Financing

Another reason that minorities are less successful as business owners is because they don’t have the assets or the access to those who do have the assets needed to be successful. As seen in the infographic that is in this paper, minority businesses in total only receive 43% of the funding that non-minority businesses do. There are multiple different sources of financing for a business, and minorities trail in their ability to receive funds from all of these sources. The most common source of funding for a new business is from the entrepreneur themselves, and since minorities on average have lower annual salaries than non-minorities, prospective entrepreneurs are much less likely to have the financial resources needed to start their business. The next main source for business funding is reaching out to friends and family, and again, since minorities make much less money, friends and family are far less likely to have the money needed either. This leads to minority businesses being much more likely to go bankrupt eventually. According to Rafael Efrat, who did a study on business owners who had filed for bankruptcy, “[t]he household income of minority bankruptcy petitioners was almost a quarter less than their White counterparts in the bankruptcy sample. While minority petitioners had substantially lower household incomes, they also had significantly higher numbers of dependents to support. Similarly, minority petitioners reported significantly less ownership of capital. For example, the homeownership rate among minority petitioners was almost half the rate of that among White petitioners” (Efrat 112). This quote shows that the lower incomes of minorities has a direct impact on their ability to be successful, and is a factor in the downfall of those businesses that do fail. Minority entrepreneurs also have a much more difficult time securing outside funding as well. Bank loans are definitely the most popular form of outside business investment, and minorities have a much more difficult time successfully gaining business loans. According to a report done by Robert W. Fairlie and Alicia M. Robb for the Minority Business Development Agency, only 17% of minority-owned businesses received loans, compared to 23% of non-minority firms. This problem is accentuated even further when looking at the denial rates for loan applications. Non-minority businesses were only denied loans 16% of the time, while minority denial rates were almost triple that amount, at 42%. The problem isn’t just in being able to receive a loan though. The average monetary amount for a non-minority loan was roughly $310,000, while minority loans were less than half that amount, at about $149,000. Additionally, minorities also paid higher interest rates on the loans that they did receive, with an average rate of 7.8%, compared to only 6.4% for non-minorities. These statistics help paint the picture of a large problem. If minority entrepreneurs have fewer personal assets to use, and their families and friends also don’t have the required amounts of funding to help businesses, then the next place that they will turn to is bank loans, and as shown above, this avenue is also one that doesn’t provide them with the necessary funding to help these entrepreneurs make their business viable. According to a report done by the University of New Hampshire’s Center for Venture Research about the angel investing market, in 2014 only 24% of the businesses making pitches for angel investment were minority-owned, and only 16% of those businesses were successful in gaining funding, which is below the industry average of about a 19.2% success rate. Additionally, in the lucrative but highly exclusive world of venture capital, 87% of the entrepreneurs to receive venture capital funding are White, and 12% are Asian, leaving only roughly 1% of entrepreneurs to belong to the other, less successful minority groups. Even the minority companies that do obtain venture capital funding receive on average about ½ to 1/3 of the money that White and Asian companies receive. Fortunately, however, steps are being taken to try and fix these systematic problems. For example, there is an organization called PowerMoves that is dedicated to bringing together some of the top emerging minority entrepreneurs together for programs designed to expose them to capital and valuable business connections. Additionally, multiple different agencies in the U.S. government, like the MBDA or the Small Business Administration, and corporations like Intel, Comcast, and AOL have funds specifically designed to fund minority-owned businesses, so there are certainly steps being taken to help minority entrepreneurs overcome the financial hurdles of operating a startup.