Geography, race and ethnicity remain barriers to capital for entrepreneurs

The U.S. Census Bureau, in partnership with the Minority Business Development Agency and the Ewing Marion Kauffman Foundation, has released its first-ever Annual Survey of Entrepreneurs (ASE). Approximately 290,000 employer businesses across all U.S. geographies and demographics participated in the survey during 2014. The results reveal that significant gaps in access to capital remain:

Race and ethnicity
Entrepreneurs across all racial backgrounds rely primarily on three sources of startup capital:

• Personal and family savings (63.9%)
• Business loans from banks (17.9%)
• Personal credit cards (10.3%)

Yet, different racial groups rely on these sources of startup capital to different extents. For example, 73% of Asian and Hispanic entrepreneurs rely on personal and family savings, and black entrepreneurs have the heaviest reliance on personal credit cards (18%). Meanwhile, white entrepreneurs have the highest utilization (19%) of traditional business loans.

Geography
The business owners most likely to finance the startup or acquisition of their company through personal and family savings were in Colorado (49.6%), Minnesota (48.9%) and Oregon (48.6%). Those in Mississippi (36.0%) and West Virginia (36.4%) were the least likely to do so.

Entrepreneurs in California, Nevada, Florida and New York reported the least reliance on traditional bank loans (between 7.4% and 7.8%). Those with the highest utilization of business loans from a bank or financial institution were in South Dakota, North Dakota and Iowa (between 27% and 28.3%).

Camoin Associates has created two interactive maps that explore the startup capital by geography data in greater detail.

Changes in startup capital sourcing
The survey finds that today’s firms are more reliant than ever on personal and family savings when starting or acquiring a business. An estimated 69% of firms less than two years old reported personal or family savings as an initial source of capital, up from 48% of firms started in 1998 or before. Additionally, today’s businesses are more likely to rack up credit card debt in the startup phase than older firms.

Access to growth capital
Aside from startup capital, most businesses did not report the need for additional financing, nor are they actively seeking more funds. However, those who did need growth capital often cited two main reasons for not seeking it: the concern over taking on additional debt (63% of businesses), and the fear of being rejected by lenders (47%).

Native Hawaiian (60%) and Black (59%) business owners were the most likely to cite fear of rejection. The Kauffman Foundation finds this fear is not altogether unwarranted. Black business owners, on average, have lower credit scores than white business owners. “Even those with the highest credit scores still fear being turned down,” explains Alicia Robb, a senior fellow at the Foundation. “Across the board, black business owners have higher denial rates, even after controlling for credit and wealth,” she added.

Learn more through ICIC’s research, “Financing Growth: A Practical Resource Guide for Small Businesses,” (April 2015).

Impact on Profitability
Business owners cited many factors influencing their business’s profitability. Two of those factors were access to capital and cost of capital. Once again, minority-owned businesses were disproportionately impacted by the access and cost of capital:

• Access to Capital: An estimated 16.5% of minority-owned businesses reported profits being negatively impacted by lack of access to capital, versus only 9.7% among nonminority firms. Of the minority groups, black entrepreneurs were almost three times as likely (28.4%) to have profits negatively impacted by access to capital than their white peers (10.1%)

• Cost of Capital: Similarly, an estimated 16.4% of minority firms expressed that the cost of capital was having a negative impact on business profits, versus only 10.4% of nonminority firms. Firms owned by black entrepreneurs were again more heavily impacted than other minority groups, being twice as likely (22.6%) as white-owned firms (10.6%) to report having business profits negatively impacted by the cost of capital.

Why does this data matter?
Small businesses (or those with less than 250 employees) are the backbone of our national economy. Recent research conducted by ICIC’s Research and Advisory Practice provides compelling evidence that small businesses rival – and often exceed – the impact of large businesses when it comes to job creation. In four of the five cities studied, the addition of only about one new job per small business would completely eliminate urban unemployment.

The vitality of employment opportunities, particularly in inner city neighborhoods where good jobs are needed most, undoubtedly relies on small business. In turn, the vitality of small business depends on inclusive access to startup and growth capital. The ASE findings echo what ICIC has learned through its own research and network of thousands of inner city businesses: persistent gaps in the access to capital remain for entrepreneurs in certain geographies and demographics.

To create inclusive small business growth for these geographies and demographics, the availability and access to capital must be expanded, and the costs to attain it must be reduced. Seeking to understand how trends in capital sourcing, such as those presented in the ASE study, affect different minority groups and geographic areas will help policymakers, capital providers and economic development agencies craft appropriate strategies to cultivate that inclusion.

Learn more about the Annual Survey of Entrepreneurs here.