May 26, 2020  
 
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Minority Funding

 

The Case for Minority Business Funding

Should minority business entrepreneurs get special treatment? There are some who object to the idea of offering funding that is exclusively available to minorities, but the case for minority business funding remains strong.

Minority owned business funding is a controversial topic in some business circles.
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The argument is that commercial lending should be dominated by free market practices and across-the-board lending criteria rather than preferences for minorities.

The irony is that no one disputes the fact that objective lending criteria should be applied to all entrepreneurs, regardless of their race. In fact, it's a misconception that minority businesses are subject to less stringent lending criteria than their non-minority peers. Banks and other lending institutions are adamant about the fact that every business must qualify for financing according to the same set of criteria.

However, there are other benefits associated with minority business funding. In addition to bank lending, additional funding for minority businesses is made available through the government and nongovernmental organizations. These organizations exist to help minority-owned companies access financing–and despite the objections of a few, there are still plenty of valid reasons for doing so.

  • Minority business growth. For many years now, minority-owned businesses have grown at a rate that surpasses the growth rate of all businesses combined. In recent years, minority companies have outpaced the growth of the business marketplace by rate of 6 to 1. Additionally, minority-owned businesses have historically reported sales that are twice as high as the rest of the marketplace. To sustain this level of growth, minority-owned businesses need access to capital.
  • Lack of equity. Despite their noteworthy growth rates, minority owned businesses only receive 2% of private equity investments and 3% of SBIC (small business investment company) funds. This lack of funding equity has the effect of limiting employment and stifling growth in minority businesses.
  • Labor mismatch. Minority owned businesses find themselves in the unique position of being engines for job creation while at the same time lacking the access to capital that is necessary for additional hiring. This disparity makes it very difficult for these companies and for the economy as a whole to maintain adequate growth and economic prosperity.
  • Disproportionate minority ownership. If access to capital were truly a level playing field, you would expect the percentage of minority owned businesses to mirror national demographics. Yet there are dramatic inconsistencies between the two. For example, in 2000 African Americans represented 12.5% of the population, but only 3.6% of firms. Latinos and Asian-Americans suffer from similar inequalities.

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