Where's the dollar?

Entrepreneur, Feb, 1999 by Cynthia E. Griffin

No matter how you view them, the numbers on start-up and growth capital available to minority-owned businesses don't look good.

The stats tell the story. According to the SBA Office of Advocacy, commercial banks are the largest single source of credit for small businesses, yet according to the Commerce Department, a surprising 40 percent of minority-owned firms with gross sales of at least $1 million never received a bank loan. And of the 60 percent who did, many were limited to SBA-guaranteed loans.

Investment capital data is no better. According to the SBA, only 5.2 percent of Small Business Investment Company (SBIC) program capital was invested in minority enterprises between October 1997 and August 1998: 1.5 percent in African-American firms, 1.45 percent in Asian subcontinent companies, 1.32 percent in Latino businesses, .91 percent in Asian/Pacific Islander enterprises and nothing in Native American firms.

So why can't minorities get the financing they need? There's no simple answer. "A lot of major banks didn't make small loans until recently, and these banks aren't familiar with the minority business community," contends Courtland Cox, director of the Minority Business Development Agency, the Commerce Department entity that promotes minority entrepreneurship. Banks and other financial institutions don't understand what minority entrepreneurs are capable of, adds Beaver.

In a 1997 meeting with bankers, minority entrepreneurs and business-development officials, the U.S. Comptroller of the Currency found a lack of full-service banks in inner cities, where the majority of minority-owned businesses are concentrated. This remains a problem, as does inadequate information on preparing loan packages. Other findings include a need for more cultural diversity among lenders and recognition that minority firms sometimes have difficulty demonstrating multiple repayment sources.

Establishing a credit history is also a major impediment, says Au Allen. "Whenever you go to a bank for a loan, they want verification of credit, but many [minorities] don't understand this," she adds. This is particularly true in immigrant communities, where paying cash is the rule of thumb. Additional problems include banking mergers and regentrification efforts that bypass minority firms.

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SILVER LINING

Despite difficulties, there have been improvements. Some changes are being generated by the SBA, which in 1998 pledged to increase lending to Latinos by $2.5 billion and to double guaranteed loans to African Americans to 3,900 by fiscal year 2000. There have been other positive developments as well:

* Wells Fargo Bank has committed to lending $1 billion to Latino firms and the same amount to African-American firms.

* AT&T contributed $1.2 million last July to the National Minority Supplier Development Council and its Business Consortium Fund to help finance and train high-tech firms.

Investment capital is also increasing, says Bill Kirk, general counsel of the National Association of Investment Companies. In the 1970s, investment firms began targeting minorities as Minority Enterprise Small Business Investment Companies (MESBICs) and although many were owned by major corporations, they weren't staffed by people with venture capital expertise and had small capital bases. Consequently, many weren't very successful, says Kirk.

After restructuring the MESBICs during the 1980s into Specialized Small Business Investment Companies (SSBICs), and adding a new emphasis on making money, the programs began to transform the industry. The 1990s brought further evolution as some SSBIC funds spun off private equity funds, which continue to target minority firms but aren't limited to this market.

In the end, minorities, like other entrepreneurs, know capital is the fuel powering their dreams and, in order to achieve success, they must continue to fight the apathetic and sometimes ignorant attitudes expressed by financial institutions, while at the same time, strengthening their own business management skills.

RELATED ARTICLE: TREVINO MORTUARY SERVICES INC.

Name, age and ethnic origin: Genaro "Bobby" Trevino, 36, Hispanic

Based: Corpus Christi, Texas

Business history: In 1995, along with wife and co-owner Laura, Trevino launched his business using $7,500 in savings. Last June, he sought a $248,000 loan to expand the company to include a full-service funeral home. The bank, however, turned him down because it deemed his $40,000 personal investment insufficient. With assistance from the local minority business-development center and $40,000 in additional collateral from friends, Trevino applied to another bank. "I went the SBA route because I thought it would be easier for me to get the loan. But it takes perseverance," says Trevino, who had 14 years of experience in the funeral services industry, a profitable business (1997 sales were $200,000) and an impressive research package. The Trevinos received the second bank's approval and are projecting first year sales of $300,000 for the combined businesses. - C.E.G.