According to the Minority Business Development Agency, the rate at which minority-owned businesses are being formed continues to rise.
By Rohit Arora, CEO of Biz2Credit
CNBC.com | 15 Apr 2016 —
In the pursuit of the American dream, minority business owners often face an uphill battle. Often facing social and economic discrimination, the climb is tough. Despite the inevitable hurdles, minority entrepreneurs seem to be confident in what the future holds.
According to the Minority Business Development Agency, the rate at which minority-owned businesses are being formed continues to rise. The number of minority business enterprises increased 39 percent between 2007 and 2012 (from 5.8 million to 8.0 million), or more than three times faster than population growth among minorities, according to the Census Bureau’s 2012 Survey of Business Owners. But they fall short in comparison to other businesses’ overall success in terms of revenue and profit growth.
In response, President Obama’s fiscal-year budget proposal for 2017 requests $35.6 million for the MBDA to expand its services and assistance to the nation’s 8 million minority businesses. This is an increase of $3.6 million over FY 2016 appropriations.
As the country’s population becomes more diverse, so too does its business sector. Latino-owned companies continue to boom, and firms owned by people from South Asia (India, Pakistan and Bangladesh) and East Asia (China, Korea, Japan and other Pacific Rim countries) are also expanding like never before. Black entrepreneurs are also thriving.
A recent Biz2Credit survey of more than 1,500 minority business owners from across the country in late March and early April asked for their opinions about the economy overall and their own prospects for success in 2016. The sample included Hispanics (59.9 percent), South Asians (19 percent), African Americans (14 percent) and East Asians (7.1 percent).
The gender breakdown was 78.3 percent male and 21.7 percent female. More than half of the respondents owned companies that were in business for two years or less. Greater than two-thirds of them were sole proprietorships or LLCs.
How confident are you on the 12-month outlookfor the US economy?
The survey revealed that, surprisingly, most minority executives are positive about the direction of the U.S. economy, believing it will maintain its current expansion (38.3 percent) or grow faster than before (21.9 percent). Only 13.1 percent of these individuals believe another recession is on the horizon.
How confident are you on the future health ofyour business?
The respondents were even more confident about the health of their companies; more than three-quarters were somewhat confident or very confident in their upcoming prospects. Over half (57.5 percent) of them said they were very confident about the future health of their business, while nearly 1 in 5 (19.3 percent) were somewhat confident. Only 7.2 percent of the responses were pessimistic about their companies’ chances of success in the coming year.
What are the top challenges facing yourbusiness this year?
When asked about the challenges they faced, most of the worries were financial. The biggest concern was not being able to acquire adequate funding (36.3 percent).
Performance naturally played a role in the availability of capital. In September 2015, Biz2Credit conducted a study that showed Latino small-business loan applications grew 18 percent, yet their owners lag behind in the necessary factors needed to secure financing, such as annual revenue, age of business and credit scores.
The average annual revenue for Latino-owned businesses was $68,540, trailing the average annual revenue of $70,641 for non-Latino companies the year prior. The average age of Latino businesses was younger, at 22 months vs. 25 months, for non-Latino firms. Meanwhile, the average credit score for Latino-owned businesses applying for loans was 603, compared to 614 for all others.
Our research shows that for years, minority entrepreneurs have had a tougher time securing capital than other groups.
When looking to launch businesses, they often faced tighter lending standards and had to visit multiple banks to find willing lenders. Technology has helped level the playing field and made the process easier. Visiting banks required having to overcome language barriers, cultural issues and potential biases. By applying for loans online, Latinos, Asians and African Americans can let their performance speak for them when they submit online funding requests.
The good news is that lenders have opened the spigot in the past few years, and more capital is flowing to companies than it did during the Great Recession. Many lenders are in the game: big banks ($10 billion-plus in assets), smaller, regional banks, credit unions, alternative lenders and, increasingly, institutional investors who buy loans on marketplace lending platforms.
Borrowers, bolstered by solid post-session performances and enticed by record-low interest rates, have begun to have an easier time securing financing. According to the most recent Biz2Credit Small Business Lending Index, big banks are granting a higher percentage of loan requests than at any time since the mid 2000s.
Further, institutional investors in search of high-yield investment vehicles are increasingly doing small-business finance deals and have become important players in the small-business credit marketplace during the past two years.
Maintaining profitability was a concern for 15.2 percent of respondents. It is the most important thing for any business, regardless of the ethnicity of the owner. Many of the company owners who participated in the study have been operating three years or less. The early years are often a trial-and-error period. We have seen a boom in minority-owned businesses, particularly in the Latino and immigrant communities. By nature, immigrants are risk-takers. They are optimistic and committed to succeed. For them failure is not an option.
Growing revenues was the biggest worry of 11.4 percent of the business owners surveyed. Other concerns included not having enough skilled workers, high health-care costs, labor turnover, taxes and regulation.
What strategies are you planning to use togrow your business over the next 12 months?
So how do minority small-business owners plan to prosper and grow their companies?
Our research reveals that many are focusing on using the internet to help expand their enterprises. They also plan to increase capital spending, hire more workers and expand their facilities. These activities require infusions of cash.
Fortunately, the SBA has numerous programs in place to help minority-owned businesses and companies that are started in economic empowerment zones. Micro-lenders, often not-for-profit, have a mission to provide funding to minority entrepreneurs. Additionally, it has not hurt that the overall U.S. economy has been on a slow but steady rebound. After a near shutdown of small-business lending during the Great Recession, banks and others have opened up the vaults again.
We really should not be surprised by the optimism reported by minority business owners. Interest rates remain low, unemployment hovers around 5 percent, jobs are being added to the economy, and low gas prices have cut the cost of doing business. Among the industries that are doing well are the construction and hospitality sectors, along with travel/transportation and logistics/trucking, which both benefit from low oil and gasoline prices. Logistics firms, in particular, are thriving because of the changes in consumer spending; shoppers are buying products online and having them shipped.
As the baby boomers — the oldest of whom will turn 70 this year — begin to retire, they often sell their businesses to a younger generation that is more diverse than ever before. They tend to be optimistic, confident and enthusiastic about buying and expanding businesses.
By Rohit Arora, CEO and co-founder of Biz2Credit, a leading online marketplace that connects entrepreneurs with small-business loan options