How The Debt Trap Limits Growth For Minority-Owned Small Businesses

Forbes

26-06-2025

How The Debt Trap Limits Growth For Minority-Owned Small Businesses
For many women of color, launching a business often begins with a personal investment from their savings, such as maxing out a credit card, taking on a high-interest loan, or, more recently, relying on a Buy-Now-Pay-Later (BNPL) plan to secure inventory. Over time, employing these options can create a debt trap, where the business struggles to grow due to the additional funding necessary to manage the existing debt, limiting business growth, hurting credit scores and quietly capping the potential of thousands of small businesses.
Minority-owned small businesses face a disproportionately high cost of capital. A University of Washington study found that Black business owners pay 3.1 percentage points more in interest than equally qualified white peers; Latino entrepreneurs pay 2.9 points more. Over time, those differences amount to an estimated $8 billion in excess interest payments annually; resources that could otherwise be used for business growth, hiring staff, or outreach efforts.
As well, the Small Business Administration shows that 17.6% of Black-owned firms and 14.9% of Latino-owned firms rely on personal credit cards for startup funding, compared to just 10% of white-owned businesses. With average interest rates over 20% and balances often carried month to month, compounding interest erodes cash flow, limiting how much can be reinvested in operations. A problem that has inspired the creation of grants initiatives to supply the gap, according to Latasha Randle, strategy and small business program manager at Block Advisors. The Fund Her Future Grant was created in response to deep disparities identified in small business funding, for example. 'As we began to talk to small business owners, we identified the funding gap between men and women. For women of color, the gap was even greater,' Randle said in our conversation in the Brown Way To Money podcast.
Knowing about the effects of a debt trap sets women of color entrepreneurs at an advantageous position to analyze and understand the cycle of debt prior to applying or using it in the business context. This article will explore how those debt traps form, why they persist, especially in periods of inflation, and what strategies and systemic shifts are emerging to address them.
Debt Traps In The Age Of Inflation And Fintech
The economic environment of the past few years has made it harder to escape the debt trap. Between 2021 and 2024, inflation surged, prompting the Federal Reserve to raise interest rates at a historic pace. For small business owners already dependent on credit, borrowing costs increased.
To bridge cash flow gaps, many turned to BNPL services or ramped up credit card use. Some opted for fintech platforms that offer faster approvals and lower credit thresholds. For many Black and Latino entrepreneurs, fintech tools provided access when traditional banks did not. But access came with trade-offs: shorter repayment periods, high effective APRs, and opaque lending terms that increased financial vulnerability.
'Buy Now, Pay Later' offers an immediate funding solution for small-ticket purchases. It's helping bring more people into the financial system,' said Amanda Estiverne-Colas, Founder of AGE Advisor, Financial Inclusion Advocate, and board member at NAFLI. 'For individuals who may not qualify for traditional credit cards or who want to avoid hard credit pulls, BNPL provides access to flexible payment options without many of the historical barriers.'
Estiverne-Colas notes that when designed thoughtfully, BNPL has the potential to be an inclusive financial stepping stone. 'It can help normalize access to responsible credit for communities that have often been excluded. But there are challenges... Without clear disclosures and embedded education, it can create confusion around repayment terms or lead to unintentional debt stacking.'
Recently, the credit industry has recognized this evolving role of BNPL in the financial lives of Americans. In a move that could have long-term implications for entrepreneurs, FICO recently announced it will incorporate BNPL activity into its credit scoring models for the first time. The newly launched FICO® Score 10 BNPL and FICO® Score 10 T BNPL aim to better reflect modern repayment behaviors by factoring in BNPL loans alongside traditional credit data.
For business owners who rely on BNPL to manage supply purchases or short-term expenses, this shift could be a double-edged sword: responsible use may help build credit, but stacking multiple BNPL plans (or missing payments) could now have direct consequences on creditworthiness.
Digital exclusion added another layer. According to Pew Research, 35% of Black adults and 29% of Latino adults lack home broadband access, making it harder to compare loan terms or access alternative funding sources. For those running businesses entirely from a smartphone, this creates an information gap that limits financial agility.
Meanwhile, traditional financial tools have not caught up to the realities of modern entrepreneurs. 'Many are still built on legacy systems that don't match the needs of modern entrepreneurs, solopreneurs, or gig workers,' Estiverne-Colas added. 'As a result, individuals are forced to rely on consumer-based tools—personal checking accounts, P2P apps, and personal credit cards—to run their businesses.'
The consequences of this financing burden are clear. Minority-owned businesses are more likely to delay hiring, postpone expansion, or scale back operations due to financial strain. What is often missing from the fintech or bank offerings is inclusivity by design. 'Inclusive design means building for a variety of users and realities: cash-flow-based products, alternative underwriting models, and built-in financial coaching,' Estiverne-Colas explained.
Side Hustles And The Risk Of The Debt Trap
Many women of color are starting businesses as side hustles. Selling products online, managing freelance work, or running a mobile service as a way to supplement income. But without clear financial tools and systems or a formal business structure, side hustlers are particularly vulnerable to falling into debt traps.
As it is common to use personal credit cards to pay for supplies, advertising, or subscriptions, many side hustlers do not seek business credit early because they do not yet see themselves as business owners. Instead, they are more likely to turn to high-interest, personal financing just to keep operations running. 'Today's financial tools must be designed for a modern workforce, not just for traditional 9-to-5 employees,' said Estiverne-Colas 'Solopreneurs, gig workers, and first-time business owners represent one of the fastest-growing segments of the economy, yet most financial products still cater to a narrow definition of 'stable income' and 'prime credit.''
As BNPL and credit card use become more common funding tools, it is critical to approach borrowing with a long-term lens. That means tracking repayment terms, separating side hustle and personal expenses where possible, and understanding how every transaction might affect your credit score.
Building A Path Out Of The Debt Trap
Escaping the debt trap begins with recognizing how it shows up in day-to-day operations not just as a balance sheet item, but as a barrier to decision-making, growth, and stability. Common indicators include relying on credit cards to cover recurring operating costs, delaying payroll or vendor payments due to loan obligations, or avoiding financing conversations due to fear or fatigue. These are not failures; they are signals that a more sustainable strategy is needed.
Protection starts with financial structure and support, which includes separating personal and business finances, creating cash-flow plans that prioritize debt servicing without starving growth, building relationships with mission-aligned lenders before capital is urgently needed, and leveraging community-based financial support systems and mentorship networks.
Recognizing a cultural component is needed to break the silence around money. 'The more we foster open conversations about money [...] the more solopreneurs and first-time entrepreneurs will feel empowered to engage, ask questions, and advocate for products that meet their needs,' Estiverne-Colas said. 'Financial shame thrives in silence. Financial confidence grows in community.'
Ultimately, the burden of high-cost debt should not fall solely on the entrepreneur. While inflation and rising interest rates have intensified financial pressure across the board, the impact has been disproportionately severe for those already operating at a capital disadvantage, which often are women of color entrepreneurs. Until broader systems are reimagined with inclusivity at their core, and entrepreneurs gain greater awareness of how financial decisions shape long-term outcomes, the most effective defense remains clarity, strategic planning, and informed decision-making.