• <div class="header-image" style="background-image: url(/live/image/gid/4/2897_V6N9_Header.rev.1540219621.jpg);">​</div><div class="header-background-color"/>

Mainstreaming Minority-Owned Small Businesses: A Look at Capital Access

September 23, 2014
A large problem facing minority-owned small businesses is that minority entrepreneurs often face an uphill battle when it comes to securing capital for either the formation or expansion of their businesses, especially when compared to the experiences of their white counterparts.

By Krishnan Sethumadhavan, SAS ’17

A study recently published in the Journal of Consumer Research showed that minority business owners were more likely to be asked to provide financial statements, tax returns, and bank account information than their white counterparts – implying that loan officers trusted minority business owners less and were less likely to approve a loan from them.  Even when minority-owned businesses are provided loans by banks, they were for smaller dollar amounts and at 32% higher interest rates, on average.[1]

The major obstacle in this quest for capital quest for capital to either initiate or expand minority-owned small business is the trust gap that exists between lenders and borrowers. Lenders tend to view minority owned small businesses as being miniscule, irrelevant, and only marginally profitable when nothing could be further from the truth. Minority owned small businesses have annual receipts of over $1 trillion and employ nearly 6 million employees around the country. They work in all fields from construction to food preparation to finance and tend to grow faster than non-minority owned small businesses – even during the Great Recession.[2] Importantly, these minority owned small businesses are often located in areas with high concentrations of minorities and reinvest in these communities, which can often help to arrest the cycle of poverty wracking urban areas in the United States.

Diminishing credit access and higher borrowing costs disproportionately impact the creation and growth of minority businesses across America. Because minority firms in the United States employ predominately minority people, this capital disparity hurts minority communities by reducing employment and reinvestment in these communities – which can increase negative societal outcomes like crime and drug usage. In turn, these negative outcomes reduce capital availability to minority entrepreneurs, creating a “cycle of impossibility” which hurts businesses and communities.

This is a serious issue, especially in Queens – the borough in which Representative Grace Meng’s district is located, which is one of the most ethnically diverse places in the country and is home to more than 500 certified minority-owned small businesses.[3]  Until 1985, the Small Business Administration (SBA) provided direct business loans to qualified small businesses and set aside a number of these loans to businesses certified under the minority small business capital ownership development program. However, it no longer does so and instead only guarantees loans given to small businesses. The size of these loans has steadily increased over the past decade, making it less likely that they would be given to minority-owned small businesses, which are seen as a bigger risk. Currently, the SBA is taking steps to increase capital access to minority-owned businesses, but is only doing so indirectly. These steps include waiving fees for smaller loans and streamlining the application process for underwritten loans of $350,000 or less – which helps reduce the costs of application to minority owned small businesses, which often take out loans for smaller dollar amounts than non-minority owned small businesses.[4]

Examples of how to increase capital availability can be found both in the federal government and in state and local governments. The Department of Transportation (DoT) offers a line of credit of up to $750,000 to largely minority owned businesses pursuing contracting opportunities in DoT funded projects.[5] This means that although the government may not pay the companies quickly, they are still able to access credit to work on projects. Unbundling large contracts and ensuring prompt payment for completed work can also make a substantial difference for minority-owned small businesses with minimal cost to taxpayers. Another example of a program that could be implemented is one modelled after Ohio’s Minority Business Direct Loan Program, which provides low-interest rate loans to certified minority-owned businesses that are purchasing or improving fixed assets and creating or retaining jobs.

These solutions however, do not address the ultimate trust gap that exists between lenders and minority-owned small businesses and cannot be implemented considering the political realities. In our office, we discussed a policy solution that we felt addressed this gap and would be able to pass a divided Congress. Essentially, it calls for the establishment of a public-private partnership that would construct a secondary market for loans to minority-owned small businesses through the usage of Consolidated Loan Obligations (CLOs).[6]

The Current System:

 

The Proposed System:


The overall structure of this secondary market would be that loan providers like banks, credit unions, municipalities, and other financial institutions would sell their loans to minority-owned small businesses to the overall loan pool, where a government agency (preferably the SBA, but other organizations could work) would package these loans into notes with various levels of risk. Then initially, impact investors from religious foundations, social entrepreneurship firms, and foundations would purchase these packaged loans with the understanding that their money would go towards supporting minority-owned small businesses but that they would receive below-market returns as the initial investors. Soon thereafter, regular investors, such as investment banks, pension funds, insurance companies, and corporations would begin purchasing these packaged loans after seeing the success of impact investors and a cycle would begin where funds would reach minority-owned small businesses. To ensure that the market does not collapse if a loan is defaulted upon, a credit reserve pool would be capitalized that would serve as insurance for investors on these loans. The government would work in a few different capacities in this model: (1) it would provide marketing support for the model, attracting lenders and impact investors; (2) it, along with private charities, would capitalize the credit reserve pool; (3) it will underwrite the initial transaction costs involved in entering the market; (4) to provide information on minority-owned small businesses and ensure transparency in the marketplace in general.

The advantages of this approach are manifold in that the secondary market that has been built is self-sustaining because of the fact that the increased yields appeal to investors’ sense of self-interest and therefore does not require extensive, continuous government expenditure. The vast majority of costs will be initial in nature and as the marketplace grows, transaction fees will help to pay for the startup costs. This policy would address the root causes of the capital shortage for minority owned small businesses – trust – by taking it out of the picture in large part. The marketplace can be implemented and administered through an existing government agency, meaning that there will be no huge increase in red tape and most importantly, the plan represents a public-private partnership which could have bipartisan appeal in a divided Congress.


[1] http://www.jcr-admin.org/files/pressPDFs/052314174349_676689.pdf

[2] http://www.sba.gov/sites/default/files/files/us10.pdf

[3] http://mtprawvwsbswtp1-1.nyc.gov/

[4] http://www.occ.gov/topics/community-affairs/publications/fact-sheets/fact-sheet-sba-7a-guaranteed-loan.pdf

[5] https://www.continentalbank.com/business/department-of-transportation-(dot)-program/

[6] http://development.ohio.gov/bs/bs_ombdlp.htm

 

 

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

 

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>