭, ‬or an ongoing injection to support and carry the company through its difficult early stages‭. ‬

Revenue-based financing‭, ‬also known as‭ royalty-based financing‭, ‬is a method of raising capital for a business from investors who receive a percentage of the enterprise’s ongoing gross revenues in exchange for the money they invested‭. ‬

Program-related investments‭ ‬are made primarily to achieve a program objective‭, ‬rather than a significant financial return‭, ‬although these investments are expected to be repaid‭. ‬They often come from foundations‭, ‬and are typically used for affordable housing‭, ‬community revitalization‭,‬‭ ‬job creation‭, ‬and construction of community facilities‭. ‬Program-related investments may be made in the form of loans‭, ‬loan guarantees‭, ‬cash deposits‭, ‬equity investments‭. ‬

Mission-related investments‭, ‬made at market rate‭, ‬support a foundation’s mission by generating a positive social or environmental impact‭, ‬while generating reasonably competitive rates of financial return‭.  ‬

This paper was developed by Anne Bovaird Nevins, M. Yasmina McCarty, and Kevin S. Dick. The authors would like to thank Larry Eichel, Ellen Hwang, Kristina Wahl, Elinor Haider, and Caitlin O’Brien for their contributions to this report.