Land of Opportunity and Challenges
Ask small-business owners what holds them back, and chances are they’ll say lack of capital. Minority-owned businesses in low- and moderate-income areas feel the credit pinch most acutely.
Yet more capital is available than ever before. Banks are handing out more small loans, alternative funds are springing up to lend to borrowers that fall below the banks’ radar, and political and community leaders--President Clinton among them--are pushing for equity financing for small and minority businesses.
So why the disconnect? Despite easier access to business capital in this strong economy, enough money isn’t getting into the hands of enterprises whose growth could help turn around neglected neighborhoods.
According to the most recent figures, Wells Fargo Bank tallied an eye-popping $1.87 billion in loans under $1 million in Southern California in 1997 to 53,838 applicants. Union Bank of California lent $1.07 billion to 5,737 small borrowers. Bank of America followed with $890 million to 23,313 borrowers.
The Small Business Administration, too, is boasting record activity. As of July 30, the Los Angeles district had guaranteed 1,923 loans for $579.3 million. Fully 53%, or 1,010 of those--for $269 million--went to minority entrepreneurs.
And alternative lenders--nonprofits and government-backed loan funds crafted to
Please see Financing, Page 27
serve neglected entrepreneurs--are more numerous than ever. In Los Angeles County alone, there are more than 40 such loan programs.
So what is wrong with this picture?
Most of California’s alternative loan programs are sitting on an unused pot of gold. On average, the organizations surveyed for a forthcoming study co-authored by Nitin Bhatt, director of the USC Business Expansion Network, said 50% of their capital was sitting idle. Their reasons? Lack of market demand and a glut of unprepared would-be borrowers.
Small-business loans may be plentiful, but start-up financing for the nation’s smallest businesses is still difficult to obtain because most lenders shun entrepreneurs with no track record. And the Greenlining Institute--a San Francisco-based community rights organization--argues that big banks still cherry-pick the least risky borrowers rather than serve the neediest neighborhoods.
Perception is a big part of the problem: A Greenlining study late last year showed that minority entrepreneurs in Watts and Santa Ana were so convinced that banks would slam the door on them, they didn’t even bother knocking. Fully three-fourths of those surveyed had not applied for loans or lines of credit, believing erroneously that banks could not serve their needs or would discriminate against them.
Clearly, availability of credit has neither solved the problem of minority business development nor reversed perceptions of inequity.
That disappointing fact has recently dawned on policymakers, who have noted that equity, not credit, built today’s booming enterprises. As long as minority entrepreneurs in needy areas lack equity financing, they will remain small, perpetuating the nation’s stubborn wealth gap, the reasoning goes.
The cheerleading squad for equity investment in minority-owned business includes Clinton, Housing and Urban Development Secretary Andrew Cuomo, SBA Administrator Aida Alvarez and the Santa Monica-based Milken Institute. In July, Clinton unveiled the nation’s first venture capital company targeting small businesses in low- and moderate-income areas, and his proposed budget calls for more such firms.
But pragmatists are rolling their eyes. Everyone agrees that equity investment could do a lot to strengthen small businesses, most of which need a combination of debt and equity to grow. But the danger is in a simplified solution.
The hurdles are complex. If alternative loan funds are having trouble finding credit-worthy borrowers, the chances that investors will fill the void are dimmer still. And, traditionally, venture capital has helped only the cream of the crop.
What is needed instead is a lot of technical training to ready entrepreneurs for financing so they grow once they get it. An expansion loan to a business that lacks proper accounting procedures could push it into the grave. In addition, more educating needs to be done to point isolated entrepreneurs to the myriad loan opportunities that already exist.
The SBA and the city of Los Angeles’ Minority Business Opportunity Committee are taking steps there. After years of planning, the partners are launching a One Stop Capital Shop out of the Watts Civic Center. The shop will help match potential borrowers with lenders and will direct entrepreneurs who aren’t quite ready for a loan to business assistance centers. USC’s Business Expansion Network already does something similar for its clients, electronically culling through the dozens of existing programs for the best match.
Rallying investors willing to take a chance on the many booming minority enterprises should be just part of the strategy. But problems that have kept many entrepreneurs away from available capital must also be addressed.
