Minority-owned firms struggle for capital

DALLAS -- The nation's 4 million minority-owned firms face large disparities in accessing capital, making it even more difficult to weather the recession, according to a new report by the U.S. Commerce Department's Minority Business Development Agency.

The report found that minority-owned businesses outgrew their counterparts in the number of firms, employment and size of payroll from 1997 to 2002, but face significant long-term growth constraints. One of the biggest barriers is that minorities obtain less debt and equity, pay more for capital and are rejected more often for bank loans.

"For all businesses, especially those that are minority-owned, access to working capital can really mean the difference between success and failure," said agency director David Hinson. "Limited financial, social and human capital and racial discrimination are primarily responsible for the discrepancies in minority business financing."

Minority-owned companies contribute significantly to the economy by creating jobs, paying taxes and leading innovation, but their "growth potential is largely untapped," Hinson said. In 2002, minority-owned firms employed 4.7 million people and generated $661 billion in revenue.

With greater access to capital, minority-owned firms could create 16 million jobs and $2.5 trillion in annual revenue, the report concluded.

Nationally, the number of minority firms grew 30 percent and their revenue rose 12 percent from 1997 to 2002.

In comparison, nonminority firms saw a 6 percent growth rate and 4 percent revenue gain, the MBDA report said.

Long term, however, minority firms were smaller, reflecting growth barriers such as lower credit scores and a lack of wealth, said report co-author Robert Fairlie, an economics professor at the University of California Santa Cruz. A lack of wealth among minorities also makes it more difficult for them to bootstrap their businesses and attract outside sources of capital, he said.

U.S. household net worth among whites is 11 to 16 times higher than that of Hispanic and black families, according to the report.

"For small-business owners, personal wealth has historically been the biggest source of capital," said Colleen Casey, an assistant professor of public policy at the University of Texas at Arlington who plans to research minorities' access to capital this year for the Federal Reserve Banks of Dallas and Atlanta.

She thinks the disparity in access to capital would be less in cities such as Dallas, which has a strong business environment, resources and support groups.

The government agency's report is largely based on census and other data from 2002 and 2003. Report co-author Alicia Robb acknowledged that the information is outdated, even though the report is based on latest available data.

Closer look

The profile of minority-owned businesses:

Created jobs at a higher rate than white-owned firms in the first four years of operation through 2002.

Added jobs at a rate of 4 percent from 1997 to 2002, while nonminority firms had a 7 percent decline.

Grew revenue by 12 percent from 1997 to 2002, compared with a 4 percent increase in nonminority firms' revenue.

Tend to be smaller, with average revenue of $167,000 and 7.4 employees in 2002 compared with $439,000 and 11.2 workers for nonminority firms.

Raised less debt and equity — $29,879 in bank and credit card debt and $2,984 in external equity vs. $36,777 and $7,607, respectively, for nonminority firms.

Received fewer loans: 17 percent of minority-owned firms with annual revenue under $500,000 landed a loan in 2002 vs. 23 percent of white-owned firms.

Secured smaller loans: Average was $149,000 vs. $310,000 for nonminority firms.

Faced loan denial rates up to three times higher.

Sources: Ewing Marion Kauffman Foundation; Federal Reserve Board; U.S. Census Bureau; U.S. Department of Commerce