Access to Capital is Still a Challenge for Minority Business Enterprises
In the current financial environment, access to capital is as much an issue today as it was in 1969 when the Minority Business Development Agency (MBDA) was established. For new businesses, especially those that are minority-owned, having access to working capital—which is used to keep operations going and to pay bills—could mean the difference between the success and failure of that business.
Other minority-owned firms need capital to fund their growth and,consequently, their ability to perform contracts. This financing could mean hundreds or even thousands of new jobs. And for other companies, primarily construction firms, capital is needed for bonding in order to fulfill contractual requirements. In fact, access to capital is one of the most important challenges business owners face.
In a recently released study from the MBDA, “Disparities in Capital Access between Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs,” authors Robert Fairlie, Ph.D. and Alicia Robb, Ph.D. reviewed both national and regional studies over several decades and found that limited financial, human, and social capital, as well as racial discrimination, were primarily responsible for the disparities between non-minority and minority businesses.
At the MBDA, we recognize these challenges and work with our clients through our national network of more than 45 Minority Business Centers to help them navigate through the obstacles. Last year, we helped our clients gain access to more than $800 million in financial packages, including working capital, equity investments, and bonding.
Our goal is to assist minority-owned firms in gaining adequate access to capital despite the disparities that exist. For example, the study found that minority-owned firms are less likely to receive loans than non-minority-owned firms, especially those businesses with gross receipts of less than $500,000. In addition,when minority-owned firms do receive loans, the dollar value is often less, while the interest rates tend to be higher. The average loan amount for firms with more than $500,000 in gross receipts was $149,000, while the average for non-minority firms was more than twice that amount at $310,000. In addition, many minority-owned firms don’t apply for business loans at all because of a real or perceived likelihood of rejection,which further limits their opportunity for growth.
Denying capital to minority-owned firms has a negative impact on our economy. These companies contribute significantly to the national economy by generating jobs, paying taxes, and by innovation. According to the U.S. Census Bureau’s “2002 Survey of Business Owners,” the growth in the number of minority-owned firms far outpaced that of non-minority-owned businesses. Minority-owned firms employed 4.7 million workers with an annual payroll of $115 billion. In addition, these firms generated $661 billion in annual gross receipts.
Despite this success, the potential for growth among minority-owned businesses is largely untapped. For example, if the minority business community had reached economic parity (the level of business activity of a business group proportional to that group’s representation in the U.S. adult population) in 2002, then the minority business community would have employed more than 16 million workers and generated more than $2.5 trillion in gross receipts and expanded the tax base by more than $100 billion.
Providing adequate access to capital would help the minority business community reach the goal of economic parity. Investing in businesses owned by minorities not only makes good business sense, but is an investment in the future growth of the U.S. economy. According to the Census Bureau, by 2050 the nation’s minority population will be the majority. In other words, new businesses, new jobs, and new products will be strongly influenced by, if not created by, the minority community.
In order to ensure better access to capital, minority-owned businesses need to do a better job of demonstrating worth and performance. For example, the MBDA recommends minority-owned firms have:
- A good record of financial performance with profitability.
- Financial statements that are audited and verifiable.
- A strong balance sheet that shows positive net worth.
- A management team in place that has financial, operational, and marketing expertise, as well as a sound business strategy.
- A definable competitive advantage within their industry.
While accessing capital for minority-owned firms still has its challenges, we can be optimistic that those financial institutions interested in making good investments will see investing in the minority business community as a sound business decision. Much of the growth of our economy and job creation will come from the minority business community.
Reprinted with permission from the March/April 2010 issue of Minority Business Entrepreneur
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