Minority entrepreneurs face extra hurdles in quest for start-up cash
Shariah Brown launched Personal Touch Cleaning Service 11 years ago with two people and a $40,000 loan taken out on the equity in her home.
Today her Harrisburg-based business employs up to 30 people throughout the year, serving commercial, construction and residential customers, and Brown said her target is to do $1 million in business in 2017.
The road to success for any small start-up is rarely smooth, and Brown — who also serves on the board of the African-American Chamber of Commerce of Central Pennsylvania — knows that the road can be extra difficult for minority entrepreneurs.
“It’s hard to get start-up capital,” Brown said. “It’s hard to make the transition from doing your job to going out on your own.”
In addition to a home equity loan, she had assistance from the Community First Fund, a non-profit agency that provides capital for low-income communities and individuals, especially people of color and women. The agency serves 13 central and eastern Pennsylvania counties, including the Capital Region.
“It’s hard to get start-up capital for any business, because of the risky nature,” said Community First Fund president and CEO Dan Betancourt. “In general, start-up capital is difficult to obtain even for a seasoned business owner.”
Arthur Gimenez sees similar challenges in and around the state’s largest city, where he serves as director of capital lending at The Enterprise Center. The Philadelphia-based organization provides access to capital, business education and economic development opportunities for minority entrepreneurs.
“A lot of lenders are very conservative,” Gimenez said, an attitude that puts startups at a competitive disadvantage when it comes to seeking funds from traditional sources, such as big-name banks.
Hurdles unique for African Americans
People of color face added hurdles, rooted in decades of discrimination that limited access to education, good-paying jobs and advancement in the workplace. As a result, many African American families do not have access to savings and investments that are key to economic advancement.
The median wealth level of white households is 20 times that of African American households, Gimenez said, citing research by the Center for Global Policy Solutions, a Washington, D.C.-based think tank.
Moreover, African Americans are nearly three times less likely to have a bank account than the general population, the center’s statistics show, while homeownership among African Americans is just below 44 percent, compared with 73.5 percent among whites.
Those factors reinforce institutional discrimination, Gimenez said, in which the system continues to work against minority borrowers, though not necessarily in a conscious way.
“It’s not that they’re intentionally denying the loans because of race,” he said.
“They look at things like, ‘Do you have a house? Do you have a car? Does anyone else in your household have a job? What’s your educational level,’” Gimenez added. “And a lot of people get denied based on those things.”
And African Americans looking to start a business “may not have a rich aunt or uncle to borrow from” if they get turned down by a bank, Gimenez said.
That’s because people of color have not accumulated the same level of wealth as their white counterparts, Betancourt said, citing past discrimination as a cause. The G.I. Bill, for example — the post-World War II program that provided mortgages, business loans and college tuition for returning veterans — discriminated against blacks, he noted. So while white veterans were purchasing homes and advancing their education and careers, which helped them build wealth to pass down to succeeding generations, black families could not.
A related consequence has been that black families lack the same business experience to pass down, which denies prospective entrepreneurs another resource needed to make a successful start.
Think like an entrepreneur
Brown cautioned would-be entrepreneurs that they shouldn’t expect to secure a business loan without some capital of their own to start with, but she also knows that’s easier said than done.
She and the chamber often talk with businesspeople about learning to think like an entrepreneur before they become one, such as looking for ways to generate extra income, including taking an extra job to raise some capital.
“You have to put some skin in the game,” Brown said. “You have to be able to save up a bit of your own money before you go to the bank.”
The chamber offers networking events to bring together African American members and industry leaders who are interested in doing business with the community, and hosts speakers who address issues of interest to small-business owners, such as banking and finance.
Organizations like Community First Fund and The Enterprise Center, meanwhile, provide loans to minority borrowers.
In Philadelphia, The Enterprise Center has a portfolio of about $3 million in loans. Its funds come from the U.S. Small Business Administration, but Gimenez and his staff govern loan decisions. Many loans are in the $40,000 range, he said. The startups served include many neighborhood businesses, such as corner stores, restaurants, hair salons, cleaning services, day care centers and home health care.
Community First Fund, meanwhile, has built up a $50 million portfolio, Betancourt said. It made $12 million in loans last year, many in the $80,000 to $90,000 range.
While the SBA, charitable foundations, religious groups and individual donors all contribute, banks make up one-third of the investors in Community First Fund.
“All of the regional banks participate,” Betancourt said.
That may seem ironic, given how difficult it can be for borrowers to secure loans directly from banks. But the institutions have an incentive to support groups that provide those loans, he explained, through the federal Community Reinvestment Act (CRA).
The law encourages banks to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, in a manner consistent with sound lending practices. So banks are not required to make risky loans under the program, but they are graded by federal examiners on how well they meet community lending goals — and they can face sanctions for not doing so, such as limitations on new branches and other expansion requests. Investing in programs like Community First Fund earns them CRA credits, Betancourt said.
On the lending end, Betancourt said flexibility in setting lending rules gives the group the ability to “look behind the story.” Potential borrowers who might not meet a bank’s standards aren’t necessarily risky, but may need some guidance on effective use of credit, he explained.
The result has been the creation of new business owners across a diverse range of fields: bakeries, restaurants, light manufacturing, limousine operators, to name a few.
“When people come to us, they have a plan, they’ve done the hard work,” Betancourt said. “They just need a chance, an opportunity to present their story.”