Shop Talk

Column: Access to capital, policies limit minority small businesses

Farad Ali
Farad Ali

At first glance, the increase in U.S. small businesses owned by African-Americans appears very promising, as those companies were deemed one of the fastest growing segments of the economy.

According to the 2007 Survey of Business Owners, the latest U.S. Census information available, the number of black-owned businesses increased by 60.5 percent to 1.9 million from 2002 to 2007, more than triple the national rate of 18 percent.

Over that same time, receipts generated by those businesses increased 55.1 percent to $137.5 billion.

Farad Ali, a former Durham City Council member and president and chief operating officer of the N.C. Institute of Minority Economic Development, said that while the increase in the number of firms is promising, he is concerned that black-owned businesses are getting stuck in a small-business box.

A closer look at the 2007 numbers reveals that he may have a point.

Of the 1.9 million black-owned firms, only 106,824 had employees and only 14,507 had receipts of more than $1 million.

“A review of national and regional studies over several decades indicates that limited financial, human, and social capital as well as racial discrimination are primarily responsible for the disparities in minority business performance,” according to a U.S. Department of Commerce’s Minority Business Development Agency 2010 report on disparities in capital access between minority and nonminority businesses.

Minority-owned businesses pay higher interest rates on loans, are more likely to be denied credit, and are less likely to apply for loans, the report states.

Unless action is taken to address the lack of access to capital, the minority business community will continue to lag behind its nonminority counterpart, “undermining the ability of the nation to quickly regain its economic footing,” Ali said.

Other challenges, Ali said, include an ecosystem of policies that encourage minority firms to remain small.

Polices include company and government organizations setting aside a certain percentage of contract funds for small, minority-owned firms. Under those scenarios, larger corporations get those contracts and get credit for using small vendors. But if those smaller companies seek to expand their revenue and hire more employees, they can be deemed too large to be a small firm and too small to compete with a corporate giant.

It is essential, Ali said, that policy makers and community leaders not just understand minority businesses’ barriers to entry, but the consequences of those limitations.

After years of surviving not thriving, minority business owners start to consider options such as downsizing, selling or closing, Ali said. Then minority communities could lose the businesses that have provided essential services, from banks, construction and insurance companies, to barber shops, funeral homes and daycare services.

Conversely, if these businesses were thriving, they would employ and inspire entrepreneurs in minority communities.

“They start seeing so and so doing this,” Ali said, “and it becomes you be what you see.”