An Open Letter in Defense of Socially and Economically Disadvantaged Small Businesses

 

By Norman David Roussell, MBA

Founder of Capital Access Project, Inc.

 

There is a presumption in America that Blacks, Hispanics, Native Americans, Asians, Pacific Islanders, women and persons with disabilities are inherently socially disadvantaged, because their disadvantages stem from circumstances out of their control.  That presumption is reinforced by the definitions of socially disadvantaged and economically disadvantaged individuals as defined in the U.S. Small Business Act (15 USC 637) where-

 

(5) Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.

 

(6)(A) Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area that are not socially disadvantaged.  In determining the degree of diminished credit and capital opportunities the Administration shall consider, but not be limited to, the assets and net worth of such socially disadvantaged individuals.

 

There is substantial evidence that minority-owned[1] businesses in America have diminished capital and credit opportunities based solely on the owner’s social disadvantage.  A lack of capital and credit ultimately limits the hiring of labor force entrants and prevents those businesses from competing competitively in the free enterprise system.

 

The following statistics are cited as evidence of the impact that social disadvantage has on minority-owned firms in America

 

1) A study by the Federal Reserve Board of Governors[2] examining the credit market experiences of small business owners revealed that within the past three years, majority-owned firms were approved for loans 73.96% of the time, while only 56% of minority-owned firms were approved (all things being equal).  The credit market access gap, by demographic group is illustrated below:

    Loan              Credit

Approval         Access

    Rate                Gap

Majority-owned firms (within the last 3 years)        73.96%            0.00%

Minority-owned firms (within the last 3 years):

- White females                                               69.67%             4.29%

- Black males                                                  31.46%[3]        42.50%

- Black females                                               46.54%[4]        26.42%

- Hispanic males                                              63.71%           10.25%        

- Hispanic females                                           66.28%             7.68%

- Asian males                                                  61.24%           12.72%

- Asian females                                                N/A[5]                 N/A

 

2) Minority-owned firms are surpassing the growth of all U.S. businesses, growing at a rate of 17 percent per year, six times the growth rate of all firms[6]. Minority-owned firms’ sales are growing 34 percent per year- more than twice the rate of all firms[7].  While minority-owned firms are growing faster than majority-owned firms in number and revenue, they remain severely constrained by a lack of access to capital[8], because all else equal, minority-owned firms were almost twice as likely to be denied credit as their white-male (majority) counterparts[9].

 

3) A study by the Federal Reserve Board of Governors[10] on the credit market experiences of small business owners revealed that of all small business owners-

 

a.       African-American-owned firms were least likely to have their credit needs met; 

b.      African-American-owned firms were most likely to have been denied credit on the firm’s most recent loan or line of credit application; and

c.       Hispanic- and Asian- and women-owned firms have a higher incidence of unmet credit needs relative those of white males.

 

4) The mean value of personal net worth is $687,719 for white business owners compared to $159,962 for African-American-owned firms[11].

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Evidence indicates that social disadvantage leads to economic disadvantage and that economic disadvantage prevents small, disadvantaged, minority- and women-owned firms from competing effectively in the marketplace. 

 

One of the mechanisms available to local, state and Federal agencies to combat social and economic disadvantage for small business owners is the creation of Disadvantaged Business Enterprise[12] (DBE) programs.

 

DBE programs help increase opportunities for DBE firms that are able to provide goods and services because the programs create a more equitable system of awarding contracts to qualified firms.  The overall impact on DBE firms is increased competitiveness, capacity and the possibility of long-term sustainability.

 

It is through DBE programs that DBE firms can begin to offset the systemic biases that exist that are limiting their access to capital, limiting their access to credit, and ultimately limiting their competitiveness in the free enterprise system.

 

Questions or comments to: norman@capitalaccessproject.org