The challenges facing minority entrepreneurs are many, but one issue ranks at or near the top of lists of concerns — lack of access to capital. The American Dream can quickly become a nightmare for minorities as they seek the funds to launch or grow their businesses.
The causes are many, including applicants’ lack of a strong credit history, insufficient collateral and/or net worth, limited management experience and other factors. The good news, while there is still progress to be made, minority entrepreneurs, one of the fastest-growing business segments, are increasingly becoming more savvy, and more and more programs are being made available to them.
Education is the key
The Minority Capital Fund of Mississippi Inc. (MinCap) was established in 1993, and went into operation in 1994, with the mission of providing non-traditional financing and technical assistance to minority and female entrepreneurs. Who walks through MinCap’s door, and the experience they have had before coming there, speaks volumes to the problem.
According to Kimberly M. McMillan, executive director of MinCap, in 2004 the organization compiled a profile of those minorities and women who were previously approved for loans. Every one of them had visited at least one financial institution before coming to MinCap for help. McMillan was quick to point out that her organization only looked at those who gained approval, not all who walked through the door. Still, the fact that 100% of approved minority entrepreneurs had been previously rejected by at least one bank is telling.
“There are four problems that our clients typically are facing — derogatory credit, lack of management skills, lack of collateral and insufficient personal wealth,” McMillan said.
Data back up McMillan’s words. According to the 2000 Census, the household median net worth of a non-Hispanic white was $79,000. The median net worth of African-American households was less than a tenth of that — $7,500. For Hispanic householders, the median net worth was $9,750. Thus, many minority entrepreneurs do not have the net worth or collateral to make them attractive loan candidates to banks. And if this minority venture is a start-up, the risk is just too high for many financial institutions to stomach.
MinCap has strategies to help overcome these barriers. For instance, MinCap’s equity requirement is only 5%, well below that asked from traditional lenders. Nor does it utilize credit scoring, rather allowing prospective clients the opportunity to explain their personal financial position. And MinCap is startup-friendly.
To McMillan, the whole issue comes down to education. She said many minorities simply do not know what is required of them, what it takes to run a business or the resources available to them to aid them in these and other issues. “It all comes down to having the knowledge and being prepared,” she said.
David Barrentine, region president at BancorpSouth, the largest Mississippi-based bank, agreed with McMillan, but added that the problems are not restricted to minorities.
“Many entrepreneurs, not just minorities, lack sufficient capital, have no business plan, have insufficient management skills,” he said.
Barrentine said BancorpSouth has strived to accommodate minority applicants. For instance, the bank is a sponsor of MinCap. It is also a preferred Small Business Administration (SBA) lender.
“In our application process in small-business lending, whether it’s a new venture or an existing one, we try to be as flexible as we can. We make our loan decisions locally, and we try to tailor-make our service to match the customers’ needs. We don’t just grab something off the shelf and say, ‘Here it is — take it or leave it.”
Barrentine added that minority-owned businesses, due to their explosive recent growth, is a lucrative future market, and banks such as BancorpSouth are trying hard to get more of them as customers.
Minorities = growth
If Barrentine and other bankers long to woo more minority entrepreneurs, it is understandable. Minority-owned businesses are some of the fastest-growing types of businesses in the U.S. Factor in women-owned enterprises, and the growth is eye-popping.
In 2005, the U.S. Small Business Administration (SBA) set new records in loan volume to minorities. In Mississippi, the SBA approved 108 loans to minority entrepreneurs (this does not include women) in fiscal year 2004. In 2005, the group okayed 268 loans to minorities.
Janita Stewart, SBA district director for Mississippi, attributed that increase to newly-launched SBA programs, particularly the pilot Community Express Loan Program. The program makes available up to $250,000, and lenders are authorized to waive collateral requirements. Applicants are not required to have a developed business plan, do not have to submit tax returns, just to name some of the advantages.
“The vast majority of the growth in ‘05 minority lending can be attributed to the Community Express Loan Program,” Stewart said.
Stewart said the number one issue when it comes to minorities’ access to capital is lack of management skills.
“Many have the technical capabilities, but do not have day-to-day operation skills,” she said.
There are no hard-and-fast statistics about how much this problem can be traced to outright racism. Both McMillan and Stewart agreed that it would be naïve to think that discriminatory lending practices play no factor. But McMillan said whatever the roots of the issue are, the problem is real nonetheless.
“It is not perception — it’s reality,” she said.
Contact MBJ staff writer Wally Northway at firstname.lastname@example.org.