Obstacles To Starting A Minority Business Essay

, Research Paper

Running Head: Obstacles to Starting a Minority Business

Adult Development & Life Assessment Module # 1

Obstacles to Starting a Minority Business

Facilitator:

Obstacles to Starting a Minority Business

The minority population will grow to nearly 50% over the next 50 years. They now represent 26% of the total United States population. By the year 2050, the population of the United States will have increased by 120 million with 90% of the growth occurring in the minority communities (Edwards, 1997). In the following paragraphs, I will discuss the obstacles minorities face in starting their own businesses. I will also apply the concepts used in Kolb.s model of analytical learning. Before I can discuss the obstacles, I must first give some background information on minority owned businesses.

Minority-owned businesses have grown explosively over the past 10 years. In fact, they are growing at double the rate of all firms in the United States economy, both in numbers of new firms and total sales. Recent estimates place the number of minority-owned firms at nearly 2 million with total sales of $205 billion. Nearly 25,000 firms have sales of more than $1 million. Skill intensive areas such as finance, insurance, real estate, and business services are the fastest growing minority enterprises (Edwards, 1997).

These communities are gaining new importance as both producers and consumers of products and services. In addition, many minority communities are located in key populated areas of the country, such as New York, Los Angeles, and Houston. This has resulted in concentrated areas with changing demographics and a rapidly growing minority business infrastructure. This has also presented a myriad of investment opportunities to the financial community and benefits to American consumers and businesses.

Minorities are still underrepresented in the ranks of the self-employed. Of the total self-employed, Asians (4.4%), Blacks (6%), and Hispanics (6%) are all underrepresented relative to no minority males. However, since 1960, a growing pool of educated and managerial-experienced minorities entered the labor force due an increase in college attendance. This pool of talent has reached an age cohort of 35-50 when entrepreneurial potential is at its peak (Edwards, 1997).

Why does the minority business market potential remain unrealized. There is a misconception that minority businesses are small, marginally profitable traditional business such as the .mom and pop. retail stores and personal services. In reality, the fastest growing industries are in wholesale trade, professional services, finance, insurance and real estate.

The special nature of small business financing needs places emphasis on seed capital and equity participation rather than commercial lending alone. There is a small number of venture capital, buy out and special-situation investment funds that invest in minority businesses. The geographic focus of government programs inhibits minority business development by restricting entry into mainstream markets. Increased regulation, capital restrictions, and industry consolidation in the commercial lending market has contributed to a general shift of capital funds away from depository institutions.

In trying to establish my business, I found that the lack of credit information resulted in the misperceptions of minority businesses as small, unprofitable and unfavorably located. I also found that the Small Business Administration (SBA) financing rules had constrained equity financing in small minority business and made commercial banks the least profitable industry sectors and firm sizes.

A 1999 Small Business Administration report states that minority firms across the nation account for more than $495 billion in revenues and employ 4 million workers in the United States. Yet, approximately 38,264 minority firms in Georgia still face an uphill battle when it comes to assessing capital and maintaining adequate cash flow. Researchers Eric Bonaparte, Robert Andoh, and Jennifer Horton of the University of Georgia Business Outreach Services/SBDC have reviewed the results of three separate studies completed in the last few years, and they report that the issues of capital and cash flow continue to be the primary obstacles for Georgia.s minority firms.

The surveys which polled hundreds of minority businesses all over Georgia showed that minority businesses are getting loans, but not at the same relative rate as non-minority businesses. Respondents cite developing relationships with bankers and establishing credit as their top challenges. By comparison, non-minority companies didn.t identify either of these responses as their top challenges. Employee productivity and government regulations are the significant issues for these firms. In addition, minority start-ups overwhelmingly depend on non-bank financing, (81% personal savings, 22% family, and 19.3% credit cards or some combination). In stark contrast, non-minority companies cite bank loans as their number one source of funding for starting their companies (61%). Existing minority companies continue to depend on personal savings as their primary source for financing day-to-day operations while non-minority companies leverage bank-extended credit as their main source of capital for operational expenses.