The Troubling Reality of Capital Limitations Faced by MBEs

The Troubling Reality of Capital Limitations Faced by MBEs

1Congressional Briefing

Cannon HOBMarch 9, 2010

U.S. Department of Commerce Minority Business Development Agency

Disparities in Capital Access between Minority and Non-Minority Businesses:

Major Findings

• Disparities in Capital Access Regardless of Firm Size

• Disparities in Capital Grow with Time

• MBEs are Good Investment Opportunities

• Minority Firms Grew Faster, but Are Smaller

• Strong Job Creation

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Barriers to Capital Access

• Financial Constraints – Lower Asset Levels

• Lending Discrimination• Other Discrimination

– Penetrating Networks– Consumer or Other Firms Discrimination

• Human Capital – Lower Education Level and Language Skill

• Business Ownership Experience and Family Background• Limited Social Networks• Industry Sectors and Geographic Locations (New

analysis)

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Current Financial Crisis

• Lower Housing Equity Values• Lower Stock Market• Lower Investment Deals and Investment

Amounts• Higher Business Bankruptcies• Numerous Bank Failures

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Lower Housing Price Index

Figure 1Quarterly Housing Price Index, Federal Housing Finance Agency

180.00

190.00

200.00

210.00

220.00

230.00

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Lower Number and Amount of VC Deals

Figure 3Venture Capital Deals, PricewaterhouseCoopers/National Venture Capital

Association MoneyTree Report

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

$8,000,000,000

$9,000,000,000

2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 2008-3 2008-4 2009-1

0

200

400

600

800

1000

1200

Amount of Deals

Number of Deals

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Higher Business Bankruptcies Filings

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Figure 4Total Business Bankruptcy Filings

Administrative Office of the U.S. Courts

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

New Analysis

• Inadequate Capital Access continues to be an important constraint to the growth of minority business.– Lower Loan and Equity Amounts– Higher fear of loan rejection and denial rates– Higher interest rates

• Differences in Capital Access Regardless of Firm Size

• Differences in Capital Grow with time.

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Higher Loan Denial Rates and Rejection FearsLoan Denial Rates

41.9%

8.4%

14.9%16.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Fear of Rejection

33.4%

18.8%17.4%12.2%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Higher Loan Interest Rates

Loan Interest Rates

6.2% 5.9%

9.1%

6.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Lower Percentage of Firms Receiving Loan and Equity Investments

Percent of Firms Receiving Loans

17%

41%

23%

52%

0%

10%

20%

30%

40%

50%

60%

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Percent of Firms Receiving Equity Investments

5.4%5.5%6.1%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Lower Loan Size and Equity InvestmentsAverage Loan Size

$9,261

$149,354

$20,482

$310,232

$0

$50,000$100,000

$150,000

$200,000

$250,000$300,000

$350,000

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Average Equity Investments

$19,377

$1,969

$7,274

$2,747

$0

$5,000

$10,000

$15,000

$20,000

$25,000

under $500,000 $500,000 +

Firm Size

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Survey of Small Business Finances (2003)

Disparities in Capital Access Grow After First Year in Operations

Total Financing Capital

$74,017

$29,447$45,627

$90,391

$0

$20,000

$40,000

$60,000

$80,000

$100,000

Startup Capital (2004) Subsequent Capital (2005-2007)

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Kauffman Firms Survey (2004-2007).

Competitive Returns on Equity Investments

• Venture Capital Funds Focused on Minority-Owned Firm Investments are Competitive - Venture capital funds focused on investing in minority-owned firms provide returns that are comparable to mainstream venture capital firms. Funds investing in minority businesses may provide attractive returns because the market is underserved.

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses Source: Timothy Bates and William D. Bradford, "Venture-Capital Investment in Minority Business," Journal of Money Credit and Banking 40, no. 2-3 (2008): 489-504

Overview of the State of MBEs

• Minority-Owned Firms Outpace Growth of Non-Minority Firms

Growth Rates, 1997 - 2002

30%

12%

4%

21%

6% 4%8%

-7%-10%-5%0%5%

10%15%20%25%30%35%

Number of Firms Gross Receipts Employment Payroll

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned BusinessesSource: U.S. Census Bureau’s 2002 Economic Census

• Minority-Owned Firms Lag Behind in Size Compared with Non-Minority Firms

Average Firm Size, 2002

$200,000

$333,000

$167,000

$439,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

Average Receipts Average Payroll

Minority Firms

Non-Minority Firms

Disparities in Capital Access between Minority and Non-Minority-Owned BusinessesSource: U.S. Census Bureau’s 2002 Economic Census

• MBEs Have Fewer Employees on Average Compared to Non-Minority Firms

Average Employment Size, 2002

7.4

11.2

0

2

4

6

8

10

12

Minority Firms Non-Minority Firms

Nu

mb

er o

f E

mp

loye

es

Disparities in Capital Access between Minority and Non-Minority-Owned BusinessesSource: U.S. Census Bureau’s 2002 Economic Census

• Average Payroll per Employee for MBEs and Non-MBEs about the Same

Group of FirmsAverage Payroll per Employee, 2002

Native American $26,848

Asian $25,352

Hispanic $23,888

African American $23,277

Non-Minority Firms $29,842

Disparities in Capital Access between Minority and Non-Minority-Owned BusinessesSource: U.S. Census Bureau’s 2002 Economic Census

Group of Firms

Employment Growth

1997-2002

Asian 2%

African American 5%

Hispanic 11%

Minority Firms 4%

Non-Minority Firms -7%

Disparities in Capital Access between Minority and Non-Minority-Owned BusinessesSource: U.S. Census Bureau’s 1997 and 2002 Economic Census

• Employment Grows During 2001 Recession

New Analysis

• Young MBEs Create Jobs at Similar Rates Compared to Young Non-Minority Firms

Total Financing 2004-2007

Net Employment Creation by

2007Financing per Job

Minority $162,358 3.1 $52,374Non-Minority $227,272 2.4 $95,492Total $214,338 2.5 $85,055

Appendix Table 11Financing per Job Created among Young Firms

Kauffman Firm Survey (2004-07)

Source: Kauffman Firm Survey 2004-07.

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

Major Findings

• Disparities in Capital Access Regardless of Firm Size

• Disparities in Capital Grow with Time

• MBEs are Good Investment Opportunities

• Minority Firms Grew Faster, but Are Smaller

• Strong Job Creation

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses

22

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