Co-Authored with Torey Alston
For many budding African American entrepreneurs there is a major detour on the road to building a successful business: access to capital. Though the percentage of African Americans aspiring to start their own business continues to rise, traditional lenders are reluctant to offer capital to new entrepreneurs with little financial resources. Due to the racial wealth divide (in 2012 African Americans median household wealth was $15,500 compared to $130,600 for the typical white household) African Americans can only provide one-twelfth of the collateral required where white entrepreneurs can offer significantly more. This leads too many African American entrepreneurs to use high-interest financing tools, such as credit cards, to bridge the gap in capital development.
Although most traditional financial institutions are geared towards individuals with significant assets and wealth, working with a micro-finance institution (MFI) is an alternative that more African American entrepreneurs should consider. MFIs provide very small amounts of capital, also known as microfinance loans, for individuals who typically do not have access to traditional financing options. They also provide other business development services including but not limited to: credit counseling, business incubation, tax prep and one-on-one business training.
A survey of business owners conducted by the US Census Bureau, confirms that the majority of African American businesses are microenterprises (also known as a microbusiness) as they typically employ less than 4 people. While microenterprises are primarily funded through grants, donations and federal funds, there is significant opportunity on the state level to increase support.
Florida is a prime example of a state working to overcome hurdles microenterprises face in accessing capital. Currently, Florida has the highest rate of microenterprise ownership in the country according to the Corporation for Enterprise Development, Assets and Opportunity Scorecard. Last year, the Florida State Legislature passed the 2014 Microfinance Act which established a direct loan program and a loan guarantee program loan fund to assist micro-enterprises to access up to $50,000 of capital for their businesses. This program is a step in the right direction, but must be strengthened to ensure it reaches the entrepreneurs who could truly benefit.
State advocates and coalitions members of the Florida Coalition for Microbusiness Development (FCMD) are working tirelessly to ensure that amendments are adopted that will target start-ups and micro-businesses, as well as, the much larger "small businesses" that can have up to 500 employees. The Florida Coalition for Micro-business, which the NAACP Florida State Conference is a part of , is also advocating for a revolving loan fund and adjusting payback terms so that microbusinesses will have the greatest opportunity to ramp up a sustainable business.
Microbusiness do not always result in fulltime self-employment for an entrepreneur but the "income-patching" or "residual income" provided by a microenterprise allows for more stability, savings, and potential asset development. As African Americans continue to struggle with racial income inequality, disproportionate debt and un/underemployment, the "wiggle room" provided by residual income allows many to entertain investment options and build an economic future versus simply staying afloat.
Microenterprise development, through microloans, can be a viable option for many African Americans who seek to make their entrepreneurial dream a reality. From short term impacts like income generation to long lasting impacts like intergenerational wealth, microloans can be a promising wealth building tool for many. For this reason, its time African Americans become more vocal about micro-finances' future.
Lillian Singh is the Director of Economic Strategic Partnerships for the NAACP Economic Department, and Torey Alston is the Economic Development Chair, for the Florida NAACP State Conference.
Research support provided by Sabrina Terry, Economic Program Specialist, NAACP