Senate Panel Examines Capital Access Obstacles and Opportunities
The recession may be ebbing but minority-owned businesses are still caught in the grip of an unrelenting credit crunch. They are twice as likely to be denied a loan and twice as likely to not even apply for one because they fear they’ll be rejected. When they are approved, they pay higher interest rates, regardless of the owner’s and the firm’s age and creditworthiness.
The Senate Committee on Small Business & Entrepreneurship held a hearing on Thursday to examine these and other obstacles and explore ways to overcome them.
“Without question, the lack of access to capital and capital formation are the principal factors holding back opportunities for minority businesses and as a consequence wealth and job creation in the minority
community,” testified Robert Johnson, chairman of The RLJ Companies and founder of RLJ Development L.L.C. (No. 8 on the BE Industrial/Service list with $605.2 million in revenue).
Johnson, chairman of The RLJ Companies, recommended that federal and state governments and major corporations consider waiving the 51% equity ownership required to define a company as a minority-owned enterprise. It was originally conceived to prevent these firms from being used as fronts or shams so that non-minorities could take advantage of government subsidies and set-asides. But according to Johnson, instead of serving as a launching pad for success, it places a ceiling on it because it forces entrepreneurs to raise debt and limits their ability to attract investment capital. He believes that other factors, such as stock or voting control should be considered to determine a majority interest.
“Lenders have only one goal, a repayment of debt with interest as quickly as possible. On the other hand, strategic equity partners seek to combine investment and operational synergies with the minority company to maximize long-term growth and value,” he said.
Johnson added that the government would hire a private investment fund to manage the monies set aside to assist minority businesses to make loans and invest in those businesses.
In separate testimony, Robert Fairlie, an economics professor at the University of California, Santa Cruz, said that in addition to racial discrimination in lending practices, limited wealth also accounts for undercapitalized businesses and fewer startups.
“Barriers to growth such as these for any group of business owners in the country limit total U.S. productivity,” he said, which has a negative effect on job creation and innovation and restricts the nation’s ability to move out of the recession and be globally competitive.
Sens. Mary Landrieu of Louisiana and Olympia Snowe of Maine, the panel’s respective chair and ranking member, said that Johnson made compelling arguments. Snowe said that both the committee and the Small Business Administration should evaluate the issues raised by Johnson and others who gave testimony. Landrieu added that she would seek ways to incorporate them in jobs bills that she and Snowe are currently drafting.
“This capital market must work for all Americans,” she said. “While government does have a limited role it could have a very muscular and important role to play in righting injustices.”
To view the hearing, click here.