Minority business owners face the same challenges as other entrepreneurs – developing a sound business plan, understanding the market and competition, and creating products and services that customers need. However, for many minority business owners, there are additional complexities, challenges … and opportunities ahead in 2019.
When exploring challenges and opportunities for minority business owners in 2019, several issues are evident. Minority entrepreneurs face racism, difficulty in securing funding, and a lack of social capital on which to draw.However, there is hope in the form of resources at the federal and local level to give minority business owners a competitive advantage.
The Discrimination Dilemma
Whether overt or subtle, racism and discrimination are very real for minority business owners. In fact, a 2016 report by the Washington, D.C.-based nonprofit Center for Global Policy Solutions, quantifies the issue in stark terms.
According to the report, based on 2007 and 2012 U.S. Census data, the racial gap in business ownership costs the country as much as $300 billion in lost income and as many as nine million jobs.
The Kellogg Foundation issued a report showing the opportunity cost of not closing the racial equity gap in the United States. The report points out that strengthening purchasing power and increased tax revenue would add $8 trillion in gross domestic product.
Given the increasing global competition and economic growth of new economic powers like China, it is even more critical for the United States to leverage the potential of would-be entrepreneurs of all backgrounds.
According to the report, by 2050, the majority of the working-age population will be non-white. Twenty-nine percent of that cohort will be Hispanic or Latino (up from 18 percent today). Black and African American workers will comprise 14 percent, up from 13 percent today and Asian Americans and Pacific Islanders will make up 10 percent, up from just 6 percent today.
Kellogg spotlights the harm that institutional racism causes from a business perspective. It estimates that there would be nine million more potential jobs if ownership rates among people of color were equal to those of whites.
While data point to many factors contributing to lower access to capital among people of color (see below), the Kellogg report raises several other important issues:
- People of color have less access to much-needed business and management skills that are helpful when running your own company.
- People of color have access to less capital and collateral and lower credit scores, meaning they may be charged higher interest rates or may be denied more frequently when applying for loans.
- While blacks and Hispanics/Latinos start businesses at the same rate as white entrepreneurs, there is a vast disparity in profitability, size, and early survival rates.
“This suggests that programs to increase access to capital for underserved populations and support business training and mentorship could leverage the initiative that already exists,” the report states, “and drive a significant increase in the number of successful small businesses, while reducing racial and ethnic earnings and wealth gaps.”
Discrimination in Financing
One of the areas of discrepancy that is most significant for minority entrepreneurs is the gap in business financing.
According to one study, minority-owned businesses grew by 79 percent from 2007 to 2017. That represents a staggering 10-fold increase compared to overall small-business growth for the same period.
However, the strength in numbers does not translate to financing. Data from the U.S. Commerce Department’s Minority Business Development Agency shows that minority-owned businesses face significant financing gaps:
- Minority-owned businesses are less likely than white-owned businesses to secure funding, especially for businesses with less than $500,000 in gross receipts.
- Loans for minority-owned businesses are smaller than for white-owned companies. For non-minority businesses with more than $500,000 in annual gross revenue, the average loan amount is $310,000. For minority-owned businesses, it’s $149,000.
- Interest rates often are higher for minority-owned businesses.
The main reasons why lending disparities exist are usually given among the following:
- Lower Net Worth. Overall, wealth levels for Hispanics/Latinos and African Americans are 11-16 times lower than for whites. White business owners end up starting their businesses with more working capital.
- Lack of Collateral. Banks are less inclined to lend to applicants with less capital to put up against a loan. Lower net worth means less home ownership and fewer high-value possessions that could be sold if a loan defaults. The combination of little collateral and low net worth means banks are inclined to issue smaller loans that need to be paid back quickly, stalling long-term growth.
- Poor Location. Minority-owned businesses in areas that have not traditionally supported new entities are less likely to be funded.
- Little to No Credit History. Credit is a key indicator to banks when considering loan applications. With credit scores lower for minority business owners, it is harder to get optimal loan conditions.
The Lack of Social Capital
Lack of access to monetary capital is just one barrier facing minority business owners. The other is a lack of social capital.
Having powerful networks of advisors, peers, colleagues, and other business owners is essential for entrepreneurs wanting to market, seek advice, and lean on others.
The U.S. Black Chambers, Asian American Chamber of Commerce and U.S. Hispanic Chamber of Commerce offer local chapters, networking events, educational programming, and other resources designed to foster deeper connections among business owners. However, such institutions have different missions than other civic and business organizations that are critical for expanding social capital.
Opportunities for Business Owners
While minority business owners face very real challenges that non-minority owners do not, there are resources and opportunities available. Here are a few resources that are designed for minority-owned businesses.
- The U.S. Small Business Administration (SBA) provides funding opportunities for minority-owned businesses and helpful tools to guide your business at each stage of its development.
- The SBA’s 8(a) Business Development Program is designed to provide a level playing field to small businesses that are owned by socially and economically disadvantaged people. The program offers access to set-asides by government agencies.
- The SBA’s Emerging Leaders Initiative operates in 60 cities, delivering executive-level entrepreneurship training. The seven-month program provides access to mentors, specialized workshops, and access to peers, civic leaders, and the financial community.
- The Minority Business Development Agency awards prizes that average $300,000 for renewable project grants.
- The Native American Business Development Institute awards grants to strengthen economic growth among Native American and Alaskan Native business owners in their communities.
- The U.S. Department of Health and Human Services awards grants to businesses that work to improve health issues among historically disenfranchised populations.
- Federal Express sponsors an annual small-business grant contest and awards 10 prizes of $25,000 each.
How Entrepreneurs Can Take Action in 2019
Whether you have just started a business or are thinking about doing so, there are many things you can do in 2019 to boost your chances of business success. Here are a few tips.
- Improve Your Financial Profile. There are some simple steps you can take to present a better picture of your finances, including:
- Demonstrate profitable performance
- Assemble audited financial statements
- Reduce debt to present a positive net worth
- Hire a strong management team
- Show your competitive advantage in the industry
- Ask for Help. Having the right mentors can make all the difference. Inquire at your local SBA office, chambers of commerce, and entrepreneurship groups. Many successful entrepreneurs are eager to share their path to success with others. Also consider your civic organizations, places of worship, and college alumni networks to find those willing to assist.
- Find the Right Advisors. You need trusted, impartial advisors to help with your financial and legal issues. Having an attorney, accountant, and financial advisor gives you resources to turn to for questions big or small.
- Don’t Be Afraid of No. Many minority entrepreneurs choose to not apply for funding for fear of being rejected. Understanding your loan-worthiness is an important first step.
- Work the Networks. While you may not start with a large business network, there is always room for growth. Join a chamber of commerce or other local business organization, attend industry trade shows, and build your base of contacts and social capital.
- Learn What You Do Not Know. Many local community colleges and public universities offer courses on entrepreneurship or business management. So do chambers, libraries, and business associations. These courses are usually inexpensive and provide helpful knowledge … and classmates with whom to connect. Online courses, some free, are also an option.
- Consider Alternatives. If traditional lending channels have not been successful for you, consider alternative ways to finance your business dreams.
One opportunity is to partner with Benetrends. For decades, Benetrends has helped thousands of business owners access capital without the need for loan applications, high-interest rates, or challenging pay-back schedules.
With Benetrends’ Rollover as Business Start-Ups (ROBs) plan, your business uses existing 401(k) or other retirement accounts to finance start-up or expansion costs, with no tax penalties or early-withdrawal losses.
In a matter of weeks, you can have access to much-needed funds for whatever your business needs most. To learn more about ROBs 401(k) business funding from the leader in innovative small-business financing, schedule a consultation with Benetrends today.