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Aron Betru
Managing Director, Center for Financial Markets
Africa and Capital Access and Emerging and Frontier Markets and Finance and Financial Innovations and FinTech and Impact Investing and Sustainable Development
Aron Betru is managing director of the Center for Financial Markets at the Milken Institute, where he leads strategic initiatives focused on expanding and leveraging resources to enhance social impact. Prior to joining the Institute, Betru was co-founder and CEO of Financing for Development, where he pioneered ways to leverage...
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Kevin Klowden
Executive Director, California Center and Managing Economist
California and Entertainment & Sports and Global Economy and Regional Economics and Technology
Kevin Klowden is the executive director of the Milken Institute’s California Center and a managing economist at the Institute. He specializes in the study of demographic and spatial factors (the distribution of resources, business locations, and movement of labor) and how these are influenced by public policy and in turn...
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The First and Most Important Step for Any Community is Getting Its Members Back to Work

By: Aron Betru and Kevin Klowden
April 26, 2017
   
   

If we want to improve lives in minority communities in American cities, we should start with jobs. African-American and Hispanic households’ median wealth (when consumer durable goods are excluded) has dropped over the past thirty years from $6,800 and $4,000 in 1983 to $1,700 and $2,000 in 2013, respectively. A study by the Institute for Policy Studies and CFED puts the ever-growing divide in stark terms: it would take black families over 200 years and Hispanics over 80 years to catch up to white families in the U.S.

Unfortunately, a key source of the problem lies in the vast network of inequalities and obstacles that dampen one of the most powerful engines of wealth creation in the United States – namely, small businesses, and particularly minority-owned small businesses. One of our most effective tools to fight crime, violence, and despair, and encourage opportunity and neighborhood stability, has been neglected and left to rust.

Small businesses contribute most of the job growth and income in the U.S., but minority-owned small businesses have a much harder time starting up, growing, and surviving than non-minority small businesses. The result is minority-owned small businesses grow and hire less than non-minority small businesses; white-owned firms have double ($2.38 million) the average sales of Asian ($1.19 million), Hispanic ($1.12 million), and black-owned ($0.91 million) businesses as reported by the Kauffman Foundation.

One critical component to success is access to capital. Without access to capital, small businesses face dramatically increased likelihood of closure. Unfortunately, this is often most true in the cities and towns that need it the most, creating a wide swath of underserved communities that are left behind.

Nationally, after personal/family savings of owner(s) at 65%, the second largest source of capital to start or acquire a business is a business loan from a bank or financial institution at 18%, according to 2007 and 2012 surveys of Business Owners and the 2014 Annual Survey of Entrepreneurs. However, given historical redlining, minorities have had to find other sources. For both Hispanic-owned and African-American-owned businesses, credit cards are the second most used source of startup capital at 21% and 25.6%, which is significantly more costly. Businesses that are not adequately capitalized are more likely to fail. Furthermore, with black-owned businesses being overrepresented in less-successful industries (for example, in the personal services industry), as well as entrepreneurs of color starting their businesses with less capital than their white counterparts, black- and Hispanic-owned businesses have higher failure rates than white-owned firms, also reported by the Kauffman Foundation.

To pile it on even more, after the 2008 U.S. housing collapse, traditional avenues used to obtain credit collapsed. Small businesses, in particular, experienced dramatic financing constraints, given the fact that a number of small businesses were dependent on real estate as a source of collateral for financing small business growth (e.g. through the use of home equity loans). Furthermore, although the effect was systemic, the minority community was hit the hardest. African-American and Hispanic communities, for instance, saw more than half (53% and 66% respectively) of their net worth wiped out, and in some zip codes, minority home values declined by more than double that of other communities. This not only eviscerated collateral values, but due to foreclosures and bankruptcies, minority credit scores experienced sharp declines. Worsened by both social biases and other deficiencies in small business lending, minorities experienced the sharpest decline in small business access to credit. As one important indication of the severe credit constraints from 2007 to 2012, U.S. Small Business Administration (SBA) loan approvals to African-American-owned small businesses decreased by 91 percent.

The federal government actually has a lot of programs that can help. Between the SBA’s Community Advantage Loan Program, Treasury’s Community Development Financial Institutions Fund (CDFI Fund), and the Department of Agriculture’s Office of Small and Disadvantaged Business Utilization, there is potential to mobilize resources that drive job creation and economic growth especially in minority communities throughout the country. That is why the Milken Institute, in collaboration with the SBA, formed the Partnership for Lending in Underserved Markets (PLUM) – a two-year pilot program focused on developing actionable solutions, with both the public and private sectors, to address long-standing structural problems that inhibit minority-owned small businesses from accessing capital and growing their operations.

With more effective access to capital for minority-owned small businesses, there will be more jobs in minority communities, more income leading to more wealth, and likely, greater prosperity in the very communities that need it the most. With loan programs, guarantee funds, and technical assistance training to put jobs, income, and wealth within reach, let’s sit back and watch these communities build their own American dreams.