The global recession of 2007-2008 hurt many segments of the U.S. economy but perhaps none more so than minority-owned small businesses. At the time, financial institutions reined in lending to all sorts of companies, concentrating instead on their own solvency. Thus, by 2015, loans to small business were still 17% below the pre-recession level, according to Business Insider. This lack of operating capital made it difficult for black or Hispanic companies to raise enough money to stay solvent during the following harsh economic years.
Times have changed.
As the United States enjoys on one of the longest periods of economic expansion in the post-World War II era, big and small banks are providing capital to more minority-owned businesses through innovative methods and additional third-party funding vehicles. Improved access to money has boosted the financial prospects for minority establishments. Tweet This
Historically, minority-owned firms have been part of the small business tapestry that has created the majority of employment in the United States. In the past 40-plus years, smaller firms have been responsible for 55% of all new jobs in this country, according to the SBA. Minority-owned firms are crucial in the U.S. job-creation picture because they tend to provide employment opportunities in poorer urban areas, neighborhoods that larger companies sometimes abandon. The Minority Business Development Agency, an arm of the U.S. Department of Commerce, recognized that minority businesses generated more than $660 billion in sales annually and created almost five million jobs.
Yet, the perception seems to be that minority-owned businesses tend to generate less revenue and fail faster than other firms. Thus, such enterprises are considered to represent a bigger financial risk to lenders.
The parsimonious credit situation faced by minority owners has forced many to rely on personal assets to start their firms. However, blacks and Hispanics tend to have fewer financial resources, generally, than other ethnic groups, a gap that widened with the 2008 recession. In 2010, for example, the net wealth of black Americans was slightly less than $5,000 and about $7,500 for Latino Americans, according to CNN. That is compared to $70,000 for Asians in the United States and $111,000 for whites. For decades, black and Hispanic businesses have had less ability to raise cash, whether from friends and families or traditional lenders.
In the current recovery, banks big and small have become more active in extending credit to black and Hispanic business owners. One major reason is the growing importance of these business segments as engines of economic growth. For example, by 2012, the number of African American-owned businesses rose to almost 10% of all U.S. firms, a one-third increase from five years earlier. Overall, minority businesses constituted about 15% of the 28 million small enterprises in the United States. Also, black and Latino small businesses remain critical in generating employment, a factor in improving the quality of life in many inner-city neighborhoods.
Changing Programs For Changing Times
In some cases, banks are helping by tailoring their lending programs to help specific groups. At the top of this list is San Francisco-based Union Bank. The $116 billion (assets) subsidiary of the financial arm of Japan’s Mitsubishi has a lending program specifically aimed at minority entrepreneurs. The company just cannot be too big (sales less than $20 million) nor too needy (borrowing requirements of less than $2.5 million).
Also assisting underserved neighborhoods are banks, such as JPMorgan Chase, which, in October 2016, more than doubled the size of its existing Small Business Forward fund. This program is aimed at getting women, minority and veteran-owned businesses critical funding after they had been turned down for more traditional financing. What started for JPMorgan as a $30 million program back in 2015 has grown to $75 million over the last three years. In addition, in 2015, JPMorgan ponied up another $3 million to help the California-based Valley Economic Development Center set up the National African American Small Business Fund. This program provides loans averaging in the range of $35,000 to $250,000 to help black businesses gain greater access to capital, technical assistance and financial consulting.
Other banking institutions are joining forces in order to help small businesses. The Lawrence Venture Fund, based in Lawrence, Mass., is a partnership among 10 regional banks and credit unions that lends aspiring entrepreneurs money on a geographical – rather than ethnic – basis. Since many underserved neighborhoods are in predominantly minority areas, this type of financing vehicle – almost by definition – has a strong minority component.
Also, financial institutions have joined together with other groups to research solutions to economic problems, such as the lack of credit, particularly in inner city areas. In 2016, the Milken Institute, a Los Angeles area think tank, worked with the U.S. Small Business Administration to launch the second pilot test of its Program for Lending in Underserved Markets (PLUM) program, this time in Los Angeles. This initiative is designed to bring government, local business and banks together to figure out solutions to capital funding and other problems that are hurting economic growth in minority-intensive neighborhoods. The project’s first foray was in Baltimore in 2016.
In The End
Minority small businesses owners continue to have problems raising sufficient capital to open their doors and keep running. Unlike past decades, however, banks and other financial institutions have proved to be willing to help by being more flexible in assessing the needs of these businesses and more innovative in injecting cash into minority-owned companies.
Photo Credit: doondevil, Twenty20