Black-owned firms are still feeling the credit crunch post Great Recession as banks, still burned by the failed sub-prime market have made lending requirements harder for businesses and individuals. Larger banks are feeling the regulatory squeeze from the Dodd Frank Wall Street Reform Act as well as the potential for increased capital reserve requirements coming out of Basel III. Increased capital requirements may increase the cost of borrowing as fewer funds are available for borrowing and if you want access to those funds, paying a higher interest rate may be among the conditions for loan approval.
Along with the financial consequences of the recession are the usual historical biases that black-owned businesses have been confronting for decades. Black-owned businesses suffer from deficiencies in the amount of capital injected into a firm during its formative years. This deficiency stems in part from the lack of personal wealth that could be used to finance a firm, a problem some white-owned firms may not have given, on average, their relatively greater personal wealth.
Access to external sources of financing, like bank loans, play a crucial role in the continuing operations of firms, especially where there is a lack of personal wealth that can be used as collateral to secure financing. In addition, minority entrepreneurs tend to face higher borrowing costs, smaller loan amounts, or greater loan application denials than their white counterparts. For this reason there is a greater reliance on the part of black entrepreneurs to rely on their owner equity as opposed to their white counterparts.
As Dane Stangler noted in an article for Forbes Magazine, capitalization provides a buffer against the liabilities of newness for young businesses. As they continue to move through their growth cycles, access to adequate capital continues to sustain them. As Mr. Stangler further notes, minority businesses are geographically concentrated in minority neighborhoods meaning that they play a crucial role in stimulating employment in these communities. If they don’t grow, their communities will not grow.
How then can capital constrained firms circumvent the barriers to capital? One way, according to Kollective Mobile chief executive officer Sian Morson, is to be visible. “Visibility leads to capital”, Ms. Morson said during an interview with Politic365.com. The emphasis should be on the community’s need and ability to fund its own businesses, Ms. Morson added.
One significant source of additional capital for growing black-owned firms will come from the revenues they generate and building on the premise of visibility, Kollective Mobile has developed a mobile app called Around the Way that locates the nearest black-owned businesses. The app uses built-in GPS to find a smartphone user’s location and plot the black-owned businesses on the map around the app user. Making it easier for the consumer to find these businesses and buy product and services there not only provides necessary capital but generates a multiplier or ripple effect through a community, a ripple effect that can generate increased output and create jobs.
At the end of the day we have the capital, said Ms. Morson. We now have to be more creative in how we leverage it in order to grow our businesses and our communities.