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Survey: Capital Not Available For Growing Small Business Market


Creating Jobs in Minority Low-Moderate Income Communities

(Al Pina, Chair-Florida Minority Community Reinvestment Coalition)


Economic Growth in the United States can not be sustained in next 20 years unless there are increased infusions of capital into minority businesses and they gain access to equity markets.


A study by Brookings Institute concluded in our countries largest major cities that minorities account for over 40% of the cities population but contribute less than 5% of the GDP.  This is a socio-economic factor that creates a major obstacle to the future economic growth for our country.  The key is and always will be to produce good paying jobs in minority communities.  The fuel to this job creation is capital. 

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

Minority-owned firms far surpassed the growth of all U.S. businesses, increasing 17 percent annually (compared to 3% for nonminority) in the decade 1987 to 1997 (Milken Institute).  This is six times faster than the annual growth rate for all businesses during that same decade.  Minority businesses also contributed over four million jobs during this period.


Companies that receive equity financing grow sales at a faster rate, hire more employees and have a much greater economic impact than companies that have not received equity financing.  The average venture backed company employs 100 workers within five years, and these firms create almost twice the amount of jobs as their nonventure-backed peers (Milken Institute).  Specifically, small venture-backed companies experience a minimum of a 40% job growth each year as compared to a 2.5% decline of Fortune 500 companies. 


For minority businesses to grow and develop inner city infrastructure critical to the support the U.S. economy, new capital sources and channels must be directed to the country’s fastest growing business sector.  Minority businesses continue to have limited access to debt capital, but even greater disparities exist with access to equity capital. 


The Small Business Investment Company program (administered by SBA) was established in 1958 to provide increased access to venture capital for small businesses that would increase their ability to create jobs for the U.S. economy.  SBIC capital ($300,000 to $5 million) was targeted for both start ups and established businesses.  Such equity capital investments have been credited to leading the small business boom of the 1990s. 


Increasing access to SBIC capital for minority businesses will allow them to expand their current role in a local economy to a more viable role in both the regional and national economies.  In addition, SBIC financing of minority-owned businesses serves a dual purpose.  One it will provide a critical capital source to the fastest growing business sector (minority owned businesses) and secondly it will create a viable vehicle for greater minority participation in the workforce.


Yet minority businesses continue to lack access to the over 300 Small Business Investment Companies (SBIC) in the United States.  This hurts the entire U.S. Economy by limiting employment growth and new entrants into the workforce.  In 2000, SBIC financing to minority businesses was only $76 million, representing only 1.83% of the $4.16 billion in total SBIC financing (Milken Institute).  SBIC funding has increased significantly since 2000, with President Obama allocating over $8 billion for SBIC investments in next year’s budget.  But the lack of access to SBIC capital continues for minority businesses.  A 2005 Minority Business Summit Report concluded that minorities businesses have received less than 6% of all SBIC investments since the inception of the program.



In conclusion, stabilization of minority communities will not be accomplished without the development of minority small businesses.  The development of inner city small business will allow for the creation of jobs, increased tax base for infrastructure development and the integration of two key inner city assets (consumption and labor) to be integrated into the regional economy.  As the following figure demonstrates, small business development in inner cities is critical for job creation.








  • 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’ sales.

  • Tend to be smaller, with average revenue of $167,000 and 7.4 employees in 2002 vs. $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 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.



·         In the last 10 years, there has been a renewed interest by institutional investors in identifying businesses and real estate opportunities in emerging domestic markets.  This growth in investor interest is driven, in part, by the recognition that changing demographics in the United States has resulted in a significant increase in minority purchasing power and business development by minority owned firms.[i]


·         Over the next 40 years, 85% of the U.S. population growth will come from non-white ethnic groups.[ii]


·         The current size of the United States Hispanic and African-American consumer market is larger than the GDP of all but nine countries in the world.[iii]


·         The Internal Revenue Service predicts that Latinos will soon own 1-in-10 businesses.  Overall growth rates in the number of minority-owned businesses are 3-to-4 times higher than for white-owned businesses.[iv]


·         Minority firms’ sales are growing 34% per year—more than twice the rate of all other firms.[v]  


·         Small businesses provide approximately 75% of net new jobs in the nation.[vi]  In California, small businesses comprise over 98% of all businesses and businesses with less than five employees make up over 88% of all businesses in the state.[vii]


·         Woman-owned firms, particularly among ethnic women, increased at a rate 5 times greater than all firms.  The rate of African-American women owned firms increased by 12% annually, as compared to 2% for all firms and just under 4% for all woman-owned firms.[viii]


·         Despite their growth, EDMs' ability to grow is constrained by their access to capital.  Even after accounting for a variety of factors (education, experience, industry, and location) EDM firms receive less capital and on less advantageous terms.[ix]  Latinos and African Americans are turned down for business loans at 3 times the rate of whites with equivalent credit characteristics.[x]


·         Minority-owned firms tend to start their businesses with lower levels of personal wealth and face barriers when tapping traditional financing sources, contributing to lower rates of overall success and growth.[xi]


·         In 2006, $130 billion was raised by private equity venture funds; approximately $25.5 billion was invested in 3,416 deals.[xii]  The composition of EDM venture portfolios differ from mainstream portfolios.  EDM venture portfolios are typically comprised of retailers, financial and business service entities, makers and distributors of consumer products, and computer software companies.  These types of companies comprise only 10% of mainstream venture capital investments.[xiii]


·         Although women own approximately 40 percent of all businesses in the US, they receive less than five percent of all venture capital.[xiv]


·         Minority owners comprise 8% of all owner firms, with Hispanics owning close to 4%.  However, minority-owned firms receive less than 2% of venture capital.[xv]


·         Rural entrepreneurs account for 10% of all businesses but receive less than 2% of all venture capital.[xvi]



·         Most providers of equity capital do not target mid-sized, traditional enterprises.  Exceptions include minority-focused venture funds, Community Development Venture Capital funds, triple-bottom line funds, and increasingly, environmental funds.  However, these models face constraints due to a lack of scale capital in the market at the particular risk/return/social impact offering.[xvii]


·         A public pension fund's decision to invest in EDMs is driven first and foremost by its fiduciary duty and overarching mission to serve its members.  Targeted investments in EDMs can play a part in the fund's overall strategy to identify investment opportunities where traditional sources of capital may have been overlooked, and to target investments in geographic areas that also benefit the economic climate where their beneficiaries live and work.[xviii] 


·         It is estimated that there is approximately $11 billion of public-sector pension fund commitments across all asset categories targeted at EDM and economic development related investments[xix]


·         Despite the clearly identified opportunities, EDM businesses are projected to remain underserved by mainstream institutional investors due to a lack of relationships, the poor fit between EDM business types and mainstream venture capital preferences, and discrimination.[xx]


·         Although the Initiative for a Competitive Inner City has demonstrated through its "Inner City 100" program that appropriate risk adjusted returns can be achieved, strong mechanisms do not exist to connect the larger universe of inner-city companies to potential investors.[xxi]


·         Research continually concludes that the current system for capturing and sharing market data about lower income populations is too immature to be reliable.[xxii]


·         Reaching underserved markets is a specialized process that requires an in-depth understanding of the market and having the ability to break through barriers like high information and transaction costs. [xxiii]


·         The undercapitalization and lack of scale within the EDM market starves both individual businesses and their surrounding neighborhoods.  Without scale, private investment may be insufficient to transform neighborhoods and companies and thus achieve the targeted returns. [xxiv]

[i] Toni Symonds, Leslie Spahnn. California's Economic Development Programs: Meeting the Challenges of Today's Economy, Assembly Committee on Jobs, Economic Development, and the Economy, March 2007.

[ii] U.S. Department of Commerce Minority Business Development Agency.  September 1999. "Minority Population Growth:  1995 to 2050." and Glenn Yago, Betsy Zeidman, Alethea Abuyman.  Milken Institute, "A History of Emerging Domestic Markets"

[iii] Jeffrey M. Humphreys.  "The multicultural economy, 2006"  Georgia Business and Economic Conditions, 66:6 (2006) and Glenn Yago, Betsy Zeidman, Alethea Abuyman.  Milken Institute, "A History of Emerging Domestic Markets"

[iv] Boyd (2006) from Janneke Ratcliffe, Center for Community Capitalism, University of North Carolina at Chapel Hill, "Who Counting?  Measuring Social Outcomes from Targeted Private Equity."

[v] Glenn Yago, Arron Pankratz, "The Minority Business Challenge" Milken Institute and the United States Department of Commerce (2000)

[vi] United States Small Business Administration, from Janneke Ratcliffe, Center for Community Capitalism, University of North Carolina at Chapel Hill, "Who Counting?  Measuring Social Outcomes from Targeted Private Equity."

[vii] California Association for Microenterprise Opportunity, 2006 Fact Sheet

[viii] U.S. Census Bureau.  2002 "Survey of Business Owners" and Glenn Yago, Betsy Zeidman, Alethea Abuyman.  Milken Institute, "A History of Emerging Domestic Markets"

[ix] Glenn Yago, Betsy Zeidman, Alethea Abuyman.  Milken Institute, "A History of Emerging Domestic Markets"

[x] Glenn Yago, Arron Pankratz, "The Minority Business Challenge" Milken Institute and the United States Department of Commerce (2000)

[xi] Robb and Fairlie, 2006, from Janneke Ratcliffe, Center for Community Capitalism, University of North Carolina at Chapel Hill, "Who Counting?  Measuring Social Outcomes from Targeted Private Equity."

[xii] PricewaterhouseCoopers and the National Venture Capital Alliance 2007 from Janneke Ratcliffe, Center for Community Capitalism, University of North Carolina at Chapel Hill, "Who Counting?  Measuring Social Outcomes from Targeted Private Equity."

[xiii] Janneke Ratcliffe, Center for Community Capitalism, University of North Carolina at Chapel Hill, "Who Counting?  Measuring Social Outcomes from Targeted Private Equity."

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