With a $700 billion Wall Street bailout deal rejected in the House, one of the largest bank failures in the seizure of Washington Mutual, and an economic fate that is uncertain, African American entrepreneurs who were already feeling the squeeze are facing an even more stringent credit system.
“There is only a narrow vein of opportunity for blacks to obtain credit in even the most vigorous economic environment. This financial crisis worsens the plight of African American entrepreneurs as they seek to get credit,” says Illinois Congressman Bobby L. Rush. Chairman of the House Energy and Commerce Committee’s subcommittee on Commerce, Trade, and Consumer Protection, Rush believes a bailout of Wall Street banks is required to stop further blockage of black businesses’ access to capital.
Increased difficulty getting loans particularly hurts the survival prospects of African American entrepreneurs, says Robert W. Fairlie, associate professor of economics at the University of California, Santa Cruz. Fairlie’s book, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States (MIT Press) provides detailed statistical analysis that finds that while access to startup capital is the most important factor determining business success, black entrepreneurs’ ability to get loans is handicapped by African American households’ $6,200 median net worth — one-eleventh of white families’ median assets. Firms with $100,000 or more in startup capital are almost ten percentage points less likely to close after four years than are firms with $25,000 to $99,999. Nearly 5% of white-owned firms have more than $100,000 in startup capital, but just 1.7% of black-owned firms have that much money. More than 11% of white-owned firms start with $25,000 to $100,000, but only 6.5% of black-owned firms do.
To bypass a complete shutdown of lending, Congress’ unpopular bailout proposal is “a necessary evil,” says Thomas Boston, a BE Board of Economists member. CEO of EuQuant, an Atlanta-based consulting firm, and professor of economics at Georgia Tech, Boston criticizes the total lack of discussion about how the bailout will affect community banks and small investment companies. “Greater provisions should be made to those who did the right thing during the last housing bubble,” he says. “Minority businesses and small businesses did not cause the speculative mess that we are currently in. For the most part, small investment houses and community banks did not participate in it either. The federal government,
therefore, should make more money available to community banks at more favorable terms to ensure there will be access to capital for minority and small businesses as well as access to loans and mortgages for consumers who still demand them,” Boston says.A wrecked financial services industry could conceivably be rebuilt in a way to benefit black businesses. “It might be the opportunity for us to really recalibrate our American economy to include not only minorities, but also more women-owned businesses, which get little attention, little reward and very little resources,” says Congressman Rush. “That might be the silver lining in this cloud. But we have to have a president who is committed to expanding the minority business community and who understands that access to capital is the main culprit in the denial of minority entrepreneurs the opportunity to be successful.”
So what survival strategies can black-owned businesses pursue now? “For small or minority business owners, everything must center on preserving and building working capital, i.e., cash and liquidity,” Boston says. “Business owners should generate reports on their cash position several times a week and forecast it realistically into the future. It doesn’t matter how much receivables you have or how much revenue you are currently generating. The only thing that matters is whether or not you can pay your current bills. In the current environment, it is unlikely that you will be extended credit unless you have a very stellar record. So the wise strategy is to build and preserve cash to weather the hard times ahead.”