Moderated by Rick Badie
Women and minorities face tougher hurdles when it comes to start-up capital and financing, according to research commissioned by the Small Business Administration’s Office of Advocacy. Today, the researcher explains her findings, while the Georgia district SBA director outlines what that agency does to level the playing field. And we learn about “angel investors.”
SBA programs help level playing field
By Terri L. Denison
One of the biggest challenges small businesses experience is access to capital. Historically, this has been particularly true for businesses started and owned by African-Americans, Hispanics and women. Many studies associate this disparity in business lending with factors such as lower median household incomes and assets, reduced likelihood of entrepreneurial knowledge and experience through family-owned businesses, and lower credit scores and profiles. During the Great Recession, these groups were disproportionately affected by tightened credit standards of commercial lenders and negative hits to individuals’ credit profiles.
Along with lack of business capital, other reasons small businesses fail include non-viable or unsustainable business concepts, underestimating competitors in the marketplace, ineffective marketing, and inadequate operating and management systems. Many experts contend these issues are more prevalent among minority- and women-owned businesses along with start-up businesses. The U.S. Small Business Administration (SBA) has programs and resources that can address some of these issues and contribute toward “leveling the playing field” for businesses in traditionally underserved populations.
An important step to facilitate obtaining capital, as well as to increase long-term success rates, is starting with a feasible business concept and plan. Education and assistance on how to prepare and present loan requests are also important. The SBA offers one-on-one counseling and education through our resource partners: Small Business Development Centers, Women Business Centers and SCORE (Service Corps of Retired Executives).
Working with these and similar business resource entities can assist prospective business owners early in the process if they have a workable business idea. For prospective and existing business owners, these resources can assist with loan application preparation. Such pre-loan education and assistance can also help reduce the apprehension that may discourage minorities and women from applying for commercial loans.
The U.S. Department of Commerce and the SBA have conducted studies that indicate the importance of lower-dollar loans to small-business formation and growth in underserved communities. The SBA’s microloan program allows approved nonprofit organizations to provide loans of up to $50,000, along with crucial pre- and post-loan technical assistance.
The SBA’s Small Loan Advantage (SLA) Program seeks to increase the number of these crucial smaller loans. For loans of up to $350,000, this program offers the borrower and commercial lender a streamlined guaranty application process based on the SBA’s preliminary review of the proposed deal. SLA loans, along with the SBA’s other loan guaranty programs, can be an important bridge for business owners in underserved markets.
For decades, minorities and women have started businesses at higher rates than the general population. To be competitive in a global economy, it is important to continue supporting not only these start-up companies, but also their expansion and long-term success. The economic well-being of our city, state and country depends on it.
Terri L. Denison is district director for the Georgia office of the U.S. Small Business Administration.
Women, minorities lack start-up capital
By Alicia Robb
The availability of capital is crucial for the start-up, survival and growth of small businesses. One of my recent studies investigated how young small firms were financed during the financial environment of the Great Recession, especially high-tech firms and firms owned by women and minorities.
The major constraint limiting the growth, expansion and creation of small firms — especially women- and minority-owned businesses — is inadequate capital. These small firms typically have almost no access to funds from public markets and are bank-dependent. Though they may have high growth potential, they have little or no collateral and lack an extensive history from which future firm or management performance can be surmised. Bank lending is also limited by regulatory changes that tighten capital requirements and bank capital crunches.
Women entrepreneurs have even less access to financial capital — or make less use of it — than male entrepreneurs. The characteristics of women-owned firms may help explain why women get smaller loans, pay higher interest rates, must put up more collateral and are dissatisfied with the bank loan process. For instance, banks don’t favor younger and smaller businesses, as women-owned businesses typically are.
On the equity side, women typically have limited social interaction with venture capital firms and are underrepresented among fast-growth and high-tech businesses. They also rely more on informal funding methods and self-financing.
For many minorities, starting out at lower wealth levels also acts as a barrier to entrepreneurship.
Women and minority entrepreneurs can improve their companies’ economic performance, however. Targeted initiatives that provide skill development and training; encourage enrollment in science, technology, engineering and math disciplines; and develop and expand networks can help them access resources.
Our research showed that high-tech firms attracted higher levels of financial capital. They depended more on formal debt financing than similar, non-high-tech firms did.
Businesses owned by women, African-Americans and Hispanics showed similar disparities in capital structure as opposed to firms owned by men and non-minorities. They used a different mix of equity and debt capital and relied more on owner-equity investments. The average woman- or minority-owned business operated with much less financial capital, even after controlling for other factors including credit score.
During the financial crisis, women and minority start-up entrepreneurs were less likely to apply for loans, fearing denial. The research controlled for some characteristics that likely affected bank borrowing, such as credit score and business type. The evidence showed that, compared with non-minority owners, minority owners of young firms were significantly less likely to have their loan applications approved.
Our study used data from the Kauffman Firm Survey, a cohort of businesses that began operations in 2004 and were followed through 2010. View the report at http://1.usa.gov/YVn0k4.
Alicia Robb is a senior fellow at the Ewing Marion Kauffman Foundation.
Angels invest in Atlanta
By Mike Eckert
Angel investors are the wellspring of the American entrepreneurial economy. This displays itself in the Atlanta metro area, which has one of the most active entrepreneurial start-up ecosystems in America. This ecosystem is a continuum that evolves from the conception of early stage/start-up companies to their receiving funding.
Atlanta’s ecosystem begins with “entrepreneurial assets.” These are start-up concepts and ideas germinated by entrepreneurs of all ages and backgrounds, and by professors and students at colleges and universities that include Emory, Georgia State, Georgia Tech, Kennesaw State and the Savannah College of Art and Design.
The next stage of the ecosystem consists of enablers. These are the various entities throughout Atlanta that help the entrepreneurial assets shape business plans that will help them become fundable companies. Among the Atlanta enablers are the Advanced Technology Development Center (ATDC); The Atlanta Tech Village; Emory University programs; Georgia Tech’s Business Plan competition, Flashpoint program and VentureLab; the Georgia Tech-Emory TI:GER program; the HBS Venture Competition; The Hub; Hypepotamus; 151 Locust; the TAG GRA Business Launch Competition; and the TiE organization.
The next step is where angel investors come in. It is very difficult and competitive for start-up entrepreneurs to obtain funding, particularly in today’s economy, primarily because of the very high risk and uncertainty related to an early and unproven company. Banks won’t lend money to such companies. Venture capital firms generally don’t invest at this early stage. Money from friends and family can only go so far. So, angel investors are the primary sources of capital for start-ups.
Angel investors are high net-worth individuals who risk their own money in early-stage companies. Without angels, start-up companies don’t get funded and don’t get started. New jobs don’t get created. Since 1990, 75 percent to 80 percent of new jobs in America have been created by small businesses. Angel investors are the primary source of their funding.
Atlanta is fortunate. Beyond having an ecosystem composed of a robust number of entrepreneurial assets and enablers, it has a strong angel investing base. The Atlanta Technology Angels is one of the larger and more active angel groups in America. New groups are being formed to invest in digital media start-ups; suburban angel groups are in nascent development stages, and a new women-only angel group was recently formed.
Entrepreneurial assets, enablers and angel investors comprise the continuum of job creation in America and Atlanta, and the latter makes it all happen.
Mike Eckert, former CEO of The Weather Channel, is chairman of Atlanta Technology Angels and vice chairman of the national Angel Capital Association.