Capital Crunch for Black Businesses

Fed report reveals tightened lending standards for smaller firms

creditcardA Federal Reserve report released this week underscores the increasing difficulty that small business owners are facing in securing loans during the current economic climate. It is a reality that has both African American entrepreneurs and legislators looking for solutions.

“On average, it’s difficult for black business owners to get access to capital but when we have downturns in the economy it becomes especially hard,” says Reginald Gates, president of the Dallas Black Chamber of Commerce. Without access to capital, entrepreneurs are finding it difficult to expand and even compete for some contracts that require business owners to have a designated amount of funds ready and available to perform the work, Gates says.

The Fed’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, based on responses from 56 banks in the United States and 21 U.S. branches of foreign banks, found that about 55% of domestic banks had tightened lending standards for commercial and industrial loans in the last quarter. Likewise, 50% of survey respondents acknowledged tightening lending standards on loans made to small firms—companies with sales of less than $50 million.

The economic uncertainties being faced by small businesses has members of Congress taking notice. Even before the Fed report, Sen. John F. Kerry (D-Mass.), chairman of the Committee on Small Business and Entrepreneurship, introduced the Small Business Lending Stimulus Act in February. The bill would reduce fees for borrowers and lenders and is designed to entice banks to offer Small Business Administration-backed loans. The bill also would increase funding for microloans—loans up to a maximum of $35,000—which proportionately benefit underserved communities, including women and minorities, more than traditional loan programs, Kerry says.

“Our economy works best when our small businesses are diverse and creating jobs. Up to 60% of our banks have made it harder and more expensive to get loans and even the SBA’s lenders are pulling back, which compounds the problem because SBA loans are an important source of capital for underserved communities,” Kerry adds.

Gates agrees that legislation that makes access to capital easier, as well as laws that level the playing field between majority- and minority-owned firms, could make a difference for African American business owners. “There’s a correlation between access to capital and access to opportunities. So, certainly as black businesses access more opportunities, the hope is that it will produce more capital for them,” he says.

But in the meantime, the credit crunch means black businesses have to be even more vigilant about their finances. “Banks don’t finance dreams. They finance businesses that are likely to be successful,” says Roby S. Williams, president and CEO of the Black Business Association in Memphis, Tennessee. That means business owners will need to show that their companies have a good financial track record or a solid business plan, he says.

For smaller businesses, personal creditworthiness is more of a factor these days. “When you get to the smaller businesses, their personal money is oftentimes the same as

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