Capital Access is a Significant Barrier for Minority-Owned Businesses

By: Kristina Busch

Capital access is known to be a key aspect that limits the establishment and growth of minority-owned businesses. In today’s economy, the current financial environment also places a burden on minority business owners. Minority-owned businesses outpace the growth of non-minority owned businesses. In fact, according to the Minority Business Development Agency, between 1997 and 2002, minority-owned businesses far outpaced non-minority-owned businesses in terms of growth in number of business total growth receipts, number of employees, and total annual payroll.

Although minority-owned businesses outpace the growth of minority-owned businesses, they tend to lag behind in size. The average employment size of minority-owned businesses was 7.4 employees, compared to 11.2 employees for non-minority owned businesses.

Drs. Robert Fairle and Alicia M. Robb conducted an in-depth study and analysis of the barriers to capital access that minority entrepreneurs face, as well as the consequences that result. In terms of loans, there are several disparities that minority-owned businesses face. They are less likely to receive loans. If they do receive loans, they are more likely to receive lower loan amounts and even pay higher interest rates on business loans. They are also more likely not to apply for loans due to rejection fears.

In terms of equity, minority-owned businesses receive smaller equity investments than non-minority firms. Their average amount of new equity investments was $3,379, which is 43 percent of the non-minority level.

When looking at financial investment, there are also are several disparities faced by minority-owned businesses. They have lower loan and equity investments. The disparities between minority and non-minority owned businesses are larger for external debts, such as bank loans and credit cards. There also are disparities in access to financial capital growth after the first year of operations. Non-minority owned businesses invested an average of $45,000 annually into their firms, while minority-owned businesses invested less than $30,000 on average after the first year of operations.

In addition, lower wealth levels are a barrier to entry for minority entrepreneurs. Estimates from the U.S. Census Bureau  say that half of all Hispanic families have less than $7,950 in wealth, and half of all African American families have less than $5,446. Wealth levels among whites are 11 to 16 times higher.

It is crucial that minority-owned businesses are able to utilize resources to help ensure access to capital in order for them to grow. These types of businesses contribute tremendously to the U.S. economy, as they are growing at a faster rate than non-minority owned businesses. It’s time to change the equation for minority-owned businesses. Limited access to financial resources restricts their ability achieve viability, generate new jobs, and to fulfill their ability to contribute to the development of our communities.

In order for the potential of our minority business community to be fully realized, capital access barriers will need to be overcome. Only with a level playing field can business owners, regardless of race, compete fairly based on the skills, innovation, and insight they bring to the table.