Posted at 7:10 AM
Washington, D.C. (January 29, 2010) – Access to capital remains one of the most important factors limiting the success of minority-owned businesses, inhibiting their ability to grow and create new jobs, according to a new report released today by the U.S. Commerce Department’s Minority Business Development Agency (MBDA). But minority-owned businesses do continue to be the engine of employment in emerging and minority communities. “Disparities in Capital Access Between Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs” found that despite limited access to capital, total unemployment during the last recession in 2001 would have been even higher if not for the minority-business community.
“Having access to working capital – capital used to keep operations going and to pay bills – could mean the difference between the success and failure of that business,” said David Hinson, MBDA’s National Director. “The growth of minority-owned firms depends on a variety of capital sources and MBDA is focused on breaking through these barriers in accessing capital to make sure that minority owned businesses are able to reach economic success.
“Last year, MBDA helped minority owned businesses access $800 million in financial packages including loans, bonding and venture capital. Despite this success, there are more firms that could successfully contribute to job creation and our economy if they had the necessary capital for growth.”
Some of the key findings of the report, which was authored by Dr. Robert W. Fairlie and Dr. Alicia Robb, include:
- Minority-owned firms are less likely to receive loans than non-minority owned firms regardless of firm size. According to an analysis of data from the Survey of Small Business Finances, for firms with gross receipts over $500,000, 52 percent of non-minority-owned firms received loans compared to 41 percent of minority-owned firms.
- When minority-owned firms do receive financing, it is for less money and at a higher interest rate than non-minority-owned firms regardless of the size of the firm. Minority-owned firms paid an average of 7.8 percent in interest rates for loans compared to 6.4 percent for non-minority-owned firms. Among firms with gross receipts under $500,000, minority-owned firms paid an average of 9.1 percent in interest rates compared to 6.9 percent for non-minority-owned firms.
- Minority-owned firms receive smaller equity investments than non-minority owned firms even when controlling for firm size, yet venture capital funds focused on investing in the minority business community are highly competitive. The average amount of new equity investments in minority-owned firms receiving equity is 43 percent of the average of new equity investments in non-minority-owned firms.
- Disparity in total investments in minority-owned firms compared to those in non-minority owned firms grew after the first year of business operations. According to the analysis of the data from the Kauffman Firm Survey, minority-owned firms investments into their firms were about 18 percent lower in the first year of operations compared to those of non-minority-owned firms. This disparity grew in the subsequent three years of operations, where minorities investments into their firms were about 36 percent lower compared to those of non-minority-owned firms.
- Minority-owned firms have consistently created jobs – with pay at similar levels to those of non-minority owned firms – even during times filled with economic challenges.
- Minority-owned firms’ revenue lags behind non-minority owned firms’ revenue, but their growth in number of firms, total gross receipts, number of employees and total annual payroll far outpaces that of non-minority owned firms.
Minority entrepreneurs face challenges (including lower family wealth and difficulty penetrating financial markets and networks) that limit their ability to secure financing for their businesses. Having access to capital would increase the chances of success, help create new jobs and have a positive impact on the U.S. and global economies.
MBDA will be submitting the report to Members of Congress for their use in proposing legislative solutions to the access to capital problem. In addition, MBDA continually reviews programs and services to ensure that minority-owned firms who are clients of our nationwide network of Minority Business Centers are served in ways that meet their financial needs.
- Executive Summary - Disparities in Capital Access between Minority and Non-Minority Businesses
- Download the full report
About the Minority Business Development Agency (MBDA)
MBDA (www.mbda.gov), U.S. Department of Commerce, serves minority entrepreneurs across America who are building and growing businesses. For the last 40 years, MBDA has promoted the growth and competitiveness of minority-owned firms. These firms are then better equipped to create jobs, impact local economies and compete successfully in domestic and global marketplaces. With a nationwide network of nearly 50 business centers and strategic partners, MBDA assists minority entrepreneurs and business owners with consulting services, contract and financing opportunities, bonding and certification services, building business-to-business alliances and executive training.
Lahne Mattas-Curry, 202-482-4690