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Justin Thomas Wayne Clint Pickman Steve Summers |
Fin: 402
Discrimination, Barriers,
& Government Financing for Minority-owned
Small Businesses
A Critical Analysis:
EXECUTIVE
SUMMARY
It is the policy of the federal government to encourage the development of Small Disadvantaged Businesses (SDBs) owned by minorities. SDBs are statutorily defined as small businesses that are owned and controlled by socially and economically disadvantaged individuals who have been subjected to racial or ethnic prejudice or cultural bias and who have limited capital and credit opportunities. It is a fact that America’s communities and economic well-being is inextricably linked to minority groups involvement in business ownership activities. Business ownership by members of minority groups in American society has increased rapidly in recent years. In this report, we try to answer the question: is the increase involvement of minorities in business ownership activities (i.e. entrepreneurship) a result from government assistance programs, and is there a need form these types of minority focus programs? This report does not focus on women-owned business, although the findings, problems, and concerns regarding the questions posed above, are similar to minority-owned firms.
Findings
Major
barriers to the formation, growth, and development of minority-owned businesses
include:
Ø
Lack
of financial capital: minorities have lower incomes, fewer assets, and
diminished access to business loans.
Ø
Lack
of social capital: minorities' access to business networks is limited, and
their own family networks may be smaller or less valuable than those of their
majority counterparts.
Ø
Lower
human capital endowments: minorities have less education and professional
training, and their access to union and other apprenticeship programs is more
limited.
Ø
Minorities'
access to lucrative, nonminority consumer markets is comparatively limited, due
in part to historical patterns of residential segregation.
Each of these barriers has been produced and/or perpetuated,
at least in part, by discrimination, which leads to our seconding finding:
government programs are not being used efficiently and effectively.
The government has tried to address these
barriers with programs that fall into two broad categories. One uses race and
gender as a factor in the award of contracts (i.e. the use of sole source
contracts, set-asides, price or evaluation advantages, and the use of goals for
prime or subcontracting). All federal agencies with procurement powers are
required by law to establish annual percentage goals for the awarding of
procurement contracts and subcontracts to small disadvantage businesses. The
second category, which our report focuses on, seeks to expand the number of
minority owned companies by increasing their financial, social, or human
capital (i.e. lending and bonding help, technical assistance programs, and
financial resources and assistance). The goal of both categories is to put
minority firms in a better position to compete with other firms. They do not,
however, directly affect outcomes—success or failure—of the business itself. Of
the two, the second category is perhaps the least studied, despite its
importance for minority economic progress. Again, the purpose of the study is
to provide information bearing on the need for programs that assist
minority-owned firms, because government funding is so important to their
growth, profitability, and survival.
We find substantial disparity in government funding. That
is, minority-owned businesses receive far fewer government contracts and
financial assistance than would be expected based on their availability. The
question remains does disparity result from discrimination? We believe this
needs to be addressed by our government because eliminating discrimination is
clearly a constitutional responsibility of the federal government. Our findings
suggest that in the private market discrimination still exist. However, in the
case of government assistance program, this disparity results from poor
management, and lack of financial accountability.
It must also be noted that federal assistance to Minority
Business Enterprise (MBE) includes procurement goals, contract price evaluation
preferences, management and technical assistance, grants for education and
training, surety bonding assistance, loans, and loan guarantees. These
affirmative action programs include the Small Business Administration’s section
8(a) program, which provides preferential treatment in obtaining federal
procurement contracts to SDBs enrolled in the program. There are no federal
programs specifically designed to help disadvantaged individuals obtain
start-up capital for new business ventures, although such assistance can be
sought from privately owned Small Business Investment Companies, which receive
federal support.
Table of
Contents
Discussion of Barriers and Discrimination
Government Directly Involved in MBE
SBA’s Section 8(a) Program Today
Constitutional & Legislative Issues
Critical Analysis and Recommendations
Traditional Businesses For
Minorities (Targeted Group)
Emerging Businesses For
Minorities (Beneficiary Group)
Appendix: Defining and Certificating
Appendix: H.R.3372—source Thomas Legislative Information on the
Internet
Appendix: S.1994—source Thomas Legislative Information on the Internet
INTRODUCTION
This report explores the
comparative success of minority entrepreneurs and its relationship to the
affirmative action programs, particularly government funding of Minority
Business Enterprise (MBE). Since the late 1960s, it has been the policy of the
federal government to assist small businesses owned by minorities to become
fully competitive and viable businesses. Federal assistance to minority owned
firms, which have come to be known as small disadvantaged businesses (SDBs), includes the following:
Ø
preferential
treatment in obtaining procurement contracts and subcontracts,
Ø
percentage
contracting goals by federal agencies,
Ø
management
and technical assistance,
Ø
grants
for education and training,
Ø
surety
bonding assistance,
Ø
loans,
and
Ø
loan
guarantees.
In this report, we focus
on the barriers minorities have to overcome, and try to answer the questions:
is the increase involvement of minorities in business ownership activities
(i.e. entrepreneurship) a result from government assistance programs, and is
there a need form these type of minority focus programs? This analysis suggests that the statistical
disparities—such as those presented in this report—are evidence of
discrimination, which hurts and possibly destroys minority firms. However, it
also makes clear that some disparities do not prove discrimination is the
direct cause.
The report begins with a
brief discussion on the barriers minority entrepreneurs have to overcome to
obtain, maintain, and grow as a business. This is important because policy
makers must understand what issues needs to be address. Next, we focus on the
Small Business Administration’s goals and policies. This focus gives one an
historical perspective for the critical analysis. Then, we discuss recent
developments in affirmative action within the courts, and the Congress.
Finally, this report concludes with an analysis of questions posed above, and
suggests future action, if any. This report tries to be objective, and uses an
historical analysis to determine what actions should be taken in the future.
This report does not
focus on women-owned business, although the findings, problems, and concerns
regarding the questions posed above, are similar to minority-owned firms.
Again, the questions posed in this report are:
1.
Is
the increase involvement of minorities in business ownership activities (i.e.
entrepreneurship) a result from government assistance programs, and
2.
Is
there a need form these types of minority focus programs?
It must also be noted
that there are no federal programs specifically designed to help disadvantaged
individuals obtain start-up capital for new business ventures, although such
assistance can be sought from privately owned Small Business Investment
Companies, which receive federal support.
Discussion of Barriers and Discrimination
We are interested in understanding the extent of
discrimination that may limit minority entrepreneur’s ability to start,
compete, and grow a business. Since the Civil Rights Act of 1964, the
government has a constitutional duty to play a role in reducing private market
discrimination. The documentation in this section of the report can result from
government or private market discrimination, and/or they can be the product of
minority-owned firms being, on average, less qualified to compete than
majority-owned firms. The latter case, being less qualified may or may not
result from past or present discrimination. If one looks at the statistics of business
owners, it would be easy to see that minorities are underrepresented. In other words, the percentage of minority
owned businesses is less than the percent of the population they make up.
Nationally, minorities made up about 30.9 percent of the total U.S. population
in 2000, but owned just 14.6 percent of all U.S. businesses in 1997. Blacks and
Hispanics were underrepresented in the minority business population: Hispanic
Americans counted for about 12.5 percent of the population in 2000, but owned
only 5.8 percent of U.S. firms in 1997, while Blacks or African Americans
constituted 12.3 percent of the U.S. population but only 4.0 percent of
business owners (SBA, Office of Advocacy, Minorities
in Business, 2001). Locally, African American’s make up 10 percent of the
population in Nebraska; yet, they own only 3.4 percent of businesses. One of
the main reasons that minorities are underrepresented is due to the fact that
it is much harder for them to start their own businesses (Bates, 1995). In
addition to this reason, once a minority firm is started, it is more difficult
for them to flourish and grow because of the following barriers: 1) lack of
financial capital, 2) lack of social capital, 3) lower human capital
endowments, and 4) limited access to nonminority consumer markets.
Lack
of Financial Capital
The bottom line of this barrier is as a whole, minorities do
not have as much income, assets, and access to financial markets as the
majority group. Roughly one-third of
both African Americans and Latinos live below the poverty level, and have only
fifty percent of the median family income of whites. These numbers translate into less money for startup capital, and
less assets for loan collateral. In
fact, households headed by blacks have, on average, just one-quarter of the
assets of white households (Blau and Graham 1990, Meyer 1990). According to
Rick Green's articles entitled Biased
Business Lending, credit scoring is based on practices
that are common in the white community such as home-equity loans, which are more
likely to be recorded in databases and easily accessed. Little or no weight is
given to deals common in minority neighborhoods, such as loans from community
groups, sub-prime lenders, and local finance companies. These lenders often do
not report to credit bureaus, so verification would require extra work and
expense. Worse, some predatory lenders withhold good payment records to prevent
customers from refinancing at lower rates. The results: no credit history for
such entrepreneurs, and thus no loan from a bank. In addition, banks have
discriminated against minorities, giving African Americans with the same amount
of financial capital as whites just one third of the loan dollars that white
people receive (Grown and Bates 1992, Ando 1988).
Since many businesses are started with no investment at all,
many argue that limited financial capital is a common problem for all firms;
therefore, should not be considered a barrier.
However, with no collateral, it is difficult to get a bank loan, and
without investing personal capital, it is almost impossible for a firm to grow.
Therefore, nonminorities have an advantage, on average, by having more money
and assets. So lack of financial
capital “is” a barrier for minorities. This leads to the question of whether or
not this is a result of discrimination.
In 2002, discrimination based on sex or race is not really a
factor. However, it was discrimination
in the past that caused a lot of the differences in financial capital between
minorities and nonminorities. In addition, they have been excluded from
institutions of higher education, been denied employment opportunities,
received lower wages, and been denied mortgages to buy homes (Higgs 1989). From
its origins, the black-business community has been constrained by limited
access to credit, limited opportunities for education and training, and white
stereotypes about suitable roles for minorities in society (Bates, 1993).
Lack
of Social Capital
Social capital is defined as networks and/or relationships
between business associates, family members, community related institutions,
customers, and employees (Fratoe 1988). Basically, it is the people who can
help you in both getting your business started, and helping it to grow.
Minorities are at a disadvantaged, because many banks are not located within
many minority communities; thus, making it harder to develop a relationship
with the banker. Business networks can provide entrepreneurs with benefits such
as introductions to new clients and suppliers, information on upcoming
projects, and information on technical developments. Business networks can also
serve a source for capital for business owners who need more investments, to
not only start a business, but also grow the business. The reasons for the lack
of access to business networks are much the same as those responsible for lack
of financial capital. As a whole,
minorities have less money, and have been discriminated against when it comes
to getting good jobs. This leads to
minorities not being able to network with the people at those jobs. There are also places, such as country clubs
or social organizations that have discriminated against minorities in the past,
and some that still do today.
Family networks can also be valuable tools for
entrepreneurs. First, family members can be a good source of workers for the
business. Family members are generally more trustworthy, and cheaper than
hiring outside employees. Second, having a family member who has been an
entrepreneur is very beneficial. Information from these family members can be
passed on to others who are looking to start a business. Having someone to give
you advice and walk you through the process is a major advantage. Minorities,
however, do not always get to share in all of these benefits. For example,
African Americans have a comparatively lower marriage rate, and women head a
large number of households (Bates 1989). This makes it very difficult for them
to draw on family as a source of social capital. The lack of social capital is
only partly related to discrimination. Past problems with discrimination have
made it difficult for minorities to start their own business, which is why
there is less family experience passed down. However, low marriage rates, and
single mothers cannot be directly attributed to discrimination.
Lower Human Capital
Human capital has to do with things such as education,
business experience, and work experience.
Minorities are again at a disadvantage, because, on average, they have
less education and experience than nonminorities. Education fosters business
formation and development, since educational training can be easily used in
running a business. Latinos and African Americans have the lowest educational
levels of all entrepreneurs. Less than 30 percent of these groups have college
degrees, and almost one-third of Latinos business owners do not have a high
school diploma. Latinos and Asians also suffer from not being educated enough
in the English language. Many people in
these groups have trouble communicating in English (Bates 1995).
Experience is also vital for entrepreneurs. Having work
experience in the field that you are starting a business in is essential. It is also important to have some kind of
experience in looking at how a business runs. Experience can also provide a
person with opportunities for business networks. However, minorities have been
discriminated against in getting jobs, which can deny them valuable experience.
Also, minorities have been historically denied to union apprenticeship and membership (Hill
1989).
Limited Market Access
The last barrier and the one that is probably most directly
related to discrimination is that of minorities not having enough access to
white consumers. Looking back at what has been said, white customers likely
have more money than minority customers. One form of discrimination that
results when white customers refuse to buy from minority owned business.
Without that market share it is hard to survive and grow.
The other cause of poor penetration into the white market
has to do with housing segregation. There are many neighborhoods that are
primarily composed by people of one ethnic group. If an African American Lives
in a part of town that is mostly made up of blacks, then they will not gain
much access to the whit e consumers. Therefore, the limited access to the
majority market is due primarily to segregation and discrimination. The problem of linking disparity to discrimination is one
that has been, and is being, grappled with by the courts. The Small Business
Administration was designed to eliminate many, if not all
of these barriers.
Small Business
Administration
Historical
Background. Federal small disadvantaged business
programs first appeared in federal legislation in 1942, when Congress acted to
moblize the productive capacity of small businesses and augment production
during WWII (P.L. 77-603). Section 4 of the law created the Smaller War Plants
Corporation and granted it authority to contact with federal agencies. The
corporation was also empowered to make loans, or advances to small businesses
and to assist small businesses in other ways to manufacture articles,
equipment, supplies, or materials for the war effort or for essential civilian
purposes. This same contracting authority reappeared in the Defense Production
Act Amendments of 1951 ( P.L. 82-96, 65 Stat. 131). This law created the
independent Small Defense Plants Administration and empowered it with the same
powers as the Smaller War Plants Corporation, with the additional power to
provide technical and managerial aid to small businesses. The legislation that created the Small
Business Administration (SBA) two years later, the Small Business Act of 1953,
which contained the same authority in almost identical wording (P.L. 83-163, 67
Stat. 230 at 236, sec. 207(c)-(e) and 208). In fact, the Small Buiness Act of
1953 authorized the President to transfer records, property, and personnel from
the Small Defense Plant Administration, which was being liquidated, to the
newly created Small Business Administration.
When the Small Business Act of 1953 was restructured and
reauthorized in 1958 (P.L. 835-536, 72 Stat. 384) as the Small Business Act,
SBA’s authority to enter into contracts with federal agencies and to let
subcontracts “to small-business concerns or others” reappeared in the new
legislation in section 8(a) (P.L. 835-536, 72 Stat. 388). After outbreaks of racial violence in
several U.S. cities during 1967, pressure arose in Congress to use the 8(a)
authority to assist small businesses in inner cities to help alleviate high
unemployment and other circumstances thought to contribute to social unrest.
The Small Business Act’s unutilized section 8(a), which authorized SBA to let
federal procurement contracts to small businesses, was administratively
reformulated to funnel federal procurement contracts to minority-owned small
businesses (P.L..95-507, 92).
The earliest statutory basis for federal aid to economically
disadvantaged entrepreneurs appeared in the 1967 amendments to the Economic
Opportunity Act of 1964, which, in part, directed SBA to assist small
businesses owned by low-income individuals--P.L. 90-222, Sec. 106 (a), later
repealed in 1974, 93-386, which established the position of administrator for
minority small business the SBA (88 Stat. 742, 748, Aug. 23 1974.). The first
law to establish a specific percentage goal for federal procurement from
minority-owned businesses was the Public Works Employment Act of 1977.
Implemented by the Economic Development Administration within the Department of
Commerce, it required that at least 10% of the total dollar value of federal
grants for local public works projects be expended through minority business
enterprises (P.L. 95-28, 91 Stat. 117, 118). Over the years, the emphasis of
this effort has broadened somewhat, from minority entrepreneurs to
entrepreneurs who are “socially and economically disadvantaged.”
Over the years, the emphasis of this effort has broadened
somewhat, from minority entrepreneurs to entrepreneurs "socially and economically
disadvantaged." This trend has cause the longstanding term "minority
business enterprise," or "MBE," to be supplemented, and in some
cases replaced, by the terms "small disadvantaged business," or
"SBD, " and "disadvantage business entreprise," or "DBE." Currently, the
Small Business Administration also uses the term "historically
underutilized businesses" (HUBs) in its contracting programs.
Government Directly Involved in MBE
President Nixon issued Executive Order 11458 in 1969. That
executive order created the Office of Minority Business Enterprise, which, in
1979, became the Minority Business Development Agency (MBDA). Located in the
Department of Commerce, the MBDA is the only federal agency charged exclusively
with promoting the creation and growth of minority-owned businesses in the
United States. Although its scope of operations has been reduced in recent
years due to budgetary reductions, the MBDA continues to help federal, state,
and local government agencies, as well as major corporations, increase their
contracting activities with minority-owned firms.
In the early 1960s, the U.S. Small Business Administration
(SBA) was “a bureaucracy that was generally unresponsive, if not specifically
hostile, to the needs of minority individuals and groups” (Blaustein and Faux,
1972, p.119). In January 1964, the SBA
launched an experimental program, entitled 6x6, to provide loan assistance to
disadvantaged owners of very small urban retail and service enterprises.
Offering loan amounts up to $6,000 and loans up to six years in maturity—hence
the 6x6 designation—SBA officials envisioned that Negro-business owners would
be the primary beneficiaries (U.S. Small Business Administration, 1970, p.2;
Bates and Bradford, 1979). The 6x6 program provided the foundation for the
Economic Opportunity Loan (EOL) program, which lended tens of thousands of
minority-business borrowers during the program’s 20 year existence. EOL lending
was one of the “War on Poverty” programs; replacing 6x6, it was authorized
under Title IV of the Economic Opportunity Act in 1965. EOL eligibility was
determined by the family income of the borrower, relative to family size. The
SBA-administered EOL program sought solely to assist persons living in poverty
(not saying all minorities live in poverty.
Amendments to Title IV subsequently broadened EOL
eligibility to include people with incomes above the poverty level who had been
socially and economically “disadvantaged.” EOL was a large program, impacting
more minority-owned businesses than any other government assistance effort.
Prior to 1969, virtually all SBA loans to minority businesses were EOLs; from
1969 to 1975—peak years of MBE assistance—30,959 EOL loans were extended to
minority-business borrowers nationwide (U.S. Small Business Administration,
1976; U.S. Comptroller General, 1973). Minority-business assistance efforts of
the federal government have come under attack repeatedly since the 1970s.
Problems in the EOL effort, such as the minimal development of viable
businesses, high loan-default rates, and a paucity of evidence regarding
benefits of assistance efforts were targets for criticism (Bates and Bradford,
1979). The EOL program found itself in a paradoxical state: the strongest candidates
for aid tend to be well-educated, high-income individuals, traits that make
them ineligible for assistance. The truly disadvantaged persons that assistance
is targeted toward commonly lack the expertise to establish and operate viable
businesses.
This scenario describes the history of the EOL program, and
many current MBE programs. A comprehensive study of EOL loans extended to
minority-business borrowers operating in three central cities – New York,
Boston, and Chicago – uncovered delinquency and default in 67.2 percent of the
mature outstanding loans (Bates and Bradford, 1979). Since SBA was targeting
loans to persons whose “total family income from all sources (other than
welfare) is not sufficient for the basic needs of the family” (SBA, 1970, p.6),
eligibility of many who repaid EOL loans was questionable. SBA’s EOL program
was designed so that few of its loan recipients possessed the skills,
education, and work experience required for successful business operation.
According to Bates (1995), the SBA, for nearly a decade, successfully covered
up the fact that over half of the businesses using EOL loans defaulted on their
repayment obligations. The program, its credibility destroyed by massive loan
default, was terminated in 1984. Yet its clones continue to be widespread today
at all levels of government and in the nonprofit sector (Bates, 1995).
SBA’s Section 8(a) Program Today
Named for the section of the Small Business Act from which
it derives its authority, the purpose of the 8(a) program is to assist eligible
small disadvantaged business concerns to compete in the American economy and
gain access to the federal procurement market through business development. All
federal departments and major independent agencies participate in the 8(a) program.
Although there are no federal programs specifically designed to help
disadvantaged individuals obtain startup capital for new business ventures, SBA
offers assistance to small business entrepreneurs who, despite sound business
plans, are unable to borrow on reasonable terms from conventional lenders. For
purposes of program enrollment, African Americans, Asian Americans, Hispanic
Americans, and Native Americans are presumed to be socially disadvantaged.
Others, such as women or disabled persons who do not belong to the
presumptively disadvantaged minority groups, can individually establish social
disadvantage by demonstrating that they have been subjected to racial or ethnic
prejudice or cultural bias because of their membership in a particular group. In
the past, there have been few nonminority business owners in the 8(a) program.
Economic disadvantage is established, in part, by the
personal net worth of the owners and managers claiming disadvantage.
Individuals whose personal net worth exceeds $250,000 (excluding their
ownership interests in the firm and the equity in their primary places of
residence) will not be considered economically disadvantaged for purposes of
8(a) program entry. All firms currently in the 8(a) program will automatically
receive SDB status and will not have to be recertified. All firms that have
exited the 8(a) program in good standing within the last three years and have
undergone a routine annual review during that period will also receive
automatic certification (See Appendix: Defining & Certifying).
The 8(a) program also is designed as a business development
program, and certified SDB firms are required to develop comprehensive business
plans with specific business targets, objectives, and goals. Program
participation is limited to a period of nine years. As companies move through
the program, they are required to obtain a progressively larger share of their
revenues from non-8(a) sources in order to enhance their chances of survival
after graduating from the program.
SBA records show that 9,034 small business firms were
certified as SDBs as of August 24, 2000. According to SBA officials,
approximately 6,405 of these firms were automatically certified due to their
8(a) certification. As of August 24, 2000, SBA had certified 2,629, or about
half, of the 5,456 small business firms that submitted applications for
certification to the Small Disadvantaged Business Certification (SDBC) program (See Appendix:
Defining & Certifying). According to Midlands Venture Forum, Nebraska does
not have a minority business certification program such as practiced in various
cities and states around the country. The Omaha Chamber of Commerce has a
process for certifying local minority-owned businesses, which is accepted and used
by private businesses interested in contracting with ethnic minority firms for
various goods and services. They do not certify a business as woman-owned
unless it is an ethnic minority owned as well.
In addition, today’s program requires SBA to provide
management and technical assistance to 8(a) firms. Assistance is provided in
such areas as loan packaging, financial counseling, accounting and bookkeeping,
marketing, and management. There are also provisions for surety bonding
assistance and for advance payments to help in meeting financial requirements
necessary to the performance of a contract. States and transit authorities must
now use race-neutral measures (i.e., measures intended to help small
businesses, not just DBEs), such as outreach and technical assistance, to the
greatest extent possible to achieve their DBE goals. Furthermore, the new
regulations revised the eligibility requirements to include a personal net
worth cap of $750,000 for the individuals who own and control DBEs.
Government
Indirectly Involved in MBE
SBA also helps finance Minority Business Enterprises (MBEs)
through its assistance to privately owned Small Business Investment Companies
(SBICs). Created by the Small Business Investment Act of 1958, SBICs are
private firms that raise funds to provide venture capital for small businesses
by selling securities guaranteed by SBA. Located throughout the United States,
they provide equity capital, long-term loans, and management assistance to
small businesses for expansion, modernization, and operating expenses, as well
as venture capital for startup costs and research and development expenses.
Assistance to small businesses often takes the form of equity-type investments,
by which SBICs share in the future growth and profits of the firms.
The MBE assistance efforts launched in the 1960s reflected
views that highly placed white politicians held toward minorities. President
Nixon’s Secretary of Commerce, Maurice Stans, was the point man for
implementing the President’s “Black Capitalism” program to promote minority
entrepreneurship. Stans, in 1969, expressed his views on assistance: “We have
to be realistic about it. We are not going to create overnight manufacturing
companies with 500 employees. The American economy did not build that way. It
started out with the corner grocery, and the deliveryman—the group of people
who cut lawns or perform services, and so forth, and I think we have to
recognize that by and large a very high percentage of the things we do are
going to be in the small ma-and-pa area.” (quoted in Blaustein and Faux, 1972,
p.155.)
The SBA, in July 1968, had begun to encourage banks to
expand their lending to MBEs. The incentive offered to banks was the loan
guarantee: in the event of default, banks would recoup 90 percent of the
outstanding balance by transforming the non-performing loan to the SBA. Banks
participating in the SBA’s 7(a) loan guarantee program would use their own
funds to lend to minority entrepreneurs. SBA involvement in the transaction
arose only in cases of default: profits from repaid loans belonged to the bank
while losses from defaults were shared, with the government partner picking up
90 percent of the tab. Lending to minority businesses, thus became a low-risk
proposition. The 7(a) loan guaranty program provides loans to small businesses
unable to secure financing on reasonable terms through normal lending channels.
The program operates through private-sector lenders that provide loans
guaranteed by the SBA; the agency has no funds for direct lending or grants. As
Maurice Stans said in 1969, “I would rather see, and I think the President
would much rather see, a private bank make a loan to a minority enterprise with
a government guarantee than the government to put out the money” (quoted in
Blaustein and Faux, 1972, p.156).
The Nixon Administration achieved vast increases in bank
participation by launching a MBE loan-guarantee program, Operation Business
Mainstream, at the SBA. By 1970, nearly 40 percent of the SBA loans received by
minority entrepreneurs (by loan numbers) were guaranteed-bank loans. After
1975, the majority of MBE lending assistance came in the form of SBA-guaranteed
loans initiated by banks (Bates, 1984). MBEs initially financed with guaranteed
loans often continued as regular bank clients, receiving products such as
working-capital loans that were not covered by SBA guarantees. The tradition of
minimal contact between banks and MBEs was broken: even if equality of loan
access was not achieved, enormous increases in MBE bank borrowing occurred
(Bates, 1993; Cavalluzzo and Cavalluzzo, 1998). Yet, black-business borrowers,
in the 1990s, were less likely to have their loan applications approved than
whites having otherwise identical business and owner traits, yet blacks also
received more of their debt financing from banks than from all other sources
combined (Bates, 1997; Cavalluzzo, Cavalluzzo, and Wolken, 1999).
Since 1985, nearly all government financing assistance
targeting minority entrepreneurs (as well as minority communities) has been
funneled through partner relationships. A variety of new arrangements were
launched in the 1990s under the Clinton Administration. Initiatives of the
1990s were both place based—the Community Development Financial Institution
(CDFI) initiatives, for example—and people based. Perhaps the largest new
people-based initiative has been the microenterprise loan programs, initially
funded by foundations, increasingly funded by government (Bates 2001).
The SBA’s Microloan Demonstration Program, begun in 1992,
financed loan programs, not individual borrowers: 65 SBA loans to
microenterprise programs had been extended by 1993 (Servon, 1999). In 1992, the
Community Development Block Grant (CDBG) program created a special category for
microenterprise programs, providing federal dollars that could be directed to
microenterprise assistance by state and local governments. CDBG funds now flow
to microenterprise programs that are place based and people based. HUD’s Office
of Community Planning and Development provides funding for microenterprise
programs, in conjunction with its empowerment zone and enterprise communities
programs.
The number and dollar
amounts of 7(a) loans have been increasing rather steadily for all minority
groups; they have reached a plateau in the recent past for nonminorities.
Asians have received a larger share of dollars than of the number of loans,
implying that they have applied for and been awarded larger loans than other
groups. The share dropped to 21 percent in 2000 (see tables 1-4 pg. 10-11). In
general, however, SBA is a lender of last resort, after other possible sources
have been exhausted.
|
Table 1 |
Number
of 7(a) Loans by Ethnicity, 1999-2000 |
|
|||||||
|
Year |
African
American |
Hispanic |
Native
American |
Asian |
Unknown |
Other
Incl White |
Mutli-National
|
Total
# Loans |
|
|
2000 |
2,000 |
3,221 |
525 |
5,359 |
64 |
32,455 |
125 |
43,749 |
|
|
1999 |
2,057 |
3,456 |
515 |
5,106 |
93 |
32,348 |
82 |
43,657 |
|
|
1998 |
1,840 |
3,036 |
439 |
4,818 |
104 |
32,039 |
44 |
42,323 |
|
|
1997 |
1,819 |
3,160 |
389 |
4,170 |
152 |
35,297 |
391 |
45,378 |
|
|
1996 |
2,231 |
3,040 |
408 |
3,300 |
94 |
36,731 |
176 |
45,980 |
|
|
1995 |
2,696 |
3,742 |
392 |
3,478 |
24 |
45,348 |
103 |
55,786 |
|
|
1994 |
1,424 |
2,383 |
229 |
2,610 |
247 |
29,470 |
56 |
36,419 |
|
|
1993 |
795 |
1,462 |
136 |
1,674 |
707 |
21,860 |
56 |
26,690 |
|
|
1992 |
675 |
1,185 |
117 |
1,484 |
673 |
19,985 |
57 |
24,176 |
|
|
1991 |
550 |
870 |
97 |
1,304 |
695 |
15,901 |
51 |
19,468 |
|
|
1990 |
610 |
718 |
87 |
1,035 |
814 |
15,799 |
66 |
19,129 |
|
|
Average |
1,518 |
2,388 |
303 |
3,122 |
334 |
28,839 |
110 |
36,614 |
|
|
Average
Share |
4.15 |
6.52 |
0.83 |
8.53 |
0.91 |
78.77 |
0.3 |
100 |
|
Source: US Small Business Administration, Office of
Advocacy, Minority Business, 2001
|
Table 2 |
Nominal Dollars Value of 7(a) Loans by Enthicity,
1999-2000 |
|
||||||||||||||||||||||
|
Year |
African American |
Hispanic1 |
Native American |
Asian |
Unknown |
Other Incl White |
Mutli-National |
Total # Loans |
||||||||||||||||
|
2000 |
353,870,408 |
664,591,345 |
94,485,017 |
2,123,381,272 |
18,187,400 |
7,332,977,208 |
19,476,942 |
10,606,969,592 |
||||||||||||||||
|
1999 |
352,940,177 |
642,133,544 |
76,205,224 |
1,894,481,899 |
31,923,800 |
7,225,275,916 |
13,120,200 |
10,236,080,760 |
||||||||||||||||
|
1998 |
278,377,347 |
544,650,285 |
67,912,734 |
1,506,676,336 |
24,144,200 |
6,671,898,131 |
11,689,300 |
9,105,348,333 |
||||||||||||||||
|
1997 |
266,741,654 |
550,810,858 |
73,816,907 |
1,316,177,833 |
40,214,288 |
7,198,643,522 |
131,395,861 |
9,577,800,923 |
||||||||||||||||
|
1996 |
264,247,374 |
418,590,780 |
67,079,536 |
887,292,852 |
30,256,822 |
6,055,871,424 |
57,171,888 |
7,780,510,676 |
||||||||||||||||
|
1995 |
268,201,875 |
466,679,023 |
57,997,718 |
796,480,862 |
3,508,644 |
6,712,235,248 |
19,429,105 |
8,324,532,475 |
||||||||||||||||
|
1994 |
205,577,625 |
434,008,823 |
49,565,259 |
863,575,696 |
66,111,995 |
6,616,932,849 |
17,620,950 |
8,253,393,197 |
||||||||||||||||
|
1993 |
139,703,672 |
299,418,026 |
33,177,285 |
596,239,102 |
183,558,436 |
5,516,675,189 |
18,395,970 |
6,787,167,677 |
||||||||||||||||
|
1992 |
122,082,835 |
254,642,992 |
27,758,660 |
532,015,365 |
182,427,585 |
4,834,745,413 |
16,946,546 |
5,970,619,396 |
||||||||||||||||
|
1991 |
97,444,699 |
168,904,151 |
18,585,198 |
423,527,977 |
161,662,543 |
3,559,612,495 |
14,870,910 |
4,444,607,973 |
||||||||||||||||
|
1990 |
96,721,264 |
143,436,389 |
13,737,808 |
300,037,350 |
17,270,792 |
3,461,048,989 |
20,357,150 |
4,208,046,742 |
||||||||||||||||
|
Average Share |
2.70 |
5.13 |
0.64 |
12.24 |
1.45 |
77.40 |
0.40 |
100.00 |
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Table 3 |
Nominal Dollar Value of 504 Loans by Ethnicity,
1990-2000 |
|
||||||||||||||||||||||
|
Year |
African American |
Hispanic1 |
Native American |
Asian |
Unknown |
Other Incl White |
Mutli-National |
Total # Loans |
||||||||||||||||
|
2000 |
37,674,000 |
102,614,000 |
7,512,000 |
271,466,000 |
1,962,000 |
1,426,182,986 |
2,615,000 |
1,850,025,986 |
||||||||||||||||
|
1999 |
36,524,000 |
113,310,600 |
8,215,000 |
254,379,400 |
370,000 |
1,629,148,198 |
N.A. |
2,041,947,198 |
||||||||||||||||
|
1998 |
26,169,999 |
90,152,000 |
9,249,000 |
189,786,000 |
2,069,000 |
1,515,471,873 |
955,000 |
1,833,852,872 |
||||||||||||||||
|
1997 |
27,228,000 |
77,320,000 |
7,089,000 |
185,971,000 |
1,078,000 |
1,198,802,586 |
5,512,000 |
1,503,000,586 |
||||||||||||||||
|
1996 |
37,092,044 |
112,896,525 |
17,683,000 |
292,291,167 |
2,756,000 |
2,114,862,319 |
15,794,000 |
2,593,375,055 |
||||||||||||||||
|
1995 |
27,324,000 |
77,730,754 |
2,852,000 |
150,697,499 |
1,580,000 |
1,349,678,817 |
11,896,000 |
1,621,759,070 |
||||||||||||||||
|
1994 |
22,616,000 |
60,727,558 |
3,124,000 |
106,147,000 |
33,755,000 |
1,146,969,882 |
4,337,000 |
1,377,676,440 |
||||||||||||||||
|
1993 |
14,706,000 |
25,038,000 |
3,382,000 |
40,552,100 |
40,709,000 |
723,656,586 |
6,548,000 |
|||||||||||||||||