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ASSESSING ACCESS: OBSTACLES AND OPPORTUNITIES FOR MINORITY SMALL BUSINESS OWNERS 

IN TODAY’S CAPITAL MARKETS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 15, 2010 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED ELEVENTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

JOHN F. KERRY, Massachusetts 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY HAGAN, North Carolina 

CHRISTOPHER S. BOND, Missouri 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia 

ROGER WICKER, Mississippi 

JAMES E. RISCH, Idaho 

DONALD R. CRAVINS, JR., Democratic Staff Director 

WALLACE K. HSUEH, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana .................. 1 

Snowe, Hon. Olympia J., Ranking Member, and a U.S. Senator from Maine .... 2 

WITNESSES

Hinson, David, National Director, U.S. Minority Business Development Agency ........................................................................................................................... 5

Hedgespeth, Grady, Director, Office of Financial Assistance, Office of Capital 

Access, U.S. Small Business Administration ..................................................... 72 

Johnson, Robert L., Founder and Chairman, The RLJ Companies ..................... 138 

Cofield, Natalie, President, NMC Consulting Group, Inc. ................................... 146 

Henningsen, Margaret, Founder and Vice President, Legacy Bank ................... 155 

Hudson, Paul, Chairman and CEO, Broadway Federal Bank ............................. 162 

Fairlie, Dr. Robert W., Professor of Economics, University of California, Santa 

Cruz ....................................................................................................................... 170

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Brown, Warren 

Written comments ............................................................................................ 240 

Cofield, Natalie 

Testimony .......................................................................................................... 146 

Prepared statement .......................................................................................... 149 

Fairlie, Dr. Robert W. 

Testimony .......................................................................................................... 170 

Prepared statement .......................................................................................... 173 

Excerpt of Chapter 4 from ‘‘Race and Entrepreneurial Success’’ ................. 178 

Hedgespeth, Grady 

Testimony .......................................................................................................... 72 

Prepared statement .......................................................................................... 74 

Statement supplement ..................................................................................... 77 

Henningsen, Margaret 

Testimony .......................................................................................................... 155 

Prepared statement .......................................................................................... 158 

Hinson, David 

Testimony .......................................................................................................... 5 

Statement supplement: Minority Business Development Agency Report ... 7 

Prepared statement .......................................................................................... 66 

Hudson, Paul 

Testimony .......................................................................................................... 162 

Prepared statement .......................................................................................... 164 

Johnson, Robert L. 

Testimony .......................................................................................................... 138 

Prepared statement .......................................................................................... 141 

Landrieu, Hon. Mary L. 

Testimony .......................................................................................................... 1 

Min, Nyein 

Written comments ............................................................................................ 242 

Peek, C. Earl 

New York Times article ‘‘You’re the Boss’’ ..................................................... 246 

Memorandum Opinion and Order ................................................................... 249 

Snowe, Hon. Olympia J. 
Page

IV 

—Continued 

Testimony .......................................................................................................... 6 
(1) 

ASSESSING ACCESS: OBSTACLES AND OPPORTUNITIES FOR MINORITY SMALL BUSINESS 

OWNERS IN TODAY’S CAPITAL MARKETS 

THURSDAY, APRIL 15, 2010 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:09 a.m., in Room 

562, Dirksen Senate Office Building, Hon. Mary L. Landrieu (chair 

of the committee) presiding. 

Present: Senators Landrieu, Cardin and Snowe. 

OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, 

AND A U.S. SENATOR FROM LOUISIANA 

Chair LANDRIEU. Good morning. Let me call the meeting of the 

Small Business Committee together this morning, welcome all of 

our witnesses, and say how pleased I am to call this meeting, ‘‘Assessing Access: Obstacles and Opportunities for Minority Small 

Business Owners in Today’s Capital Markets.’’ 

Before I begin, I would like to just say thank you to those of us 

who joined some of the Committee members earlier this morning 

when we dedicated our new Small Business Committee hearing 

room in the Russell Building. We honored a really intrepid entrepreneur and extraordinary woman of history, Ida B. Wells, who 

was a small business owner, a journalist, a reporter and someone 

who has made a significant contribution to the effort of recording 

domestic terrorism and lynchings and tortures that took place in 

this country. But for her spirit of never giving up and trying to get 

it right and telling the truth, we honored her this morning. 

Senator Snowe, thank you. We also had Senator Cardin and Senator Burris there with us, which is why we are a little late to this 

hearing, because we were wrapping up that reception and walking 

back over here. 

We will be happy for the Small Business Committee to actually 

start having meetings in our regular committee room. So thank you 

all for the slight inconvenience of using another committee room 

this morning. 

I am going to be introducing our panel in a moment, but I would 

like to give brief opening remarks and then call on my Ranking 

Member. 

Again, thank you for joining us to discuss the obstacles and opportunities facing minority-owned small business today in America. 
2 

Since becoming Chair of this Committee, I have made access to 

affordable capital for all small businesses a top priority. The staff 

have been constantly updating me on how many banks are participating in the small business lending programs and how many 

banks and other institutions are being helped through the Department of Commerce as well. 

We keep updated information about how many SBA loans are 

being made, and my staff says he gets so aggravated with me asking that question. He keeps the information on the back of his ID 

card. 

I convened a roundtable with Senator Snowe on minority entrepreneurship on September 24th. We have had requests in to the 

Small Business Administration to give us an update on many of 

their initiatives, including the potential hiring of a new position 

that would fill the position for the Minority Small Business and 

Capital Ownership Development Officer, and I am looking forward 

to hearing about that this morning. 

The current economic recession, as we know, has seen credit 

tightening drastically. Many banks have withdrawn or reduced 

their lending activities. Minority-owned and small businesses have 

even more difficulty in many neighborhoods and areas, accessing 

credit even under optimal economic conditions. 

This is important because minority business development plays 

a crucial role in the economic vitality of America. These businesses 

are some of our nation’s greatest assets. Diversity, we believe on 

this Committee, is a strength, not a liability, and we want to leverage all the strength that we have in this nation to the work ahead, 

which is to lead us out of a recession, and create the kind of jobs 

that our people need. 

According to the most recent data available from the SBA, minority-owned businesses are among the fastest growing segments of 

the small business community. From 1997 to 2002, firms owned by 

African Americans grew by almost 45 percent, Hispanics by 31 percent, Asians by 24 percent and Hawaiian-Pacific Islanders by 49 

percent. Minority-owned business enterprises account for more 

than 50 percent of the 2 million new businesses over the last 10 

years. There are now more than 4 million minority-owned companies in the United States with sales totaling more than $700 billion. 

One of the things we are going to review today is those accomplishments as well as the obstacles that still exist and what the 

Small Business Administration and the Department of Commerce 

can do in that effort, and then hear from some successful entrepreneurs their life stories about what it took for them to succeed. 

I will introduce them when I introduce the panelists. 

Chair LANDRIEU. Let me now turn to my Ranking Member, Senator Snowe, for her opening remarks. 

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, RANKING 

MEMBER, AND A U.S. SENATOR FROM MAINE 

Senator SNOWE. Thank you, Chair Landrieu for your continued 

leadership in championing our nation’s small businesses, especially 

during these precarious economic times, and I am very appreciative 

for your scheduling this hearing today to discuss the hurdles for 
3 

our nation’s small businesses. Certainly, so many in our underserved communities, are facing the tremendous impediment of accessing capital, which is obviously the economic lifeblood of our 

businesses and essential if they are to remain open and create jobs. 

As you have said, Madam Chair, this has been a top priority in 

terms of capital access, and that has been indisputable in terms of 

your agenda before this Committee, and I am certainly appreciative 

of that. 

I also want to thank our distinguished panelists who are here 

today, both from the Small Business Administration and the Minority Business Development Agency, as well as various segments 

of the private sector—entrepreneurs, academia, bankers—who will 

lend their expertise as we explore the root causes of why minorityowned small businesses continue to encounter unacceptable barriers in accessing affordable credit. 

With unemployment still close to 10 percent, the regrettable reality is that the unemployment rate for minorities is much worse. 

Austan Goolsbee, a member of the President’s Council of Economic 

Advisors, recently noted the alarming fact that unemployment in 

the African American community is at 16.5 percent. Among Hispanics, that number is 12.6 percent. 

Imagine the strides we could achieve towards economic recovery, 

as opposed to the jobless recovery that we are now experiencing, 

if we could facilitate more access to capital for minority-owned 

firms. 

To underscore this fact, the Bureau of Labor Statistics’ recent 

unemployment data revealed that of the 114,000 private sector jobs 

created last month, 81,000 came from newly created small businesses. That means that over 71 percent of the private sector job 

growth came from those new small businesses. 

For our nation’s unemployment levels to drop, particularly in minority communities, small businesses must drive the economic recovery. In fact, we are depending on small businesses to lead us out 

of this recession and towards a strong economic recovery, as they 

have done in every previous downturn. Without them, we simply 

cannot make it happen. 

The market for small business capital across all populations is 

still suffering through some of the worst effects of this recession. 

The Federal Deposit Insurance Corporation reported that in 2009 

loan balances declined by $587 billion, or 7.5 percent. This is the 

largest drop in outstanding loan balances since 1942. 

Providing access to capital is especially necessary for underserved communities because of the great disparities in capital financing. The Kauffman Foundation’s February 2009 survey on patterns of financing, found that on average white-owned businesses 

started with $81,773, yet African American owned businesses started with an astonishing average of only $28,198. In addition, the 

survey also found that African American-owned businesses were 

more likely to tap higher interest credit sources such as credit 

cards, rather than lower interest business bank loans. 

It is long past time we reverse this pernicious trend. That is why 

it is more imperative than ever that we improve access to affordable credit, and why Chair Landrieu and I have joined forces to increase the guarantee rate on SBA loans to 90 percent and reduce 
4 

fees for small business borrowers. These proposals, which were enacted as part of the Recovery Act, have paid incredible dividends, 

and we have seen that with the guarantee in fee reduction that has 

driven lending across this country, up 90 percent since the passage 

of the stimulus. 

In fact, these provisions have already been extended three times 

by Congress, but temporary extensions are not sufficient. With the 

90 percent guarantee rate set to expire at the end of this month, 

and the funds for fee relief quickly dissipating, Congress must provide more certainty to small business owners through a longerterm extension of these key provisions. 

Additionally, this Committee recently reported out another initiative that would increase capital to small businesses. The legislation 

will allow small business owners to access larger SBA loans, increasing 7(a) and 504 loans from $2 million to $5 million and 

microloans from $35,000 to $50,000. 

While 18 percent of our nation’s small businesses are minorityowned, they have received fully 23 percent of the SBA 7(a) and the 

504 loans since the enactment of the stimulus, and for microloans, 

approximately 40 percent traditionally go to minority entrepreneurs. 

In fact, today Mr. Hedgespeth will testify that the agency’s SBAbacked loans are about three times more likely than conventional 

loans to go to minority-owned firms. 

Just think about how much more powerful a tool these loans 

could be in helping minority-owned businesses if their levels were 

increased. This is particularly the case when considering, as our 

witness, Dr. Fairlie’s research demonstrates, the vital need for 

startup capital within these minority communities. 

Our legislation was resoundingly passed by this Committee. And 

just yesterday, Mark Zandi, who is the Chief Economist at Moody’s 

Analytics, testified before the Finance Committee, reaffirming that 

larger SBA loan sizes would help drive SBA loan volume. In fact, 

he said that small businesses are imperative and crucial to an economic recovery and robust job creation. 

While I am pleased that SBA loans are being utilized by minority-owned businesses, clearly much more can be done and must be 

done to address the problems that minorities face in accessing capital. That is why I am calling on the Administration to take several 

steps to address this issue. For instance, the SBA should examine 

the microloan program’s successes and determine if there are ways 

to replicate them in other programs. 

The agency must also reach into minority communities and open 

a dialogue with community bankers, like some of our witnesses 

here today, and with minority-owned businesses from whom we 

will be hearing from in the second panel, to develop strategies to 

increase the flow of capital to underserved communities. 

Moreover, the SBA’s entrepreneurial development partners need 

to work together with the Minority Business Development Agency 

to find ways to help level the playing field for minority entrepreneurs seeking capital. 

So, Chair Landrieu, I thank you again for shedding light on this 

injustice and the chilling statistics that we have heard as well with 

respect to minority-owned businesses, and what we can do to make 
5 

it better. I look forward to working with you to forge additional solutions to address this issue and to providing access to capital. 

Thank you. 

Chair LANDRIEU. Thank you. I thank my colleague from the 

State of Maine. 

And let’s get right into our witnesses. Mr. Grady Hedgespeth is 

the Director of the Small Business Administration Office of Financial Assistance which oversees all of the small business lending 

programs. He is our first witness today. Mr. David Hinson is the 

National Director for U.S. Minority Business Development in the 

Commerce Department. 

I know firsthand the Administration’s commitment to both of 

these offices and the increase of funding that has changed, I think, 

a very detrimental trend from the past, to investing more in the 

SBA and the hiring of an extremely competent leader at the SBA 

and, both, at the Department of Commerce. 

So if both of you would begin and of course limit your remarks 

to five minutes, thank you so much. We will start with you, Mr. 

Hinson. 

STATEMENT OF DAVID HINSON, NATIONAL DIRECTOR, U.S. 

MINORITY BUSINESS DEVELOPMENT AGENCY 

Mr. HINSON. Thank you very much. Good morning, Madam Chair 

Landrieu, Ranking Member Snowe and distinguished members of 

the Committee. Thank you for inviting the Minority Business Development Agency (MBDA) here today to discuss the capital access 

for minority businesses and to discuss the activities of MBDA. 

My name is David Hinson, and I was appointed National Director of the Minority Business Development Agency by Commerce 

Secretary Gary Locke on July 15th, 2009. 

It is abundantly clear that the financial environment and recession last year have created tight credit markets, a decline in housing values and swollen labor markets. For all businesses, especially 

minority-owned firms, having access to capital has always been the 

difference between success and failure for that particular business. 

While there are valuable lending and bonding programs available, 

minority owned businesses continue to face substantial barriers 

and disparities with respect to access to capital. 

Last year, as a result of multiple stakeholder forums, MBDA 

commissioned a study to dissect the issues of access to capital. The 

results of this study are outlined in the MBDA reported entitled 

‘‘Disparities in Capital Access Between Minority and Non-MinorityOwned Firms: The Troubling Reality of Capital Limitations Faced 

by MBEs.’’ 

I would like to highlight three key findings. Number one, minority-owned firms are less likely to receive loans than non-minorityowned firms. Number two, when minority-owned firms do receive 

financing, they are provided less money than non-minority-owned 

firms, regardless to the size of the firm. Number three, minorityowned firms pay higher interest rates than their non-minority 

counterparts. 

I would like to take second and illustrate these findings: 
6 

The denial rate for firms with annual revenues of more than 

$500,000 is 14.9 percent for minority-owned firms, but only 8.4 percent for non-minority-owned firms. 

For firms of the same size, the average loan is $150,000 for minority-owned firms, yet it is more than $310,000 for non-minorityowned firms. 

For firms earning under $500,000 in gross revenue, minorityowned firms paid on average more than 9 percent in loan interest 

rates, yet non-minority-owned firms secured interest rates at less 

than 7 percent. 

I see that Dr. Fairlie, a co-author of the MBDA study, is scheduled to testify on the next panel. So, at this time, Madam Chair, 

I would like to request that the MBDA report in its entirety be entered into the hearing’s official record. 

Chair LANDRIEU. Without objection. 

[The information follows:] 
7 

Disparities in Capital Access between 

Minority and Non ... Minority-Owned Businesses: 

January 2010 
8 

Disparities in Capita' Access between Minority and 

Non-Mlnority-Owned Businesses: 

U.S. Department of Commerce, Minority Business Development Agency 

by 

Robert W. Fairlie, Ph. D. and Alicia M. Robb, Ph.D. 

January 2010 

This report was developed under a contract with the U.S. Department of Commerce's 

Minority Business Development Agency, and contains information and analysis that was 

reviewed and edited by officials of the Minority Business DevelopmentAgency. 

David Hinson 

National Director 

Minority Business Development Agency 

U.S. DEPARTMENT 0' COMMUCE 
9 

Table of Contents 

Preface "', .... " .. , .. " .... , .... , .. , .. , .. , .. " .. ,""", ...... , .. , .. " .... ,,'"'''', .. " .... ,,, .. , .. , .... , .. ,,, .. ,,,,,,,, .. ,,, ........ ,,,,,,,,,,, .. ,, .. , .... ,1 

Executive Summary, .... " .. , .... ", .. " .. ", .. """, .. , .... "", .... , ...... ", ...... , .... , .... "" ...... , .. , .. " .. , .... ", ...... , .... , .... , .... ", .. ,3 

Introduction""", .... , ........ , .... " .. , .. ", .. ", ...... ", .. """,""''''''''''''''''''''''''''''''''''''''' .. , .... , .. ,,, ........ , ........ , .. , .... , .... ,7 

The State of Minority Business" .... , .. ", .... , .... ", .... , .... " .... , .... " .. , .. ,,, .... , .. ,, .. ,,,"" .... , .. " .... " .. , .... ", .. , ...... , .. , .... ,9 

Total Gross Receipts of Minority-Owned Businesses ...... " .... """""""""""""" .. """"""" .... " ........ " .. " .... 1 0 

Total Employment and Payroll .. """ .. ", .. "", .. " .. , .... "", .... , .... "", .... , .. ", ...... """", .. " .. ", .. " .. , .. ",,,,,, .... ,,, .. , .. ,,11 

Average Firm Performance "",,, .. ,,,,,,,,,, .. ,,,,, .. ,,, ...... ,,,,, .. , .. ,,,,,,,,,,,, .. ,,, .. ,,, .. , .. ,, .. "",,,,,, .. ,,,,,,, .. , .... ,,,,,, .. ,,, .. ,,13 

Previous Research on Constraints Faced by Minority-Owned Businesses .. """" ............ " ...................... , 17 

Financial Capital Constraints,,, .... ,,,,,, .... ,,,,,,,, .. ,, .. ,,, ...... , ...... , .. ,,,,,,,,,, .... """""" .. "", .......... , .... , .. ", .. ",,,, .... ,17 

Evidence of Lending Discrimination """"'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' .. , .... , .. " .. , .. ", .. , .. ",21 

Other Types of Discrimination """","""'''''''''''''''''''''''''''''''''''''''''''''''''''''''''', ...... ", .... ", .. """"", .. , .. "" .. ,22 

Human Capital Barriers ""'"'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''', .. , .. , .... " .. , .. ", .... , .... , .... "" .. "" .. ,22 

Family Business Background and Social Capital .... "" .............. " ........ , ........ , .. " .. "" ........ " .. " ...... " .. " ........ 24 

The Current Financial Crisis "', .. ,",', .. ,', ...... , .... ,,' ...... ,', ...... , ...... , .... ,", .... , .... , .... , .... , ........ ", .. , ...... , .... , .... ", .. ,27 

New Empirical Analysis .. ", .. ", .. " .. ", .. , ........ , .... , .... " .. , .... ,,,,,,, .. ,,, .. ,,,,,,,,,,," .. , .... , .... , ...... , ...... , ...... , .... , ........ ,,31 

Data Description .. "", .... "", .... " .. , .. ", .. ", .... , .. " .. ", .. ", .. " .. ", .. ", ...... ", .. """""'"'''''''''''''''''''''''''''''''''''''''''''' 31 

Sources of Startup and Expansion Capital.. .............. " ...... " ............ " ........................................................ 32 

Capital Use among More-Established Minority Firms ...... " .................. " .................. " .. " .. "" .. """"" .. " .... ,35 

Regression Analysis of Equity Investment and Loan Amounts " .. "",,, .. ,, .. ,,,,,,, ............ ,, ........ , ...... , .......... ,37 

Decomposition Estimates "', .... , .... , .... " .. , .... , .. ", ...... ", .. " .. ,"', .. ,', .. ,"", .... , .. ," .. " .. , .... ",,,,, .. ,,,,, .. ,,,,,,,,,,,,,, .. ,,,39 

Capital Use among Newly-Formed Minority Firms "" ...... " ........ " .... " .......... , .. " .. " .... , .. ,,, .. ,,,,,,,,,,,,,,,,,,,,,,,,,41 

The Employment Returns to Financing """"'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''', .... , .. ", ........ , .. , .. """ .. 47 

Conclusions" .... ", ...... ", .... , .... ", .. ",,, .. ,,, .. , .... , .. ,, .... ,,,,,,""""""'''''''''''''''''''''''''''''''''''''''''''''''''''''''''' .. ,', .... 51 

Bibliography" .... "", .... , ...... "", .. , .... , .. ", .... , .. """, .... ,"""""""""'"'''''''''''''''''''''''''''''''''''''''''''''''', .. , .... ,,", .. 53 

About the Authors"" .. """ .. " .. , .. " ", .. " .. , .. , ...... ", .... , .. " .. ", .. ", .. " .. ", .. , .... , .... ", .. , .. ", .... , ...... ,,, .... , .. , .. ,,, .... , .. ,, .. 59 
10 

Preface 

Capital access remains the most important factor limning the establishment, expansion and growth 

of minority-owned businesses. Given this well established constraint, the current financial environment 

has placed a greater burden on minority entrepreneurs who are trying to keep their businesses thriving in 

today's economy. 

In this study, Dr. Robert W. Fairlie and Dr. Alicia Robb provide an in-depth review and analysis of 

the barriers to capital access experienced by minorHy entrepreneurs, and the consequences that limited 

financial sources are placing on expanding minority-owned firms. 

Minority-owned businesses have been growing in number of firms, gross receipts, and paid 

employment, at a faster pace than non-minority firms. If n were not for the employment growth created 

by minority firms, American firms, excluding publicly-held firms, would have experienced a greater job 

loss between 1997 and 2002. While paid employment grew by 4 percent among minority-owned firms, it 

declined by 7 percent among non-minority firms during this period. 

Minority-owned businesses continue to be the engine of employment in emerging and minority 

communities. Their business growth depends on a variety of capital, from seed funding to establish new 

firms, to working capital and business loans to expand their businesses, to private equity for acquiring and 

merging with other firms. 

Without adequate capital minority-owned firms will fail to realize their full potential. In 2002 there were 

4 million minority-owned firms, grossing $661 billion in receipts and employing 4.7 million workers. If 

minority-owned firms would have reached parHy with the representation of minorities in the U.S. population, 

these firms would have employed over 16.1 million workers, grossed over $2.5 trillion in receipts, and 

numbered 6.5 million firms. Increasing the flow of capHal for minority-owned businesses must be a national 

priority to re-energize the U.S. economy and increase competitiveness in the global marketplace. 

David A. Hinson 

National Director 

Minority Business Development Agency 
11 

Executive Summary 

Minority business enterprises (MBEs) make a substantial contribution to the U.S. economy, generating 

$661 billion in total gross receipts in 2002. Minority-owned firms also employed 4.7 million people with 

an annual payroll totaling $115 billion. The growth rates in the total number of firms, employment and 

gross receipts of minority-owned businesses far outpaced non-minority-owned businesses between 1997 

and 2002. Had minority-owned businesses reached economic parity, the U.S. economy would have 

recorded higher levels of key economic activity estimated at $2.5 trillion in gross receipts and 16.1 million 

employees. As defined by the Minority Business Development Agency, economic parity is achieved when 

the level of business activity of a business group is proportional to that group's representation in the U.S. 

adult population.' 

Minority-owned firms are an engine of employment, with young firms creating jobs at similar rates 

as young non-minority firms. Greater capnal access for minority-owned firms is essential to sustain their 

growth, reduce national unemployment levels, and in particular the high rate of unemployment in minority 

communities. 

At the very time that broad economic productivity is critical to strengthening the economic foundation 

of the nation, the growth potential of minority-owned businesses is being severely hampered. Across the 

nation minority-owned businesses face the obstacles of access to capital, access to markets and access to 

social networks, all of which are essential for any business to increase in size and scale. 

A review of national and regional studies over several decades indicates that limited financial, human, 

and social capital as well as racial discrimination are primarily responsible for the disparities in minority 

business performance. Inadequate access to financial capital continues to be a particularly important 

constraint limiting the growth of minority-owned businesses. The latest nationally representative data on 

the financing of minority firms indicates large disparities in access to financial capital. Minority-owned 

businesses are found to pay higher interest rates on loans. They are also more likely to be denied credn, 

and are less likely to apply for loans because they fear their applications will be denied. Further, minorityowned firms are found to have less than half the average amount of recent equity investments and loans 

than non-minority firms even among firms with $500,000 or more in annual gross receipts, and also invest 

substantially less capital at startup and in the first few years of existence than non-minority firms. 

The current economic crisis is posing severe challenges for minority businesses to meet their potential 

of creating 16.1 million jobs and generating $2.5 trillion in annual gross receipts. Existing obstacles to 

greater minority business success challenge the realization of the American Dream of ownership and 

wealth creation. Unless immediate action is taken, minority communities will continue to lag behind their 

non-minority counterparts undermining the ability of the nation to quickly regain its economic footing. 

! us. Department of Commerce, Minority Business Development Agency, The State a/Minority Business Enterprises, An Overview a/the 2002 

Sun;ey of Business Owners, Number of Firms, Gross Receipts> and Paid Employees (2006). 

3 
12 

Key Findings 

Job Creation 

Young Minority-Owned Firms Create Jobs at Similar Rates as Young Non-Minority Firms -

Young minority firms created jobs at similar rates as young non-minority firms over the first four 

years of operations. Between 2004 and 2007, young minority firms created 3.1 jobs while young 

non-minority firms created 2.4 jobs during the same period according to an analysis of the 

Kauffman Foundation Survey. 

Minority Businesses Create Jobs with Good Pay - The average payroll per employee was 

not substantially higher among non-minority employer firms compared to that of minority-owned 

firms. In 2002, payroll per employee was $29,842 for non-minority employer firms compared to 

about $26,000 for minority-owned firms, according to data from the U.S. Census Bureau. 

Minority-owned firms are employing workers at similar wages as non-minority firms, and are the 

backbone of many minority communities across the nation. 

2001 U.S. Recession Benefited from Minority Business Job Creation - Between 1997 and 

2002, total employment declined by 7 percent among non-minority firms, however total 

employment increased among minority firms during the same period. Total employment grew by 

11 percent among Hispanic owned firms, by 5 percent among African American owned firms, 

and by 2 percent among Asian firms. For all minority firms employment increased by 4 percent 

during the same period. If not for employment growth among minority-owned firms over this 

period the loss in total employment would have been even larger: an additional 160,000 jobs 

would have been lost. 

Faster Growth 

4 

Minority-Owned Firms Outpace Growth of Non-Minority Firms - Between 1997 and 2002, 

minority-owned firms far outpaced non-minority firms in terms of growth in number of businesses 

total gross receipts, number of employees, and total annual payroll. Minority firms grew in 

number of firms by 30 percent and in gross receipts by 12 percent, compared with an increase 

of 6 percent in number of firms and 4 percent in gross receipts for non-minority firms. Total 

employment grew by 4 percent and annual payroll by 21 percent for minority-owned firms 

compared to a decline of 7 percent in total employment and an increase in annual payroll of 8 

percent for non-minority firms during the same period. 

Minority-Owned Firms Lag Behind in Size Compared with Non-Minority Firms - AHhough 

minority-owned firms outpaced the growth of non-minority firms in several business measures, 

minority-owned firms are smaller on average than non-minority firms in size of gross receipts, 

employment, and payrolls. In 2002, average gross receipts of minority-owned firms were about 

$167,000 compared to $439,000 for non-minority firms. Average employment size of minority 

employer firms was 7.4 employees compared to 11.2 employees for non-minority employer firms 

in 2002. Average payroll of minority employer firms was about $200,000 compared to $333,000 

for non-minority employer firms. 
13 

Capital Access Disparities 

Minority-Owned Firms Are Less Likely To Receive Loans than Non-Minority Firms - Among 

firms with gross receipts under $500,000, 23 percent of non-minority firms received loans 

compared to 17 percent of minority firms. Among high sales firms (firms with annual gross 

receipts of $500,000 or more), 52 percent of non-minority firms received loans compared w~h 41 

percent of minority firms according to 2003 data from the Survey of Small Business Finances. 

Minority-Owned Firms Receive Lower Loan Amounts than Non-Minority Firms - The 

average loan amount for all high sales minor~ firms was $149,000. The non-minority average 

was more than twice this amount at $310,000. Conditioning on the percentage of firms 

receiving loans, the average loan received by high sales minority firms was $363,000 compared 

with $592,000 for non-minority firms. 

Minority-Owned Firms Are More Likely To Be Denied Loans - Among firms with gross receipts under $500,000, loan denial rates for minority firms were about three times higher, at 42 

percent, compared to those of non-minority-owned firms, 16 percent. For high sales firms, the 

rate of loan denial was almost twice as high for minority firms as for non-minor~ firms. 

Minority-Owned Firms Are More Likely To Not Apply for Loans Due to Rejection Fears -

Among firms with gross receipts under $500,000, 33 percent of minority firms did not apply for 

loans because of fear of rejection compared to 17 percent of non-minor~ firms. For high sales 

firms, 19 percent of minority firms did not apply for loans because of a fear of rejection 

compared to 12 percent of non-minority firms. 

Minority-Owned Firms Pay Higher Interest Rates on Business Loans - For all firms, 

minority firms paid 7.8 percent on average for loans compared with 6.4 percent for non-minority 

firms. The difference was smaller, but still existed between minority and non-minor~ high sales 

firms. 

Minority-Owned Firms Receive Smaller Equity Investments than Non-Minority Firms - The 

average amount of new equity investments was $3,379 for minority firms, which is 43 percent of 

the non-minority level. The average amount of new equity investments was $7,274 for minority 

firms with high sales, which was only 38 percent of the non-minority level according to 2003 data 

from the Survey of Small Business Finances. 

Venture Capital Funds Focused on Minority-Owned Firm Investments Are CompetitiveVenture capital funds focused on investing in minor~-owned firms provide retums that are 

comparable to mainstream venture capital firms. Funds investing in minority businesses may 

provide attractive retums because the market is underserved. 

5 
14 

Financiallnvesfmenf 

6 

Minority-Owned Firms Have Lower Loan and Equity Investments - Investment disparities 

between minority and non-minority firms were larger for extemal debt (bank loans, credit cards) 

and especially extemal equity, compared to the disparity in personal or family loan investments. 

Minority firms averaged $29,879 in extemal debt compared with $36,777 for non-minority firms. 

Minority firms had the most trouble obtaining extemal equity with $2,984 on average compared 

with $7,607 on average for non-minority firms. 

Disparities in Access to Financial Capital Grow after First Year of Operations - Non-minority 

businesses invested an average of $45,000 annually into their firms, while minority-owned firms 

invested less than $30,000 on average after the first year of operation. The disparity in financial 

capital between minority and non-minority firms was much larger in percentage terms for the 

next three years in operation than their first year. 

Lower Wealth Levels Are A Barrier to Entry for Minority Entrepreneurs - Estimates from 

the U.S. Census Bureau indicate that half of all Hispanic families have less than $7,950 in 

wealth, and half of all African American families less than $5,446. Wealth levels among whites 

are 11 to 16 times higher. Low levels of wealth and liquidity constraints create a SUbstantial 

barrier to entry for minority entrepreneurs because the owner's wealth can be invested directly 

in the business, used as collateral to obtain business loans or used to acquire other businesses. 

Experience, Geographic Location, Lower Sales and Industry Sectors Partially Limit Capital 

Access for Minority Firms - Minority-owned businesses had less business experience, lower 

sales, and less favorable geographical and industry distributions, all of which partially limited 

their ability to raise financial capital. 
15 

Introduction 

Minority businesses enterprises (MBEs) contribute substantially to the U.S. economy. Businesses 

owned by minorities produced $661 billion in gross receipts in 2002, and their growth rate in total gross 

receipts far outpaced the growth rate for non-minority-owned businesses between 1997 and 2002.2 In 

2002, minority firms employed a workforce of 4.7 million people with an annual payroll of $115 billion. 

These jobs are located across the nation, many in emerging communities and employing a large proportion 

of minorities.' Another contribution that is often overlooked, however, is that minority business owners 

create an additional four million jobs for themselves. 

Although minority-owned businesses contribute greatly to the macro-economy and many are 

extremely successful, there remains a sizeable untapped potential among this group of firms. If minorityowned firms would have reached economic parity in 2002, these firms would have employed over 

16.1 million workers and grossed over $2.5 trillion in receipts.' As defined by the Minority Business 

Development Agency, economic parity is achieved when the level of business activity of a business group is 

proportional to that group's representation in the U.S. adult population.' 

Minority-owned firms are smaller on average than non-minority-owned firms with lower gross receipts, 

survival rates, employment, and payrolls.' The disparities are extremely large: for example, Hispanicowned firms have an average annual gross receipts level that is one-third the non-minority level, and 

African American owned firms have an average annual gross receipts level that is one-sixth the nonminority level. A growing number of studies indicate that limited financial, human and social cepHal, as well 

as racial discrimination are responsible for these disparities in business performance.' Inadequate access 

to financial capital is found to be a particularly important constraint limiting the growth of minority-owned 

businesses. 

Given the current financial crisis, the credit markets have tightened and access to capital has being 

further restricted for MBEs. Moreover, the rapid decline in the housing, stock and labor markets in the past 

several months has taken a toll on an entrepreneur's personal and family wealth. This wealth is important 

because is frequently the primary source of capital entrepreneurs have for investing in their businesses. 

Likewise, the potential to receive outside equity funding from venture capitalists and angel investors has 

also dropped considerably in recent months. For example, the total amount invested by venture capitalists 

plummeted from $5.7 billion for 866 deals in the fourth quarter of 2007 to only $3.0 billion for 549 deals in 

the fourth quarter of 2008.' 

2 Robert Fairlie and Alicia Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States 

(Cambridge: MIT Press, 2008), U.S. Department of Commerce, Minority Business Development Agency, The State of Minority Business (fact 

sheet), 2008 (accessed July 2009); available from hnp:l/www.mbda.gov/index.php?section_id=6&bucket_id=789#bucket_852, 

'Thomas D. Boston, The ING Gazelle Index, Third Quarter, 2003 (accessed July 2009); available from www.inggazelleindex.coID. Thomas 

D. Boston, "The Role ofBJa.ck~Owned Businesses in Black Community Development," in Jobs and Economic Development in Minority 

Communities: Realilies, Challenges, and Innovation, eds, Paul Ong and Anastasia Loukaitou-Sideris (philadelphia: Temple University Press, 2006). 

U.S. Census Bureau, /992 Economic Cemus: CharactensUes a/Business Owners (Washington, D.C.: U.S. Government Printing Office, 1997). 

4U.S. Department of Commerce, Minority Business Deve1opmentAgency, The State of Minority Business Enterprises, An OverVl€W o/the 2002 

Survey of Business Owners, Number 0/ Fmm, Gross Receipts, and Paid Employees. 

$ Ibid. Note: In 2002, minorities represented 29 percent of the U,S. adult population. 

6U.S. Census Bureau, 1992 Economic Census: Characteristics a/Business Owners (1997). U.S. Census Bureau, 2002 Economic Census, Survey 

of Business Owners (Washington, D.C: US Government Printing Office, 2006). 

'U.S. Department of Commerce, Economics and Statistics Administration and the Minority Business DevelopmentAgency, Keys to Minority 

Entrepreneurial Success: Capital, Education and Technnlogy, Patricia Buckley (2002). David G. Blanchflower, P. Levine, and D. Zimmerman, 

"Discrimination in the Small Business Credit Market," ReVIew a/EconomiCS and Statistics 85, no. 4 (2003): 930-943. Ken Cavaltuzzo, Linda 

Cavalluzzo, and John Wolken, "Competition, Small Business Financing, and Discrimination: Evidence from a New Survey," Journal o/Business 

75, no. 4 (2002): 641~679. Fairlie and Robb, Race and EnJrepreneuria[ Success.' Black-, Asian-, and White-Owned Businesses In the United States. 

8 PricewaterhouseCoopers and the National Venture Capital Association, MoneyTreeTM Report, 2009 (accessed October 2009); available from 

http://www.pwcmoneytree.com 

7 
16 

Banks and other lending institutions have also severely tightened lending standards and increased 

loan costs to small, medium and large businesses, In its annual survey of senior loan officers, the Federal 

Reserve found that 65 percent of domestic banks have "tightened lending standards on commercial 

and industrial loans to large and middle-market firms," and 70 percent of these banks tightened lending 

standards to small firms, In addition, "large fractions of banks reported having increased the costs of 

credit lines to firms of all size,'" Banks are reluctant to lend to minority-owned firms and other businesses 

in the current economic recession because of concems about the ability to repay loans, Additionally, the 

decline in the personal wealth of entrepreneurs has limited their ability to use this wea~h as collateral or 

personal guarantees for loans, The secondary market for loans has dried up, and many banks, especially 

community banks, are struggling to have enough deposits to meet the demand for loans, 

Diminishing credit access and higher borrowing costs will disproportionately impact the creation and 

growth of minority businesses across America, The recent unprecedented decline in the financial market 

combined with a severe drop in demand for goods and services resulting from the current economic 

recession may lead to many minority business failures, Anecdotally, business trade organizations and the 

Minority Business Enterprise Centers funded by the Minority Business Development Agency have reported 

that credit lines of viable minority-owned businesses have been closed down by their lending institutions, 

As a result of the existing financial constraints, the tremendous growth in number of firms, gross receipts 

and employment enjoyed by minOrity firms during the past decades could be haHed with large negative 

consequences for the entire U,S, economy, 

It is an important policy concern to ensure and ultimately improve the performance of MBEs in the 

United States, Business owners represent roughly 10 percent of the workforce, but hold nearly 40 percent 

of the total U,S, wealth,1O Strong minority business growth directly impacts the reduction of inequality in 

earnings and wea~h between minorities and non-minorities,11 

Another concern is the loss in economic efficiency resulting from blocked opportunities for 

minorities to start, acquire and grow businesses, Among these barriers to business formation are 

liquidity constraints and unfair lending practices that result from structural inequalities or racial 

discrimination, Barriers to entry and expansion faced by MBEs are very costly to U,S, productivity, 

especially as minorities represent an increasing share of the total population, Additionally, by limiting 

the business success to only a few groups and not the broad range of diverse groups that comprise 

the United States we are constraining innovative ideas for new products and services, and access to 

global markets where many minority entrepreneurs have a competitive advantage based on cultural 

knowledge, social and familial ties, and language capabilities,12 

In addition, barriers to business growth may be especially damaging for job creation in emerging 

communities," Minority firms in the United States employed nearly 4,7 million paid workers in 2002," a 

disproportionate share of them minorities and many of these jobs are located in minority and emerging 

communities, Without the continuing success and expansion of minorily businesses the benefrts of economic 

growth win be unevenly dMded across the popUlation, 

9 Board ofGovemors of the Federal Reserve System, The January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, 2009 

(accessed July 2009); available from http://www,federalreserve,gov/boarddocs/SnLoanSurveyJ200902/defaulthtrn. 

lIlBoard of Govemors of the Federal Reserve System, "Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey 

of Consumer Finances," Federal Reserve Bulletin, Brian K. Bucks, Arthur B. Kennickell, and KeVin B. Moore, 2006 (accessed October 2009); 

available from http://federaireserve.govJpubs/oss/ossZ12004/bul10206.pdf. 

" WilliamD, Bmdford, 'The Wealth Dynamics ofFntrepreneurship fur BlackandWhite Families in the U.S.," Review aJInrome and fli,01th49 (2003): 89-116, 

1210hn Owens and Robert pazomik, Minorrty Business Enlerprises In the Global Economy.· The Business Case. Prepared in collaboration with the 

Minority Business Deyelopment Agency (Washington D.c.: Minority Business Development Agency, 2003). 

D Thomas D. Boston, "Generating Jobs through African American Business Development," Readings in Black Political Economy, eds. 1. 

\¥hitehead and C. Harris (Dubuque: Kendall-Hunt, 1999). Boston, "The Role of Black-Owned Businesses in Black Community Development." 

l4 U.S. Census Bureau, 1992 Economic Census; Characteristics o/Business Owners. u.s. Census Bureau, 2002 &anomie Census: Survey o/Business Owners. 

8 
17 

The State of Minority Business 

To gain some perspective on the state of minority business in the United States we briefly discuss 

current business ownership and performance pattems. We first discuss estimates of minority business 

ownership created from microdata from the 2008 Current Population Survey (CPS). This survey is 

conducted by the U.S. Bureau of Labor Statistics and Census Bureau and contains the latest available 

national data on business ownership in the United States. Table 1 reports the business ownership rate, 

which is the ratio of the number of business owners to the total workforce. The CPS captures individuals 

who own all types of businesses including incorporated, unincorporated, employer and non-employer 

businesses although owners of side- and low-hours businesses are excluded." 

Table 1 

Business Ownership Rates by Race/Ethnicity 

Current Population Sun.ey (2008) 

Business Ownership 

Percent of 

Workforce Sample Size 

Total 10.1% 692,609 

Non-Minority 11.3% 506,160 

Natil.e-American 7.6% 6,570 

Asian/Pacific Islander 10.3% 33,700 

Hispanic 7.9% 74,037 

African-American 5.5% 61,957 

Notes: (1) The sample consists of indi'<iduals ages 20-64 who 

work 15 or more hours per usual week. (2) Business ownership 

status is based on the worker's main job acti'<ity and includes 

owners of both unincorporated and incorporated businesses. (3) 

All estimates are calculated using sample weights pro'<ided by 

the Cunrent Population Sun.ey. 

In the United States, 10.1 percent of the total workforce owns a business. Business ownership rates, 

however, differ substantially by race and ethnicity. Despite the growth in the number of minority firms 

between 1997 and 2002, minority business ownership rates as a percentage of the minority workforce 

lagged behind those of non-minorities. Business ownership rates are the highest for non-minorities (i.e. 

non-Hispanic wMes) at 11.3 percent. Asians have the next highest rate at 10.3 percent, which is similar to 

findings in previous stUdies." There are differences across Asian groups, however, with some groups such 

as immigrants from the Philippines having very low rates of business ownership. 

15 Owners of side- and smail-scale businesses Ilfe excluded because business o'\\'llership status is defined for the main job activity and only 

workers with at least 15 hOUTS worked in the survey week are included in the swnpk Published estimates from the CPS only include 

unincorporated business owners and do not restrict the number of hours worked. 

16 Kwang Kim, Won Hurh, and Maryilyn Fernandez, "Intragroup Differences in Business Participation: Three Asian Immigrant Groups," 

InfernotioMl Migration Review 23, no. 1 (1989). Don Mar, "Individual Characteristics vs. City Structurnl Characteristics: Explaining Self .. 

Employment Differences among Chinese, Japanese, and Filipino~ in the United States," Jou.rnal ofSocio~Economics 34, noJ (2005), Robert W 

Fairlie, Estimating the Contribulion o/Immigrant Business Owners to the U.S, Economy, Final Report/or u.s. Small Business Administration, (2008). 

9 
18 

Business ownership rates are lower among Native Americans, Hispanics and African Americans. The 

rate of business ownership among Native Americans is 7.6 percent, among Hispanics is 7.9 percent, and 

the African American business ownership rate is even lower at 5.5 percent. 

Overall, minority business ownership is low relative to the size of the minority workforce. An analysis 

of trends over the past few decades does not reveal major changes in business ownership rates among 

minority groupS.'7 The barriers to business formation responsible for these patterns are discussed in 

the next section. Existing barriers to business formation among minorities limit the nation's potential for 

economic growth and productivity. 

Total Gross Receipts of Minority-Owned Businesses 

Over the past two decades, growth in the total number of minority-owned firms and their annual 

gross receipts far outpaced the growth rate for non-minority-owned firms. Table 2 reports estimates of 

the number of businesses and total gross receipts by ethnic and racial group over the past two decades.'" 

The statistics are from the most widely used and highly respected sources of data on minority-owned 

businesses - the Survey of Minority-Owned Business Enterprises (SMOBE) and the Survey of Business 

Owners (SBO), which are surveys conducted by the U.S. Census Bureau. Estimates are derived for nonminority-owned firms as outlined below. 

Table 2 

Sales and Receipts by Ethnicity and Race 

Survey of Minority~Owned Business Enterprises (1982~1997) and Survey of Business Owners {2002} 

Includes NorrMinority Black~Owned Hispanic- Asian and P.I. M Native AmerJ 

C-Co~s All Firms Owned Firms Firms Owned Firms Owned Firms Nat, Alaskan 

Total number of 1982 No 12,059,950 11,318,310 308,260 233,975 187,691 13,573 

firms 1987 No 13,695,480 12,481,730 424,165 422,373 355,331 21,380 

1992 No 17,253,143 15,287,578 620,912 862,605 603,426 102,271 

1997 No 18,278,933 15,492,835 780,770 1,121,433 785,480 187,921 

1997 Yes 20,440,415 17,316,796 823,499 1,199,896 912,960 197,300 

2002 Yes 22,480,256 18,326,375 1,197,567 1,573,464 1,132,535 201,387 

Total sales and 1982 No $967,450,721 $932,996,721 $9,619,055 $11,759,133 $12,653,315 $495,000 

receipts ($1,000) 1987 No $1,994,808,000 $1,916,968,057 $19,762,876 $24,731,600 $33,124,326 $911,279 

1992 No $3,324,200,000 $3,122,188,579 $32,197,361 $76,842,000 $95,713,613 $8,057,003 

1997 No $4,239,708,305 $3,904,392,106 $42,670,785 $114,430,852 $161,141,634 $22,441,413 

1997 Yes $8,392,001,261 $7,763,010,611 $71,214,662 $186,274,581 $306,932,982 $34,343,907 

2002 Yes $8,783,541,146 $8,055,884,659 $88,641,608 $221,927,425 $330,943,036 $26,872,947 

Mean sales and 1982 No $80,220 $82,433 $31,204 $50,258 $67,416 $36,469 

receipts 1987 No $145,654 $153.582 $46,592 $58,554 $93,221 $42,623 

1992 No $192,672 $204,230 $51,855 $89,081 $158,617 $78,781 

1997 No $231,945 $252,013 $54,652 $102,040 $205,151 $119,419 

1997 Yes $410,559 $448,294 $86,478 $155,242 $336,195 $174,069 

2002 Yes $390722 $439579 $74018 $141044 $292214 $133439 

Sources: U,S, Census Bureau, Economic Census, Survey of MinorityMOwned Business Enterprises (1982,1987,1992,1997), U.S. Census 

Bureau, Survey of Business Owners (2002), and special tabulations prepared by the u.s, Census Bureau. Notes: (1) All firms excludes 

publicly he!d. foreign-owned, not for profit and other firms, which are not included in the estimates by race. (2) Estimates are not directly 

comparable over time. (3) The nonMminority category is equal to all firms minus all minority firms for 1982,1987 and 1992, and all 'Nhitefirms 

minus Latino-owned firms in 2002. (4) The most recenU)' revised estimates are reported when applicable. (5) Native AmericanlNatille 

Alaskan estimates for 2002 do not include American Indian tribal entities making them not directly comparable to 1997. 

17 See Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States, for more 

discussion on recent trends in business outcomes by race and ethnicity. 

IS The tables reported here represent a new compilation of data of recent trends in business outcomes by race. The data reponed here are 

taken from goverrunent publications and special tabulations prepared for us by U.S, Census Bureau staff (see Fairlie and Robb, Race and 

Entrepreneurial Success: Black-, AsianM. and WhIte-Owned BUSinesses in the Unrted States for more details). These data, however, experienced 

several changes in sample criteria and definitions making them not directly comparable over time. Estimates were also revised in many cases by 

the Census Bureau, and we attempted to find the most recently available data. The 2002 Survey of Business O\llners (SBO) contains the most 

recent data. Prelim:inary data for the 2007 SBQ will be published by the Census in 2010. 

10 
19 

Data from the SMOBE and SBO indicate that the number of minority businesses grew rapidly 

over the past two decades. The growth rates and increases in the number of Asian- and Hispanicowned businesses are large. Asian-owned businesses grew from 187,691 to more than 1.1 million in 

2002, and Hispanic-owned businesses grew from 233,975 in 1982 to 1.6 million in 2002. Likewise, 

African American-owned businesses grew from 308,260 in 1982 to nearly 1.2 million in 2002. The total 

number of businesses and the number of non-minority-owned businesses also grew substantially over 

the period, but at much slower rates. For example, the total number of businesses in the United States 

grew by 86 percent from 1982 to 2002. On the other hand, growth rates for Asian and Hispanic business 

were the highest at 503 percent and 572 percent, respectively. The growth rate for African Americanowned businesses was also high at 288 percent during the same period. One major factor spurring the 

rapid growth rates in the number of minority businesses is population growth, especially for Asians and 

Hispanics. In addition, growth rates are partly due to changes in the sample universe of businesses 

included in the SMOBE and SBO surveys. Because of sample changes, growth rates for total minorityowned firms may not be comparable over the past two decades. 

If we focus on the most recent period available, 1997 to 2002, statistics for the total number 

of businesses including C corporations indicate rapid growth rates in the number of minority-owned 

businesses. Minority-owned firms grew in number of firms by 30 percent, from 3 million to 4 million 

firms during that period." The number of Asian and Hispanic businesses grew by 24.1 percent and 31.1 

percent, respectively. The number of African American-owned businesses grew faster, by 45.4 percent, 

from 1997 to 2002. In contrast, the number of non-minority businesses grew by 5.8 percent from 1997 to 

2002. Although data from the CPS indicate slower rates of growth in the number of business owners, these 

data confirm the finding that the number of minority businesses increased much faster than the number of 

non-minority businesses over the past two decades." 

Total gross receipts for all minority-owned firms were nearly $700 billion in 2002. Native American 

owned firms grossed $27 billion in receipts. Asian-owned firms had the largest contribution among 

minority-owned firms at $331 billion. Hispanic-owned firms grossed $222 billion in receipts, and African 

American-owned firms had total gross receipts of nearly $90 billion. 

Total gross receipts grew much faster for minority-owned firms than for non-minority-owned firms, 

by 12 percent from $591 billion to $661 billion." The growth rate in total gross receipts for Asian-owned 

firms was 8 percent, and for Hispanic-owned firms 19 percent. African American-owned firms experienced 

the fastest growth rate in total sales at 24 percent from 1997 to 2002. In contrast to these high growth 

rates, total gross receipts grew by only 4 percent from 1997 to 2002 for non-minority firms. It is difficutt to 

estimate growth rates for Native American firms because the 2002 data excluded Native American tribal 

entities more effectively than in 1997 and are therefore not comparable. 

Total Employment and Payroll 

Minority-owned firms also contribute substantially to greater employment in the U.S. economy. 

Minority-owned firms employed 4.7 million workers with a total annual payroll of$115 billion in 2002. 

Among specific groups, Native American firms employed nearly 200,000 paid workers, Asian firms 2.2 

million paid workers, Hispanic firms more than 1.5 million paid workers, and African American firms over 

750,000 paid workers. Table 3 includes the data. 

19 U.S Department of Commerce, Minority Business Deve1opmentAgency, The State o/Minority Businesses. 

20 Fairlie and Robb, Race and Entrepreneurial Success: Black~, Asian-, and WhIte-Owned Businesses in the Untted Stales. 

21 U.S Department of Commerce, Minority Business Development Agency, The State oj Minority Businesses, 

II 
20 

Table 3 

Employment Statistics by Ethnieity and Race 

Survey of MinOrity~Owned Business Enterprises (1982-1997) and Survey of Business O'M'lers (2002) 

Includes Non-Mlnority Black-O'M'led Hispanic~ Asian & P.L- Native Amer.l 

C-C0!:Es All Firms Owned Firms Firms Owned Firms OWned Firms Nat Alaskan 

Tota! number affirms 1982 No 12,059,950 11,318,310 308,260 233,975 187,691 13,573 

1987 No 13,695,480 12,481,730 424,165 422,373 355,331 21,380 

1992 No 17,253,143 15,287,576 620,912 862,605 603,426 102,271 

1997 No 18,278,933 15,492,835 780,770 1,121,433 785,480 187,921 

1997 Yes 20,440,415 17,316,796 823,499 1,199,896 912,960 197,300 

2002 Yes 22,460,258 16,326,375 1,197,567 1,573,464 1,132,535 201,387 

Total number of 1982 No NfA NfA 121,373 154,791 NfA NfA 

employees 1987 No 19,853,333 19,016,850 220,487 264,846 351,345 8,956 

1992 No 27,403,974 25,531,104 345,193 691,056 NfA NfA 

1997 No 29,703,946 27,122,185 376,346 838,738 1,224,733 202,535 

1997 Yes 58,901,412 54,084,357 718,341 1,388,746 2,203,079 298,661 

2002 Yes 55,368,216 50,429,209 753,978 1,536,795 2,243,267 191,270 

Mean number of paid 1982 No NfA NfA 0.4 0.7 NfA NfA 

employees 1987 No 1.4 1.5 O.S O.S 1.0 OA 

1992 No 1.S 1.7 O.S 0.6 NfA NfA 

1997 No 1.6 1.6 0.5 0.7 1.S 1.1 

1997 Yes 2.9 3.1 0.9 1.2 2.4 1.5 

2002 Yes 2.S 2.6 O.S 1.0 2.0 D •• 

Sources: U.S. Census Bureau, Economic Census, Survey of Minority-Owned Business Enterprises (1982, 1987, 1992, 1997), U.S. Census 

Bureau, Survey of Business Owne~ {2002), and special tabulations prepared by the U.S. Census Bureau, Notes: (1) AU firms excludes 

publicly held, foreign-owned, not fOT profit and other firms, which are not included in the estimates by race. (2) Estimates are not directly 

comparable over time. (3) The non~mjnority categOfY 1s equal to all firms minus aU minority firms for 1982, 1987 and 1992, and all white firms 

minus Latino~owned firms in 2002. (4) The most recently revised estimates are reported when applicable. (5) Native AmerlcanfNative 

Alaskan estimates for 2002 do not include American Indian tribal entities making them not directly comparable to 1997. 

Even more striking from the results reported in Table 3, however, are the relative patterns of 

employment growth. Total employment grew by 11 percent among Hispanic owned firms from 1997 to 

2002, and by 5 percent among African American owned firms. For all minority-owned firms, employment 

increased by 4 percent between 1997 and 2002." In contrast, total employment actually declined by 7 

percent among non-minority firms from 1997 to 2002. If not for employment growth among minority-owned 

firms over this period the loss in total employment would have been even larger: an additional 160, 000 jobs 

would have been losl." 

Minority-owned firms make major contributions to the total payroll of firms in the United States (see 

Table 4). Native American firms paid their employees a total of $5 billion in wages and salaries in 2002, 

Asian-owned firms paid their employees a total of $57 billion. Hispanic-owned firms had a total 

annual payroll of $37 billion, and African American-owned firms paid their employees a total of $18 billion. 

Total payrolls have been growing much faster among minority-owned firms than among non-minority 

firms. Asian-, Hispanic- and African American-owned businesses combined experienced an increase in 

total payroll of 23 percent from 1997 to 2002. The rate of growth in the total payroll among non-minority 

businesses was 8 percent. 

:u u.s. Department of Commerce, Minority Business Development Agency, Characteristics of Minority Businesses and Entrepreneurs (2008). 

21 Ibid 

12 
21 

Table 4 

Employment Statistics by Ethniclty and Race for Employer Finns Only 

Survey of Minority~Owned Business Enterprises (1992-1997) and Survey of Business Owners (2002) 

Includes 

C-Corps 

Tola! number of employer 1982 No 

firms 1987 No 

1992 No 

1997 No 

1997 Yes 

2002 Yes 

Total annual payroll for 1982 No 

employer firms 1987 No 

($1,000,000) 1992 No 

1997 No 

1997 Yes 

2002 Yes 

Mean annual payroll for 1982 No 

employer firms 1987 No 

1992 No 

1997 No 

1997 Yes 

2002 Yes 

AU Firms 

N/A 

3,487,454 

3,134,959 

3,277,510 

5,027,208 

5,172,064 

N/A 

$299,176 

$523,574 

$675,452 

$1,499,298 

$1,626,785 

N/A 

$85,786 

$167,011 

$206,087 

$298,237 

$314,533 

Non-Minority 

Owned Firms 

N/A 

3,239,305 

2,823,264 

2,860,580 

4,372,817 

4,512,577 

N/A 

$289,667 

$495,037 

$628,500 

$1,395,150 

$1,504,917 

N/A 

$89,423 

$175,342 

$219,711 

$319,051 

$333,494 

B!ack-Owned 

Firms 

37,841 

70,815 

64,478 

63,010 

93,235 

94,518 

$948 

$2,761 

$4,807 

$6,532 

$14,322 

$17,550 

$25,055 

$38,990 

$74,547 

$103,673 

$153,615 

$185,680 

HispanicOwned Finns 

39,272 

82,908 

115,364 

151,571 

211,884 

199,542 

$1,240 

$3,243 

$10,768 

$15,391 

$29,830 

$36,712 

$31,573 

$39,120 

$93,340 

$101,540 

$140,785 

$183,980 

Asian & P.I.-

Owned Finns 

NlA 

92,718 

N/A 

185,357 

289,999 

323,161 

N/A 

$3,502 

N/A 

$21,620 

$46,180 

$56,871 

N/A 

$37,770 

N/A 

$116,642 

$159,240 

$175,984 

Native Amer.1 

Nat Alaskan 

N/A 

3,739 

N/A 

26,075 

33,277 

24,498 

N/A 

$109 

N/A 

$4,108 

$6,624 

$5,135 

N/A 

$29,225 

NlA 

$157,543 

$199,063 

$209,620 

Payroll peremp!oyee for 1982 No N/A N/A $7,812 $8,010 N/A N/A 

employer firms 1987 No $15,069 $15,232 $12,524 $12,246 $9,967 $12,201 

1992 No $19,106 $19,390 $13,924 $15,582 N/A N/A 

1997 No $22,739 $23,173 $17,266 $18,350 $17,653 $20,283 

1997 Yes $25,454 $25,796 $19,938 $21,480 $20,961 $22,180 

2002 Yes $29381 $29842 $23277 $23888 $25352 $26848 

Sources: U.S. Census Bureau, Economic Census, Survey of Minority-Owned Business Enterprisas (1982, 1987, 1992, 1997), U.S. Census 

Bureau, Survey of Business Owners (2002), and special tabulations prepared by the U.S. Census Bureau. Notes: (1) AI! firms excludes 

publicly held, foreign-owned, not for profit and other firms, whlch are not included in the estimates by race. (2) Estimates are not directly 

comparable over time. (3) The non-minority category is equal to allfinns minus all minority firms for 1982, 1987 and 1992, and all white firms 

minus Latino-owned firms in 2002. (4) The most recently revised estimates are reported when applicable. {5} Native American/Native Alaskan 

estimates for 2002 do not include American Indian tribal entities making them not directly comparable to 1997. 

Minority-owned firms clearly make an important contribution to the U.S. economy as measured 

by total gross receipts. employment and total payroll. As discussed before. MBEs had total annual 

gross receipts of $661 billion. employed 4.7 million workers and paid them $115 billion in wages and 

salaries in 2002. More importantly. however, minority-owned firms have far outpaced non-minority 

firms in terms of growth rates in the number of businesses. total gross receipts. number of employees, 

and total annual payroll. In short. minority businesses continue to be a substantial part of the U.S. 

business force with the ability to do more. 

Average Firm Performance 

Minority-owned businesses contribute greatly to the U.S. economy. but there is sizeable untapped 

potential among these firms. Although the growth in number of firms, gross receipts and employees of 

minority firms far outpaces that of non-minority firms, minority-owned firms are smaller on average than 

non-minority-owned firms in size of gross receipts, employment, and payrolls. Tables 2-4 report estimates 

of average gross receipts. employment and payroll, respectively. We now briefly discuss these patterns." 

Minority-owned firms have lower average gross receipts per firm than non-minority-owned firms. 

In 2002. average gross receipts for minority-owned firms were about $167.000 per firm. compared to 

$439.000 for non-minority firms. Native American firms had average gross receipts of $133,439, about 30 

percent of the average receipts of non-minority firms. Asian-owned firms also had lower average gross 

2A Faidie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States. 

13 
22 

receipts than non-minority firms, but the difference is much smaller. Average annual gross receipts were 

$292,214 for Asian-owned businesses. But, for some groups included in the Asian category, average sales 

were much lower. Filipino-owned firms had average receipts of$113,110, Vietnamese-owned firms had 

average receipts of $1 05,501, and Native Hawaiian and Pacific Islander owned firms had average receipts 

of $147,837." 

Hispanic firms also had lower average gross receipts than non-minority firms. Average gross receipts 

of Hispanic firms were $141,044 in 2002." Finally, African American-owned firms had the lowest average 

gross receipts among all reported groups at $74,018 per firm. These ethnic and racial disparities have 

also existed throughout the past two decades and trends in average gross receipts do not indicate recent 

improvements. 

Data from the 8BO and 8MOBE also indicate that minority-owned firms employed fewer workers on 

average than non-minority firms. Levels of employment among Native American-, Hispanic-, and African 

American-owned firms are especially low. Native-American firms averaged 0.9 employees per firm. Asian, 

Native Hawaiian and Pacific Islander firms averaged 2 employees, Hispanic-owned firms averaged 1 

employee, and African American-owned firms averaged 0.6 employees. In comparison, non-minority firms 

had a mean employment level of 2.8. 

If we compare the average number of employees among employer firms the differences in 

employment between minority and non-minority firms are smaller. In 2002 minority-owned firms had on 

average 7.4 employees per employer firm, compared to 11.2 employees for non-minority firms." Native 

American firms averaged 7.8 employees, Asian firms averaged 6.9 employees, Native Hawaiian and 

Pacific Islander averaged 7.9 employees, Hispanic-owned firms averaged 7.7 employees, and African 

American-owned firms averaged 8 employees." 

Conditioning on employment, racial pattems differ somewhat, and there is evidence that minority 

employer firms have gained some ground on non-minority employer firms. Table 4 reports estimates of 

mean annual payroll and payroll per employee by race for the subsample of employer firms. Minority 

employer firms have made gains relative to non-minority employer firms in recent years, although all four 

minority groups had lower average payrolls and payrolls per employee than non-minority employer firms. 

In 2002, all four minority groups had average payrolls that were roughly equal to or less than $200,000 

compared with an average payroll of $333,494 among non-minority firms. Much of the difference is due 

to the number of paid employees. The average payroll per employee was not substantially higher among 

non-minority employer firms. Payroll per employee was $29,842 for non-minority employer firms compared 

with $26,848 for Native-American employer firms, $25,352 for Asian employer firms, $23,888 for Hispanic 

employer firms, and $23,277 for African American employer firms. Minority-owned firms are employing 

workers at similar wages as non-minority firms, and are the backbone of many minority communities across 

the nation. 

25 Fairlie and Robb, Race and Entrepreneurial Success: B/ack-, Asian-, and White-Owned Businesses in the United States. 

26 Black and Hispanic finns are also found to be overrepresented at the bottom of the sales distribution and underrepresented at the top of the sales 

distribution compared to non-minority finns (Fairlie and Robb, Race and Entrepreneurial Success: Black-, ASlan-, and White-Owned Businesses in 

the United States). This finding indicates !.hat higher average sales among non-rninority-{t""1led businesses are not being driven by a few businesses 

wiLh very high revenues. 

27 U.s, Department of Commerce, Minority Business Dcve1opmentAgency, Characteristics o/Minority Businesses and Entrepreneurs. 

2sIbid 

14 
23 

The new compilation of Census Bureau data reported here and described more thoroughly in a recent 

publication" indicates that although minority firms make large contributions to the U.S. economy they 

have not achieved parity with non-minority firms. Minority firms have made progress, but continue to have 

lower average gross receipts, employment, and total payroll than non-minority firms. Under economic 

parity conditions, minority firms would have grossed about $2.5 trillion in receipts and employed 16.1 million 

workers.30 

29 Fairlie and Robb, Race and Entrepreneurial Success: Black-, AsiGlt-, and White-Owned Businesses in the United States. 

;() US, Department of Commerce, Minority Business Development Agency, The Stale of Minority Business Enterprises, An Overview a/the 

2002 Survey afBusiness Owners, Number of Firms, Gross Receipts, and Paid Employees. 

15 
24 

Previous Research on Constraints Faced by Minority-Owned Businesses 

What are the barriers faced by minority-owned businesses limiting business ownership and 

performance? This section reviews previous studies exploring these constraints. We emphasize the role 

of financial constraints because of their importance. 

Financial Capital Constraints 

Financial constraints are the most significant issue affecting minority business ownership and 

business performance. The importance of personal wealth as a determinant of entrepreneurship has been 

the focus of an extensive body of literature. Numerous studies using various methodologies, measures 

of wealth and country microdata explore the relationship between wealth and entrepreneurship. Most 

studies find that asset levels (e.g. net worth) measured in one year increase the probability of starting a 

business by the following year." The finding has generally been interpreted as providing evidence that 

entr~preneurs face liquidity constraints. 

Do inequalities in personal wealth then translate into disparities in business creation and ownership? 

To get an idea of the importance of access to financial capital in contributing to racial disparities in business 

ownership, one only has to look at the alarming levels of wealth inequality existing in the United States. 

Estimates from the U.S. Census Bureau'" indicate that half of all Hispanic families have less than $7,950 in 

wealth, and half of all African American families less than $5,446. Wealth levels among whites are 11 to 16 

times higher. Low levels of wealth and liquidity constraints create a substantial barrier to entry for minority 

entrepreneurs because the owner's wealth can be invested directly in the business, used as col/ateral to 

obtain business loans or used to acquire other businesses. Investors frequently require a substantial level 

of owner's investment of his/her own capital as an incentive, commonly referred as "skin in the game." 

31 David S. Evans and Boyan Jovanovic, "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political 

Economy 97, no. 4 (1989): 808~827. David S. EVWlS and Linda S. Leighton, "Some Empirical Aspects of Entrepreneurship," American 

Economic Review 79 (June 1989): 519-535. Bruce Meyer, "\\Thy Are There So Few Black Entrepreneurs?" National Bureau of Economic 

Research. Working Paper No. 3537 (1990). Douglas Holtz~Eakin, David Joulfaian, and Harvey S. Rosen,. "Entrepreneurial Der;;isions and 

Liquidity Constraints," lUND Journal of Economics 25, no. 2 (1994): 334-347. Thomas Lindh and Henry Ohlsson, "Self~Employment 

and Windfall Gains: Evidence from the Swedish Lottery," Economic JoW'nal 106, no. 439 (1996): 1515-1526. Jane Black, David de Meza. 

and David Jeffreys, "House Prices, The Supply of Collateral and the Enterprise Economy," The Economic JoW'nal 106, no. 434 (1996): 60-

75. David G. Blanchfiower and Andrew J. Oswald, "What Makes and Entrepreneur?" Journal 0/ Labor Economics 16, no. 1 (1998): 26-60. 

ThomasA. Dunn and Douglas J. Holtz-Eakin, "Financial Capital, Human Capital, and the Transition to Self~Employment: Evidence from 

Intergenerational Links," Journal a/Labor Economics 18, no. 2 (2000): 282~305. RobertW. Fairlie, "The Absence of the African American 

Owned Business: An Analysis of the Dynamics of Self-Employment," Journal a/Labor Economics 17, no. 1(1999): 80-108. John S. Earle 

and Zuzana Sakova. "Business Start-Ups or Disguised Unemployment? Evidence on the Character of Self-Employment from Transition 

Economies," Labour Economics 7, no. 5 (2000): 575--601. Edvard Johansson, "Self-Employment and Liquidity Constraints: Evidence from 

Finland," Scandinavian Journal a/EconomIcs 102, no. I (2000): 123-134. Mark P. Taylor, "Self-Employment and Windfall Gains in Britain: 

Evidence from PaneJ Data," Economica 68, no. 272 (2001): 539~565. Douglas Holtz-Eakin and Harvey S. Rosen, "Cash Constraints and 

Business Start~Ups; Deutschmarks versus Dollars," Contributions to Economic Analysis & Policy 4, no. I (2005). Robert W. Fairlie and Harry 

A. Krashinsky, "Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited," Working Paper (2008). 

J2 U.S. Census Bureau, Wealth and Asset Ownership, 2008 (accessed July 20'()9); available from http://w,",yw.census.govlhhes/www/wealthl2002/ 

wlth02·1. html 

17 
25 

Table 5 

Median Household Net Worth by 

Ethnicity/Race, 2002 

Total 

Non-minority 

Asian or Pac. Islander 

Hispanic 

African-American 

Median Net Worth 

$58,905 

$87,056 

$59,292 

$7,950 

$5,446 

Source: U.S, Census Bureau, Housing and 

Household Economic Statistics Di~sion (2008). 

Racial differences in home equity may be especially important in providing access to startup capital. 

Less than half of Hispanics and African Americans own their own home compared wHh three quarters of 

non-minorities. Asian Americans also have a low rate of home ownership at 57 percent. 33 The median 

equity of Hispanic and African American home owners is also substantially lower than for non-minorities 

($49,000 for Hispanics, $40,000 for blacks, and $79,200 for whHes). Homes provide collateral and home 

equity loans provide relatively low-cost financing. Without the ability to tap into this equity many minorities 

will not be able to start businesses. 

Previous stUdies found that relatively low levels of wea~h among Hispanics and African Americans 

contribute to their lower business creation rates relative to their representation in the U.S. population. 

Indeed, recent research using statistical decomposition techniques provides evidence supporting this 

hypothesis. Using matched CPS Annual Demographic Files (ADF) data from 1998 to 2003, Robert Fairlie 

found that the largest single factor explaining racial disparities in business creation rates are differenoes in 

asset levels. 34 Lower levels of assets among African Americans account for 15.5 percent of the difference 

between the rates of business creation among whites and blacks. This finding is consistent with the 

presence of liquidity constraints and low levels of assets limiting opportunities for African Americans to start 

businesses. The finding is very similar to estimates reported by Fairlie in a 1999 study" for men using the 

Panel Study of Income Dynamics (PSID). Estimates from the PSID indicate that 13.9 to 15.2 percent of the 

blacklwhite gap in business start rates can be explained by differences in assets. 

Fairlie also found that differences in asset levels represented a major hindrance for business creation 

among Hispanics.'" Fairlie and Christopher Woodruff focused on the causes of low rates of business 

formation among Mexican Americans in particular.37 One of the most important factors in explaining the 

gaps in rates of business creation between Mexican Americans and non-Hispanic whites is also assets. 

Relatively low levels of assets explain roughly one quarter of the business entry rate gap for Mexican 

Americans. Magnus Lofstrom and Chumbei Wang analyzed SIPP data and also found that low levels of 

wealth for Mexican Americans and other Latinos work to lower self-employment entry rates.3Il Apparently, 

low levels of personal wea~h limit opportunities for Mexican Americans and other Latinos to start businesses. 

" Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States, and U,S. Census 

Bureau, Wealth and Asset Ownership, 2008 (accessed July 2009); available from http://v.ww.census,govlhhes/www/wca1th12002Iwlth02~2.htmL 

'4 Robert W, Fairlie, "Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of Self-Employment by Gender, Race and 

Education," in The Life Cyc.:le of Entrepreneurial Ventures, international Handbook Series on Entrepreneurship, ed. Simon Parker (New York: 

Springer, 2006). 

35 Fairlie. "The Absence of the African American Owned Business: An Analysis of the Dynamics ofSelf~Employment." 

~(, Robert W. Fairlie, 'T:.ntreprenemship among Disadvantaged Groups: AnAnfllysis of the Dynamics of Self-Employment by Gender, Rnce and Education." 

17 Robert W. Fairlie and Christopher Woodruff, "Mexican-American Entrepreneurship," University of California Working Paper (2009} 

38 Magnus Lofslrom and Chunbei Wang, "Hispanic Self~Emptoyment A Dynamic Analysis of Business Ownership," University of Texas at 

Dalla. .. Working Paper (2006). 

18 
26 

Although previous research indicates that low levels of personal wealth result in lower rates of 

business creation among minorities, less research has focused on the related question of whether low 

levels of personal wealth and liquidity constraints also limit the ability of minority entrepreneurs to raise 

adequate levels of startup capital. Undercapitalized businesses will likely have lower sales, profits and 

employment and will be more likely to fail than businesses receiving optimal levels of startup capital. 

Evidence on the link between startup capital and owner's wealth is provided by examining the relationship 

between business loans and personal commitments, such as using personal assets for collateral for 

business liabilities and guarantees that make owners personally liable for business debts. Robert B. 

Avery, Raphael W. Bostic and Katherine A. Samolyk39 used data from the SSBF and Survey of Consumer 

Finances (SCF) and found that the majority of all small business loans have personal commitments. The 

common use of personal commitments to obtain business loans suggests that wealthier entrepreneurs may 

be able to negotiate better credit terms and obtain larger loans for their new businesses possibly leading to 

more successful firms." Ken Cavalluzzo and John Wolken also found in their study'" that personal wealth, 

primarily through home ownership, decreases the probability of loan denials among existing business 

owners. If personal wealth is important for existing business owners in acquiring business loans then it 

may be even more important for entrepreneurs in acquiring startup loans. 

Estimates from the 1992 CBO microdata indicate that Hispanic- and African American-owned 

businesses have very low levels of startup capital relative to non-Hispanic white-owned businesses." 

For example, less than 2 percent of African American firms start with $100,000 or more of capital and 

6.5 percent have between $25,000 and $100,000 in startup capital. Hispanic firms also have low levels 

of startup capital although the disparities are not as large. African American-owned firms are also found 

to have lower levels of startup capital across all major industries" What are the consequences of these 

racial disparities in startup capital? Previous research indicates that the level of startup capital is a strong 

predictor of business success." In tum, low levels of startup capital are found to be a major cause of 

worse outcomes among African American-owned businesses. Using earlier CBO data in his 1997 study, 

TImothy Bates found evidence that racial differences in business outcomes are associated with disparities 

in startup capital." More recent estimates indicate that lower levels of startup capital among African 

American firms are the most important explanation for why African American-owned businesses have lower 

survivor rates, profits, employment and sales than non-minority-owned businesses." In contrast to these 

patterns, Asian firms are found to have higher startup capital levels and resulting business outcomes" 

,9 Roben B. Avery, Raphael W, Bostic, and Katherine A Samolyk, "The Role of Personal Wealth in Small Business Finance," Journal of 

Banking and Finance 22, no, 6 (1998): 1019-1061. 

40 Astebro and Berhardt (2003) found a positive relationship between business survival and having a bank loan at startup after controlJing for 

owner and business (;haracteristics. 

41 Ken Cavalluzzo and John Wolken, "Small Business LOlln Tumdovms, Personal Wealth and Discrimination," Journal a/Business 78, no. 6 

(2005): 2153·2177. 

42 U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners. Fairlie and Robb, Race and Entrepreneurial Success: 

Black~, Asian-, and White-Owned Businesses in the United States. 

41 U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners. 

44 Timothy Bates, Race, Se!f.Employment & Upward MobIlity: An Illusive American Dream (Washington, D.C.~ Woodrow Wilson Center Press 

and Baltimore: John Hopkins University Press. 1997), and Fairlie and Robh, Race and Entrepreneurial Success: B/ack-, Asian~, and WhiteOwned Businesses in the United States, provide two re(;ent examples. 

4$ Bates, Race, Sel,fEmployment & Upward Mobility: An l//usIVe American Dream. 

4(j Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-. and White-Owned Businesses in the United States. 

471bid. 

19 
27 

Minority and non-minority entrepreneurs differ in the types of financing they use for their businesses. 

Previous research indicates, for example, that African American entrepreneurs rely less on banks than 

whites for startup capital." African Americans are also less likely to use a home equity line for startup 

capital than are whites, which may be partly due to the lower rates of home ownership reported above. 

On the other hand, African American business owners are more likely to rely on credit cards for startup 

funds than are white business owners. In a few studies using the 1987 GBO, Bates" found large 

differences between African American and white-owned firms in their use of startup capital. African 

American firms were found to be more likely to start with no capital, less likely to borrow startup capijal 

and more likely to rely solely on equity capital than white firms. BatesSO also found that loans received by 

African American firms borrowing startup capital are significantly smaller than those received by whiteowned firms even after controlling for equity capital and owner and business characteristics such as 

education and industry. Previous research also indicates that MBEs are more likely to use credit cards 

and less likely to use bank loans to start their businesses than non-minority-owned businesses.51 

Addijional evidence on racial differences in access to financial capital is provided by published 

estimates from the GBO." The GBO questionnaire asks owners with unsuccessful businesses from 1992 

to 1996 why their businesses were unsuccessful. African American business owners were two to three 

times more likely as all business owners to report "lack of access to business loans/credit" or "lack of 

access to personalloansicredit" as a reason for closure. Hispanic business owners were also more likely 

to report that lack of access to financial capital was a reason for closure. 

Minorijy firms also have trouble securing funds from venture capitalists and angel investors. Private 

equijy funds targeting minority markets are very small relative to the total, which is problematic because 

these funds appear to be important for success.53 Minority angels comprise 3.6 percent of all angel 

investors, and MBEs comprise 3.7 percent of firms presenting their business ideas to potential angel 

investors.54 The disparity in access to venture capital funds does not appear to be driven by performance 

differences. Bates and William D. Bradford" examined the performance of investments made by venture 

capital funds specializing in minority firms and found that these funds produce large returns. Venture 

capital funds focusing on investing in minority firms provide returns that are comparable to mainstream 

venture capital firms. Funds investing in minorijy businesses may provide attractive returns because the 

market is underserved. 

48 u.s. Census Bureau, 1992 Economic Census: Characteristics of Business Owners. 

49 Bates, Race, Self-Employment & Upward Mobibty: An illUsive American Dream. Timothy Bates, "Financing Disadvantaged Firms." Credit 

Markets/or the Poor, eds. Patrick Bolton and Howard Rosenthal. (New York; Russell Sage Foundation, 2005). 

so Bates, Race, Self-Employment & Upward Mobility: An Il/usive American Dream, 

51 U.S. Department of Commerce, Minority Business Development Agency, CharacteristIcs of Mtnorily Businesses and Entrepreneurs. 

52 U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners. 

51 Milken Institute and the Minority Business Development Agency, The Minomy Business Challenge: Democrati::ing Capitalfor Emerging 

Domestic Markets, Glenn Yago and Aaron Pankrat (2000). 

54 Jeffrey SohI, "The Angel Investor Market in 2008: A Do'WIl Year In Investment Dollars But Not In Deals," Center for Venture Research, 2008 

(accessed July 17,2009); available from http://wsbe.llnh.edU/files/2008_Analysis_Report_FinaLpdf. 

5S Timothy Bates and William D. Bradford, "Venture~Capital Investment in Minority Business," Journal of Money Credit and Banking 40, no. 

2-3 (2008} 489-504 

20 
28 

Evidence of Lending Discrimination 

A factor posing a barrier to obtaining financial capital for minority-owned businesses is racial 

discrimination in lending practices. Much of the recent research on the issue of discrimination in business 

lending uses data from various years of the Survey of Small Business Finances (SSBF). The main finding 

from this literature is that MBEs experience higher loan denial probabilities and pay higher interest rates 

than white-owned businesses even after controlling for differences in credit-worthiness, and other factors. 56 

Cavalluzzo and Wolken" found in their study using the 1998 SSBF that while greater personal wealth 

is associated with a lower probability of denial, even after controlling for personal wealth, there remained 

a large difference in denial rates across demographic groups. African Americans, Hispanics, and Asians 

were all more likely to be denied credit, compared with whites, even after controlling for a number of owner 

and firm characteristics, including credit history, credit score, and wealth. They also found that Hispanics 

and African Americans were more likely to pay higher interest rates on loans that were obtained. They 

also found that denial rates for African Americans increased with lender market concentration, a finding 

consistent with G. Becker's classic theories of discrimination." Using the 2003 SSBF, Blanchflower 

(2007)59 also found Asian Americans, Hispanics and African Americans were more likely than whites to be 

denied credit, even after controlling for creditworthiness and other factors. 

Using the 1993 National Survey of Small Business Finances (NSSBF), Cavalluzzo, Linda Cavalluzzo, 

and Wolken60 found that all minority groups were more likely than whites to have unmet credit needs. 

African Americans were more likely to have been denied credit, even after controlling for many factors 

related to creditworthiness. In fact, denial rates and unmet credit needs for African Americans widened 

with an increase in lender market concentration. The fear of denial often prevented some individuals from 

applying for a loan, even when they had credit needs. Hispanics and African Americans most notably had 

these fears. David G. Blanchflower, P. Levine, and D. Zimmerman conducted a similar analysis with similar 

results, but did not have access to some of the proprietary information available to researchers from the 

Federal Reserve. However, they did find that African American-owned businesses were more likely to 

have a loan application denied, even after controlling for differences in creditworthiness, and that African 

Americans paid a higher interest rate on loans obtained. They also found that concems over whether a 

loan application would be denied prevented some prospective borrowers from applying for a loan in the first 

place. The disparities between the denial rates between whites and African Americans grew when taking 

these individuals into consideration along with those that actually applied for a loan. R. Bostic and K. P. 

Lampani" include additional geographic controls and continue to find a statistically significant difference in 

approval rates between African Americans and whites. 

5& Lloyd Blanchard, John Yinger and Bo Zhao, "Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?" Syracuse University 

Working Paper (2004). Blanchflower, Levine, and Zimmerman. Cavalluzzo, Cavalluzzo, and Wolken. Cavalluzzo and Wolken. Susan 

Coleman, "The Borrowing Experience of Black and Hispanic~Owned Small Firms: Evidence from the 1998 Survey of Small Business 

Finances," The Academy oj Entrepreneurship Journal 8, no. I (2002): 1~20. Susan Coleman, "Borrowing Patterns for Small Finns: A 

Comparison by Race and Ethnicity." The Journal o/Entrepreneurial Fmance & Business Ventures 7, no. 3 (2003): 87~108. United States Small 

Business Administration, Office of Advocacy. Availability of Financing to Small Firms using the Survey of Small Business Finances, K. Mitchell 

and D.K. PeW',e, (2005). 

F CavaUuzzo and Wolken. 

5S G. Becker, The Economics a/Discrimination, 2nd ed. (Chicago: University of Chicago Press, 1971). 

59 David G. Blanchflower, "Entrepreneurship in the United States," IZA Working Paper No. 3130 (2007). 

&0 CavaUuzzo, Cavalluzzo, and Wolken. 

61 R Bostic and KP. Lampani, "Racial Differences in Patterns of Small Bminess Finance: The Importance of Local Geography," Working Paper (1999) 

21 
29 

Other Types of Discrimination 

Discrimination against minority businesses may occur before these businesses are even created. 

Previous research indicates that minorities have limited opportunities to penetrate networks, such as those 

in construction.52 If minorities cannot acquire valuable work experience in these industries then it will limit 

their ability to start and operate successful businesses. There is also evidence in the literature indicating 

consumer discrimination against minority-owned firms. Minority firms may have difficulty selling certain 

products and services to non-minority customers limiting the size of their markets and resulting success. 

According to a study of microdata from the 1980 Census,·3 African Americans negatively select into selfemployment, with the most able African Americans remaining in the wage/salary sector, whereas whites 

positively select into self-employment and negatively select into wage/salary work. These findings are 

consistent with discrimination by white consumers. Among African Americans low earners are the most 

likely to enter into business ownership, whereas both low and higher earning whites are the most likely 

to enter self-employment.'"' He notes that this finding is consistent with the theoretical predictions of 

consumer and credit market discrimination against African Americans. 

More generally, minority-owned firms may face limited market access for the goods and services that 

they produce.·5 This may be partly due to consumer discrimination by customers, other firms, or redlining. 

But, it may also be due to the types, scale and locations of minority firms. Published estimates from the 

CBO'· indicate that African American-, Hispanic-, and other minority-owned businesses are all more likely 

to serve a local market than the average for all U.S. firms. Minority firms are more likely than white firms 

to report that their neighborhood is the geographic area that best describes where the business's goods 

and services are sold. Furthermore, minority-owned businesses are much more likely to sell to a minority 

clientele than are white businesses, which may reflect more limited market access. 

Human Capital Barriers 

Education has also been found in the literature to be a major determinant of business ownership.·' 

Lower levels of education obtained by Hispanics and African Americans partly limit their business 

ownership rates.58 According to an analysis of CPS data by Fairlie,.' 6.0 percent of the blackfwhite gap in 

self-employment entry rates is explained by racial differences in education levels. Similar estimates from 

the PSID are reported in another study." Mexican Americans have even lower levels of education than 

African Americans, which translate into a limiting factor for business creation. Estimates from the CPS 

indicate that education differences account for 32.8 to 37.9 percent of the entry rate gap for Mexican 

6

2Timothy Bates, Banking on Black Enterprise (Washington, D.C.: Joint Center for Political and Economic Studies, 1993), Joe R. Feagin 

and Nikitah Imani, "Racial Barriers to Afiican American Entrepreneurship: An Exploratory Study," Social Problems 41, no. 4 (1994): 562-585. 

Timothy Bates and David Howell, "The Declining Status of African American Men in the New York City Construction Industry," Race, 

Markets, and Social Outcomes, cds. Patrick Mason and Rhonda Williams (Boston: Kluwer, 1997). 

6J George Borjas and Stephen Bronars, "Conswner Discrimination and Self-Employment," Journal of Political Economy 97, no. 3 (1989): 581~605. 

(>4 Daiji Kawaguchi, "Negative Self Selection into Self~Employment among AfiicanAruericru1S," TopICS in EconomicAnafysis & Policy 5, no. 1 (2005): 1-25. 

65 Bates, Race, Self-Employment & Upward Mobility: A" illUSive American Dream. 

66 U.S. Census Bureau, 1992 Economic Census: Characteristics a/Business Owners. 

61 J. van dec Sluts, M. van Praag and W. Vijverberg, Education and Entrepreneurship in Industriali::ed Countries: A Meta-Analysis, Tinbergen 

Institute Working Paper no. TI 03-046/3 (Amsterdam: Tinbergen Institute, 2004). Simon C Parker, The Economics a/Self-Employment and 

Entrepreneurship (Cambridge: Cambridge University Press, 2004). U.S. Small Business Administration, Office of Advocacy, Educational 

Attainment and Other Characteristics of the Self-Employed: An Examination Using the Panel Study a/Income Dynamics Data, C. Moutray, 

Working Paper (2007). 

6!1 Minority business owners are found to be less likely to use technology which may be related to lower levels of human capital, U.S. 

Department of Commerce, Economic Statistics Administration and the Minority Business Development Agency. 

69 Fairlie, Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics o/Self-Employment by Gender, Race and Education. 

70 Fairlie, "The Absence of the African American Owned Business: An Analysis of the Dynamics of Self~Employment." 

22 
30 

Americans." Education is important in explaining differences in business creation rates between Mexican 

Americans and whites, as well as the types of businesses entrepreneurs are likely to pursue. "The high 

rate of business ownership by ASians is in part due to their relatively high levels of education." These 

resuKs, however, are for all Asians and some groups are less educated. Fairlie, Zissimopoulos, and 

Krashinsky find, for example, that Vietnamese immigrants have lower levels of education than the national 

average." 

Previous research indicates an even stronger relationship between the education level of the owner 

and business performance. Businesses with highly educated owners have higher sales, profits, survival 

rates, and hire more employees than businesses with less-educated owners." The general and specific 

knowledge and skills acquired through formal education may be useful for running a successful business 

and the owner's level of education may also serve as a proxy for his/her overall ability or as a positive 

signal to potential customers, lenders or other businesses. The estimated relationships between owner's 

education and small business outcomes are strong even after controlling for family business background 

measures, startup capital levels and industries. 

Lower levels of education may be challenging the business performance of some minority 

entrepreneurs, such as Hispanics and African Americans." Mexican American business owners have 

lower incomes than non-Hispanic white business owners, and most of the difference is due to low levels of 

education among Mexican American owners.n Mexican American business owners, especially immigrants, 

have substantially lower levels of education. The single largest factor in explaining why Mexican immigrants 

and U.S. bom Mexican Americans have lower business income than whites is education. Lower levels of 

education account for more than half of the gaps in business income. 

Another measure of human capital relevant for Hispanics is language ability. Limited English 

language ability may make it difficult to communicate with potential customers and suppliers, and learn 

about regulations. Previous stUdies provide some evidence that a better command of the English language 

is associated with higher business ownership rates." But, the evidence linking language ability to business 

performance is even stronger. Fairlie and Woodruff found that one of the most important factors explaining 

low business incomes among Mexican American businesses is language ability. For Mexican immigrant 

men, limited ability to speak English explains roughly one third of the gap in business income. 

7j Fairlie and Woodruff 

72 Lofstrom and Wang. 

71 Fairlie, Entrepreneurship among Disadvantaged Groups: An Analysis o/the Dynamics o/Self-Employment by Gender, Race and Education. 

74 Robert W, Fairlie, Julie Zissimopoulos, and Harry Krashinsky, "The International Asian Business Success Story? A Comparison of Chinese, 

Indian and Other Asian Bll'iinesses in the United States, Canada and United Kingdom," in international Differences in Entrepreneurship, eds. 

Joshua Lerner and Antoinette Schoar (forthcoming), (accessed October 2009): available from http://www.nber.org/chaptersic822Lpdf. 

75 Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream. u.s. Department of Commerce, Economic Statistics 

Administration and the Minority Business DevelopmentAgency. Astcbro Thomas and Irwin Bernhardt, "Start-Up Financing, Owner 

Characteristics and Survival," Journal o/Economics and Business 55, no. 4 (2003): 303-320. Alicia Robb, The Role a/Race, Gender, and 

Discrimination in Business Survival, Doctoral Dissertation, (Ann Arbor; University of Michigan Press, 2000). van der Sluts, van Praag, and 

Vijverberg. 

76 Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States. 

77 Fairlie and Woodruff: Magnus Lofstrom, and Timothy Bates, "Latina Entrepreneurs," Small Business Economics (2009) (forthcoming). 

7S Robert W. Fairlie and Bruce D. Meyer. "Ethnic and Racial Self-Employment Differences and Possible Explanations," Journal o/Human 

Resources 31, no. 4 (1996): 757-793. Fairlie and Woodruff 

23 
31 

Family Business Background and Social Capital 

Research also indicates that the probability of self-employment is substantially higher among the 

children of the self-employed." These studies generally find that an individual who had a self-employed 

parent is roughly two to three times as likely to be self-employed as someone who did not have a selfemployed parent. There is evidence that this strong intergenerationallink in business ownership is 

detrimental to disadvantaged minorities. In a study by Michael Hout and Harvey S. Rosen80 they note a 

'~riple disadvantage" faced by African American men in terms of business ownership. They are less likely 

than white men to have self-employed fathers, to become self-employed if their fathers were not selfemployed, and to follow their father in self-employment. Another study" provides evidence from the PSID 

that current racial patterns of self-employment are in part determined by racial patterns of self-employment 

in the previous generation. 

Recent research indicates that family business backgrounds are also extremely important for the 

success of businesses" More than half of all business owners had a self-employed family member prior 

to starting their business with many of these business owners working in those family businesses. Working 

in a family business leads to more successful businesses. Business outcomes are 15 to 27 percent better 

if the owner worked in a family business prior to starting his or her own business even after controlling 

for other factors. African American business owners have a relatively disadvantaged family business 

background compared with white business owners. African American business owners are much less likely 

than white business owners to have had a self-employed family member prior to starting their businesses 

and are less likely to have worked in that family member's business. Only 12.6 percent of African American 

business owners had prior work experience in a family member's business compared with 23.3 percent of 

white business owners. Hispanic business owners are also less likely to have self-employed parents and 

work in family businesses than non-minority business owners." This lack of prior work experience in family 

businesses among future minority business owners, perhaps by restricting their acquisition of general and 

specific business human capital, limits the success of their businesses relative to whites. This creates a 

cycle of low rates of business ownership and relatively worse business outcomes being passed from one 

generation of minorities to the next" 

Related to the family business background constraint, previous research also indicates that the size 

and composition of social networks are associated with self-employment. B5 If minority firms have limited 

access to business, social or family networks or have smaller networks then they may be less likely to enter 

business and create successful businesses. These networks may be especially important in providing 

financing, customers, technical assistance, role models, and contracts, but it is difficuH to identify their 

contributions to racial differences in business performance.il6 Limited networks manifest themselves in 

?'J Bernard Lentz and David Laband, "Entrepreneurial Success and Occupational Inheritance among Proprietors," Canadian Journal of 

Economics 23, no. 3 (1999); 563w579, Fairlie, "The Absence of the African American Owned Business: An Analysis of the Dynamics ofSelfw 

Employment." Thomas A Dunn and Douglas 1, Holtz-Eakin, "Financial Capital, Human Capital, and the Transition to Self-Employment; 

Evidence from Intergenerational Links," Journal o/Labor Economics l8, no. 2 (2000): 282-305. Michael Hoot and Harvey S. Rosen. "SelfEmployment, Family Background, and Race," Journal of Human Resources 35, no. 4 (2000): 670-692 

so Bout and Rosen. 

81 Fairlie, "The Absence of the Afiican American Owned Business: An Analysis of the Dynamics of Self-Employment." 

~2 Robert W. Fairlie and Alicia M. Robb, "Why are Black-O\\'flcd Businesses Less SuC(;essful than White-Owned Businesses: The Role 

of Families, Inheritances, and Business Human Capital," Journal afLabor Economics 25 (2007): 289-323. Fairlie-Robb, Race and 

Entreprenelmal Success: Black-,Asian-, and WhIle-Owned Businesses in the Uniled States. 

BJ US. Census Bureau, [992 Economic Census: Characteristics of Business Owners. 

Jill Fairlie-Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States, 

~5 W. David Allen, "Social Networks and Selt:'Employment," Journal a/Socia-EconomIcs 29, no. 5 (2000): 487-501. 

86 These networks may also be important in forming strategic alliances with other firms as discussed in Leonard Greenhalgh, Increasing MBE 

Competitiveness through Strategic Alliances (Washington D.C.: Minority Business Development Agency, U.S. Department of Commerce, 2008). 

24 
32 

many of the factors listed below such as financial capital, discrimination, and human capital. For example, 

minority businesses are known to have limited networks in the investment community resulting in lower 

levels of capital use." Given these interactions and the inherent difficulty of measuring networks, it is 

difficult to identify their effects on business performance. 

87U,S. Department of Commerce, Minority Business Development Agency, Accelerating Job Creation and Economic Productivity: Expanding 

Financing Opportunities/or Minority Businesses (2004). 

25 
33 

The Current Financial Crisis 

The current financial crisis creates special challenges to MBEs in securing financing. It is likely that 

the constraints mentioned in the previous section will probably get much worse. To get some insight into 

what is happening we investigate current trends in several measures. Although it is difficult to obtain recent 

data on the use of startup and expansion capital, we examine trends in related measures. We first focus 

on factors affecting the personal wea~h of the entrepreneur. 

Figure 1 

Quarterly Housing Price Index, Federal Housing Finance Agency 

ZW.oo .--------------------------------------------------------------------, 

220.00 r-----------------· -.... -----------~r"" .. -.---.... --.-.""":_'---------.-_j 

210.00 +--·-··---·-------·---·-··---7---

100.00 +-.--.. ---~-----------.. -.. -.--.. ---.-------.... --.-.--.-.-... ·--·-----.. ··1 

160.00 +-...,...--...,---r----r----r--,------r----r--r----r----r--r----r--,----,-,-----,----,----r--,---l 

The largest single asset affecting personal wealth is home equity. Over the past two years housing 

values have dropped precipitously. Figure 1 displays the Monthly House Price Index from the Office of 

Federal Housing Enterprise Oversight from January 2004 to February 2009. The peak in the housing 

market was in the summer of 2007, but has steadily dropped since then with evidence of a slight rebound. 

The recent decline in housing equity does not bode well for access to finanCing. Home equity is found to 

be a major determinant of starting a business in the United States." The decline in housing values is likely 

to further limit the amount of capital available to minority entrepreneurs. 

88 Fairlie and Krashinsky, 

27 
34 

Stock market investments represent another component of personal wealth. The stock market has 

fallen considerably over the past few years. The Dow Jones Industrial Average dropped from over 11,000 

in September 2008 to levels above 8,000 in May 2009 (Figure 2). The substantial drop in stock market 

wealth has undoubtedly resulted in less personal wealth to invest in businesses and use as collateral for 

loans for entrepreneurs. 

Figure 2 

Dow Jones Industrial Average 

12.500.00 ,------------------------------------, 

12,000.00 

11,000.00 1---"'-=----

10,500.00 t---........................ -,---~-----.---......... --.-------------_j 

10,000.00 t-------.... -.... ---\,-------------......... --.---------_j 

9.500.00 t-----.--.-.-.... ---....... -.... --.h:--f------.----.. --..... -- ..... ----------i 

9,000.00 t--------... ---+tl~+-lo::_:__-__. .. -~t_--...... -.---.......... ------_j 

8,000.00 

7,500.00 

7,000.00 t-.. -....... -... --... ------.......... -.--...... -.. -.. ---------~~~-------_j 

More direct measures of access to capital are represented by the number of venture capital deals. 

Figure 3 displays the number of venture capital deals made in the United States over the past couple of 

years. The total number and amount of deals declined substantially since the second quarter of 2008. In 

the first quarter of 2009 there were only 549 venture capital deals in the Untted States worth $3 billion 

(Figure 3). These levels were half or less than half of what they were one year earlier. Additionally, 

estimates of the total amount of funding from angel investors dropped by 26,2 percent from 2007 to 2008 

resulting in total investments of $19.2 billion." 

$9Sohl 

28 
35 

Figure 3 

Venture Capital Deals, PricewaterhouseCoopers/National Venture Capital 

Association MoneyTree Report 

$9,000,000,000 -,-------------------------T1200 

$5,000,000,000 400 

$3,000,000,000 1--_--_--_--_--_-_--_--_-4-+ 

2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 2008-3 2008-4 2009·1 

The decline in access to these potential sources of financial capital for businesses has resulted in a 

rapid rise in the number of business bankruptcy filings. Business bankruptcy filings have increased sharply 

in the last two quarters of 2008 (Figure 4). The number of bankruptcy filings increased to 12,901 in the 

fourth quarter of 2008 from 7,985 one year earlier. 

FJgure 4 

Total Business Bankruptcy Filings 

Administrative Office ofthe U.S. Courts 

14,000 ,-------_____ -'-_________________ -, 

10,000 j-,---,--,---,-------------------,--

2,000 

Mar-OS Mar-07 Jun-O 7 Sap-O? Oec-07 Mar-08 Jun<l8 Sep-06 Doc-OS 

29 
36 

Surveys of financial institutions provide another well-cited barometer of current conditions in the 

financing market. A good summary of the overall climate for banking and finance is available in the Federal 

Reserve's "Beige Book." The report from April 2009 notes that credit availability remains "very tight." The 

report also notes deteriorating loan quality and rising delinquencies for all loan types and regions. Another 

widely read source of the state of financing in the United States is the Federal Reserve's Senior Loan 

Officer Opinion Survey on Bank Lending Practices. The report from May 2009 also indicates that business 

lending policies remain vel}' tight, although there is some evidence that the tightening is easing. The 

report also notes a continuing weakening of demand for business loans. As of this publication, the CIT 

Group Inc., one of the nation's largest and publicly traded lending institutions to small and medium size 

enterprises, is facing a possible bankruptcy although it received funds from the Treasury last year as part 

of its rescue package. There have been many other banks declaring bankruptcy as a result of the current 

financial environment. 

Surveys of small businesses indicate similar problems in the credit markets. A recent survey of small 

businesses from the National Federation of Independent Business indicates a sharp drop in reported loan 

availability over the past year. Small business owners were also more likely to report that they expected 

credit conditions to worsen over the next few months. Optimism among small business owners is also 

down considerably compared to a year ago. The American Express OPEN Small Business Monitor 

indicates a more optimistic outlook for small business owners, but also notes that capital investments are at 

their lowest level in the eight years surveys have been conducted. The Monitor's findings are based from a 

national semi-annual survey of 727 small business owners with fewer than 100 employees. 

All of the recent trends presented here indicate worsening financial conditions. These trends and 

those in the overall economy do not bode well for minority-owned businesses. Because of the limited 

capital available to minority-owned firms, they are likely to be especially vulnerable in the current economic 

conditions. The gains experienced by minority firms in growth of number of firms, gross receipts and 

employment between 1997 and 2002 could be reversed if minority business owners do not have adequate 

access to capital. 

30 
37 

New Empirical Analysis 

In this section, we conduct a new empirical analysis of the barriers to financing faced by minorityowned firms. The findings provide a broader discussion of the barriers to financing faced by minority 

businesses and support some of the previous research discussed in Section 3. 

Data Description 

We use three sources of data for the analysis - the Survey of Business Owners (SBO), Kauffman 

Firm Survey (KFS), and the Survey of Small Business Finances (SSBF). These are the most commonly 

used and respected sources of data on financing of minority-owned businesses. We briefly describe each 

of these data sources. 

The SBO is conducted by the U.S. Census Bureau every five years to collect statistics that describe 

the composition of U.S. businesses by gender, race, and ethnicity. This survey was previously conducted 

as the Survey of Minority- and Women-Owned Business Enterprises (SMOBEISWOBE). The universe 

for the most recent survey is all firms operating during 2002 with receipts of $1 ,000 or more that filed 

tax forms as individual proprietorships, partnerships, or any type of corporation. Businesses that are 

classified as agricultural production, domestically scheduled airlines, railroads, U.S. Postal Service, mutual 

funds (except real estate investment trusts), religious grant operations, private households and religious 

organizations, public administration, and govemment are excluded. The SMOBE and SBO data have 

undergone several major changes over time including the addition of C corporations and the removal of 

firms with annual receipts between $500 and $1,000 starting in 1997.90 

The SBO and SMOBE/SWOBE surveys provide the most comprehensive data available on 

businesses by the race, ethnicity, and gender of the owners. Business ownership is defined as having 51 

percent or more of the stock or equity in the business. Business ownership was categorized by: Gender 

(Male; Female; or Equally Male-IFemale-Owned); Ethnicity (Hispanic, non-Hispanic); and Race (White; 

Black or African American; American Indian or Alaska Native; Asian; Native Hawaiian or Other Pacific 

Islander). The public use tables from the SBOISMOBE are the most widely used source for tracking the 

number, performance, size, and industry composition of minority-owned businesses in the United States. 

In this section, we report detailed information on sources of startup and expansion capital by race from 

published sources. Unfortunately, microdata from the SBO are not publicly available and require an 

extensive application and disclosure process prohibiting additional analyses for this report. 

To examine the use of capital among more established firms, we use microdata from the 2003 Survey 

of Small Business Finances (SSBF). The SSBF is one of the only business-level datasets that provides 

information on the owner, which is essential for identifying businesses owned by minorities. The SSBF is 

conducted by the Board of Governors of the Federal Reserve System every five years. The 2003 SSBF 

contains a large sample of 4,240 for-profit, non-governmental, non-agricultural businesses with fewer than 

500 employees. The SSBF provides detailed information on many owner and firm characteristics, including 

credit histories, recent borrowing experiences, balance sheet data, and sources of financial products and 

services used. 91 

IlOFairlie.and Robb, Race and Entrepreneurial Success: Black~) Asian~, and White~Owned Businesses in the United Stales. 

91 Board of Govemors of the Federal Reserve System, "Financial Services Used by Small Businesses: Evidence from the 2003 Survey of Small 

Business Finances," Federal Reserve Bulletin, Traci L Mach and John D. Wolken (2006): 167~195 (accessed October 2009); availabJe from 

http://www.federaJreserve.gov/pubslbullctin/2006/smallbusiness/smallbusiness.pdf. 

31 
38 

To examine access to financial capital among businesses in their early, formative years of 

development we use confidential-access longitudinal microdata from the newly released Kauffman 

Firm Survey (KFS). The KFS tracks a panel of almost 5,000 firms from their inception in 2004 through 

2007, providing information on sales, employment, and owner characteristics. Also, the survey offers 

unprecedented detail on the capital injections that these firms receive: not only when and how much capital 

they receive, but detailed information of each financial injection. It includes whether the capital comes from 

formal or informal channels, and whether it is equity or debt in the form of personal or business loans, 

credit cards, or from other sources. Information on up to ten owners includes age, gender, race, ethnicity, 

education, work experience, and previous startup experience with large subsamples of MBEs. The KFS 

is the only large, nationally representative, longitudinal dataset providing detailed information on new firms 

and their financing activities over time. Most previous datasets are cross-sectional and focus on older, more 

established firms. 

Sources of Startup and Expansion Capital 

We first examine sources of startup and expansion capital for minority-owned firms from the SBO. 

Estimates are taken from the U.S. Department of Commerce, Minority Business Development Agency'2 

We highlight some of the main findings here. 

Table 6 reports sources of capital used to start or acquire the business by ethnic/racial group and 

sales level. We define high sales firms as firms with $500,000 or more in annual sales. This is consistent 

wijh MBDA:s target market of MBE firms capable of generating significant employment and long-term 

economic growth. The most common source of funding for minority businesses is personal and family 

savings. More than half of all minOrity firms use this source of capital at startup. Among high sales firms 

a higher percentage of minority businesses report the use of personal and family savings (71.0 percent), 

which is higher than for high sales non-minority firms. In addition, related to this source of financing 14.0 

percent of high sales MBEs used other personal and family assets as sources of startup capijal. Overall, 

among firms wijh high-growth and employment potential, MBEs appear to be more reliant on personal 

equity for financing than non-minority firms. For all firms, they use these sources Similarly. 

gz u.s. Department ofC{)mmerce, Minority Business Development Agency, Characteristics o/Minority Businesses and Entrepreneurs. 

32 
39 

Table 6 

Sources of Capital Used to Start or Acquire the Business by Ethnicity/Race and Sales Le...el ($500,000 or more) 

SUl\ey of Business Owners (2002) 

Personall Other PersonaV Business Go-..emment Business 

family personal( business loan from guaranteed loan from Outside None 

sa>Jnas famil;! assets credit card go...emment bank loan bank in\e$tor needed 

American-Indian and Total 51.9% 10.0% 12.2% 1.0% 0.8% 7.8% 2.0% 30.8% 

Alaska Nati...e High Sales 66.8% 17.3% 12.0% 3.1% 3.9% 22.1% 5.7% 

Low Sates 51.3% 9.6% 12.2% 0.9% nla 7.2% 1.9% 

Asian Total 61.4% B.9% 9.S% 1.0% 8.0% 10.2% 3.1% 22,6% 

High Sales 73.2% 13.7% 9.8% 2.2% 2.7% 25.7% 5.6% 

Low Sales 60.2% 8.4% 9.5% 0,9% 0.6% 8.6% 2.8% 

Nati...e Hawaiian and Total 52.6% 10.3% 12.7% 2.3% 0.4% 5.2% 2.1% 29.9% 

Other Pacific High Sales 66.5% 15.8% nla nla nla 20.3% 4.0% 

Islander Low Sales 51.9% nla 13.0% n/. nla nla nla 

Hispanic Total 51.2% 6.7% 9.4% 0.8% 0.4% 5.6% 1.8% 33.1% 

High Sales 69.0% 13.9% 11.6% 1.9% 2.3% 19.1% 4.4% 

Low Sales 50.3% 6.3% 9,3% 0.7% 0.3% 4,9% 1.7% 

Afiican-American Total 50,2% 7,1% 10.1% 1.1% 0.5% 5.7% 2.1% 33.0% 

High Sales 68.2% 14,2% 13.2% 3.1% 4.1% 25.0% 4.9% 

Low Sales 49.8% 6.9% 10.0% 1.0% 0.5% 5.2% 2.1% 

Minority Total 54.1% 7.7% 9.8% 1.0% 0.6% 7.2% 2.3% 29.7% 

High Sales 71.0% 14.0% nla nI. n/. 23.3% 5.1% 

Low Sales 53.1% nla 9.8% nla n/. nla nla 

Non-minority Total 55.6% 9.3% 8.8% 0.8% 0.7% 12.0% 2.5% 27.4% 

High Sales 64.9% 14.8% nla nI. n/. 29.2% 5.4% 

Low Sales 53.5% nI. 8.8%1 nla n/. nla nla 

All Respondent Total 54.6% 9.0% 8.8% 0,9% 0.7% 11.4% 2.7% 27.7% 

Firms High Sales 60.6% 13.7% 6.8% 1.9% 2.1% 27.6% 6.5% 

Low Sales 53.9% 8.5% 9.0% 0.8% 0.5% 9.6% 2.3% 

Notes; (1) Source: 2002 SUl\ey of Business Owners, as reported in U.S. Department of Commerce, Minority Business Dewlopment 

Agency (2008). (2) Businesses with $1,000 or more in receipts are included. (3) High sales firms are those with $500,000 or more in 

annual sales. 

A source of financing that has attracted much discussion in the literature is bank financing. We 

discuss the use of bank financing by minority and non-minority firms in more detail below using the SSBF 

and KFS, but we first examine percentages of firms receiving this source of financing. Among all minority 

firms, 7.2 percent received a business loan from a bank compared with 12.0 percent of non-minority 

firms. High sales minority firms were more likely to receive bank loans with 23.3 percent receiving this 

source of startup capital. But, this level is lower than for high sales non-minority firms w~h 29.2 percent 

receiving bank loans. The disparities in amounts of bank loans and other features of the loan are larger as 

discussed below. 

We also find that minority firms are more likely to rely on credit cards for startup capital, which is a 

high-costs source, but the difference is not large. Minority and non-minority firms are similarly likely to 

receive startup funding from outside investors. 

33 
40 

Table 7 reports sources of capital used to finance expansion or capital improvement by race and 

receipts level. As expected the percentage of minority firms using personal and family saving and assets 

for expansion is lower than for startup. Among all minority firms 33.8 percent of firms reported these two 

sources of capital for expansion. Use of this source of capital was higher for minority firms than nonminority firms. High sales minority firms continue to rely more on credit cards than non-minority firms, 

although the difference is not overly large. Finally, both all and high sales minority firms are less likely to 

use bank loans to fund expansion than are their non-minority counterparts. 

Table 7 

Sources ofeapital Used to Finance ExpanSion or Capitallmprowment of the Business byEthnicitylRace and Sales Lewl ($500,OOO or more) 

SurwyofBusiness ONners (2002) 

Personall Personal! Business GOlJemment Business 

family Other personal! bUsiness loan from guaranteed loan from Outside None 

savinl1s famil~assets credit card 9,olJemment bank lean bank inwstor needed 

Nnerican-Indian Total 30.8% 7.1%, 15.5% 0.7% 0.3% 7.6% 1.3% 52.7% 

and lIIaska NatilJe High Sales 28.1% 9.8% 13.0% 1.1% nla 29.7% nla 40.7% 

Low Sates 30.9% 7,0% 15.6% 0.7% n/. 6.7% 1.3% 53.2% 

Asian Total 31.4% 5.3% 10.6%1 0,6% 0.4% 7.3% 1.5% 53.6% 

High Sales 27.5% 6.7% 10.2% 1.2% 1.1% 22.6% 2.4% 47.2% 

Low Sales 31.8% 5.2% 10.7% 0.5% nla 5.7% 1.4% 54.3% 

Natiw Hawaiian Total 28.6% 5.6%:> 13.6% 1.2% 0.9% 5.6% s 55.3% 

and other Pacific High Sales 27,4% nla 17.5% nla nla 23.4% n/a 42.0% 

Islander Low Sales 28.7% nla 13,4% nla nla nla nla 55.9% 

Hispanic Total 26.5% 4,4% 10.9% 0.5% 0.3"/0) 5.2"1" 1.3% 58.4% 

High Sales 26.8% 6.7% 13.2% 1.6"10 1.1% 27.4% 2.4% 41.8% 

Low Sales 26,4% 4.3% 10.8% 0.5% 0.2% 4.0% 1.3% 59.2% 

African~NrIerlcan Total 29.1% 4.8% 11.5% 0.7% 0.3% 4.1% 1.3% 56.3% 

High Sales 28.0% 6.5% 14.3% 1.8% 2.1% 24.7% 1.7% 43.2% 

Low Sales 29.2% 4.8% 11.5% 0.6'% 0.2% 3.7% 1.3% 56.6% 

Minority Total 28.9% 4.9% 11.2% 0.6% 0.3% 5.7% nla 56.0% 

High Sales 27,4% nla 11.8% nla nla 24.7% nla 44.7% 

Low Sales 29.0% nla 11.2% nla nla nla nla 56.7% 

Non~minority Total 25.0% 5.1% 11,7% 0.5% 0.3% 9,7% nla 59.0% 

High Sales 21.2% nla 9,8% nla nla 30.2% nla 48.8% 

Low Sales 25.9% nla 11.9% nla nla nla nla 60,1% 

~I Respondent Total 25.5% 5.0% 11,4% 0,5% 0.3% 9.2% 1.2% 58,5% 

Firms Hi9h Sales 

Low Sales 

Notes; (1) Source: 2002 SurwyofBusiness OWners, as reported in U.S. of Commerce, MnorityBusiness DelJelopmentAgency(2008). (2) 

Businesses with $1,000 or more in receipts are inclUded. (3) High sales firms are those with $500,000 or more in annual sales. 

The SBO data indicate some differences in the use of sources of startup and expansion capital 

between minority and non-minority firms even when we focused on firms with $500,000 or more in annual 

gross receipts. Minority firms generally rely more on personal and family equity and are less likely to obtain 

bank loans than non-minority bUSinesses. There is also some eVidence of slightly higher use of credit 

cards than non-minority firms. 

34 
41 

Capital Use among More-Established Minority Firms 

The SSBF provides information on older, more-established firms. Average sales and employment of 

firms in the SSBF are much higherthan the total for all firms as reported in the SBO. We examine recent 

equity investments and loans for these firms. Table 8 reports estimates for minority and non-minority firms 

and high and low-sales firms. We defined high sales similarly as having annual gross receipts of at least 

$500,000. 

Table 8 

Equity Investmensts and Loan Amounts 

Survey of Small Business Finances (2003) 

Equity Investments Loans 

Groue Sales Employees Percent Mean Percent Mean N 

Total 

Non-minority $1.043.216 7.3 5.7% $7,822 31.9% $108,912 3,685 

Minority $992,207 6.5 5.1% $3,379 23.6% $46,514 555 

Sales> $500,000 

Non-minority $3,103,310 19.2 6.1% $19,377 52.4% $310,232 1,868 

Minority $3,409,946 18.0 5.4% $7,274 41.2% $149,354 248 

Sales < $500,000 

Non-minOrity $138,329 2.1 5.5% $2,747 22.8% $20,482 1,817 

Minoo!}: $116,392 2.3 5.0% $1,969 17.2% $9,261 307 

Notes: (1) All estimates use survey weights provided by the SSBF. (2) The samples used to estimate mean equity 

investments and loan amounts include firms not receiving those sources of funding. 

We first examine equity investments in the firm. The question in the SSBF asks about new equity 

investments from existing owners, new or existing partners, or new or existing shareholders (excluding 

retained earnings) during the past year. For all firms, minority businesses are less likely to receive new 

equity investments than are non-minority businesses, but the difference is not overly large. MBEs are less 

likely to receive equity investments even when conditioning on high sales firms. In all cases, however, only 

5 to 6 percent of firms receive new equity investments each year. 

The main difference between minority and non-minority firms is the amount of new equity investments. 

Although minority firms are almost as likely to receive new equity investments they receive much smaller 

amounts of new equity. The average amount of new equity investments in minority high sales firms is 

$7,274, which is only 38 percent of the non-minority level. The average amount of new equity investments 

in minority firms receiving equity investments is $3,379, which is 43 percent of the non-minority level. The 

differences in average amount of equity investment are striking especially when noting that average sales 

and employment levels are not that different between minority and non-minority firms (reported in Columns 

1 and 2). Equity investments are notably lower in low-sales firms. Although not reported we also find that 

a very small share of firms receiving new equity financing receive it from venture capital firms or public 

offerings. In fact, no minority firms in the SSBF sample report either of these sources of financing. 

We also examine minority/non-minority differences in loan usage. The SSBF questionnaire asks 

about business loans received during the past 3 years. Table 8 reports estimates of the percent of firms 

receiving loans. Minority firms are less likely to receive loans than non-minority firms. Among high sales 

firms, 52 percent of non-minority firms received loans compared with 41 percent of minority firms. The 

average loan amount for all high sales minority firms was $149,000. The non-minority average was more 

than twice this amount at $310,000. If we condition for only high sales firms receiving loans, the minorityl 

35 
42 

non-minority difference in average loans is smaller, but a large gap in loan amounts remains. The average 

loan received by high sales minOrity firms is $363, 000 compared with $592, 000 for high sales non-minority 

firms. 

Although sample sizes are too small to report separate estimates, we find that there are substantial 

differences within racial groups. Hispanic and African American owned firms have much lower levels of 

loans than non-minority firms, and Asian and African American firms have much lower levels of new equity 

investments than non-minority firms. 

As noted above in Section 3, the SSBF has been used extensively to study the experience of 

minority businesses in credit markets. We update the results of these studies using data from the 2003 

SSBF. Table 9 reports estimates of loan denial rates, fear of applying, and interest rates for minority and 

non-minority firms and by sales size. As found in previous studies, loan denial rates are much higher for 

minority firms than for non-minority-owned firms. This holds true for high sales firms and low-sales firms. 

For high sales firms, the rate of loan denial is almost twice as high for minority firms as for non-minority firms. 

Group 

Total 

Non-minority 

Minority 

Sales> $500,000 

Non-minority 

Minority 

Sales < $500,000 

Non-minority 

Minority 

Table 9 

Loan Denial Rates, Fear of Applying, and Interest Rates 

Survey of Small Business Finances (2003) 

Did not Apply: 

Fear of 

Denial Rate N Rejection N I nterest Rate 

12.3% 1,679 15.8% 3,685 6.4% 

31.5% 218 29.5% 555 7.8% 

8.4% 1,212 12.2% 1,868 5.9% 

14.9% 132 18.8% 248 6.2% 

16.0% 467 17.4% 1,817 6.9% 

41.9% 86 33.4% 307 9.1% 

Note: All estimates use sample weights provided by the SSBF. 

N 

1,586 

175 

1,168 

123 

418 

52 

Although a large percentage of minority firms that applied for loans were rejected even more might 

have been rejected if they had applied. Of course, it is impossible to measure how these firms would have 

been treated in they applied for loans. Instead, the SSBF provides related information on whether the firm 

did not apply for credit when it needed it because the firm thought that the application would be tumed 

down (i.e. fear of rejection). Estimates reported in Table 9 indicate that minOrity firms are more likely to not 

apply for loans because of a fear of being rejected than non-minority firms. For high sales firms, minority 

firms are much more likely to not apply for loans because of a fear of rejection than non-minority firms. 

Previous studies have also found that minority firms tend to pay higher interest rates on business 

loans than do non-minority firms." We find similar evidence for minority firms, For all firms, minority firms 

pay 7.8 percent on average for loans compared with 6.4 percent for non-minority firms. The difference is 

smaller, but still exists for high sales firms. 

<n Blanchflower, Levine and Zirnmennan. Cavalluzzo, Cavalluzzo and Wolken. 

36 
43 

Overall, minority firms are more likely to be denied when applying for loans and are less likely to apply 

for loans because of a fear of rejection. When these firms do receive loans they are for smaller amounts 

and for higher interest rates than non-minority firms. These alarming differences in treatment in the lending 

market, however, may be due to differences in the size, creditworthiness and other characteristics of the 

owners and firms. This does not appear to be the case, however, as previous studies control for numerous 

owner and firm characteristics including the creditworthiness of the firm. We conduct a similar analysis 

including an even more extensive set of controls and continue to find that minority firms are more likely to 

experience loan denials, not apply for loans because of fear of rejection, and pay higher interest rates on 

loans. Any remaining negative racial or gender differences in lending outcomes are consistent w~h the 

existence of lending discrimination.'" 

Regression Analysis of Equity Investment and Loan Amounts 

In this section we conduct a regression analysis to further investigate differences in equity investment 

and loan amounts between minority and non-minority businesses. We estimate several regressions using 

log equ~ investments and log loan amounts as the dependent variables. The main owner controls include 

female, education, age and experience, the main geographic controls include region and urbanic~, and 

the main business controls include number of owners, whether the business was purchased or inherited, 

firm age, legal form and industry. We also include log sales which controls for current and recent business 

performance. To control for the owner's creditworthiness we include whether the owner owns a home, 

home equity, and personal credit scores. Finally, to control for firm creditworthiness we include whether the 

firm filed for bankruptcy in the past. These represent detailed measures of what lenders and investors look 

for in making decisions about providing financial capital to firms. 

Table 10 reports regression estimates for log equity investments and loan amounts for all firms and 

high sales firms. Results for log equity investments are discussed first. After controlling for detailed 

owner and business characteristics we find lower levels of equity investments in minor~ firms compared 

to non-minor~ firms, but the difference is not statistically significant. The education level of the owner 

and experience is strongly associated with receiving equity cap~al. Having more business owners also 

increases the amount of new equity investments in the firm. The sales level does not predict equ~ 

investments in the firm. This may be due to the fact that successful firms do not need as much in new 

equity as less successful firms, but less successful firms have more difficulty attracting new equity 

investments. In the end, the potentially offsetting factors may result in a flat relationship between business 

performance and new equity investments. Higher credit scores are associated with lower levels of equity 

investments which might partly reflect less need. We also estimate a regression including only firms with 

$500,000 or more in annual sales. The results are fairly similar. 

94 Ibid,,36 

37 
44 

Table 10 

Linear Regressions for Log Equity Investments and Loan Amounts 

Survey of Small Business Finances (2003) 

Specification 

Log Equity Investments Log Loan Amount 

(1) (2) (3) (4) 

Sample All Firms Hi-Sales All Firms Hi-Sales 

Minority -0.0916 -0.1616 -0.3499 -0.8365 

(0.0564) (0.1053) (0.1273) (0.2356) 

Female -0.0689 -0.0397 -0.0965 -0.0071 

(0.0423) (0.0793) (0.0955) (0.1775) 

High school graduate 0.0305 0.1101 -0.9618 -0.6670 

(0.1506) (0.2743) (0.3401) (0.6136) 

Some college 0.1061 0.1239 -0.8729 -0.5122 

(0.1484) (0.2699) (0.3351) (0.6037) 

College 0.2942 0.2436 -0.9013 -0.4303 

(0.1500) (0.2733) (0.3388) (0.6113) 

Graduate school 0.3066 0.3538 -0.8277 -0.3871 

(0.1522) (0.2790) (0.3437) (0.6240) 

Age -0.0073 0.0010 -0.0138 -0.0231 

(0.0024) (0.0048) (0.0055) (0.0108) 

Experience 0.0079 0.0008 -0.0068 -0.0051 

(0.0028) (0.0052) (0.0062) (0.0115) 

Number of owners 0.0606 0.0533 0.1049 0.0334 

(0.0120) (0.0122) (0.0271) (0.0273) 

Firm age -0.0021 -0.0010 0.0103 0.0073 

(0.0026) (0.0042) (0.0058) (0.0095) 

Log sales -0.0092 0.0173 0.5409 1.3669 

(0.0119) (0.0392) (0.0268) (0.0877) 

Log home equity -0.0044 -0.0560 0.0080 -0.0663 

(0.0109) (0.0210) (0.0247) (0.0470) 

D& B credit score: 11-25 -0.1988 -0.3226 0.1070 0.3967 

(0.0847) (0.1508) (0.1913) (0.3374) 

D&B credit score: 26-50 -0.2667 -0.1648 0.2849 0.5181 

(0.0799) (0.1419) (0.1805) (0.3174) 

D&B credit score: 51-75 -0.3684 -0.3061 0.1353 0.4900 

(0.On3) (0.1245) (0.1745) (0.2785) 

D&B credit score: 76-90 -0.3502 -0.3519 0.1293 0.2503 

(0.0820) (0.1312) (0.1851) (0.2935) 

D&B credit score: 91-100 -0.3848 -0.2673 0.1829 0.2373 

(0.0927) (0.1403) (0.2094) (0.3138) 

Legal form of organization Yes Yes Yes Yes 

Industry Yes Yes Yes Yes 

Region and urban Yes Yes Yes Yes 

Mean of dependent variable 4.9640 5.0545 7.5048 9.4940 

Sample size 4,240 2,116 2,516 2,116 

Notes (1) OLS coefficient estimates and their standard errors (in parentheses) are reported. 

(2) All estimates use sample weights provided by the SSB F. 

38 
45 

What are the determinants of loan amounts? Specifications 3 and 4 in Table 10 report estimates. 

Minority firms receive smaller loan amounts than non-minority firms even after controlling for detailed 

business and owner characteristics. The differences are large and statistically significant. Among all 

firms, minority businesses have loan amounts that are 35 percent lower than for non-minority firms. The 

difference is even larger when focusing on loans received by high sales firms. 

In addition to race, the number of owners and sales increase loan amounts. Although having more 

sales may reduce the need for loans it may have a much larger effect on the ability to obtain business 

loans. Also, higher credit scores are generally linked to the ability to obtain larger loans. 

Decomposition Estimates 

The regression analysis identifies several potential barriers to financing among minority businesses. 

For example, high credit scores are found to be an important determinant of obtaining business loans. 

If minority firms have low credit scores on average then this could limit their ability to obtain business 

loans. Lower sales levels among minority businesses may also limit their potential to obtain loans. The 

impact of each factor, however, is difficult to estimate. In particular, we want to estimate the contribution of 

differences between minority and non-minority firms in credit scores, sales, and other owner and business 

characteristics to the racial gaps in obtaining financing. 

To explore the questions stated above further, we decompose inter-group differences in a dependent 

variable into those due to different observable characteristics across groups (sometime referred to as the 

endowment effect) and those due to different "prices" of characteristics of groups.95 The Blinder-Oaxaca 

decomposition of the non-minority/minority gap in the average value of the dependent variable, Y, can be 

expressed as: 

Similar to most recent stUdies applying the decomposition technique, we focus on estimating 

the first component of the decomposition that captures contributions from differences in observable 

characteristics or "endowments." We do not report estimates for the second or "unexplained" component 

of the decomposition because it par\iy captures contributions from group differences in unmeasurable 

characteristics and is sensitive to the choice of left-out categories making the results difficult to interpret. 

We also weight the first term of the decomposition expression using coefficient estimates from a pooled 

sample of all groups.w The regression estimates are taken from Table 10. The contribution from racial 

differences in the characteristics can thus be written as: 

Where Jt are means of firm characteristics of race j, if'is a vector of pooled coefficient estimates, 

and j=Wor M for non-minority (non-Hispanic white) or minority, respectively. Equation (2) provides an 

estimate of the contribution of racial differences in the entire set of independent variables to the racial gap. 

Separate calculations are made to identify the contribution of group differences in specific variables to the gap. 

% Alan S, Blinder, "Wage Discrimination: Reduced Fonn and Structural Variables," Journal o/Human Resources, 8, no. 4 (1973): 436-455. 

Ronald Oaxaca, "Male-Female Wage Differentials in Urban Labor Markets," International Economic ReView, 14, no, 3 (l973); 693-709. 

~G Ronald Oaxaca and Michael Ransom. "On Discrimination and the Decomposition of Wage Differentials," Journal of Econometrics, 61, no. I 

(1994): 5-21. 

39 
46 

Table 11 reports estimates from this procedure for decomposing the non-minority/minority gaps in 

levels of equity investments and loan amounts discussed above. The separate contribu1ions from racial 

differences in each set of independent variables are reported. We focus on the main explanatory factors. 

Minority firms have a lower level of equity financing by 3.6 log points (or roughly 3.6 percent). The only 

factor contributing to the difference in log equity investments is experience. Minority business owners 

have less experience than non-minority business owners (16 years compared with 20 years of experience, 

respectively). The lower level of experience explains 3.0 percentage points of the 3.6 percentage point 

difference in log equity investments. This is a small contribution, however. Overall, the differences in log 

equity investments between minority and non-minority firms are not large and there are no factors that 

contribute strongly to the difference. Interestingly, differences in sales, home equity, credit scores, legal 

forms, and industries do not contribute to minority/non-minority differences in equity financing. When we 

focus on only high sales firms we find similar results (reported in Specification 2). 

Table 11 

Decompositions for Log Equity Investments and Loan Amounts 

Survey of Small Business Finances (2003) 

Specification 

Log Equity Investments Log Loan Amount 

(1) (2) (3) (4) 

Sample All Firms Hi-Sales All Firms Hi-5ales 

Non-minority mean of dep var 4.9084 5.0064 6.6563 8.3738 

Minority mean of dep. var 4.8722 4.9656 6.0736 7.5482 

Non~min/min.difference 0.0362 0.0408 0.5827 0.8256 

Female 0.0020 0.0013 0.0028 0.0002 

Education -0.0083 -0.0428 -0.0131 -0.0241 

Age -0.0241 0.0032 -0.0454 -0.0746 

Experience 0.0297 0.0036 -0.0256 -0.0227 

Number of owners 0.0000 0.0059 0.0000 0.0037 

Firm age -0.0075 -0.0050 0.0361 0.0347 

Log sales -0.0027 -0.0016 0.1600 -0.1226 

Log home equity -0.0031 -0.0154 0.0057 -0.0183 

Credit scores -0.0338 -0.0301 0.0084 0.0155 

Legal form of organization -0.0042 -0.0408 -0.0066 -0.0064 

Industry -0.0062 -0.0008 0.0228 0.1150 

Region and urban 0.0000 -0.0186 0.0897 0.1156 

Total explained -0.0583 -0.1411 0.2349 0.0159 

Notes: (1) See text for more details on decompositions. 

(2) Coefficient estimates used in decomposition are reported in Table 10. 

The minority/non-minority gap in financing is much larger for loan amounts. For all firms, we find a 

58 log point difference between minority and non-minority loan amounts. A large part of the difference can 

be explained by minority/non-minority differences in log sales. Minority firms have sales levels that are 

30 percent lower than non-minority firms, and this difference translates into a loan amount gap of 16 log 

points. Thus, roughly 16 percentage points of the gap in loan amounts is due to lower sales levels among 

minority firms. potentially limiting their ability to obtain bank loans. 

40 
47 

Geographical differences also provide a large contribution to why minority firms obtain lower loan 

amounts (9.0 log points). Minority firms have a less favorable regional distribution in the country and are 

more likely to be located in urban areas, which have lower loan amounts all else equal. Surprisingly, credit 

scores are not a major factor only explaining a small amount of the differences in loan amounts. 

If we focus on high sales firms, we find that industry and geographical differences are the two most 

important explanations for why high sales minority firms have roughly 80 percent lower levels of bank loans 

than high sales non-minority firms. Geographical differences explain 12 percentage pOints of the difference 

in loan amounts. Industry differences explain a similar amount of the difference. Minority finms are less 

concentrated in construction and manufacturing which tend to have higher loan amounts, and are more 

concentrated in retail trade, which tend to have lower loan amounts. 

Overall, minority finms have lower equity investments and loan amounts than non-minority firms. 

Having less experience, lower sales, and less favorable geographical and industry distributions partially 

limit their ability to raise financial capital. On the other hand, business owner's education, home equity 

and credit scores do not appear to represent major barriers to raising either equity financing or loans for 

the larger, more established businesses represented in the SSBF. The findings for newly fonmed minority 

businesses may differ, however. We investigate this question next using data from the KFS. 

Capital Use among Newly-Formed Minority Firms 

The KFS provides information on businesses formed in 2004 and follows these new business 

ventures annually through 2007. The KFS, which only recently became available, provides the first 

evidence on the financing patterns of young minority finms. It is useful to examine disparities in financing 

at the early stages of finm growth to understand the life cycle of minority firms and how they compare to 

non-minority firms.97 The KFS also provides the latest microdata on financing of minority businesses with 

estimates from 2007. Another major advantage of the KFS is that it provides a more accurate measure 

of sources and amounts of startup capital than commonly used data sources such as the CBO and Seo 

because the information is gathered in the first year of operations not retrospectively which tor some firms 

could be 20 or more years ago. 

Table 12 reports estimates for the percentage of minority and non-minority firms that use each source 

of financing, as well as the amounts of startup and subsequent capital by source. The sources of financing 

are aggregated into three broad categories: 1) internal financing (debt and equity finanCing by the owner(s) 

and insiders (friends and family), 2) external debt financing (bank loans, credit lines, credit cards, etc.), and 

3) external equity financing (venture capital, angel financing, etc.). Estimates are for both start up capital 

(capital injections in 2004, the first year of operations) and for subsequent new financial injections (annual 

average based on 2005-2007). All dollar figures are reported in 2007 dollars. 

'J7 .Andrew 8. Bernard and Matthew J. Slaughter, The Life C.ycle of a Mjnority~Owned Business: ImplicatiOns for the American Economy 

(Washington: Minority Business Development Agency, 2004). 

41 
48 

Table 12 

Sources of Startup and Subsequent Capital for New Business Ventures 

Kauffman Firm Survey (2004-07) (2007 Dollars) 

Internal Financing Extemal Debt 

Group % of firms Mean % of firms Mean 

Startup capital (2004) 

Non-minority 86.7% $ 46,007 38.1% $ 36,777 

Minority 87.8% $ 41,154 33.6% $ 29,879 

Subsequent capital (2005-2007) 

Non-minority 65.3% $ 16,180 51.8% $ 25,365 

Minority 68.4% $ 13,604 48.2% $ 13,783 

All estimates use survey weights provided by the KF S. 

External Equity 

% of firms Mean 

4.7% $ 7,607 

3.5% $2,984 

5.4% $ 4,082 

6.7% $2,059 

Total 

Financial Capital 

Mean 

$90,391 

$ 74,017 

$45,627 

$ 29,447 

In the first year of operations, minority-owned firms invested nearly $75,000 into their businesses, 

while non-minorities invested more than $90,000. Internal financing was the most frequently used source 

of financing, with more than 85 percent of firms using internal financing for start up capital. It was also the 

largest source of capital for both groups, making up nearly 51 percent of non-minority start up financing 

and more than 55 percent of minority-owned business start up financing. Disparities between minority and 

non-minority firms were larger for external debt and especially external equity. Minority firms averaged 

$29,879 in external debt compared with $36,777 for non-minority firms. Minority firms had the most trouble 

obtaining extemal equity with $2,984 on average equity compared with $7,607 on average for non-minority 

firms. Very few firms used this type of financing though-just 4.7 percent of non-minority firms and 3.5 

percent of minority-owned firms. 

In terms of levels of subsequent financial injections, non-minority businesses continued to make larger 

capital investments. Non-minority businesses invested an average of $45,000 annually into their firms, 

while minority-owned firms invested less than $30,000 on average. This represents a key new finding 

provided by the KFS: disparities in access to financial capital do not become smaller after startup, but 

instead grow in the years just after startup. The minority/non-minority disparity in financial capital is much 

larger in percentage terms for the 2005-07 period than the 2004 year. 

Subsequent financial injections displayed different pattems in terms of financing sources, most 

notably that internal financing dropped in importance. Although it was still the most common source used, 

only 65.3 percent of non-minority firms used internal financing and 68.4 percent of minority-owned firms. 

For non-minority firms, this source made up just over one third of their new financial injections, while for 

minorities it was closer to one half (46.2 percent). Young minority business owners are more reliant on 

using their own or family money to finance operations in the years just following startup than non-minority 

owners. 

Minority and non-minority firms increased their use of external debt financing for subsequent capital 

injections. More than half of non-minority firms (51.8 percent) and nearly half of minority firms (48.2 

percent) used external debt financing for subsequent financial injections. As a percentage of the total 

invested, external debt financing became the most important source of financing, making up more than 55 

percent of non-minority business financing and nearty 47 percent of minority business financing. External 

equity continued to be the least important source, making up 9 percent of non-minority business financing 

and 7 percent of rninority business financing. A slightly larger share of minority-owned firms used this 

source (6.7 percent), compared with non-minority firms (5.4 percent), but the average level of investment 

was half the amount used by non-minority firms. 

42 
49 

Mu~ivariate regressions on the log levels of start up capital are presented in Table 13. Even after 

controlling for numerous owner and finn characteristics, including two-digit industry and credit score, 

minority-owned businesses were still more likely to have significantly lower levels of external debt financing 

and external equity financing. These differences were statistically significant. The coefficient on the 

minority variable was also negative in the internal financing equation, but it was not statistically Significant. 

The coefficient on female was negative and statistically significant in all three models. Owner age, 

education, start up experience, and hours worked were positively correlated with the levels of financing, 

while the owner's previous industry experience was negatively correlated. As far as firm characteristics, 

incorporation was positively associated with the levels of financing, while being home based was negatively 

associated with levels of financing. Levels of innovation, as measured by comparative advantage and 

intellectual property were mixed. Finally, having a high credit score was positively correlated with levels 

of financing and statistically significant in the external debt model, while having a low credit score was 

negatively associated with all three levels of financing and statistically significant in the internal and 

extemal debt financing models. The owner's credit rating is important for obtaining startup financing 

especially for extemal debt. 

43 
50 

Table 13 

Unear Regressbns for Startup Capital 

Kauffman Firm Survey (2004) 

Log of2004 Log of 2004 log of 2004 

Internal Extema! External 

Coefficients Finand[!g Debt Financi!19, Eguil:: Financing 

Minority ~0.0547 ~0.276""" ~0.0746* 

(0.0797) (0'<J965) (0.0386) 

Female -0.161~ -1).168" ~0.133**" 

(0.0755) (0.0889) (0.0337) 

Age 0.0338' 0.0515 .... 0.0244 .... 

(0.0195) (0.0231) (0.00969) 

Age Squared ~0.000207 -1).000427" -0.000232"'* 

(0.000208) (0.000248) (0.000102) 

HS Graduate 0.266 0.130 0.0210 

(0.262) (0.292) (0.101) 

Some College 0.333 0.0928 0.0958 

(0.248) (0.278) (0.0985) 

College Graduate 0.481' 0.0818 0.0907 

(0.252) (0.282) (0.101) 

Graduate Degree 0.556~ 0.231 0.143 

(0.259) (0.292) (0.106) 

Hours Worked 0.0211- 0.00945~· 0.00115 

(weekly average) (0.00150) (0.00175) (0.000784) 

Industry Experience -0.O128~" -0.0139''' -0.000499 

(years) (0.00350) (0.00436) (0.00218) 

Start up Experience 0.0528 0.0539 0.0307 

(0.0677) (0.0807) (0.0380) 

Team Ownership 0.320*"" 0.278" 0.0878 

(0.0885) (0.110) (0.0608) 

Partnership 0.177 -0.155 0.159 

(0.171) (0.197) (0.116) 

Limited LiabilityCorp. 0.500'" OA46'~ 0.197-

(0.0925) (0.108) (0.0494) 

Corporation 0.446""'" 0.369" ..... 0.195ri' 

(0.0946) (0.112) (0.0502) 

Home Based -0.675'" -0.538·~ -0. 15r' 

(0.0732) (0.0846) (0.0396) 

Comparative Adv. 0.146 .... 0.0555 -0.0574 

(0.0701) (0.0825) (0.0401) 

Intelec1ual Property 0.178- -0.0122 0.117** 

(0.0851) (0.101) (0.0547) 

H~h Credit Score 0.111 0.447"""* 0.0169 

(0.122) (0.152) (0.0741) 

Low Credit Score -0.257"" _0.303·ri -D.0242 

(0.0724) (0.0836) (0.0403) 

Constant 7.155"" 6.286* .... 5. 826riO 

(0.608) (0.720) (0.344) 

Observations 3806 3806 3806 

R-squared 0.234 0.122 0.051 

Robuststandard errors in parentheses 

""* p<0.01, .... p<O.OS, "p<0.1 

24g1t industry dummies included 

44 
51 

The decomposition exercise was repeated for average financial injections over the 2005-2007 period, 

with the addition of sales as a control variable. Results are presented in Table 14. In these models the 

minority coefficient was positive in all three cases, but only statistically significant in the internal financing 

model. The finding indicates that the disparities presented in Table 12 disappear after controlling for other 

factors. The coefficient on female was again negative and statistically significant in all three models. The 

coefficients on the sales dummies were positive and usually statistically significant in all three models, 

indicating a positive correlation between size and level of financing. Owner age and education were 

generally no longer Significant predictors, while hours worked continued to be positive and strongly 

significant in all three models. Credit scores continued to be an important determinant of the amount of 

financial capital obtained by the firm although the effects appear to be smaller than for startup capital. A 

strong determinant of subsequent capital investments for most types of financing are the sales level of the 

firm. Higher sales levels in the early stages of firm growth increased the amount of financing used in the firm. 

45 
52 

Table 14 

Linear Regressions for Subsequent Capital 

Kauffman Firm Survey (2005..07) 

Log of Log of Log of 

Internal Extemal EJdernal 

Coefficients FinancIng Debt FinanooQ EgLi!:lFinancina 

Minority 0,278"" 0.0125 0.0283 

(0.0760) (0.0807) (0.0377) 

Female ·0.201""" ~0.242"- -o.0997"H 

(0.0721) (0.0762) (0.0316) 

",. .0.00465 0.1)401"" ..0.00729 

(0,016S) (0.0192) (0.00838) 

Pqe Squared 0.000150 -0.000329 0.000129 

(0,000198) (0.000204) (0,0000918) 

HS Graduate 0.0596 ·OJJ'i192 ..0.114 

(0.242) (0.237) (0.0791) 

Some College 0.113 0.0206- -0,00951 

(0.231) (0.223) (0.0791) 

College Graduate. 0.0701 -0.107 0.0462 

(0.234) (0.226) (0.063i) 

Graduate Degree. 0.198 ·0.136 0.112 

(0.242) (0235) (0.0904) 

HoursWa-ked 0.00946'"''' 0.00553- 0.001SS-

(weekly average) (0.00149) (0.00158) (0.000791) 

Indus1ryExperience. -OJ))405 ·0.0112~" 0.000311 

(years) (0,00330) (0.00382) (0.00100) 

Startup Experience 0.256 .. •• 0.0629 0.0390 

(0,0636) (0.0691) (0.0321) 

Team Ownership 0.0670 0.120 0.153""* 

(0.0869) (0.0917) (0.0489) 

Partnership 0.0393 -0,391"" ..0.0493 

(0.155) (0.153) (0.0716) 

Umiled Liabij!tVCorp. 0.0775 0.168" 0.0623 

(0.0862} (0.0951) (0.0391) 

Corporation 0.0826 0,228- 0.0983""" 

(0,0923) (0,0996) (0,0375) 

Home Based -0.217"· -0.0877 ..0.0326-

(0.0705) (0.0755) (0,0366) 

Comparative Adv. -Q106 -0.0805 0.0309 

(0.0649) (0.0710) (O.0287) 

Inle.UectualProperty OA02 ..... 0.145- 0.214--

(0.0828) (U.0881) (U.0511) 

High CredHScore. 0.168 0.348 ..... 0,0462-

(0.117) (0.il3) (0.0664) 

Low Credit Score -0.137"~ -0.160"· 0.0203 

(0,0683) {0.0737} (0,0305} 

Sales ($50-$18,000) 0.859"H 0.439*"" 0.0436 

(0.0835) (0,0838) (0.0346) 

Sales ($18,OO1-$52,000) 1,203* .... 1 ,028*~~ 0.0271 

(0.091'\) (0.0947) (0.037e) 

SaJes{$52.001-$121,000) 1.509 .... * 1.633""" 0.0267 

(0.102) (0.108) (0.0422) 

Sales ($121.000+) 1.544- 2.301-· 0.207"·· 

(0.114) (0.118) (0.0606) 

Constant 6.766*- 6.302~·~ 6.248"-~ 

(0.569) (0,576) (0.307) 

Observations 3906 3806- 3800 

R·squarec! 0.203 0.264 0.077 

RobuststWldard errors in parenlhese!J 

""'1)<0,01. ** p<O.05, "p<0.1 

2-digit lnduslry dummres Incl1Jded 

46 
53 

We now turn to explaining differences in financing between minority and non-minority firms. The 

decomposition exercise described earlier was repeated with the KFS data. Results are presented in Table 

15. Very little of the differences in start up capijal are explained by racial differences in owner and firm 

characteristics, including credij scores. The owner's age provides the largest contributions to the gaps in 

intemal financing and external debt at roughly 4 percentage points. This may partly capture the effects of 

owner's wealth on access to internal financing and use as collateral for obtaining loans. Minority owners 

tend to be younger and may have less personal wea~h. Credit scores only explain a small amount of the 

gap in startup capital. 

Table 15 

Decompositions for Logs of Startup and Subsequent Capital 

Kauffman Firm Survey (2004-07) 

Specification 

Startup Capital Subsequent Capital 

Internal External Internal External 

Financing Ext. rnal Debt Equtty Financing External Debt Equity 

(1) (2) (3) (4) (5) (6) 

Non-minority mean ofdep var 9.2300 7.6700 6.4400 7.9900 7.8700 6.4000 

Minority mean of dep. var 9.1600 7.3700 6.3400 8.0600 7.6100 6.4000 

Non..min/min, difference 0.0700 0.3000 0.1000 -0.0700 0.2600 0.0000 

Female 0.0016 0.0017 0.0013 0.0020 0.0024 0.0010 

Owner EdUcation 0.0089 0.0029 -0.0015 -0.0014 -0.0076 ~.0051 

Owner Age 0.0455 0.0382 0.0098 0.0277 0.0307 0.0304 

Industry and start Up Experience -0.0169 -0.0186 0.0013 0.0114 -0.0136 0.0032 

Team Ownership 0.0032 0.0028 0.0009 0.0007 0.0012 0.0015 

Legal form of orga nizatian 0.0105 0.0097 0.0040 0.0017 0.0033 0.0009 

Comparative Adv & Intellectual Prop. 0.0088 0.0033 -0.0034 -0.0064 -0.0048 0.0019 

Home Based -0.0135 -0.0107 -0.0030 -0.0043 -0.0018 ~.0007 

Credit scores 0.0176 0.0271 0.0018 0.0116 0.0166 ~.0003 

Hours Woil<ed (week) -0.0639 -0.0286 -0.0035 -0.0287 -0.0168 ~.0047 

Industry -0.0079 -0.0180 0.0070 0.0073 0.0075 0.0090 

Sales nla nla nla 0.1715 0.2256 0.0137 

Total explained -0.0061 0.0098 0.0146 0.1930 0.2427 0.0509 

Notes (1) See text for more details on decompositions. 

About a quarter of the differences in subsequent financial injections of external debt are explained by 

differences in sales. Surprisingly, only about two percent is explained by differences in credit scores. Just 

under 20 percent of the differences in internal financing injections after start up are explained. Again, the 

majority is explained by differences in sales. Only about five percent of the differences in external equity 

injections are explained. Sales only accounted for about one percentage point of the five percentage point 

difference. 

The Employment Returns to Financing 

A stated goal of the U.S. Small Business Administration (SBA) Certified Development Company/504 

guaranteed lending program is to create or retain one job for each $50,000 provided by the SBA.98 Small 

manufacturers have a $100,000 job creation or retention goal, and in the 2009 stimulus package the goal 

for the SBA program has been increased to $65,000 per job. A similar calculation can be made from 

the overall amount spent on the President's stimulus package. The total amount spent on the stimulus 

package is $789.5 billion with the goal of creating 3.5 million jobs. This translates into $225,000 of stimulus 

funds for each job created in the United States. 

<Ill u.s, Small Business Administration, CDCIS04 Program (accessed July 2009): availabJe from http://www,sba.gov/financialassistance/ 

prospectivelenders/cdc504/index.htmL 

47 
54 

The SBA also provides information on the number of jobs created and retained from firms receiving 

funding from its 7(a) and 504 programs. As Table 16 indicates, the 7(a) program provides $18,000 in loans 

for every job created or retained by participant businesses. The 504 program provides $42,000 in funds for 

each job. 

Table 16 

Job Creation through Small Business Administration Loan Programs (2005-08) 

SBA 7(a) Program 

Total amount of loans ($OOOs) 

Jobs created 

Jobs retained 

Investment per job created or retained 

SBA 504 Program 

FY 2005 

$13,998,331 

155,821 

506,312 

$21,141 

Total amount of loans ($OOOs) $4,942,067 

Jobs created 85,540 

Jobs retained 49,482 

Investment per job created or retained $36,602 

Source: U.S. Small Business Administration (2009) 

FY 2006 

$13,447,225 

206,608 

583,562 

$17,018 

$5,610,828 

89,601 

45,878 

$41,415 

FY 2007 

$13,211,731 

265,095 

599,852 

$15,275 

$6,176,210 

97,280 

43,498 

$43,872 

FY 2008 

$11,675,399 

200,081 

449,190 

$17,982 

$5,117,079 

79,274 

42,449 

$42,039 

Are these estimates in line with the amount of financing firms use and their resulting job creation? 

The data demands for such a calculation are great. A measure of each firm's investments through equity 

financing or loans over time is needed as well as a measure of the net number of jobs created over the 

same time period. Unfortunately, this level of detailed data is not readily available. There is one exception 

and that is for new firms that are measured in the KFS. Because the KFS captures firms from their initial 

startup to several years out, and records annual investment amounts from all sources, we can estimate the 

total amount invested in these young firms. We can also examine total net employment created by the firm 

in the last year of the survey. The main disadvantage of this approach is that it may understate the total 

employment returns to financing because it only measures employment four years after business inception. 

Firms starting in 2004 are followed through 2007 in the KFS. The retum to financial investments at the 

earlier stages of firm growth may take longer to be realized. 

Estimates from the KFS indicate that the average young firm invests $214,338 over the first four 

years of existence (see Table 17). The average firm by the end of this period has created 2.5 net new jobs. 

Thus, the average investment per created job for young firms is $85,055. Focusing on young minority 

firms, we find an investment of $52,374 per job. The non-minority average investment per job is $95,492. 

48 

Table 17 

Financing per Job Created among Young Firms 

Kauffman Firm Survey (2004-07) 

Total 

Financing 

2004-2007 

Employment 

Creation by 

2007 

Minority $162,358 3.1 

Non-Minority $227,272 2.4 

Total $214,338 2.5 

Source: Kauffman Firm Survey 2004-07. 

Financing 

per Job 

$52,374 

$95,492 

$85,055 
55 

Employment measures after only four years since business inception are likely to underestimate 

longer-term employment creation because of the short time frame. Longer-term job creation would result 

in a smaller level of financing per job than the estimates from the KFS sample of young firms. Although 

understated, the estimates from the KFS are in the same broad range as the new SBA goal of $65,000 per 

job created or retained. 

It is important to note that this measure of the employment returns to financing does not represent 

the causal effects of financing on employment. Firms that receive SUbstantial amounts of financing, for 

example, may have created a large number of jobs without these funds or with fewer funds. And, firms that 

have only obtained small amounts of financing may not have created a large number of jobs even if they 

had obtained substantially more financing. With these concerns in mind, the calculations here provide only 

an approximation to actual levels and some care is required in interpreting these results as the required 

amount of financing needed to create a job. 

Table 17 also indicates that young minority-owned firms created jobs at similar rates than young nonminority firms. As discussed before, 2002 Census data showed that minority firms also paid similar wages 

compared to non-minority firms. According to the Bureau of Labor Statistics, the national unemployment 

rate reached 9.8 percent in September of 2009, and the unemployment rate of African Americans is even 

higher at 15.4 percent, followed by that of Hispanics at 12.7 percent. Greater capital access for minorityowned firms is essential to sustain their growth, reduce national unemployment levels, and in particular the 

high rate of unemployment in minority communities. 

49 
56 

Conclusions 

Minority business enterprises (MBEs) contribute substantially to the U.S. economy. The number of 

minority firms, their gross receipts, employment and payrolls are growing at a faster rate than for nonminority firms. 

Moreover, young minority-owned firms created jobs at similar rates than young non-minority firms. 

Minority-owned firms are a critical component to reducing the national unemployment rate, especially the 

elevated unemployment in minority communities. 

Inadequate access to financial capital is found to be a particularly important constraint limiting the 

growth of minority-owned businesses. Estimates generated for this report provide extensive evidence of 

the difficuHies in obtaining financial capital among minority-owned businesses. 

The current economic climate is only making the situation worse. All recent indicators of personal 

wealth and access to financial capital point to worsening conditions for entrepreneurs. Bankruptcy filings 

have increased dramatically over the past year and are likely to continue. 

It is vital to the short-term survival and long-term success of MBEs that we aggressively address the 

liquidity constraints created by the current financial crisis. The resulting loss of MBEs will be very harmful 

for job creation, innovation, economic parity, and productivity in the country. There is a sizeable loss of 

efficiency in the overall U.S. economy imposed by the financing constraints faced by MBEs because of the 

large and growing share of all businesses owned by minorities. Barriers to ensuring access to capital and 

thus growth to any of the diverse sets of groups of businesses in the country limit total U.S. productivity in 

addition to contributing to economic inequality. 

51 
57 

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U.S. Department of Commerce, Minority Business DevelopmentAgency and Milken Insmute. The Minority 

Business Challenge: Democratizing Capital for Emerging Domestic Markets. Research Report, Glenn Yago and 

Aaron Pankrat, 2000. 

U.S. Department of Commerce, Economics and Statistics Administration and the Minority Business Development 

Agency. Keys to Minority Entrepreneurial Success: Capital, Education and Technology, Patricia Buckley, 2002. 

57 
62 

U.S. Department of Commerce, Minority Business Development Agency. Accelerating Job Creation and 

Economic Productivity: Expanding Financing Opportunities for Minority Businesses, 2004. 

U.S. Department of Commerce, Minority Business Development Agency. The State of Minority Business 

Enterprises, An Overview of the 2002 Survey of Business Owners, Number of Firms, Gross Receipts, and Paid 

Employees, 2006. 

U.S. Department of Commerce, Minority Business Development Agency. The State of Minority Business (fact 

sheet), 2008. Accessed October 2009. Available from http://www.mbda.gov/index.php?sectionJd:6&buckeL 

id=789#buckeL852. 

U.S. Department of Commerce, Minority Business Development Agency. Characteristics of Minority Businesses 

and Entrepreneurs, An Analysis of the 2002 Survey of Business Owners, 2008. 

Untted States Small Business Administration, Office of Advocacy. Availability of Financing to Small Firms using 

the Survey of Small Business Finances, K. Mitchell, K. and D.K. Pearce, 2005. 

U.S. Small Business Administration, Office of Advocacy. Educational Attainment and Other Characteristics of the 

Self-Employed: An Examination Using the Panel Study of Income Dynamics Data, C. Moutray. Washington, D.C 

Working Paper, 2007. 

U.S. Small BusinessAdministration. CDC/504 Program. Accessed October 2009. Available from http://www.sba.gov. 

van der Sluis, J., van Praag, M., and Vijverberg, W. Education and Entrepreneurship in Industrialized Countries: 

A Meta-Analysis. TIn bergen Institute Working Paper no. TI 03--04613, Amsterdam: TInbergen Institute, 2004. 

58 
63 

About the Authors 

Dr. Robert W. Fairlie 

Dr. Robert W. Fairlie is a Professor of Economics at the University of Califomia, Santa Cruz, Director of 

the UCSC Masters Program in Applied Economics and Finance, and adjunct researcher at RAND. He 

was a Visijing Fellow at Yale University, Australian National University, and IZA, in Germany. His research 

interests include entrepreneurship, technology, inequality, labor economics, education, and immigration. 

He recently published "Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses 

in the United States" with MIT Press. He is also author of the Kauffman Index of Entrepreneurial Activity. 

He has published numerous articles in leading academic joumals in economics, public policy, management 

and demography. He has testified to the U.S. Congress, U.S. Department ofTreasury and the California 

State Assembly regarding the findings from his research. Dr. Fairlie holds a Ph.D. and MA in Economics 

from Northwestern University and a BA with honors from Stanford University. 

Dr. Alicia M. Robb 

Dr. Alicia M. Robb is a Senior Economist with Beacon Economics, specializing in minority entrepreneurship, 

small business outcomes, lending discrimination, government procurement, and economic development. 

She is currently a Senior Research Fellow with the Ewing Marion Kauffman Foundation. She is also the 

Founder and President of the Foundation for Sustainable Development, an international development 

organization working with local nonprofit organizations in six countries throughout Latin America, East 

Africa, and South Asia. She has worked as a staff economist for an economic consulting firm and as an 

economist for the Office of Economic Research in the Small Business Administration and for the Division 

of Research and Statistics at the Federal Reserve Board of Governors. She recently published "Race 

and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States' with 

MIT Press. She received her Ph.D. in Economics from the University of North Carolina at Chapel Hill, 

specializing in economic development and econometrics. 

59 
64 
65 

Mr. HINSON. And now, with the Committee’s approval, I would 

like to move on into some of the things that MBDA is doing to address some of these challenges. 

As many of you know, MBDA has been in existence for over 40 

years. The agency’s mission is to foster the growth and global competitiveness of minority-owned and operated firms nationwide. Our 

goal is to create a new generation of businesses with $100 million 

or more in annual revenue, which in turn will generate higher economic activity and job creation. 

MBDA’s performance is evaluated annually on the number of 

new jobs created, the dollar value of contracts awarded and the dollar value of financing packages. Last year, MBDA executed on over 

$3 billion in contracts and financings, which equated to the creation of over 3,000 new jobs. 

However, the potential for growth is largely untapped and unrealized. If the minority-owned business community reached economic parity, which is something we spend a lot of time talking 

about in our agency, this business sector would employ 16 million 

people and generate $2.5 trillion in gross receivables, thereby expanding the national tax base by billions of dollars. 

Clearly, the growth of minority-owned firms can generate much 

needed employment, gross receipts, and add to the overall expansion of our national economy. Investing in firms owned by minorities not only makes good business sense, but it is an investment 

in the future of our nation. 

MBDA is undertaking a variety of actions to improve access to 

capital. I would like to take a moment and just touch on several 

of these particular initiatives that we are focusing on. 

Chair LANDRIEU. Try to wrap up in a minute, if you would. 

Mr. HINSON. Okay, very good. The first one is a surety bonding 

initiative. Although minority-owned firms represent 12 percent of 

the total construction companies, typically they receive less than 1 

percent of the government contracts. One of the things we are focusing on, Madam Chair, is to identify $100 million in private capital through a public-private partnership that will leverage up to 

a billion dollars to provide surety bonding access and capability for 

minority-owned and operated construction firms. 

The second initiative that we are focusing on is a minority investment fund initiative. We are working with investment firms 

nationwide to pull together and coalesce capital around minorityowned and operated businesses in high-growth industries such as 

green technology, clean energy, health care infrastructure and 

broadband technology. And we believe that by coalescing capital 

around these particular key industries, that we can pull together 

over a billion dollars of wealth from private sources and institutional capital, to help address the issue of access to capital for minority firms within these key industries. 

On a final note, Madam Chair, the Department of Commerce and 

MBDA are honored by this opportunity to testify before you and 

your distinguished colleagues. I respectfully request that my full 

written testimony be entered into the official hearing record. 

We look forward to working with you to create an environment 

where minority firms have an equal opportunity to participate in 

every sector of the marketplace. Thank you. 
66 

[The prepared statement of Mr. Hinson follows:] 

U.S. DEPARTMENT OF COMMERCE 

fVi 

MINORITV aUSINESS 

~Bt'\TM~ DEVelOPMENT AGENCV 

WRITTEN TESTIMONY OF 

DAVID A. HINSON, NATIONAL DIRECTOR 

MINORITY BUSINESS DEVELOPMENT AGENCY 

U.S. DEPARTMENT OF COMMERCE 

Before the United States Senate 

Committee on Small Business and Entrepreneurship 

April 15, 2010 
67 

Opening 

Good Morning Madam Chair Landrieu, Ranking Member Snowe, and distinguished Members of 

the Committee. Thank you for inviting the Minority Business Development Agency (MBDA) 

here today to discuss capital access for minority businesses and the activities ofMBDA. 

My name is David A. Hinson and I was appointed as the National Director of the Minority 

Business Development Agency by Commerce Secretary Gary Locke on July, 15,2009. 

Prior to assuming this position, I was the President and CEO of Wealth Management Network, 

Inc., a multi-million dollar independent, financial advisory boutique. I have also held a variety 

of senior-level and mid-management positions at Bank of America, Morgan Stanley & 

Company, First Chicago Bank (now JP Morgan Chase) and the Village Foundation. 

Overview 

As is abundantly clear, the financial environment and recession last year has created tighter 

credit markets, a decline in housing values and swollen labor markets. For all businesses, 

especially those that are minority-owned, having access to working capital- or capital that is 

used to keep operations going and pay bills - has always been, and continues to mean the 

difference between the success or failure of that business. 

Firms also need capital to fund their growth and ability to perform on contracts. And still others 

- primarily those in the construction field - need bonds to fulfill contractual obligations. Capital 

access is, in fact, one of the most important challenge business owners face on a daily basis. 

Access to capital for minority-owned businesses, however, is an issue today as it was in 1969 

when the Minority Business Development Agency was established. While there are some 

valuable lending and bonding programs available, minority-owned businesses continue to face 

substantial barriers and disparities with respect to accessing capital. 

Last year we conducted multiple stakeholder forums with minority businesses, financiers and 

minority business associations to dissect the issue and explore solutions. It was from these 

meetings that MBDA agreed a study about capital access between minority and non-minorityowned businesses was needed. 

Key Findings from the MBDA Report 

In the January 2010 study commission by MBDA and co-authored by Drs. Robert Fairlie and 

Alicia Robb, entitled Disparities in Capital Access between Minority and Non-Minority-Owned 

Businesses: The Troubling Reality a/Capital Limitations/aced by MBEs, we found that limited 

financial, human and social resources - as well as racial discrimination - are primarily 

responsible for the disparities in capital. 

Some particular aspects of the fmdings include: 

L Minority-owned firms are less likely to receive loans than non-minority owned firms. 

Page 2 of6 
68 

The denial rate for minority-owned firms with less than $500,000 in annual 

revenues is 41.9% compared to 16% for non~minority-owned firms.l 

The denial rate for minority-owned firms with more than $500,000 in annual 

revenues is 14.9% compared to 8.4% for non-minority-owned firms.2 

2. When minority-owned firms do receive financing, they are provided less money 

regardless of the size of their finn, and at a higher interest rate. 

The average loan size for a minority-owned finn with less than $500,000 in 

annual revenues is just over $9,000 while the average loan amount for a nonminority-owned finn of the same size is more than $20,000.3 

The same holds true for firms with annual revenues exceeding $500,000-

the average loan amount for a minority-owned finn is approximately $150,000 

compared to more than $310,000 for a non-rninority-owned fum. 4 

Additionally, loan interest rates for minority-owned firms with gross revenues 

less than $500,000 exceed 9% while non-minority-owned firms of the same size 

are often able to secure interest rates at less than 7%.5 

3. Minority-owned finns also receive smaller equity investments than non-minorityowned firms even when controlling for finn size. 

The average equity investment in a minority-owned fum earning more than 

$500,000 just exceeds $7,000; yet for a non-minority-owned finn, the average 

investment is more than $19,000.6 

4. Yet, this same report finds that venture capital funds focused on investing in the 

minority business community are highly competitive. 7 

5. Moreover, during the 2001 recession, employment at minority-owned fums increased 

by 4% while employment among non-minority fums declined by 7%.8 So had it not 

been for the employment growth among minority-owned finns, the job loss during 

this period would have been even larger.9 

I see that Dr. Fairlie is scheduled to testify and understand he will go into more details of the 

MBDA report in a later panel this morning. Thus, at this time, Madam Chair, I would like to 

request that the MBDA report, Disparities in Capital Access between Minority and NonMinority-Owned Businesses: The Troubling Reality of Capital Limitationsfaced by MBEs, in its 

entirety be entered in the hearing'S official record. 

And now, with the Committee's approval, I would like to move into some of the things MBDA 

is doing to address these challenges. 

'U.S. Department of Commerce, Minority Business Development Agency, Disparities in Capital Access between 

Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs 

(2010). The data source is the Federal Reserve System, Board of Governors, 2003 Survey of Small Business 

Finances. 

2lbid. 

) Ibid. 

• Ibid. 

, Ibid 

'Ibid. 

7 Timothy Bates and William D. Bradford, "Venture-Capital Investment in Minority Business," Journal of Money 

Credit and Banking 40, no. 2-3 (2008): 489-504. 

• U.S. Department of Commerce, Minority Business Development Agency, Disparities in Capital Access between 

Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs 

(2010). The data source is the U.S. Census Bureau's Special Tabulation on Minority-Owned Firms issued for the 

Minority Business Development Agency (2007). 

, Ibid. 

Page30f6 
69 

Overview of MBDA 

As many of you know, MBDA has been in existence for over forty years. We are authorized by 

Executive Order 11625, as amended, and receive annual appropriations from the Commerce, 

Justice, and State Appropriations Subcommittee. The Agency's mission is to foster the growth 

and global competitiveness of U.S. businesses that are minority-owned. 

We work with minority-owned firms of all sizes during all stages of their business life cycle with 

a special focus on firms with annual gross revenues of at least one million dollars. Our goal is to 

create a new generation of businesses with $100 million in annual revenue which in turn will 

generate higher economic activity and job creation. 

MBDA funds a nationwide network of approximately 45 centers, which are operated as 

public/private partnerships. The centers are staffed by professional consultants who have the 

knowledge and practical experience necessary to operate profitable businesses. 

MBDA's Performance Accomplishments 

MBDA's performance is evaluated annually on the number of new jobs created, the total dollar 

value of contract awards and the total dollar value of financing transactions generated by the 

Agency. Last year, MBDA helped firms access more than $3 billion in contracts and financing, 

of which $800 million was specifically working capital, equity investments and bonding. 

Additionally, the growth of these minority firms led to the creation of more than 3,000 new jobs. 

Still, there is much work ahead of us. 

Consider this: A special tabulation completed by the U.S. Census Bureau on the 2002 Survey of 

Business Owners, showed that the growth rate in the number of minority-owned firms far 

outpaced that of non-minority owned businesses. Minority-owned firms employed almost 4.7 

million workers with an annual payroll of$115 billion. 1O And these firms generated $661 billion 

in annual gross receipts.!! 

Despite this success, the potential for growth among minority-owned firms is largely untapped 

and unrealized. 

For example, if the minority-owned business community had reached economic parity with their 

population representation in 2002, minority-owned businesses would have employed more than 

16 million workers and generated more than $2.5 trillion in gross receipts,!2 thereby expanding 

the national tax base by billions of dollars. Clearly, the growth of capable and qualified 

10 U.S. Department of Commerce, Minority Business Development Agency, Disparities in Capital Access between 

Minorily and Non-Minority-Owned Businesses; The Troubling Realily aJCapital Limitations Faced by MBEs 

(2010). The data source is the U.S. Census Bureau's Special Tabulation on Minority-Owned Firms issued for the 

Minority Business Development Agency (2007). 

"Ibid. 

12 Ibid. U.S. Department of Commerce, Minority Business Development Agency, The State oj Minority Business 

Enterprises, An Overview oJthe 2002 Survey oJBusiness Owners, Number oj Firms, Gross Receipts, and Paid 

Employees (2006). U.S. Department of Commerce, Minority Business Development Agency, The State oJMinority 

Business Enterprises,(Fact Sheet) (2008). 

Page 4 of6 
70 

minority-owned fums is necessary and will generate much needed employment, gross receipts, 

and add to the overall expansion of our national economy. 

Denying capital to minority-owned firms constrains innovation and jo b creation. Working 

together, we can close this opportunity gap. By providing adequate capital to the minorityowned business community, we can achieve our goals of domestic prosperity and global 

competitiveness. 

Moreover, in light of the U.S. Census' projections that the U.S. population will be majority 

minority by 2042,13 investing in firms owned by minorities not only makes good business sense, 

but it is an investment in the future of the U.S. economy. 

MBDA Initiatives 

In addition to our ongoing efforts to grow the dollar volume of financing awards that we 

facilitate for our clients, MBDA is undertaking two specific initiatives to improve access to 

traditional and non-traditional sources of capital: 

1. Surety Bonding Initiative 

Although minority finns represent 12 percent of all firms in construction nationwide, 14 

currently fewer than one percent of all Federal construction contracts go to minority 

contractors. One of the leading causes of this is these contractors' inability to obtain 

surety bonding. 

The inherent problem is twofold: I) consolidation of the surety industry has restricted 

access to performance bonds by raising underwriting standards; and 2) minority 

contractors continue to face discriminatory barriers and often lack the capacity, both 

financially and in terms of human resources, to effectively navigate through the myriad 

Federal, state, insurance, surety company, and private technical assistance programs 

available to them. 

Our goal is to help to identify over $100 million in private capital through a 

public/private partnership and to grow that capacity to over $1 billion in surety bonding 

capacity over time. 

2. Minority Investment Fund Initiative 

MBDA is also focused on assisting minority-owned businesses outside the construction 

industry gain greater access to capital. 

MBDA is currently exploring the viability of a privately managed investment fund that 

would target minority-owned businesses in high-growth industries including green 

technology, clean energy, health care, infrastructure and broadband technology. 

13 U.S. Census Bureau's 2000 Census projections for population (2008) . 

• 4 MBDA industry analysis of data from the U.S. Census Bureau's Special Tabulation on Minority-Owned Finns 

issued for the Minority Business Development Agency (2007). 

Page 5 of6 
71 

MBDA believes it is possible to spur the development of a privately managed investment 

fund that would attract $100 million dollars in private wealth and institutional capital and 

help to address some of the barriers minority owned firms face in obtaining capital from 

existing funds and lenders. 

Conclusion 

I would again like to thank you Madam Chair Landrieu, Ranking Member Snowe, and the entire 

Committee for allowing me to testify before you today. I respectfully request the Chair to enter 

my full written testimony into the official hearing record. 

On a final note, Madam Chair, the Department of Commerce and MBDA are honored by this 

opportunity to testify before you and your distinguished colleagues. We look forward to 

working with you to create an environment where minority firms have an equal opportunity to 

participate in the marketplace. Thank you. 

Page 6 of6 
72 

Chair LANDRIEU. Thank you very much, Mr. Hinson. 

Mr. Hedgespeth. 

STATEMENT OF GRADY HEDGESPETH, DIRECTOR, OFFICE OF 

FINANCIAL ASSISTANCE, OFFICE OF CAPITAL ACCESS, U.S. 

SMALL BUSINESS ADMINISTRATION 

Mr. HEDGESPETH. Chair Landrieu, Ranking Member Snowe, 

thank you for the opportunity to discuss the access to capital for 

minority-owned small businesses. 

At SBA, we understand the unique challenges that underserved 

communities face in the current economic environment. SBA’s loan 

programs are designed to fill various market gaps, including those 

created by racial discrimination. Historically, small businesses in 

these underserved communities are among the hardest hit during 

tough economic times, and based on what we have seen, that is certainly the case in this recession. 

As my counterpart, Director Hinson, points out, this recent 

MBDA study found that minority entrepreneurs face significant 

discriminatory barriers in the marketplace. Through our loan guarantee programs, a series of new targeted initiatives and our 8(a) 

Business Development Program, SBA is expanding its efforts to 

help these entrepreneurs overcome some of those barriers. 

In terms of accessing capital, SBA has a proven track record of 

assisting minority-owned firms through our 7(a) and 504 guaranteed loan programs, as well as our microloan program. According 

to the study by the Urban Institute, SBA-backed loans are about 

three times more likely than conventional loans to go to minorityowned firms. 

Also, minority small business loans constitute a percentage of 

our loan dollars that is five times greater than that of the private 

sector. In 2009, 22 percent of all SBA-backed loans were made to 

minorities. These are loans to minority firms that are good credit 

risks, pointing out the critical role that SBA plays in addressing 

the barriers these firms face in the private market. 

As we move forward in addressing the specific barriers that underserved communities, particularly minority communities, face, 

SBA continues to explore ways to engage its partners that share 

in a commitment to this mission. SBA’s microloan program is an 

important way that the agency focuses on underserved markets. 

SBA makes direct loans to nearly 180 community-based microloan 

intermediaries who provide both loans and technical assistance to 

small business borrowers. Since its inception, this program has 

made nearly $438 million of small business loans possible. 

SBA also recognizes that many small businesses need more than 

just the loan. They need counseling and technical assistance to help 

strengthen their business plans and make them more bankable in 

this tight lending environment. To fill this need, SBA is working 

closely with its nationwide network of partners including about 900 

small business development centers, 350 SCORE chapters and 

more than 100 women’s business centers. 

SBA is particularly excited about the results we are seeing from 

Emerging Leaders, formerly known as E–200, an intensive entrepreneurship training pilot for promising firms in our inner cities. 

In 2009, SBA provided training to businesses in New Orleans, Bal-
73 

timore, Atlanta and several other cities: 62 percent of the participants were minorities, and early indicators show that 63 percent 

of participating companies hired new employees, of which 43 percent were hired from the local inner city communities. 

In addition to our counseling and lending programs, SBA also 

provides support to minority-owned businesses through its 8(a) and 

HUBZone Business Development programs. However, a recent Federal Court ruling suggests that it would be useful to clarify and reiterate Congress’s original intent that there should be parity among 

SBA’s contracting programs. SBA hopes that Congress will act 

swiftly to resolve this issue, and we look forward to working with 

you and your counterparts in the House to confirm parity among 

SBA’s contracting and business development programs. 

SBA takes the issues of access to effective tools, including capital, contracts and counseling, very seriously because we know that 

minority and women-owned small businesses are among the fastest 

growing segments of our economy. At least they were until this recession. 

We hope that this hearing will provide valuable insights into the 

challenges that the current economic climate poses for minorityowned businesses and underserved markets more broadly. We also 

hope this hearing will highlight the incredible potential these businesses have to help lead us into full economic recovery. 

SBA thanks the Committee for inviting us to participate in this 

important discussion, and I am happy to take your questions and 

also ask that you permit us to submit more detailed testimony for 

the Committee record. 

Chair LANDRIEU. Without objection, your testimony can be submitted. 

[The prepared statement of Mr. Hedgespeth and the Compelling 

Interest brief follows:] 
74 

U.S. SMALL BUSINESS ADMINISTRATION 

WASHINGTON, D.C. 20416 

Testimony of Grady Hedgespeth 

Director of Financial Assistance 

Office of Capital Access 

U.S. Small Business Administration 

Before the 

Committee on Small Business & Entrepreneurship 

United States Senate 

Assessing Access: Obstacles and Opportunities for Minority Small Business 

Owners in Today's Capital Markets 

April 15, 2010 

Chair Landrieu, Ranking Member Snowe and members of the Committee, thank you for 

the opportunity to discuss access to capital for minority-owned small businesses. At SBA 

we understand the unique challenges that underserved communities face in the current 

economic environment. SBA's loan programs are designed to fill various market gaps, 

including those created by racial discrimination. Historically, small businesses in these 

underserved communities are among the hardest hit during tough economic times, and 

based on what we've seen, that is certainly the case in this recession. However, SBA 

remains fully committed to helping small businesses in these underserved communities 

obtain the financing they need to start and grow successful small businesses. 

That commitment is evidenced by SBA's proven track record of assisting minorityowned firms through our 7(a) and 504 guaranteed loan programs, as well as our 

micro loan program. According to a study by the Urban Institute, SBA-backed loans are 

about three times more likely than conventional loans to go to minority-owned firms. 

Also, minority small business loans constitute a percentage of our loan dollar volume that 

is about 5 times greater than that of the private sector. In 2009, 22% percent of all SBAbacked loans were made to minorities. 

As we move forward in addressing the specific barriers that underserved communities 

particularly minority communities face, SBA continues to explore ways to engage its 

partners that share a commitment to this mission. 

Page I 
75 

SBA's Microloan program is an important way that the Agency focuses on underserved 

markets. SBA makes direct loans to nearly 180 community-based micro lender 

intennediaries who provide both loans and technical assistance to small business 

borrowers. Forty percent of SBA microloans are made to minorities. The Recovery Act 

temporarily increased funding for this program. As a result, SBA has engaged 20 new 

microlending partners this year and continues to expand the reach of this program. 

SBA also recognizes that many small businesses need more than just a loan-they need 

counseling and technical assistance to help strengthen their business plans and make them 

more "bankable" in this tight lending environment. To fill this need, SBA is working 

closely with its nationwide network of partners, which includes about 900 Small Business 

Development Centers, 350 SCORE chapters, and more than 100 Women's Business 

Centers. These partners, and other organizations that receive SBA PRIME grants, work to 

assist small businesses in underserved markets. 

SBA is particularly excited about the results we are seeing from emerging leaders 

(fonnerly E-200), an intensive entrepreneurship training pilot for promising finns in our 

inner cities. In 2009, SBA provided training to businesses in New Orleans, Baltimore, 

and Atlanta, among other cities. Sixty-two percent of the participants were minorities. 

Our early indicators show that 63 percent of participating companies hired new 

employees, of which 43 percent were hired from the local inner-city community. This 

initial data is one reason the President's FYl1 budget asks for funding to expand this 

program. SBA will continue to track the correlation between finn participation and 

hiring to help improve the program and detennine its impact. 

In addition to our counseling and lending programs, SBA also provides support to 

minority-owned small businesses through its 8(a) and HUBZone business development 

programs. These programs help qualirying small businesses compete in the federal 

procurement marketplace. But a recent federal court ruling suggests that it would be 

useful to clarify and reiterate Congress's original intent that there be parity among the 

SBA's contracting programs. l SBA hopes that Congress will act swiftly to resolve this 

issue, and we look forward to working with you and your counterparts in the House to 

confirm "parity" among SBA's contracting and business development programs.2 

SBA takes the issue of access to effective tools, including capital, contracts and 

counseling, very seriously because we know that minority and women-owned small 

businesses are among the fastest growing segments of our economy. We hope this 

hearing will provide valuable insights into the challenges that the current economic 

1 Mission Critical v. U.S., (09-864 C, Ct. of Fed Claims, Feb. 26, 2010). 

2 SBA strongly supports legislation to cl.ril)- and reiterate Congress's origin.l intent not to prioritize one small 

business development program over another. 

Page 2 
76 

climate poses for minority-owned businesses and underserved markets more broadly. We 

also hope this hearing will highlight the incredible potential these businesses have to help 

lead us into full economic recovery. . , 

SBA thanks the Committee for inviting us to participate in this important discussion. 

am happy to take your questions. 

#### 

Page 3 
77 

Compelling Interest for Race- and Gender-Conscious 

Federal Contracting Programs: An Update to the May 23, 1996 Review of Barriers for 

Minority- and Women-Owned Businesses 

I. 

Introduction 

Barriers to access to capital for minority- and women-owned small businesses must be 

viewed in the broader context in which these fInns conduct business. As detailed below, race 

and gender discrimination ~ of which discrimination in access to capital is just one example -

remain a significant obstacle for minority and women entrepreneurs, and federal programs 

continue to have a critical role in addressing it. . 

In Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995) (Adarand 111), the Supreme 

Court held that federal race-conscious classifications "are constitutional only if they are nanowly 

tailored measures that further compelling governmental interests." Id. at 227. In United States 

v. Virginia, 518 U.S. 515 (1996), the Court made clear that gender-conscious classifIcations must 

be substantially related to an important governmental objective. 

FollowingAdarand, the government recognized that, in order to establish a compelling 

interest to support its race-conscious procurement programs, it must show with specifIcity how 

race discrimination and its effects diminished contracting opportunities for minorities. In'1996, 

the Department of Justice summarized and published in the Federal Registerl an extensive body 

of evidence - inclUding Congressional reports and hearings, academic research, state and local 

government disparity studies and testimony - which identifIed discriminatory practices 

affecting racial minorities that act as barriers to their participation in federal contracting. This 

evidence helped explain the compelling interest behind Congress's adoption of race-conscious 

contracting programs, such as the Small Business Administration's Sea) program and the 

Department of Transportation's Disadvantaged Business Enterprise (DBE) program. A year 

later, this same document was presented to Congress arid entered into the Congressional record.2 

Since Adarand, a number of federal courts have cited that document when holding that 

Congress had a compelling interest justifying its race-conscious procurement programs.3 

1 The Compelling Interest for Affirmative Action in Federal Procurement: A 

Preliminary Survey, 61 Fed. Reg. 26,050 (May 23, 1996). This report summarized more than 50 

documents and 30 congressional hearings between 1980 and 1996. 

2 Unconstitutional Set-Asides: ISTEA 's Race-Based Set-Asides After Adarand: Hearing 

Before the Subcomm. on the Constitution, Federalism, and Property Rights of the S. Comm. on 

the Judiciary, 105th Congo 27-80 (1997). See also 144 Congo Rec. S1493 (daily ed. Mar. 6, 

1998) (statement of Sen. Liebennan). 

3 Western States Paving CO. V. Washington State Dep 't ofTransp., 407 F.3d 983, 991-

993 (9th Cir. 2005) (quoting Adarand III, 515 U.S. at 223); Adarand Constructors, Inc. v. Slater 

(Adarand VlI), 228 F.3d 1147, 1167-1176 (10th Cir. 2000), cert. dismissed, 534 U.S. 103 (2001); 

id. at 1176 ("[W]e conclude that the evidence cited by the government and its amici, particularly 

that contained in The Compelling Interest, 61 Fed. Reg. 26,050, more than satisfIes the 

(continued ... ) 
78 

Specifically, these courts recognized that the vast body of evidence before Congress, much of 

which was summarized in the Department of Justice's 1996 memorandum, provided a "strong 

basis in evidence for [Congress's] conclusion that [race-conscious] remedial action was 

necessary.,,4 

Since 1996, a significant body of new data has been generated that bears directly on the 

inquiry of whether race- and gender-consciouss procurement and business development 

programs remain necessary. This includes: Congressional hearings and reports that address the 

barriers faced by minority- and women-owned businesses; government-produced and 

government-sponsored reports on the characteristics and dynamics of minority- and womenowned small businesses; academic literature by social scientists, economists, and other academic 

researchers that focuses on the manner in which various forms of discrimination act together to 

restrict business opportunities for minorities and women; and disparity studies commissioned by 

. state and local governments to determine whether there is evidence Of racial discrimination in 

their contracting markets. Much of this evidence is alrea? before Congress; additional evidence 

is discussed in this statement and submitted along with it. 

( ... continued) 

goverument's burden of production regarding the compelling interest for a race-conscious 

remedy."); see also Sherbrooke Turf, Inc. v. Minnesota Dep't o/Transp., 345 F.3d 964, 970 (8th 

Cir.2003). In 2008, the Court of Appeals for the Federal Circuit invalidated the contracting 

program authorized under 10 U.S.C. § 2323, holding that the evidence before Congress was not 

sufficiently current to provide the compelling interest necessary to support the program. Rothe 

Dev. Corp. v. U.S. Dep't a/De!, 545 F.3d 1023 (Fed. Cir. 2008). This memorandum responds to 

that decision, demonstrating that Congress does currently have ample evidence to demonstrate 

that race-conscious contracting programs are narrowly tailored to serve a compelling goverument 

interest and that gender-conscious programs are substantially related to an important 

goveinmental objective. . 

4 Adarand VII, 228 F.3d at 1174-1175 (holding that "the government has met its initial 

burden of presenting a 'strong basis in evidence' sufficient to support its articulated, 

constitutionally valid, compelling interest"); see also The Department a/Transportation's 

Disadvantaged Business Enterprise Program: Hearing Be/ore the H Comm. on Transp. and 

Infrastructure, 111 th Congo 204 (2009) (Opening Statement of the Hon. James 1. Oberstar, 

Chairman and Rep. from Minnesota) ("Since Adarand, every federal court that has reviewed the 

DOT's DBE program has found it to be constitutional."). 

S Although gender-conscious remedial programs were not the focus of the 1996 

memorandum, which addressed the impact of the Adarand III decision and therefore dealt with 

the race-conscious provisions at issue in that decision, the present memorandum addresses both 

kinds of programs. See 15 U.S.C. 637(m)(2) (giving agencies the authority to "restrict 

competition for any contract for the procurement of goods or services by the Federal 

Government to benefit small business concerns owned and controlled by women" under certain 

circumstances). 

6 Between 2006 and the end of 2009, Congress conduCted thirty-six separate hearings 

concerning public procurement and minority- and women-owned business enterprises. See 

(continued ... ) 

2 
79 

This memorandum summarizes a sample of the extensive body of evidence generated 

since 1996 and builds on the evidence already before Congress at that time. That evidence 

clearly shows that discriminatory barriers continue to impede the ability of minority- and 

women-owned businesses to compete with other firms on a fair and equal footing in government 

contracting markets. Indeed, significant discrimination, in arenas such as access to capital and 

employment, limits the formation of these businesses in the first instance. 7 . 

As in 1996, these barriers "are real and concrete, and reflect ongoing patterns and 

practices of exclusion, as well as the tangible, lingering effects of prior discriminatory conduct."g 

The evidence discussed below confirms that many of the barriers identified more than a decade 

ago remain just as significant today. The government has a compelling interest in race- and 

gender-conscious federal procurement programs where necessarY to ensure that it does not 

"perpetuat[ e] the effects of racial discrimination in its own distribution of federal funds" and 

thereby become a "'passive participant' in a system" of racial or gender exclusion. 9 Adarand 

Constrs, Inc. v. Slater, 228 F.3d 1147 (10th Cir. 2000). 

C ••• continued) 

II. 

Discriminatory Barriers to Contracting Opportunities for 

Minority- and Women-Owned Businesses 

Appendix A for a list of Congressional hearings addressing this subject. Appendix B contains a 

list of academic studies and reports cited herein. Appendix C contains a list of recent disparity 

studies conducted by stat~ and local governments. 

7 For these reasons, some metrics that have been used to measure discrimination in 

government procurement programs - such as bidders' lists or lists of registered contractors 

likely understate the true continuing effects of discrimination. 

s 61 Fed. Reg. at 26,051. 

9 The Supreme Court has recognized and approved the government's compelling interest 

in avoiding becoming a "passive participant" in marketplace discrimination. As the Supreme 

Court stated in City ofRichrnondv. Croson Co., 488 U.S. 469, 492 (1989), for example: 

[I]f the city could show that it had essentially become a "passive participant" in a system 

of racial exc1usionpracticed by elements of the local construction industry, we think it 

clear that the city could take affirmative steps to dismantle such a system. It is beyond 

dispute that any public entity, state or federal, has a compelling interest in assuring that 

public dollars, drawn from the tax contributions of all citizens, do not serve to finance the 

evil of private prejudice, 

3 
80 

Difficulties exist for any person interested in developing and sustaining a business that 

can compete for government contracts. First, a would-be business owner generally needs both 

experience and .financial resources to create a viable enterprise. The practical experience needed 

to succeed in the government contracting market is often gained through prior employment in the 

targeted field, an infonnal apprenticeship .in a family-run business, or membership in a 

professional trade union. The needed financial resources may come from personal wealth, 

commercial business loans, venture capital, or personal loans. And once a business is fonned, 

access to working capital remains critical to both sustain and grow the business. Equally 

important is access to fair contracting opportunities, which means fair treatment by prime 

contractors and private sector customers, business networks, financial institutions, suppliers and 

bonding providers. 

These are significant barriers, and they pose potential barriers to business fonnation and 

success for all businesses, regardless of the race or gender of their owners. But the evidence 

sampled in this memorandum shows that these barriers are substantially more difficult for 

businesses owned by minorities and women to overcome because of the widespread and 

systematic impact of race and gender discrimination that still exists in the economy generally and 

in the government contracting market specifically. The evidence shows that these barriers -

whether the result of intentional discrimination or other activity that nonetheless perpetuates 

discrimination - often: (1) prevent minorities and women from forming businesses by denying 

them needed access to both experience and capital; 10 and (2) deprive minority- and womenowned businesses of fair access to contracting opportUnities because of origoing discrimination 

by prime contractors, business networks, financial institutions, suppliers, and bonding providers. 

These types of disadvantages are in many ways precisely what the federal programs -

like the U.S. Small Business Administration's Sea) and Women Owned Small Business programs 

and the Department of Transportation's Disadvantaged Business Enterprise program -are 

designed to address. Each of these programs is designed to eliminate discriminatory barriers and 

help the development of small disadvantaged finns to enable them to gain a foothold in federal 

procurement contracting. In this way, the firms first gain access to relatively small contracting 

opportunities; which can then lead to success in larger federal contracts and the economy as a . 

whole. 

A. Statistical Evidence Demonstrates the Existence of Discrimination. 

10 Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 1 (2008) (statement of the Hon. John F. Kerry, Chairman and 

Sen. from Massachusetts) (explaining that the disparity between minority- and women-owned 

businesses on the one hand, and non-minority-owned businesses on the other, is "not due to any 

lack of motivation or detennination on behalf of minorities and women," but is instead "due to 

the tremendous hurdles women arid minorities must face each day to gain fair and adequate 

access to venture capital, credit and business and technical training"). 

4 
81 

1. There Are General Disparities Between Minority- And Women-Owned 

Businesses Relative To Their Non-Minority, Male-Owned Counterparts. 

A primary objective of programs that consider raCe or gender as a factor in government 

contracting is to encourage and support the fOl1TIation and development of minority- and womenowned businesses. This effort is a means to help remedy the effects of discrimination that have 

inhibited such business fOl1TIation and success. I The most recent government statistics on 

minority- and women-owned businesses illustrate the disproportionately small share of the 

market these businesses currently occupy. For example, using data from the 2002 Survey of 

Business Owners,12 the U.S. Small Business Administration's Office of Advocacy prepared a 

report in 2007 entitled Minorities in Business: A Demographit; Review of Minority Business 

Ownership.13 The report analyzed infol1TIation on minorities in the work force and minorityowned businesses, including statistics about the minority population, their labor force 

participation, age, education, occupation, work schedules, average personal and household 

income, business ownership, and business dynamics. The report focused on the growth of 

minority-owned businesses over recent years in relation to the growth of the minority 

populations in America during the same time period. Additionally, it analyzed revenue created 

by minority businesses in comparison to that created by non-minority-owned businesses. The 

report showed: 

• Minorities (defined in the study as either Hispanic, Black, American Indian or 

Alaska Native, Asian, Native Hawaiian or other Pacific Islander) made up 

roughly 32% of the population, but owned only approximately 18% offil1TIs. 14 

II Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programsfor the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo 2 (2007) (statement of the Hon. John F. Kerry, Chairman and 

Serio from Massachusetts) ("These programs to help minority and disadvantaged fil1TIS access 

Federal contracts are needed to help these fil1TIs break into the Federal market."); see also id at 

1-2 ("(W]hile the numbers of minority-owned businesses hold promise for the future, and 

obviously that growth is important, it is clear. that much more needs to be done to encourage and 

strengthen the minority business community and to guarantee the opportunities within it. The 

potential for small business growth and entrepreneurship has simply not been fully tapped and 

barriers continue to exist for many minority business owners."). 

12 Census Bureau, 2002 Survey of Business Owners, Advance Report on 

Characteristics of Employer Business Owners: 2002, available at 

http://www.census.gov/econ!census02/sbo/intro.htmQast visited April 29, 2010). This survey 

provides economic and demographic characteristics for the owners of businesses with paid 

employees operating in the United States and is the fust survey requesting infol1TIation about 

business owners since the 1992 Characteristics of Business Owners (CBO) survey. 

. 13 Ying Lowrey, Minorities in Business: A Demographic Review of Minority Business 

Ownership, 298 U.S. Small Business Administration (2007). 

14 Id. at 1, 3. 

5 
82 

• 

• 

• 

• 

• 

• 

Blacks constituted 11.8% of the total U.S. population, but owned only 5.0% of all 

fIrms, and accounted for less than 1 % of total receipts.!S . 

Hispanics constituted 13.5% of the total population, but owned only 6.55% of all 

fIrms, and accounted for only 2.48% oftotal receipts.!6 . 

More than: half of Black-owned businesses had less than $10,000 in business 

receipts in 2002, compared with one-third of \Vhite-owned fIrms.!7 

On average, a non-minority-owned employer fIrm (i.e., a fIrm with one or more 

employees) had more than $1.6 million, while a Black-owned employer fIrm had 

just $696,158 in sales.!S 

On average, for every dollar that a \Vhite-owned fIrm made, PacifIc Islanderowned fIrms made about 59 cents, Hispanic-, Native American-, and Asianowned businesses made about 56 cents, and Black-owned businesses made 43 

cents.!9 

Minoritywomen owned 29% of Black employer finns and 47% of Black nonemployer fIrms; non-minority women owned 17% of White employer fIrms and 

31 % of White non-employer fInns.2o 

A 2006 report produced by the Minority Business Development Agency also fInds that, 

while minority-owned businesses grew in number at a fast pace between 1997 and 2002, their 

growth in gross receipts and paid employment lagged behind the growth in number of fIrms.21 

In fact, the report fInds that the gap between the share of gross receipts generated by minority 

businesses and the share of the minority population slightly widened during that geriod.22 This 

disparity "underscores the opportunity gap that still exists in the U.S. economy." 

IS Id at 1. 

16 Ibid Similarly, while Asian-owned fIrms accounted for 4.8% of all nonfarm 

businesses in the United States, these fInns accounted for only 2.0% of nonfarm business 

employment and a scant 1.4% of their receipts. Census Bureau, Survey of Business OwnersAsian-Owned Firms: 2002: Summary of Findings, available at . 

http://www.census.gov/econisbo/02/asiansof_all.html (last visited April 29, 2010). 

17 Ying Lowrey, Minorities in Business: A Demographic Review of Minority Business 

Ownership, 298 U.S. Small Business Administration 8 (2007). 

IS Id at 7. 

19 Id at 2. 

20 Id at 4. 

11 U.S. Department of Commerce, Minority Business Development Agency, The State of 

Minori~ Business Enterprises, An Overview of the 2002 Survey of Business Owners (2006). 

1 Id. at 12. 

13 The Minority Business Development Agency: Enhancing the Prospects for Success: 

(continued ... ) 

6 
83 

Additional data from the Census Bureau's 2002 Survey of Business Owners show that 

women-owned businesses account for just a fraction of the receipts of all non-farm businesses in 

the United States. For example, in 2002, there were 6.5 million women-owned firms in the 

United States, which accounted for 2S.2% of all non-farm business in the United States but just 

4.2% of their receipts.24 Only 1.S% of women-owned firms had receipts of more than $1 

million, and less than 0.1 % had more than 500 employees?5 

Government reports also show that minority-owned fIrms experience a higher failure rate 

than that of non-minority owned firms. For example, data based on the 1997 Survey-of 

Minority-Owned Business Enterprises (SMOBE) show that, between 1997 and 2001, the 

survival rate for non-minority-owned employer establishments was 72.6%.26 The survival rate of 

all minority-owned employer establishments was about 4 percentage points lower.27 The 

survival rates for specific minority-owned employer establishments were as follows: 

• Asian and Pacific Islander-owned employer establishments: 

( ... continued) 

Hearing Before the H. Subcomm. on Commerce, Trade, and Consumer Protection of the H. 

Comm. on Energy and Commerce, lllth Congo (2009) (statement of David A. Hinson, National 

Director, Minority Business Development Agency) (testifying on the disparities between the 

minority population and the gross receipts generated by minority-owned businesses). 

24 Census Bureau, Survey of Business Owners - Women-Owned Firms: 2002, available 

at http://www.census.gov!econlsbo!02/womensof.html (last visited April 29, 2010). 

25 Elaine Reardon, Nancy Nicosia and Nancy Y. Moore, The Utilization of WomenOwned Small Businesses in Federal Contracting, Kauffman-RAND Institute for 

Entrepreneurship Public Policy 14, 17 (2007). A report issued by the House Smilll Business 

Committee Democratic Staff shows that the federal government's failure to meet its own 

procurement goals of 5% contracting to women-o.wned businesses represented a cost of $6 

billion in lost contracting opportunities for women-owned businesses in FY 2003. House Small 

Business Committee Democratic Staff, Scorecard V: Dramatic Gains in the Federal 

Marketplace Fail to Result in Small Business Contracts (2004) (noting that only 2.89% of 

contracts awarded throughout the entire federal government in FY 2003 went to women-owned 

businesses). For FY 2004, the estimated loss was $5.5 billion. Id at 12. Contracts awarded to 

women-owned small businesses throughout th.e entire federal government in FY 2004 amounted 

to 3.03%; by 200S, that amount had increased very little, to 3.39%. Small Business 

Administration, FY 2004 Official Goaling Report; Small Business Administration, Fiscal Year 

2004: Small Business Prime Contract Goaling Achievements (both documents available at 

http://www.sba.gov/aboutsbalsbaprograms/goals/index.html (last visited April 29, 2010»). 

26 Ying Lowrey, Dynamics of Minority-Owned Employer Establishments, 1997-2001, 

251 U.S. Small Business Administration 10 (2005). 

27 Ibid 

28 Ibid. Note, however, that Asian-American firms exhibited a slightly higher rate of 

contraction than non-minority owned firms (23% in comparison to 21 %). Ibid' Also, a study of 

(continued ... ) 

7 
84 

• 

• 

• 

Hispanic-owned employer establishments: 

American-Indian and Alaska Native-owned employer 

establishments: 

African-American-oWned employer establishments: 

68.6%.29 

67.0%.30 

61.0%.31 

Black-owned employer establishments also had the lowest expansion rate (26%) of all 

minority business groupS.32 Moreover, Black-owned firms and, to a lesser extent, Latino-owned 

firms, had lower sales, hired fewer employees, and had smaller payrolls than White- owned 

firms.33 

Anumber of Congressional hearings have addressed disparities in business formation and 

"success between minority-and women-owned businesses, on the one hand, and businesses owned 

by their non-minority, male counterparts,34 on the other, as well as the specific barriers that 

minority- and women-owned businesses continue to face.35 The evidence presented at these 

( ... continued) 

the survival rate of Asian American firms in SBA's 8(a) program has shown that it is not 

statistically different from the business survival rates of other MBEs in the pro grain. See Asian 

American Justice Center, Equal Access: Unlocking Government Doors for Asian Americans: 

Public Contracting Laws and Policies 28 (2008). 

29 Ying Lowrey, Dynamics of Minority-Owned Employer Establishments, 1997-2001, 

251 U.S. Small Business Administration 10 (2005). 

30 Ibid; 

31 Ibid; 

32 [d; at 20. 

33 Robert W. Fairlie, Minority Entrepreneurship, The Small Business Economy, 

produced under contract with the SBA, Office of Advocacy 74 (2005). 

34 See, e.g., Opportunities and Challenges for Women Entrepreneurs: Roundtable 

Before the S. Comm. on Small Business and Entrepreneurship, 11 Oth Congo 3 (2008) (statement 

of the Hon. John F. Kerry, Chairman and Sen. from Massachusetts) (fmding generally that 

"women-owned businesses sti1l1ag behind their male counterparts in important areas," and 

"fmding specifically that "[w]omen-owned firms have lower revenues and fewer employees than 

their male-owned counterparts"); Expanding Opportunities for Women Entrepreneurs: The 

Future of Women 's Small Business Programs: Hearing Before the S. Comm. on Small Business 

and Entrepreneurship, 1l0th Congo 2 (2007) (statement of the Hon. John F. Kerry, Chairman 

and Sen. from Massachusetts) (stating that "women owned small businesses still continue to 

have markedly lower revenue and fewer employees than firms, even comparable ones, owned by 

men"); Access to Federal Contracts: How to Level the Playing Field: Field Hearing Before the 

S. Comm. on Small Business and Entrepreneurship, 110th Congo 4-8 (2007) (statement of the 

Hon. Benjamin L. Cardin, Sen. from Maryland). 

35 See, e.g., Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs 

(continued ... ) 

8 
85 

hearings shows that the disparities between the minority share of the business population and its 

share of business sales and receipts "are adverse, very large, and statistically significant.,,36 

Moreover, these disparities have been observed in all 50 states and the District of Columbia for 

all minority groups and for women.37 

These studies and data of course provide a snapshot of firms at a particular period of 

time. But the data show that minority-and women-owned firms continue to have only limited 

success both in the larger economy and in the federal procurement market. 

( ... continued) 

for the Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo (2007); Access to Federal Contracts: How to Level the Playing 

Field: Field Hearing Before the S, Comm. on Small Business and Entrepreneurship, I lOth 

Congo (2007); Expanding Opportunities for Women Entrepreneurs: The Future of Women's 

Small Business Programs: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo (2007); How Information Policy Affects the Competitive Viability 

of Small and Disadvantaged Business in Federal Contracting: Hearing Before the Subcomm. on 

Information Policy, Census, and National Archives of the H Comm. on Oversight and 

Government Reform, 11 Oth Congo (2008); Business Start-Up Hurdles in Underserved 

Communities: Access to Venture Capitaiand Entrepreneurship Training: Hearing Before the 

H Subcomm. on Economic Development, Public Buildings, and Emergency Management Staff of 

the H Comm. on Transp. and Infrastructure, 11 Oth Congo (2008); The Department of 

Transportation's Disadvantaged Business Enterprise Program: Hearing Before. the H Comm. 

on Transl and Infrastructure, 111 th Congo (2009). 

3 How Information Policy Affects the Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the Subcomm. on Information Policy, Census, 

and National Archives of the H Comm. on Oversight and Government Reform, 110th Congo 19 

(2008) (statement of Jon Wainwright, Vice President, NERA Economic Consulting); see also 

Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the Minority 

Business Community: Hearing Before the S. Comm. on Small Business and Entrepreneurship, 

1 lOth Congo 26-34 (2007) (statement of Jon Wainwright, Vice President, NERA Economic 

Consulting). 

37 How Information Policy Affects the Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the Subcomm. on Information Policy, Census, 

and National Archives of the H Comm. on Oversight and Government Reform, 11 Oth Congo 25 

(2008) (statement of Jon Wainwright, Vice President, NERA Economic Consulting); see also 

The Department of Transportation 's Disadvantaged Business Enterprise Program: Hearing 

Before the H Comm. on Transp. and Infrastructure, 111 th Congo 328 (2009) (statement of Jon 

Wainwright, Vice President, NERA Economic Consulting) (testifying that minority-and womenowned construction and construction-related professional service businesses earned on "average 

almost 25 percent lower than their non-minority male counterparts, again even when other 

attributes are held constant," and that the disparities are even larger for African American-, 

Native American-, and non-minority women-owned businesses). 

9 
86 

2. Discrimination Is A Basis For Identified Disparities Between MinorityAnd Women-Owned Businesses And Their Non-Minority, Male-Owned 

Counterparts: 

The findings outlined above are mirrored by the numerous studies commissioned by 

state and local governments that have identified stark and continuing disparities between the 

availability of minority- and women-owned businesses and the utilization of such businesses in 

state and local govemment procurement. The Supreme Court has held that such significant 

disparities can support an inference of "discriminatory exclusion.,,38 

A list of approximately 70 recently conducted disparity studies is attached?9 The studies 

show that "minority-owned businesses and women-owned businesses throughout the nation 

continue to face large disparities in almost every aspect of business enterprise activity that can be 

quantified,,40 in a pattern of discriminatory barriers that is repeated across the nation. Moreover, 

the findings confIrm that the disparities "are symptoms of discrimination in the labor force that, 

in addition to its direct effect on workers, reducers] the future availability of [minority- and 

women-owned businesses] by stifling opportunities for minorities and women to progress 

through precisely those internal labor markets and occupational hierarchies that are most likely 

to lead to entrepreneurial opportunities.,,41 The disparities identified in these state and local 

government studies "demonstrate the nexus between discrimination in the job market and 

reduced entrepreneurial opportunities for minorities and women.',42 Past hearings have identified 

similar disparities that exist in the federal contracting market.43 

38 Croson, 488 U.S. at 509. 

39 See Appendix C for a complete listing of these studies. The studies document 

evidence from 25 states and the District of Columbia, including: Alaska, Arizona, California, 

Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Kansas, Maryland, Massachusetts, 

Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, 

Pennsylvania, Tennessee, Texas, Virginia, Washington, and suburban Washington, D.C. 

Eighteen of these studies focus on disparities state-wide: Alaska,Arizona, California, Colorado, 

Idaho, Illinois, Kansas, Kentucky, Maryland, Minnesota, Missouri, Montana, Nevada, New 

Jersey, North Carolina, Oregon, Pennsylvania, and Virginia. See, e.g., The Department of 

Transportation's Disadvantaged Business Enterprise Program: Hearing Before the R Comm. 

on Transp. and Infrastructure, 111 th Congo (2009) (citing more than 20 disparity and utilization 

studies throughout); Business Start-Up Hurdles in Underserved Communities: Access to Venture 

Capital and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 1 lOth Congo (2008) (citing more than 12 different studies throughout). 

40 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the R Comm. on Transp. and Infrastructure, 111 th Congo 326 (2009) (statement 

of Jon Wainwright, Vice President, NERA Economic Consulting). 

41 National Economic Research Associates, Inc., Race, Sex and Business Enterprise: 

Evidencefrom Memphis, Tennessee 100 (2008). 

42 Ibid. 

43 Expanding Opportunities for Women Entrepreneurs: The Future afWomen 's Small 

(continued ... ) 

10 
87 

Academic research using a variety of publicly available statistical data conf=s that 

these disparities remain large and statistically significant even when minority- and womenowned businesses are compared with otherwise similar (with respect to characteristics such as 

industry, geography, etc.) male- and nonminority-owned firmS.4 In reaching these conclusions, 

researchers controlled for factors such as industry, geography, education, age, and labor market 

status even though minority- and women-owned businesses face demonstrable barriers to 

achieving parity in these areas - thus demonstrating that the remaining disparities likely result 

in large part from discrimination. Recent independent research has also concluded that the gap 

that exists between minority business owners and their non-minority counterparts "has not in any 

way been caused by a lack of effort on the part of minority entrepreneurs," but rather results in 

part because "discriminatory conditions that previously existed were deep and pervasive and 

have not been fully reversed.,,45 In addition, some disparities are likely to be greater than data 

( ... continued) 

Business Programs: Hearing Before the S. Comm. on Small Business and Entrepreneurship, 

I 10th Congo 2 (2007) (statement of the Hon. John F. Kerry, Chairman and Sen. from 

Massachusetts) (stating that firms owned by women "account for less than 3 percent of all 

Federal contracts even though they comprise 30 percent of all privately-held f=s," and 

describing this as "an unacceptable ratio"); Full Comm. Hearing to Consider Legislation 

Updating and Improving the SBA's Contracting Programs Before the H Comm. on Small 

Business, I lOth Congo 3 (2007) (statement of the Hon: Steve Chabot, Ranking Member and Rep. 

from Ohio) ("Despite the extra assistance from the SBA, small businesses owned by socially and 

economically disadvantaged individuals [and] women * * * do not receive their fair proportion 

of contracts to sell goods and services to the federal government."); Federal Contracting.' 

Removing Hurdlesfor Minority-Owned Small Businesses: Hearing Before the Subcomm. on 

Government Management, Organization, and Procurement of the House Comm. on Oversight 

and Government Reform, I 10th Congo 3 (2007) (statement of the Hon. Edolphus Towns, 

Chairman and Rep. from New York) ("Although procurement provides the federal government 

with a potentially powerful tod for promoting minority opportunities and counteracting 

discrimination, there continues to be disparity in the allocation of government contracts to 

minority firms."). 

44 Congress heard the results of academic studies that were based on data taken from the 

2002 Survey of Business Owners (SBO) and the Public Use Microdata Sample (PUMS), which 

are both produced by the Census Bureau; the Current Population Surveys (CPS), which is 

produced jointly by the Census Bureau and the Bureau of Labor Statistics; and the Survey of 

Small Business Finances (SSBF), which is produced by the Federal Reserve Board and the SBA. 

See Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the Minority 

Business Community: Hearing Before the S. Comm. on Small Business and Entrepreneurship, 

I lOth Congo 30-34 (2007) (statement of Jon Wainwright, Vice President, NERA Economic 

Consulting); see also The Department of Transportation 's Disadvantaged Business Enterprise 

Program: Hearing Before the H Comm. on Transp. and Infrastructure, III th Congo 328 (2009) 

(statement of Jon Wainwright, Vice President ofNERA Economic Consulting). 

45 Boston Consulting Group, The New Agendafor Minority Business Development 14 

. (continued ... ) 

11 
88 

show; because the age and size of minority- and women-owned businesses may themselves have 

been limited by discrimination, current statistics likely understate the number and size of 

minority- and women-owned firms that might exist once the effects of discrimination no longer 

stifle their creation and expansion.46 . 

Qualitative evidence from minority and women business owners gathered from surveys, 

interviews, and presented via Congressional testimony overwhelmingly support these findingS.47 

For example, minorities and women business owners often report that they "encounter 

significant barriers to doing business in the public and private sector market[s], as both prime 

contractors and subcontractors," that are greater than those faced by their non-minority and nonfemale counterparts.48 Minorities and women report that they "often suffer from stereotypes 

about their suspected lack of competence and are subject to higher performance standards than 

similar White men," and that they "encounter discrimination in obtaining loans and surety bonds; 

receiving price quotes from suppliers; working with trade unions; obtaining public and private 

sector prime contracts and subcontracts, and being paid promptly.'.49 Indeed, Congress has 

repeatedly recognized that there is overwhelming evidence that shows that "considerable 

( ... continued) 

(2005). ". 

46 How Information Policy Affects the Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the Subcomm. on Information Policy, Census, 

and NiltionalArchives of the /f; Comm. on Oversight and Government Reform, 1 lOth Congo 66-

67 & n.2 (2008) (Statement of Anthony W. Robinson, President, Minority Business Enterprise 

Legal Defense Fund). Congress also heard testimony that discriminatory barriers impede the 

ability to measure the actual business capacity ofMBEs because "[mlany, ifnot all, 'capacity' 

indicators are themselves impacted by discrimination. Therefore, it is not good social science to 

limit availability measures by factors such as firm age, revenues, or numbers of employees." The 

Department of Transportation 's Disadvantaged Business Enterprise Program: Hearing Before 

the /f; Comm on Transp. and Infrastructure, 111 th Congo 375 (2009) (statement of Jon 

Wainwright, Vice President, NERA Economic Consulting) "[F]ocusing on the 'capacity' of 

businesses in terms of employment, revenue, bonding limits, number of trucks, and so forth is 

simply wrong as a matter of economics because it can obscure the existence of discrimination. A 

truly 'effective' discriminatory system would lead to a finding of no 'capacity,' and under the 

'capacity' approach, a finding of no discrimination."Id. at 376; see also id. at 10, 325 (Rothe 

court "made several serious errors in its economic reasoning, concluding, for example that 

factors such as firm size should be factored into study estimates ofDBE availability"), 371 

(proper statistical analysis "should not control for the variables affected by the behavior sought 

to be isolated"). 

47 See, e.g., Minority Entrepreneurship: Assessing the Effectiveness of SEA 's Programs 

for the Minority Business Community: Hearing Eeforethe S. Comm on Small Business and 

Entrepreneurship, l10th Congo 337 34 (2007) (statement ofJon Wainwright, Vice President, 

NERA Economic Consulting). 

48 Ibid. 

49 Ibid. 

12 
89 

discrimination" exists throughout the federal contracting market that affects small minority- and 

women-owned businesses across the racial and ethnic spectrum. so 

B. Discrimination Affects the Formation and Development of Minority-And Women-Owned 

Businesses. 

The 1996 report prepared by the Department of Justice identified discrimination in two 

sectors of the national economy that accounted, at least in part, for diminished opportunities for 

minorities to form their own businesses: (1) discrimination by employers, which prevented 

minorities from acquiring necessary technical skills; and (2) discrimination by lenders, which 

prevented minorities from accessing much-needed capital to develop and sustain a business;sl 

Discrimination in these same sectors of the economy persists and remains a significant barrier to 

the formation of viable businesses by minorities and women. 

1. Discrimination by Employers Results in a Lack of Human Capital. 

50 How Information Policy Affects the Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the Subcomm.on Information Policy, Census, 

and National Archives of the H. Comm. on Oversight and Government Reform, 110th Cong.1-2 

(2008) (statement of the Hon. William Lacy Clay, Chairman and Rep. from Missouri) ("There 

has been a large body of evidence conceming discrimination. Court cases, legislative hearings, 

quantitative studies and anecdotal reports detail the considerable discrimination based on race 

and national origin that confronts minority contractors in all parts of the country and in virtually 

every industry. The discrimination is not limited to one particular minority group, instead, 

evidence shows businesses owned by African-Americans, Latinos, Asians, Pacific Islanders and 

Native Americans all must overcome discriminatory practices in order to grow and prosper."); 

see also Opportunities and Challenges for Women Entrepreneurs: Roundtable Before the S. 

Comm. on Small Business and Entrepreneurship, 11 Oth Congo 3 (2008) (statement of the Hon. 

John F. Kerry, Chairman and Sen. from Massachusetts) ("In reviewing the last 20 years, it is 

disturbing to see that the issues that were hindering women entrepreneurs from achieving their 

full potential 20 years ago are still barriers today."); see also The Department of Transportation 's 

Disadvantaged Business Enterprise Program: Hearing Before the H. Comm. on Transp. and 

Infrastructure, lllth Congo 204-205 (2009) (statement of the Hon. James 1. Oberstar, Chairman 

and Rep. from Minnesota) ("The Committee has also received volumes of evidence, both 

empirical and anecdotal, about the discrimination that continues to impact minority and women 

business owners across this nation. This data demonstrates that it is difficult for small and 

disadvantaged businesses to compete - discrimination impactS minority and women owned 

businesses at many points in the contracting process, including obtaining credit, bonding, and 

insurance."); The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111th Congo 309 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT) (noting that states and 

localities had reported to DOT that discrimination against women and minorities persists). 

51 The Compelling Interestfor Affirmative Action in Federal Procurement: A 

Preliminary Survey, 61 Fed. Reg. 26,050 (May 23, 1996). 

13 
90 

Discrimination in the workplace may take many forms. It can be intentional ,and overt, as 

when employers puwosefully treat employees and would-be employees differ~ntly based on 

their race or genderS or when others in the business community explicitly state their preference 

not to work with minorities and women.53 It can involve explicit harassment by employers or 

co-workers that gives rise to a hostile work environmentS4 or can take a more subtle, yet no less 

52 See, e.g., EEOCv. Area Erectors, Inc., No. 1:07-cv-02339 (ND. m. May 27, 2009) 

(construction company settling lawsuit for $630,000 where group of African-American 

employees were terminated because of their race); EEOC v. Marjam Supply Co., No. 7:03-cv5413 (S.D.N.Y. April 14, 2009) (building materials supplier settling lawsuit for $495,000 where 

African-American employees were subjected to differential discipline and termination); EEOC v. 

Michigan Seamless Tube, No. 2:05-cv-73719 (B.D. Mich. June 5, 2007) (steel tubing company 

settling lawsuit for $500,000 after refusing to hire a group of African Americans who were 

former employees of its predecessor company); EEOC v. S & Z Tool. & Die Co., No. I :03-cv2023 (N.D. Ohio Aug. 16,2006) (metal manufacturing firm settling lawsuit for $850,000 where 

it refused to hire women and African-American applicants because of their gender and race, 

respectively); EEOC v. Optical Cable Corp., No. 7:00-cv-00757 (W.D. Va. Feb. 20,2002) . 

(fiber-optic cable manufacturer settling lawsuit for $1 million after failing to hire AfricanAmerican applicants for a ten year period, and assigning women to lower-paying positions than 

their similarly situated male counterparts); EEOC v. Landis Plastics, Inc., No. 5:00-cv-01874 

(N.D.N.Y. Dec. 8,2000) (settling lawsuit for $782,000 after discriminating against women on 

the basis of gender in the assignment of jobs and in promotions). ' 

53 See, e.g., Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs 

for the Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, II0th Congo 39 (2007) (statement of Anthony W. Robinson, President, 

Minority Business Enterprise Legal Defense and Educational Fund) (relating experience of an 

African-American business owner who was told by a potential business partner that he "[doesn't] 

like doing business with you people"); see also Women in Business: Leveling the Playing Field: 

Roundtable Before the S. Comm. on Small Business and Entrepreneurship, I 10th Cong.42 

(2008) (statement of Kerstin Forrester, President, Stonebridge Precision Machining & Certified 

Welding) (testifying that when she first purchased her business, two former customers told her 

"outright that they would not do business with a woman," and that one engineer told her that 

"machining was nothing that a woman could understand"). 

54 See, e.g., EEOC v. Brand Energy Solutions, LLC, No. 2:08-cv-00305 (S.D. Tex. May 

30,2009) (construction contractor settling sexual harassmerit and retaliation lawsuit for $175,000 

where female employee was forced to quit her job when company failed to take appropriate 

remedial action after she was subjected to repeated unwelcome physical contact, sexual advances 

and comments, and threatening behavior); EEOC V. Ceisel Masonry, Inc., No. 06-cv-2075 (N.D. 

Ill. May 22, 2009) (construction company settling lawsuit for $500,000 where Hispanic' 

employees were called racially derogatory terms by their supervisors and routinely exposed to 

racist graffiti); EEOC V. Talbert BUilding Supply, Inc., No. I :08-cv-00707 (M.D.N.C. May 26, 

2009) (North Carolina lumber and hardware retailer settling race discrimination lawsuit for 

$80,000 where employee was subjected to explicit racial slurs as well as racial jokes and 

(continued ... ) 

14 
91 

damaging, form. 55 It can result from practices that, although facially neutral, unjustifiably and 

disproportionately exclude groups of employees or applicants based on their race, national origin 

or sex.56 Regardless of the form, race and gender discrimination in the workplace have a 

devastating effect on the ability of minorities and women to develop and sustain their own 

businesses. In particular, they result in a marked decrease in human' capital - the experience 

necessary to create a viable new business in today's markets. 

This historical discrimination in employment limited - and continues to limit - the 

advancement of minorities and women to higher level positions in the workforce, and thus their 

opportunity to gain the skills, experience, and business contacts necessary to develop a 

successful business model. Among other things, historical discrimination prevented many 

( ... continued) 

derogatory stereotypes about African Americans onan almost daily basis for two years); EEOC 

v. Wheeler Construction, Inc., No. 2:07-cv-01829 (D. Ariz. March 5, 2009) (construction 

company settling lawsuit for $325,000 where Mexican employees were harassed based on their 

national origin). 

55 See, e.g., CRA International for the San Mateo County Transit District and 

thePeninsula Corridor 10int Powers Board, Measuring Minority- and Women-Owned 

Construction and Professional Service Firm Availability and Utilization 95 (2008) (discussing 

study in which researchers sent fictitious resumes that included randomly assigned "white- an.d 

black-sounding" names to help-wanted ads in Boston and Chicago, and finding that resumes with 

"white-sounding" names received 50% more callbacks for interviews than did the resumes with 

"black-sounding" names); see also Section 15: Race and Color Discrimination, EEOC 

Compliance Manual, § 15-1 (2006), available at http://www.eeoc.gov/policy/docs/race-color.html 

(last visited April 29, 2010) (citing a 2003 study in Milwaukee :fui.ding that Whites with a 

criminal record received job call-backs at a rate more than three times that of Blacks with the 

same criminal record, and even at a rate higher than Blacks without a criminal record; a 2003 

study in California finding that temporary agencies preferred White applicants three to one over 

African American applicants; and a 2002 study in Boston and Chicago finding that resumes of 

persons with names common among Whites were 50 percent more likely to generate a request 

for an interview than equally impressive resumes of persons with names common among 

Blacks); cf. Women in Business: Leveling the Playing Field: Roundtable Before the S. Comm. 

on Small Business and Entrepreneurship, I lOth Congo 44 (2008) (statement of Sharon Green, 

President, Custom Copper and Slate, Ltd.) (testifying to her experience that decision making 

officials ,prefer talking to a man, not a woman, regarding construction projects). 

5 42 U.S.C. Sec. 2000e-2(k)(I)(A) (prohibiting employment practices that havea 

disparate impact on the basis of race, color, religion, sex or national origin); see, e.g., Griggs v. 

Duke Power Co., 401 U.S. 432 (1971) (recognizing that "good intent or absence of 

discriminatory intent does not redeem employment procedures or testing mechanisms that 

operate as 'built-in headwinds' for minority groups and are unrelated to measuring job 

capability"); EEOC V. Dial Corp., 469 F.3d 735, 742-743 (8th Cir. 2006) (upholding district 

court's finding that a physical strength test had an unlawful disparate impact on female 

employees). 

15 
92 

minorities and women from forming businesses and passing them on to their children; as a result, 

many would-be minority and female business owners of today never had the opportunity to work 

in a familtrun business and thus gain skills to develop a successful business in today's 

markets.s Indeed, minority business owners state that they face an initial barrier stemming from 

a lack offamiliarity about running a business.58 . 

Academic research conf=s that the lingering effects of discrimination can extend across 

generational lines. For example, one researcher found that black business owners face three 

different hurdles in comparison to their white counterparts: they are less likely to inherit 

businesses, and thus need to raise their own capital to start a business; they are less likely to be 

employed by family members who own small businesses, thus missing out on gaining first-hand 

business experience; and they are less likely to have family members who own small businesses, 

thus lacking ready access to business mentors.59 Thus, not only are minorities statistically less 

likely to start a business due to historical and current patterns of lower self-employment, they are 

also less likely to have had the opportunity to learn the skills necessary to run a successful 

business.5o As one researcher concluded, "the lack of prior work experience in family businesses 

among future black business owners, perhaps by restricting their acquisition of general and 

specific business human capital, limits the successfulness of their businesses relative to 

whites.',61 Women business owners have also reported fewer opportunities to learn the skills 

necessary to run successful businesses.62 

57 Business Start-Up Hurdles in Underserved Communities: Access to V~nture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, I 10th Congo 3 (2008) (statement of Margaret Henningsen, Vice President, 

Legacy Bank) (explaining that many would-be minority entrepreneurs are first generation 

entrepreneurs who "do not have the benefit of family members handing down a business or 

providinr them with the necessary training and coaching that is so crucial for business success"). 

5 Access to Federal Contracts: How to Level the Playing Field: Field Hearing Before 

the S. Cornm. on Small Business and Entrepreneurship, 110th Congo 71 (2007) (statement of 

Wayne Frazier, Sr., President, Maryland-Washington Minority Contractors Association) 

(testifying that the majority of minority business owners do not have family members who have 

owned a business, and therefore have little if any understanding of how to run a business). 

59 Robert W. Fairlie and Alicia M. Robb, Why are Black-Owned Businesses Less 

Successfol Than White-Owned Businesses? The Role o/Families, Inheritances, and Business 

Human Capital, 25 Journal of Labor Economics 289, 295 (2007) (Table 2). 

60 Michael Hout and Harvey S. Rosen, Self-Employment, Family Background and Race, 

35 Journal of Human Resources 670-692 (2000). 

61 . Robert W. Fairlie and Alicia M. Robb, Why are Black-Owned Businesses Less 

Successfol Than White-Owned Businesses? The Role o/Families, Inheritances, and Business 

Human Capital, 25 Journal of Labor Economics 289, 308 (2007). 

62 For example, one researcher testified before Congress that, based on a national study 

by the Center for Women's Business Research, women business owners of fast-growth 

companies reported that, unlike their male counterparts, role models and mentors "[weren't] 

really available to them." Women in Business: Leveling the Playing Field: Roundtable Before 

(continued ... ) 

16 
93 

Current discrimination in hiring and promotions by employers can also severely limit the 

opportunities for minorities and women to build the human capital necessary for future business 

success. In 2008, women comprised 46.5% of the U.S. labor force, yet held only 15.2% of US 

Fortune 500 directorships.63 In addition, although women account for 51 % of all workers in 

high-paying management, professional, and related occupations, of the top ten occupations of 

women workers, senior manager and middle manager did not make the list. 64 At a recent 

workshop on transition points in women's careers (e.g., moving into more senior levels and 

assuming leadership roles) held by the National Academies Committee on Women in Science, 

Engineering, and Medicine (CWSEM), several women's professional societies referred to 

surveys and studies in which women identified their work environments as hostile.6s Such 

conditions act as a barrier to advancement - or even continued employment - within a company. 

Thus, minorities and women.often lack equal access to the two central means of gaining 

the experience needed to operate a business. A history of discrimination in employment 

opp.ortunities provided sign~fic~tly fewer opportuni~es ~or minori~es and women to de~elo£ 

busmesses to pass on to theIr children or to teach theIr children busmess"development skills. 6 

And the continued discrimination by employers and would-be business partners against . 

minorities and women severely limits their development of those skills and their entry into the 

( ... continued) 

the S. Comm. on Small Business and Entrepreneurship, 1l0th Congo 8 (2008) (statement ofTeri 

Cavana~h, Principal, Teri Cavanagh and Associates). 

3 Ernst & Young, 2008 Catalyst Census of Women Board Directors of the Fortune 500, 

at 1. Quick Stats on Women Workers, 2008, United States Department of Labor, available at 

http://www.dol.gov/wb/stats/main.htm(lastvisited. Apri129, 2010). See also Siri Terjesen, Ruth 

Sealy and Val Singh, Women Directors on Corporate Boards, 17 Corporate Governance: An 

International Review 325, 320-337 (2009). In addition, in 2008, only 15.7 % of corporate 

officers of Fortune 500 companies were women. Ernst & Young, 2008 Catalyst Census of 

Women Corporilte Officers and Top Earners of the Fortune 500, at 1. A study controlling for 

organization and director characteristics found that women directors are less likely than men to 

be on the executive committee and more likely to be on the public affairs committee. See Craig 

A. Peterson and James Philpot, Women's Roles on Us. Fortune 500 Boards: DirectorExpertise 

and Committee Memberships, 72(2) Journal of Business Ethics 177, 179 (2007). 

64 Quick Stats on Women Workers, 2008, United States Department of Labor, available at 

http://www.doLgov/wb/stats/main.htm(lastvisited.ApriI29.2010). 

6S Opportunities and Challenges for Women Entrepreneurs: Roundtable Before the S. 

Comm. on Small Business and Entrepreneurship, 1l0th Congo 56 (2008) (statement of Cat 

Sbrier, Ph.D., P.G. Watercat Consulting LLC). 

66 Robert W. Fairlie, Minority Entrepreneurship, The Small Business Economy, 

produced under contract with the SBA, Office of Advocacy 97 (2005) (identifying one of the 

major barriers to minority-owned business as relatively disadvantaged Jamily business 

backgrounds which "appear to limit entry and success in small business"). 

17 
94 

business markets today.67 

2. Discrimination Limits Access To Capital. 

Access to financial capital is absolutely essential for business formation and 

development.68 However, lack of access to capital is the most frequently cited obstacle among 

minority and women business owners to developing and growing their businesses.69 A critical 

question, then, is the extent to which their lack of equal access to capital, which can prevent 

minority- and women-owned bUsinesses from forming, developing, and succeeding in today's 

markets, is a result of discrimination in lending practices.70 

Numerous studies that address the question have reached the same conclusion: minority 

and women small business owners routinely face discrimination in the lending market. Relying 

on data from the National Survey of Small Business Finances (SSBF), Jon Wainwright, Vice 

President, NERA Economic Consulting, found that "African-American-owned firms, Hispanicowned firms, and to a lesser extent other minority-owned firms are substantially and statistically 

significantly more likely to be denied credit than are White-owned firms," even when controlling 

for firm size and credit history. 71 Other researchers have made similar findings. 72 One study 

67 See, e.g., supra notes 59-62, 

68 See, e.g., Opportunities and Challenges for Women Entreprenews: Roundtable 

Before the S. Comm. on Small Business and Entrepreneurship, 110th Congo 110 (2008) (report 

by the National Association of Women Business Owners ProcUIement Task Force, submitted by 

Gayle Waldron, President & Owner, The Management Edge, asserts that "[a]ccess to capital has 

been, and remains, a critical issue for emerging and growing businesses, particularly those 

owned bl women and minorities"). 

6 How Information Policy Affects the Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the Subcomni. on Information Policy, Census, 

and National Archives of the H Comm. on Oversight and Government Reform, 11 Oth Congo 20 

(2008) (statement of Jon Wainwright, Vice President, NERA Economic Consulting); see also 

Robert W. Fairlie, Minority Entrepreneurship, The Small Business Economy, produced under 

contract with the SBA, Office of Advocacy 97 (2005) (identifying one of the major barriers to 

minority-owned businesses as relatively low asset levels, which limit business entry and lead to 

higher rates of business closUIe, lower sales and profits, and less employment). 

70 Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo 3 (2008) (statement of Jon Wainwright, Vice President, NERA 

Economic Consulting). 

71 ld. at 4. 

72 See, e.g., David G. Blanchflower, Phillip B. Levine, and David J. Zimmerman, 

Discrimination in the Small-Business Credit Market, 85(4) Review of Economics and Statistics 

930,942 (2003) (fmding that "loan denial rates are significantly higher for black-owned firms 

that for white-owned firms even after taking into account differences in an extensive array of 

measures of creditworthiness and other characteristics"); Lloyd Blanchard, Bo Zhao, and John 

(continued ... ) 

18 
95 

concluded that personal wealth plays an important role in predicting loan furndown rates, but that 

even after controlling for personal wealth, large differences in loan turndowns between AfricanAmerican-, Hispanic-, and Asian-owned small businesses relative to those of whites remain.73 

Minority business owners who do receive loans often are required to pay higher interest rates on 

their loans than are charged to comparable white business owners. 74 

Indeed, the U.S. Small Business Administration recently concluded that the restrictions 

minorities face in gaining access to credit are "consistent with prejudicial discrimination against 

African-American and Hispanic firm owners.,,7S The same has been found for women-owned 

firmS.76 Given their personal experience, or that of their colleagues, in being denied credit for 

( ... continued) 

Yinger, Do Credit Market Barriers Exists for Minority and Women Entrepreneurs? 14 Center for 

Policy Research, Maxwell School, Syracuse University, Working Paper No. 74(2005) (finding 

that African-American- and Hispanic-owned firms face a higher probability of loan denial than 

that of white-owned firms even when controlling for a number of relevant variables); Myron 

Quon, Discrimination Against Asian American Business Enterprises: The Continuing Needfor 

Affirmative Action in Public Contracting, Asian American Policy Review 41,43,46 (2008) 

(mentioning a study showing that Asian-American owned firms are denied loans at a rate 50% 

higher than white-owned companies and pay higher interest rates than comparable white-owned 

firms); Susan Coleman, Access to Debt Capital for Women and Minority Owned Small Firms: 

Does Educational Attainment Have an Impact, 9(2) Journal of Developmental Entrepreneurship 

127, 132-133 (2004) (finding that firms owned by African-American, Hispanic, and Asian men 

were significantly more likely to be denied their most recent loan requests than white men); 

Jonathan Taylor, Income and Wealth Transfer Effects of Discrimination in Small Business 

Lending, 32(3/4) Review of Black Political Economy 87, 88-90 (2005) (finding evidence that 

African-American business owners face a higher probability of loan denial). 

73 Ken Cavalluzzo & John Wolken, Small Business Loan Turndowns, Personal Wealth, 

and Discrimination, 78(6) Journal of Business 2153, 2170 (2005). 

. 74 Business Start-Up Hurdles in Underserved Communities: Access to' Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 4 (2008) (statement ofJon Wainwright, Vice President, NERA 

Economic Consulting); see also ibid. (Testimony of Margaret Henningsen, Founder Legacy 

Bank)(discussing her bank's successful business serving minority entrepreneurs who had been 

denied loans by larger financial institutions); see also David G. Blanchflower, Phillip B. Levine, 

and David J. Zimmerman, Discrimination in the Small-Business Credit Market, 85(4) Review of 

Economics and Statistics 930, 941 (2003) ("Even among a sample of firms with no past credit 

problems, black-owned firms pay significantly higher interest rates."). 

75 Karlyn Mitchell & Douglas K. Pearce, Availability of Financing to Small Firms Using 

the Survey of Small Business Finances, 257 U.S. Small Business Administration 46 (2005). 

76 Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 4 (2008) (statement of Jon Wainwright, Vice President, NERA 

Economic Consulting). 

19 
96 

perceived discriminatory reasons, many minority and women business owners expect to be 

turned down and simply do not apply for financing. 77 

In addition to the academic and government-commissioned studies discussed above, 

numerous disparity studies conducted by state and local governments have also concluded that 

minorities and women face discrimination in the 1e.nding market. For example, one study found 

that African-American-, Hispanic-, and female-owned businesses reported loan denial rates of 

47%, 39%, and 26%, respectively, in contrast to 21 % for non-minority male-owned firms, even 

after controlling for creditworthiness and other related variables.78 A disparity study conducted 

for San Mateo County, using data from the 1998 and 2003 Survey of Small Business Finances 

(SSBF), concluded that loan denial rates are much higher for similarly situated minority firms 

than for non-minority firms - both at the national level and for the Pacific region.79 At the 

national level, African-American- and Hispanic-owned firms that did receive loans received 

much smaller amounts than non-minority-owned finns. so Moreover, the minority-owned firms 

receiving loans paid higher interest rates than did non-minority-owned firms.S! 

There is also evidence that minority" and women-owned businesses are less likely to 

secure outside investment revenue. The results from a 200 I study prepared for the U.S. Sma!! 

Business Administration show that women-led firms received just 4.1 % of all venture capital 

investments in 1998.82 This suggests that women may be left behind in the asset creation 

process, limiting their opportunities to develop and grow their businesses~ The study also states 

that "~mlinority women seeking capital may have greater barriers than white women or minority 

men." 3 One possible cause for the disparity between the access to outside capital of maleowned and female-owned firms is the "gender dominance" in the venture capital industry84 and 

77 Opportunities and Challenges for Women Entrepreneurs: Roundtable Before the S. 

Comm. on Small Business and Entrepreneurship, 110th Congo 14 (2008) (statement of the Center 

for Women's Business Research). The Center concluded that the "expectation of being turned 

down is especially prevalent among women business owners of color." Ibid; see also David G. 

Blanchflower, Phillip B. Levine, and David J. Zimmerman, Discrimination in the Small-Business 

Credit Market, 85(4) Review of Economics and Statistics 930, 942 (2003) (finding that .concems 

about being turned down due to prejudice or discrimination prevent more African-Americanowned firms from applying for loans). 

78 Griffm & Strong, p.e., City of Atlanta Disparity Study: Executive Summary 7 (2006). 

79 CRA International, Measuring Minority- and Women-Owned Construction and 

Professional Service Firm Availability and Utilization 82 (2008). 

80 Id. at 85. 

81 Ibid. 

82 Candida G. Brush et ai., An Investigation of Women-Led Firms and Venture Capital 

Investment 14 (2001). 

83 Id. at 16. 

84 Women in Business: Leveling the Playing Field: Roundtable Before the S. Comm. on 

Small Business and Entrepreneurship, 110th Congo 10-11 (2008) (statement of Laila Partridge, 

CEO, Cover4me) (explaining that women are not well-represented in venture capital firms and 

(continued ... ) 

20 
97 

the perception among many women and minorities that venture capitalists focus on pre-existing 

relationships or networks to which women and minorities do not have access. ss 

Without access to traditional sources of financing, minority- and women-owned 

businesses are often forced to forgo opportunities or rely on higher cost capital to support their 

businesses. 86 For example, a survey conducted by Women Impacting Public Policy showed that 

66% of the respondents, women-owned businesses, relied on bank financing that was backed by 

home equity loans and 49% used credit card fmancing. 87 Another 36% received their funding 

from family and friends. 88 And while some business owners may be able to rely on personal 

wealth to fund and support their businesses, research shows that the lower median net worth of 

African-American households compared to white households (e.g., $6,166 v. $67,000 in 2005, 

based largely on the net worth of homes oWned by the households) translates into lower levels of 

start-up capital among African-American business owners than among white business owners.89 

( ... continued) 

therefore they lack an opportunity to develop relationships with firms looking to invest ill small 

businesses); see id at 10 ("Having spent 10 years in venture capital and working with larger 

finns, you * * * never see women in those fums."); see also Expanding Opportunities for 

Women Entrepreneurs: The Future of Women 's Small Business Programs: Hearing Before the 

S. Comm. on Small Business and Entrepreneurship, 110th Congo 114 (2007) (statement of Ann 

Marie Ameida, President and CEO, Association of Women's Business Centers) (explaining that 

"the majority of venture capital deals are made through referrals via a fairly closed system of 

networks" to which women business owners do not have access). 

85 Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, I 10th Congo 4 (2008) (statement of Donald T. Wilson, President and CEO, 

Association of Sin all Business Development Centers); see also Women in Business: Leveling the 

Playing Field: Roundtable Before the S. Comm. on Small Business and Entrepreneurship, II Oth 

Congo II (2008) (statement of Laila Partridge, CEO, Cover4me) (explaining that the people who 

funded her business were people who knew her, had worked with her, and who understood what 

she could do). 

86 Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital 

and Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 1 (2008) (statement of Don O'Bannon, Chairman, Airport 

Minori~ Advisory Council (AMAC)). . 

7 Opportunities and Challenges for Women Entrepreneurs on the 20th Anniversary of 

the Women's Business Ownership ACt: Roundtable Before the S. Comm. on Small Business and 

Entrepreneurship, 1 lOth Congo 31-32 (2008) (statement of Ann Sullivan, Women Impacting 

Public Policy). 

88 Ibid. 

89 Robert W. Fairlie and Alicia M. Robb, Why are Black-Owned Businesses Less 

Successful Than White-Owned Businesses? The Role of Families, Inheritances, and Business 

Human Capital, 25 Journal of Labor Economics 289, 309-311 (2007). 

21 
98 

These findings are borne out in a 2008 report published by the Minority Business 

Development Agency, which examined many of the challenges faced by minority-owned 

businesses that contribute to their lower survival rates when compared to non-minority 

businesses.9o The report found that "a greater proportion of minority businesses operating in 

2002 used more expensive sources of capital, such as credit cards, to start or acquire the 

business, compared to non-minority businesses. Minority firms were also less likely to use bank 

loans to start, ac~uire, expand or finance capital expansions of the business compared to nonminority frrms.,,9 Differences in capital usage between minority firms and non-minority firms 

still existed when data were segregated for firms with gross receipts of$500,000 or more.92 The 

findings suggest minority-owned firms may be faced with a larger financial burden when starting 

and expanding their businesses because credit cards often carry higher costs compared to 

business loans that generally have more favorable terms. 93 

Finally, Congressional hearings provide specific examples of how lending discrimination 

plays out in the real world. Testimony from minority and women business owners has provided 

egregious examples ofracial and gender discrimination by lenders. For example, one minority 

contractor with solid financial data was denied a loan only to have one of his white employees 

take the same financial data to the same loan officer, receive a loan, and be told that he was "the 

kind of businessman [the banle was] looking for.,,94 After that experience, the contractor never 

went into a bank without a white employee accompanying him. Other testimony revealed that 

some women business owners are repeatedly asked to have a man co-sign their business loan . 

applications, even when the men are not affiliated with the business and have lower credit scores 

or lower personal incomes than the women seeking the loans.95 According to one witness, after a 

female applicant in that situation explained to the loan officer that her husband had no 

involvement with her company or the construction industry and that he had a lower credit score 

than the applicant, the loan officer nonetheless stated that the bank would be "a lot more 

90 U.S. Department of Commerce, Minority Business Development Agency, 

Characteristics of Minority Businesses and Entrepreneurs, An Analysis of the 2002 Survey of 

Business Owners (2008). 

91 Id. at 54. . 

92 Id. at 26-27. 

93Id. at 54. 

94 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, 111 th Cong, 311 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). 

95 The Department ofTTansporiation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, 111 th Congo 299 (2009) (statement 

of Joarm Payne, President, Women First National Legislative Committee); see also Opportunities 

and Challenges for Women Entrepreneurs: Roundtable Before the S. Comm. on Small Business 

and Entrepreneurship, 1 10th Congo 25 (2008) (statement of Margot Dorfman, CEO, U.S. 

Women's Chamber of Commerce) (relaying experience of woman business owner who was told 

she would need her husband to co-sign her loan application because the lender did not believe 

that the applicant had a higher salary than her husband). 

22 
99 

comfortable with a man's name on the application.,,96 

C. Discrimination Limits Access To Contracting Markets. 

Even when women and minorities are able to form and develop businesses, they often 

continue to experience discrimination that impedes their ability to compete equally for 

government contracts.97 This discrimination takes many forms, including discrimination by 

prime contractors, exclusion from business networks, and discrimination by bonding companies 

and suppliers.98 

96 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, I11th Congo 299 (2009) (statement 

of Joami Payne, President, Women First National Legislative Committee). 

97 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, 111 th Congo 309 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT) ("The Department 

believes strongly that, while substantial progress has been made, discrimination and its effects 

continue to exist today and to distort contracting opportunities for DEEs."); Opportunities and 

Challenges for Women Entrepreneurs: Roundtable Before the S. Comm. on Small Business and 

Entrepreneurship, HOth Congo 8 (2008) (statement of Virginia Littlejohn, Co-Founder and CEO, 

Quantum Leaps, Inc.) ("Access to federal procurement remains a huge area of 

underachievement, and is one of the biggest structural impediments to the economic 

advancement of women owned businesses in the US."). 

98 See Minority Entrepreneurship: Assessing the Effectiveness of SBA 's Programs for 

the Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 27 (2007) (statement ofJon Wainwright, Vice President, NERA 

Economic Consulting) (discussing findings from thousands of surveys and interviews that show 

that, throughout the country, and within both the public and private sector marketplaces, 

minorities report similar instances of negative stereotyping regarding their qualifications, double 

standards about their performance, and discrimination by bonding companies and suppliers); 

How Information Policy Affects the Competitive Viability of Small and Disadvantaged Business 

in Federal Contracting: Hearing Before the Subcomm. on Information Policy, Census, and 

National Archives of the H Comm. on Oversight and Government Reform, 110th Congo 28 

(2008) (statement of Jon Wainwright, Vice President, NERA Economic Consulting) (concluding 

that "minorities and women reported that they still encounter significant barriers to doing 

business in the public and private sector market places, as both prime contractors and 

subcontractors"and "continued operation of federal, state, and local efforts to ensure equal 

access to the public contracting process is essential to the competitive viability of minorityowned and women-owned business enterprises."); The Department of TranSportation 's 

Disadvantaged Business Enterprise Program: Hearing Before the H Comm. on Transp. and 

Infrastructure, 111 th Congo 223 (2009) (statement of Julie Cunningham, President and CEO, 

Conference of Minority Transportation Officials) (testifying that "discrimination is still a serious 

problem" and citing "use of antiquated 'old boy networks,' exclusion ofDEEs from business 

opportunities, discrimination in credit lending, bonding and insurance, attempts to induce DEEs 

(continued ... ) 

23 
100 

I. Discrimination By Prime Contractors Creates Obstacles. 

Discrimination by prime contractors poses a very significant and continuing obstacle to 

contracting for minority- and women-owned businesses. In the past, evidence before Congress 

has shown that "minority-owned firms are seldom or never invited to bid on projects that do not 

contain affirmative action requirements.,,99 This remains true today for both minority- and 

women-owned firms. loo A recent study that included surveys and interviews of hundreds of 

Disadvantaged Business Enterprises (DBEs) found general agreement among them "that without 

the use of affirmative remedies such as the USDOT DBE Program, minorities and women would 

receive few if any opportunities' [- either as prime contractors or as subcontractors101 - 1 on 

government contracts.,,102 That study's author testified before Congress that, through his 

research, he has repeatedly found that contractors who use minority- and women-owned 

businesses on projects with goals "rarely use [those businesses] - or even solicit them - in the 

absence of such goals. ,,103 

( ... continued) 

to act fraudulently as 'fronts' and discriminatory application of procurement and contracting 

rules"); see also id. at 328 (statement of Jon WainWright, Vice President, NERA Economic 

Consulting). 

99 61 Fed. Reg. at 26,058. 

100 How Information Policy Affects the Competitive Viability of Small and 

Disadvantaged Business in Federal Contracting: Hearing Before the Subcomm. on Information 

Policy, Census, and National Archives of the H. Comm. on Oversight and Government Reform, 

I 10th Congo 86 (2008) (statement of Anthony Brown, Chair, Government Affairs Committee of 

the AMAC, Senior Associate Partner, MGT of America) ("I can say in the many offices that I 

have held in airports, it has been very frustrating when you have contracts that are of a particular 

size and you will come in contact with very qualified, very capable minority business owners 

who have been limited in their abilities and their business's ability to grow, not due to their 

vision, not due to their hard work, not due to their ability, but simply due to the fact that no one 

will give them the opportunity to do the work because of what their racial or ethnic background 

is or their sex."). 

101 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, III th Congo 331 (2009) (statement 

of Jon Wainwright, Vice President, NERA Economic Consulting) ("In general, minorities and 

women reported that they stiIl encounter significant barriers to doing business in the public and 

~rivate sector market places, as both prime contractors and subcontractors. "). 

02 Ibid.; see also Minority Entrepreneurship: Assessing the Effectiveness of SBA. 's Programs 

forthe Minority Business Community: Hearing Before the S. Comm. onSmallBusiness and 

Entrepreneurship, 1 lOth Congo 27 (2007) (statement of Jon Wainwright, Vice President, NERA 

Economic Consulting). 

103 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 331 (2009) (statement 

of Jon Wainwright, Vice President, NERA Economic Consulting) 

24 
101 

The discriminatory attitudes of some prime contractors towards minority- or womenowned fInns are demonstrated by prime contractors who cynically use minority- or womenowned fInns to get lower prices from non-minority subcontractors, or even to win the prime 

contract itself, with no intention of ever actuaily using the minority- or women-owned fIrms. In 

"bid shopping," a prime contractor solicits a bid for subcontract work from minority- or womenowned fInns in order to qualify for a contract goal, but then, rather than using the minority-or 

women-owned business, shares those bids with non-minority' subcontractors so the non-minority 

businesses can submit a lower bid.104 In Pima County, Arizona, for example, 19% of Caucasian 

women business owners and 25% of Hispanic business owners experienced pressure to lower 

quotes on a bid because of bid shopping by prime contractors.105 

Another questionable practice is the "bait and switch," in which a contractor commits to 

using a minority- or woman-owned business to win a contract that contains race- or genderconscious goals for subcontractors, but then never actually gives the minority- or woman-owned 

fInn the promised work. For example, after receiving a complaint from a DBE owner who 

alleged that a large prime contractor had used the DBE to secure a contract without generating 

work for the DBE, the DOT investigated and learned that the Pcrime contractor had falsely 

represented to the DOT that it had met its DBE requirements. 06 Another time a DBE alleged 

that it had been included on the prime's original contract but was replaced by a non-DBE 

contractor after the contract had been awarded to the prime.107 A number of state and local 

104 For example, one witness testifIed before Congress that a Hispanic construction 

subcontractor was infonned by a large majority owned prime contractor that they would use him 

on a job to fulfIll a contract goal, but they in fact "shopped" his bid to a much larger majority 

subcontractor and removed the minority subcontract from the contract. How Information Policy 

Affects the Competitive Viability of Small and Disadvantaged Business in Federal Contracting: 

Hearing Before the Subcomm. on Information Policy, Census, and National Archives of the H 

Comm. on Oversight and Government Reform, 11 Oth Congo 60 (2008) (statement of Anthony 

Brown, Chair, Government Affairs Committee of the AMAC, Senior Associate Partner, MGT of 

America). The subcontractor also reported that, based on his 25 years of experience in the 

industry, he feels "there is signifIcant racial animus against Hispanic owned companies." Ibid. 

See also Minority Entrepreneurship: Assessing the Effectiveness of SBA 's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo 43 (2007) (letter from Rita Baslock, President, Max Electric, 

Inc.). 

105 D. Wilson Consulting Group, A Comprehensive Study of the Pima County MWBE 

Program 9-11 (2008). . 

106 The Department of Transportation's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Tramp. and Infrastructure, 111 th Congo 313 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). 

101 Ibid. See also Expanding Opportunities for Women Entrepreneurs: The Future of 

Women's Small Business Programs: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo 57 (2007) (statement ofWendi Goldsmith, President, 

(continued ... ) 

25 
102 

disparity studies have concluded that this practice is a major problem facing minority- and 

women-owned businesses. loa 

The prevalence of discrimination comes starkly into focus in jurisdictions that recently 

have discontinued race-conscious programs. For example, Congress heard testimony that less 

than a year after Michigan discontinued its affirmative action contracting program, the 

percentage of state-funded highway construction projects performed by DBEsfell to zero, even 

though their participation in the federal program was 13 %.l 09 Other states also experienced 

dramatic decreases in the participation ofminoritt;- and women-owned businesses when raceand gender-conscious remedies were abandoned. 10 Indeed, research shows that the disparity in 

( ... continued) 

Bioengineering Group) ("In many cases, small firms are recruited onto teams to help win work 

as called for in contract solicitations. We appear in the proposals, often at great expense to the 

small and minority and women-owned businesses due to the work related to researching and 

compiling proposal materials, only to never actually receive work under the contract. I cringe to 

recount how many times that happened to my firm and to tally how much money, namely 

hundreds of thousands of dollars my firm involuntarily contributed in order to help other firms 

win and perform work, while we received none or sometimes a token amount."); see also Access 

to Federal Contracts:. How to Level the Playing Field: Field Hearing Before the S. Comm. on 

Small Business and Entrepreneurship, 1 10th Congo 172 (2007) (statement of Women Impacting 

Public Policy (WIPP)) (explaining that prime contractors often list women-owned business on 

their bid, but then revert to using "the same old subcontractors tliey have used in other bids" after 

winnin!j the contract). 

08 See, e.g., CRA International for the San Mateo County Transit District and the 

Peninsula Corridor Joint Powers Board, Measuring Minority- and Women-Owned Construction 

and Professional Service Firm Availability and Utilization 139 (2008) (finding that, in many 

cases, minority- and women-owned businesses were considered by prime contractors bidding for 

govemmentjobs merely "for cosmetic purposes related to compliance With suggested or required 

good faith efforts"); Mason Tillman Associates, Ltd., State of New Jersey Construction Services 

Disparity Study, 2000-2002 at 2-34 (2005) ("Many [minority and women business owners] 

reported that prime contractors have purposely used tactics to circumvent the [DOT DBE 

program's 'good faith effort'] requirements. For example, some prime contractors will seek to 

obtain [minority- and women-owned] business names and certification numbers without 

intending t() use them on their projects."). One DBE in New Jersey explained that majoritycontractors frequently get a minority business to bid on a project just "so they can say they 

[have] a minority bid" but do not actually consider subcontracting with the minority-owned firm. 

Id. at 2-36. 

109 The Department of Transportation 's Disadvantaged Business Enterprise Programs: 

Hearing Before the H. Comm on Transp. and Infrastructure, 111 th Congo 301 (2009) (statement 

of Joann Payne, President, Women First National Legislative Committee). 

110 In Idaho, for example, the rate of minority- and women-owned business participation 

remained steady at just above 6% from 2004 through 2006 under a goal-based program. When 

Idaho switched to a race-neutral program in 2007, their participation rate dropped to below 4%. 

(continued ... ) 

26 
103 

contracting between minority- and majority-owned businesses is "markedly greater in 

jurisdictions where there [is] no goals program in place."lll Joann Payne, President'ofWomen 

First National Legislative Committee, told Congress that based on "history and present DBE 

particip!ltion percentages on state funded projects," absent race- and gender-conscious remedies, 

"participation [in government contracting] of women and minority owned businesses will drop 

nationally to approximately 2[%].,,112 

Academic studies have also found that the presence of race- and gender-conscious 

programs significantly improves minority- and women-owned businesses' ability to develop and 

participate in government contracting. For example, one study found that the gap between white 

and minority self employment rates narrowed during the 1980s "when affi=ative action 

programs were implemented by many public sector jurisdictions."ll3 The same study found that 

the gap began to widen again when the number of race-conscious contracting prograrn.s was 

reduced after the Supreme Court's decision in Croson,114 and then narrowed again after 2000 

once courts began to declare race-conscious contracting programs constitutionalYs Another 

study found siinilarly that when race-conscious "programs are removed or replaced with raceneutral pr0f,ams the utilizatien of minorities and women in public construction declines 

rapidly."ll That study concluded that affi=ative action programs appear to work but have not 

( ... continued) 

Ibid. The same thing happened.in California: DBE participation in federally funded contracts 

was 9% between 2002 and April 2006, but dropped to less than 5% in May 2006 after the state 

discontinued setting DBE goals. Ibid. The participation rate for women-owned businesses was 

just 0.1 %. Ibid 

III Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and. 

Entrepreneurship, II Oth Congo 3 (2007) (statement of Anthony W. Robinson, President, 

Minori~ Business Enterprise Legal Defense and Educational Fund). 

12 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, III th Congo 302 (2009) (statement 

of Joann Payne, President, Women First National Legislative Committee). 

113 David G. Blanchflower, Minority Self-Employment in the United States and the 

Impact of Affirmative Action Programs, National Bureau of Econornic Research, Working Paper 

13972, at 17 (2008). . 

114 City of Richmond V. J.A. Croson, Co., 488 U.S. 469,492 (1989) (holding that the City 

of Richmond had failed to demonstrate a compelling interest to justifY its race-conscious 

contracting program). 

115 David G. Blanchflower, Minority Self-Employment in the United States and the 

Impact of Affirmative Action Programs, National Bureau of Econornic Research, Working Paper 

13972, at 17 (2008). 

116 David G. Blanchflower and Jon Wainright, An Analysis of the Impact of Affirmative 

Action Programs oli Self-Employment in the Construction Industry,Nationai Bureau of Economic 

Research, Working Paper 11793, at 24 (2008) ("The evidence we have available to us suggests 

that very rapidly after the race and gender conscious programs were removed the utilization of 

(continued ... ) 

27 
104 

yet achieved their objectives "because they have not been allowed to work by non-minority 

contractors and by the COurtS.,,1l7 

Congress has also heard testimony reporting a general "unwillingness [by prime 

contractors] to use minorities and women on jobs where there is no [minority- or women-owned 

business contracting] goal" even though "[t]here are a significant number of minority/women 

small business contractors who have the capability and proven experience to perform.,,1l8 One 

witness testified that many prime contractors maintain a "mentality of exclusion" with respect to 

subcontractors, and explained that contractors exhibiting this mentality believe that "minorityand women-owned businesses don't belong at the table."II9 

DOT's recent experience in administering its DBE program provides further evidence of 

the lasting effects of discrimination in contracting and the continuing need for race- and genderconscious programs to address those effects. DOT's program requires states to use the "best 

evidence available to estimate the DBE rcarticipation they could expect to obtain if there were a 

nondiscriminatory level playing field.,,1 0 This "evidence-based estimate" then becomes the 

state's goal for DBE participation.I2I States are required to "achieve as much as possible of that 

annual goal through ...... 'race-neutral' means," including "[0 ]utreach, technical and bonding 

( ... continued) 

firms owned by women and minorities collapsed."); see also Insight Center for Community 

Economic Development, The Impact of State Affirmative Procurement Policies on Minority- and 

Women- Owned Businesses in Five States, BestPractices, Imperfections, and Challenges in State 

'Inclusive Business Programs iv (2007) (concluding that "when affirmative procurement policies 

end or are interrupted, MBEs and WBEs do not grow as fast as similar businesses in other states" 

and that these "slower business growth rates are not usually made up later, indicating the 

importance of the consistent presence of affIrmative procurement programs"). 

ll7 Ibid. 

118 Minority Entrepreneurship: Assessing the Effectiveness o/SBA's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo 43 (2007) {letter from Rita Baslock, President Max Electric, 

Inc.). 

119 How Information Policy Affects Competitive Viability in Minority Contracting: 

Hearing Before the Subcomm. on Information Policy, Census, and National Archives of the H. 

Comm. on Oversight and Government Reform, 1 10th Congo 85 (2008) (statement of Anthony 

Brown, Chair, Government Affairs Committee of the AMAC, Senior Associate Partner, MGT of 

America} 

I 0 The Department o/Transportation's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comrrl. on Transp, and Infrastructure, 111th Congo 308 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT); see also 49 C.F.R. 26. 

121 The Department of Transportation's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. ,on Transp, and Infrastructure, 111 th Congo 308 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). 

28 
105 

assistance, unbundling of contracts, and small business programs.,,122 

What DOT found is that, between 2004 and 2008, states that received federal 

transportation dollars had to resort to race-conscious measures to meet their DBE participation 

goals 81 % of the time. 123 The magnitude of this finding was not lost on DOT officials: "This 

means that, eight out of ten times, [DOT funding] recipients, if denied the availability of raceconscious goals, would have left unremedied the effects of discrimination on small, 

disadvantaged business.,,124 Perhaps even more revealing is that "in 69 percent of these cases, 

the race-conscious component of the goal was needed to make up the maj ority of the entire 

overall goal.,,125 These facts led DOT to conclude that "in the absence of race-conscious goals, 

the gap between a level playing field and the reality facin~ DBEs trying to find work with [DOT 

funding] recipients would have been significantly larger." 26 

. That conclusion was proven in jurisdictions that have suspended the use of raceconscious measures. These jurisdictions have experienced declines in DBE participation and 

have not been able to meet their participation goals. For example, Congress heard testimony that 

after jurisdictions discontinued the use of race-conscious measures, following the Ninth Circuit's 

decision in Western States Paving Co., 127 the results were striking. Arizona's DOT set overall 

goals of9.1 % in 2007 and 9.9% in 2008, but only achieved 3.8% and 3.1%, respectively; 

California's DOT set goals of 10.5%, 10.5% and 13.5% for 2006-2008, butwas only able to 

achieve 8.2%,6.6% and 4.6% participation by DBEs during those years; Sound Transit in 

122 Ibid. 

123 Id. at 309. 

124 Ibid. 

125 Ibid. 

126 Ibid; see also The Department a/Transportation's Disadvantaged Business 

Enterprise Program: Hearing Be/ore the H Comm on Transp. and Infrastructure, 111 th Congo 

292 (2009) (statement of Don O'Barmon, Chairman, Airport Minority Advisory Council) ("One 

study found that DBE participation dropped to virtually zero on federally-assisted contracts 

during a time when the program was enjoined. Researchers stated that 'it appears that the mere 

fact of adopting a DBE program - whether or not goals are being set on any given contractincreases DBE participation. "~). 

127 Western States Paving Co., Inc. v. United States and Washington State Dep 't 0/ 

Transp., 407 FJd 983 (9th Cir. 2005). In Western States Paving Co., the court concluded that 

DOT's race-conscious contracting program - the Transportation Equity Act for the 21st 

Century - is constitutional on its face. The evidence before Congress established a compelling 

interest for the program, id at 991-993, and - because race-conscious measures are used only 

when race-neutral means prove ineffective, and are employed in a flexible marmer for a limited 

duration - the program is narrowly tailored, id. at 993-996. But the court determined that the 

program was unconstitutional as applied in Washington state because - the court concluded - the 

State failed to proffer "evidence of discrimination within its own contracting market and 

* * * thus failed to meet its burden of demonstrating that its DBE program is narrowly tailored." 

Id. at 1003. 

29 
106 

Washington state set goals of 15% in 2007 and 13% in 2008, but only achieved 8.6% and 6.8% 

participation; Portland's airport set goals of7.3% and 4% for the years 2007 and 2008, but only 

achieved 2% and 1.1 % participation in those years.128 From the reduction in the use ofDBE 

programs following the Western States Paving Co. decision, DOT concluded that without the 

ability to use race conscious measures, states that are DOT funding recipients cannot, in many 

cases, "ensure [that] their Federally-assisted contracting programs provide nondiscriminatory 

access to business opportunities on a level playing field, as defined by their overall goals.,,129 

One DBE contractor "told State officials, since 'there's no DBE participation goal, our phones 

have stopped ringing ... we don't get calls any more. ",1l0 

These data - which reveal the significant downturn in contracts and dollars won by 

minority- and women-owned firms when race- and gender-conscious programs are eliminateddemonstrate more than just that these programs present opportunities. They establish that 

without such programs, minority- and women-owned firms are left with significantly less 

business than they actually can perform. When race- and gender-conscious programs are in 

place, minority- and women-owned firms secure, and perform, many more contracts than they 

secure without such programs. This certainly demonstrates that the amount of business these 

firms can handle is not defmed by their success when these programs are not in place; rather, 

their capacity to perform work outstrips what they are hired to do in the absence of goals and in 

any event expands as contracts become available to them. 

The evidence before Congress also contains many examples of blatant and egregious 

discrimination against minorities and women: 

• Olile Alaskan-Native construction specialty contractor was regularly told by a prime 

contractor that he was only hired because he is a minority.l3l The prime contractor also 

128 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, liith Congo 310 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). See also id at 31 

(statement of Joann Payne, President, Women First National Legislative Committee) (noting that 

in Idaho, the rate of minority- and women-owned business participation remained steady at just 

above 6% from 2004 through 2006 but dropped to below 4% in 2007 and that DBE participation 

in federally funded contracts was 9% between 2002 and April 2006, but dropped to less than 5% 

in May 2006). 

129 Id at 310 (statement of Joel Szabat, Acting Assistant Secretary, Transportation 

Policy, DOT). 

130 Ibid A DOT official relayed additional stories ofDBE contractors following the 

Western States Paving Co. decision: one DBE contractor reported a 50% drop in calls following 

the decision; and a woman business owner reported that "where there are no go8.J.s, I can tell you 

that the fax machines stop ... the next day I got no faxes, the phone didn't ring, asking for my 

bid. Iused to get maybe 20 faxes a day ... now I might get three a week." Ibid 

131 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, 111 th Congo 292-293 (2009) 

(continued ... ) 

30 
107 

explicitly expressed his view that "minority businesses [are] not qualified.,,132 At this 

same job site, the Alaskan Native's "company's equipment was regularly turned on 

during the night, causing the batteries to die and the project to be delayed. No nonminority contractors experienced this problem.,,133 

• A Hispanic contractor was told by a general contractor that he "did not want any 

Mexicans on the job.,,134 On other job sites, that same Hispanic contractor "has been 

called 'Wetback,' 'brown like s**t,' 'dumb Mexican,"little Mexican,' [and] 'my little 

Mexican friend. ",135 

• A DBE owner in Delaware had a disagreement with one of her prime contractors, who 

insisted on speaking with her male foreman whenever he called her office. 136 Despite the 

male foreman's insistence that the prime needed to speak with his female boss, the prime' 

called the boss's home -and left a messagefor her husband, who was not involved in 

the project. 137 In the message to the husband, the prime explained that he wanted to 

resolve the issue through a meeting but that "we don't have to have your wife 

( ... continued) 

(statement of Don O'Bannon, Chairman, Airport Minority Advisory Council). 

m Ibid ' 

133 Ibid 

134 Ibid 

l35 Ibid.; see also The Department of Transportation's Disadvantaged Business 

Enterprise Program: Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 

311 (2009) (statement of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT) 

(relaying incident where a Hispanic contractor "was not allowed to provide a proposal on a 

private c'ontract because of ethnicity"). 

Congress has heard many other reports of direct discrimination by prime contractors 

against minorities. One minority contractor reported not being given a seat at the table for a 

presentation to a general contractor during which the general contractor "joked ,and laughed 

about the fact that he believed he had a way of 'getting around' the DBE ordinance." The 

Department of Transportation 's Disadvantaged Business Enterprise Program: Hearing Before 

the H. Comm. on Transp. and Infrastructure, 111 th Congo 294 (2009) (statement of Don 

O'Bannon, Chairman, Airport Minority Advisory Council). An African-American contractor 

reported that he encounters people who assume he does not understand fairly simple workrelated matters because of his race. Id. at 293. Another minority contractor reported 

encountering the attitude, among other contractors, that "minorities are better-suited to be 

janitors or plumbers than architects." Id at 294. That contractor also reported "that his firm gets 

less credit than non-minority owned firms when projects are successful, and disproportionate 

criticism when projects are not successful." Ibid 

136 The Department of Transportation's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 299 (2009) (statement 

of Joann Payne, President, Women First National Legislative Committee). 

137 Id. at 299-300. 

31 
108 

involved.,,138 When the prime finally met with the female owner of the company, the 

first thing he said to her was "I am sorry this has taken so long but I don't like dealing 

with women.,,139 

Similar evidence of discrimination by prime contractors against minorities and women is 

recounted in local disparity studies. For example, when a female contractor attempted to collect 

money she was owed on a subcontract from the prime contractor, the prime contractor refused to 

pay her, saying "no woman [should] make that kind ofmoney.,,140 

Another particularly egregious example of discrimiriation by a prime contractor occurred 

138 Id at 300. 

139 Ibid Another woman told of an instance "when a project's resident engineer [would 

not] speak to [her] on the job site but direct[ed] aU his comments to the (male) foreman standing 

two feet to [her] left." Id. at 299. Similarly, another woman reported getting calls asking for the 

man in charge; the caller simply hung up after finding out that the person in charge was a 

woman. The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, Illth Congo 214 (2009) (statement 

of Katherine M. Cloonen, President and Owner, JK Steel Erectors, Inc.). Cloonen also reported 

that when she was starting out, she was not taken seriously and was sent the worst workers from 

the union. Ibid Other women complained that they frequently encounter people who assume 

that they are "fronts" for the man who really owns the business. The Department of 

Transportation's Disadvantaged Business Enterprise Program: Hearing Before the R Comm. 

on Transp. and Infrastructure, III th Congo 293, 299 (2009) (statement of Joann Payne, 

President, Women First National Legislative Committee & statement of Don o 'Bannon, 

Chairman of the Airport Minority Advisory Council). 

140 Mason Tillman Associates, Ltd., State of New Jersey Construction Services Disparity 

Study, 2000-2002, Vol. 1 at 2-11 (2005); see also BBC Research & Consulting for the 

Washington Suburban Sanitary Commission, WSSC 2005 Disparity Study - Summary and 

Recommendations, § 3 at 17 (2005) (African-American business owner in the Washington, D.C., 

area reported that he lost work when a client learned of his race; officials in charge of the proj ect 

indicated that they loved his company's proposal but then used a white-owned company instead 

after learning that his firm was minority-owned); MGT of America, Inc., The City of Phoenix 

Minority-, Women-Owned and Small Business Enterprise Program Update Study 6-22 (2005) 

(minority contractor reported that "[t]here have been incidents where I've been on the job site 

and the General [Prime Contractor] won't talk to me, they will go to the white foreman and talk 

to the foreman"); Washington Suburban Sanitary Commission by BBC Research & Consulting, 

WSSC 2005 Disparity Study - Summary and Recommendations, § 4 at 21 (2005) (Hispanic 

owner of a construction firm recounting experience where three white men at an industry 

conference pointed to hisfriend, an African-American man, and started making raciSt comments 

and using racial slurs); University of Minnesota Disparity Study Research Team, Analysis of 

Essex County Procurement and Contracting: Final Report 91 (2005) (recounting racially and 

gender motivated harassment experienced by minorities arid women at job sites). 

32 
109 

on a government contract in Iraq. Worldwide Network Services (WWNS), an AfricanAmerican-owned frrm, was awarded a subcontract to perform communications work on two 

security-related contracts for DynCorp International.1 1 DynCorp was initially satisfred with 

WWNS's work and rated it as "exceptional" and "very good.,,142 But in 2005, DynCorp began 

discriminating against and exhibiting racial animus toward WWNS in a number of ways, 

including: excluding WWNS from planning meetings, failing to respond to WWNS' s requests 

for information and assistance, refusing to provide WWNS employees with security badges they 

needed in order to perform their work, and refusing to make or process payriJ.ents on WWNS' s 

invoices.143 These actions "effectively put WWNS ,. '" '" out of business."l44 The jury found that 

DynCorp's conduct was motivated by racial animus. DynCorp's IT maruigerreferred to WWNS 

as "kaffrrs," a derogatory term for black South Africans, and also made many other derogatory 

comments. 145 

2. Discrimination By Business Networks Limits Opportunities. 

As the Department of Justice explained in 1996, access to informal business networks is 

essential to survival in contracting because these networks "serve as conduits of information 

about upcoming job opportunities and facilitate access to the decisionmakers."I46 These same 

networks and contacts "can help a business frnd the best price on supplies, facilitate a quick loan, 

foster a relationship with a prime contractor, or yield information about an upcoming contract for 

which the firm can prepare - all of which serve to make the frrm more competitive.,,147 

Race- and gender-conscious contracting programs have helped some women and 

minorities break into .these networks. Indeed, a DOT official recently testifred before Congress 

that "possibly the most important function" the DBE program has performed over the1ast 30 

years "is to address the lack of access by minority and women contractors to these crucial 

141 Worldwide Network Services, LLC v. DynCorp International, LLC, No.1 :07-cv-627, 

Doc. 459 at 6 (E.D.VA Sept. 22, 2008). 

142 Id. at 6-7. 

143 Id. at 7-8. 

144 Id. at 8. 

145 Id. at 7. 

146 61 Fed. Reg. at 26,059. See also Expanding Opportunitiesfor Women 

Entrepreneurs: The Future of Women's Small Business Programs: Hearing Before the S. 

Comm. on Small Business and Entrepreneurship, 110th Congo 57 (2007) (statement ofWendi 

Goldsmith, President, Bioengineering Group) ("It is virtually impossible to win work through a 

competitive process without a level of comfort that comes through personal relationships, '" ,. ,. 

long-term relationships - going to school together, working together or what have you."). 

147 61 Fed. Reg. at 26,059; see also Expanding Opportunities for Women Entrepreneurs: 

The Future of Women 's Small Business Programs: Hearing Before the S. Comm. on Small 

Business and Entrepreneurship, 11 Oth Congo 57 (2007) (statement of Wendi Goldsmith, 

President, Bioengineering Group) (discussing the importance of networks). 

33 
110 

informal networks.,,148 The official explained that the program requires prime contractors, who 

may not normally socialize with minority or female contractors, to make an effort to involve 

minority- and women-owned firms as subcontractors.I49 This, the official explained, "is a very 

beneficial way of introducing prime contractors to DBEs and, hopefully, beginning to create 

business relationships that will lead to opportunities for DBEs to get the work they need to 

succeed." 150 

But progress for minorities and women attempting to break into established business 

networks has been slow, and more work needs to be done. 151 Opening business networks to 

minority- and women-owned businesses "doesn't happen by accident and * * * doesn't happen 

without help.,,152 DOT still considers lack of access to business networks and to the information 

'those networks provide to be "[o]ne of the most important barriers to participation [in 

contracting)" that minorities and women face. 153 

Many minorities and women still find themselves excluded from informal business 

networks today. Congress has heard a significant amount of testimony about the continued 

prevalence of "old boys' networks" and the difficulty minority and women business owners face 

in attempting to break into these networks. 154 Likewise, many state and local disparity studies 

148 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 312 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). 149 Ibid. 

150 Ibid. 

lSI Anthony Brown, Chair of the Government Affairs Committee of the AMAC, testified 

about the importance of"help[ing] majority firms move beyond their established networks to 

give previously excluded businesses the opportunity to prove themselves." How Information 

Policy Affects the Competitive Viability of Small and Disadvantaged Business in Federal 

Contracting: Hearing Before the Subcomm. on Information Policy, Census, and National 

Archives of the H. Comm. on Oversight and Government Reform, 11 Oth Congo 58-59 (2008) 

(statement of Anthony Brown, Chair, Government Affairs Committee of the AMAC, Senior 

Associate Partner, MGT of America). But Brown said effecting this change is "hard" because of 

"[t]he mentality of exclusion can exist in contractors and public contracting officials." Id at 55. 

152 Id. at 59. 

153 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 311 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT). 

154 Opportunities and Challenges for Women Entrepreneurs: Roundtable Before theS. 

Comm, on Small Business and Entrepreneurship, HOth Congo 15 (2008) (statement of the 

Center for Women's Business Research) ("Acceptance into industry networks is often difficult, 

especially for women of color. Even when they join the meetings, they are not welcomed nor are 

they part of the activities."); id. at 18 (statement of Lisa Dolan, President, Securit) ("[B]eing in a 

male-dominated field in security, I am usually the only woman at the table and not taken 

seriously."); Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the 

(continued. ,,) 

34 
111 

reveal that minorities and women still face barriers to participation in business networks. 155 

When minority- and women-owned businesses are excluded from business networks, 

they are cut off from information and decision-makers and, as a result, are placed at a serious 

disadvantage. As one minority business owner told Congress: "One of the major problems that 

we face is the overall inability to have access to decision makers as we are unable to gain access 

to their many formal and informal networking activities." 156 A DOT official relayed to ' 

( ... continued) 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, I 10th Congo 43 (2007) (letter from Rita Baslock, President, Max Electric, 

Inc.) ("MBEs experience difficulty breaking into old-boy networks of general contractors. 

Because of the monetary and time consumption of the construction business for small businesses, 

many small minority and women subcontractors do not have the social connections, money, or 

time to effectively network in the old boy system."); Women in Business: Leveling the Playing 

Field: Roundtable Before the S. Comm. on Small Business and Entrepreneurship, 110th Congo 

43 (2008) (statement of Kerstin Forrester, President and Owner, Stonebridge Precision 

Machining & Certified Welding) ("There is still very much an 'old boys' network in place."); 

The Department of Transportation's Disadvantaged Business Enterprise Program: Hearing 

Before the H Comm. on Transp. and Infrastructure, III th Congo 208 (2009) (statement of 

Gilbert Aranza, CEO, Stars Concessions, Ltd.) ("I Wish I could report that the Good 01' Boy 

NetWork no longer exists, but I am afraid that I run up against it all the time."); id. at 312 

(statement of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT) (quoting one 

business owner as stating, "An Idaho Hispanic contractor described the network there as 'white 

guys that have been running around with the same white guys that have controlled the money'" '" 

'" for [many 1 years. '''). See also Michael Bonds, Looking Beyond the Numbers, The Struggles of 

Black Businesses to Survive: A Qualitative Approach, 37 Journal of Black Studies 581, 595 

(2007) (concluding that "racIsm seems to playa major role in limiting African American 

business opportunities"); id. at 598 ("Black business owners expressed their frustration with their 

inability to break in to the old boys' network, being denied business loans, having to constantly 

prove themselves to White business owners, or being held to a higher performance standard than 

Caucasian firms."). 

155 For example, a New Jersey disparity study found that both "new and established 

minority and women business owners report difficulties breaking into the contracting network." 

Mason Tillman Assocs., State of New Jersey Construction Services Disparity Study, 2000-2002, 

Vol. 1 at 2-25 (2005). That study also found that some minority- and women-owned businesses 

that "have been in been in operation for more than 20 years'" ...... are still excluded from job 

opportunities because they are not included in the social and business networks with those' in 

positions of power in their respective fields." Ibid. Another study reported that many female 

and some minority business owners interviewed "were especially vocal about the 'good ole boy' 

system." CRA International for the San Mateo County Transit District and the Peninsula 

Corridor Joint Powers Board, Measuring Minority- and Woman-Owned Construction and 

Professional Service Firm Availability and Utilization 140 (2008). 

156 Minority Entrepreneurship: Assessing the Effectiveness of SEA 's Programs for the 

(continued ... ) 

35 
112 

Congress minority and women business owners' concern about lack of access to important 

information: "There's still very much an old boy network ... and if you're not an old boy, 

you're not in that network [and] there's a lot of information you don't get.,,157 

In some places, minorities are still excluded from the social clubs that are a primary site 

for business networking. IS8 More commonly, exclusion of minorities and women may be the 

result of non-minority contractors being comfortable with existing homogeneous networks, 

rather than overt discrimination. 159 That is one reason why programs that require majorityowned businesses to reach outside of their comfortable networks are so essential. If a contractor 

has a positive experience with a minority- or women-owned business, that may, over time, open 

the door to a continuing business relationship. That is precisely what has happened for Katherine 

M. Cloonen, the president and owner of JK Steel Erectors, Inc., who told Congress that the DBE 

( ... continued) 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 1 10th Congo 46 (2007) (letter from Bobby E. Henderson, President, ATIlab 

Environmental). 

157 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H. Comm, on Transp. and Infrastructure, ll1th Congo 311 (2009) (statement 

of Joel Szabat, Acting Assistant Secretary, Transportation Policy, DOT); ibid (relating comment 

from a DBE firm owner, who noted that the "number one thing [that] puts DBEs at a 

disadvantage is lack of access to decision makers, who maybe ... go out to drinks every once in 

a while ... ' or see each other on the golf course"); id. at 311-312 (relating comment from a trade 

association representative, who stated: "Lots ofthings get done with back slapping and who 

knows who and if you're not in that group you might as well not come to the party."); see also 

MGT of America, Broward County Small Disadvantaged Business Enterprise (SDBE) Study 6-

97 (2001) (quoting a business owner explaining that white owners enjoy certain advantages 

because "[t]hey play golf together and their kids go to the same schools"). 

158 Chuck Covington, CEO of People's Transit, told Congress that in Michigan:, where he 

does business, the Eagles Club is a primary hub for networking. The Department of 

Transportation's Disadvantaged Business Enterprise Program: Hearing Before the H Comm. 

on Transp. and Infrastructure, III th Congo 5 (2009). This club has an unwritten rule excluding 

African Americans. Ibid Covington said the club's rule "sickens" him, "[b]ut the fact that it 

impacts my ability to conduct business is reprehensible." Ibid. Summarizing the problem, 

Covington said, "If people do business with the people they are comfortable with, and if! am 

denied opportunities to sit down and get to know people - based on nothing more than my race 

- it automatically puts me and my business at a disadvantage." Ibid 

159 Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, I lOth Congo IS (2007) (statement of Professor Candida Brush, Paul T. 

Babson chair-professor of entrepreneurship, Babson College) ("[W]e know from what is called 

the theory ofhomophily that people like to do business with people who are like themselves. So 

if you have this very homogeneous group, if you happen to be different in some way, it is going 

to be hard for you to get over that barrier;"). 

36 
113 

program has allowed her to slowly break into business networks. 16u 

3. Discrimination In Bonding And By Suppliers Burdens 

Disadvantaged Firms. 

Many contracts, both public and private, require bidders to secure a surety bond. 

Accordingly; success in contracting depends not only upon a firm's ability to do the work at a 

good price, but also on the firm's ability to obtain quality services from bonding companies. 

Any discrimination that exists in the bonding market makes fulfilling this requirement much 

more difficult for minority· and women-owned firms. 161 

A surety bond is required "[b]efore any contract of more than $100,000 is awarded for 

the construction, alteration, or repair of any public building or public work of the Federal 

Government.,,162 As the Department of Justice explained in 1996,163 our coJintry's history of 

discrimination often lands minority- and women-owned businesses in a vicious cycle: they 

cannot get bonding because they lack experience, yet they cannot get experience because they 

lack bonding.164 A 2006 report of the National Association of Women Business Owners 

160 The Department of Transportation 's Disadvantaged Business Enterprise Program: 

Hearing Before the H Comm. on Transp. and Infrastructure, Illth Congo 213·214 (2009) 

(statement of Katherine M. Cloonen). 

161 See; e.g., The Department of Transportation 's Disadvantaged Business Enterprise 

Programs: Hearing Before the H Comm. on Transp. and Infrastructure, III th Congo 2 (2009) 

(statement of the Hon. James L. Oberstar, Chairman and Rep. from Minnesota) ("This data 

demonstrates that it is difficult for small and disadvantaged businesses to compete -

discrirriination impacts minority and women owned businesses at many points in the contracting 

process, including obtaining credit, bonding, and insurance.") (emphasis added) .. 

16240U.s.C.313J. 

163 61 Fed. Reg. at 26,060. 

164 See, e.g., Access to Federal Contracts: How to Level the Playing Field Before the S. 

Comm. on Small Business and Entrepreneurship, I lOth Congo 132 (2007) (statement of Randy 

McRae) ("[B]onding has been a cruel Catch-22 for [DBEs]. These struggling firms either can't 

afford a bond or can't persuade bOIiding companies to guarantee their performance. But without 

a bond, they can't bid on many jobs in the public or private sector, limiting their growth."); Id. at 

48 (statement of Wayne Frazier, Sr., President, Maryland-Washington Minority Contractors 

Association) ("Small businesses dealing with the Federal Government cannot get surety bonding. 

Again, no financing, no bonding, no contract, no award, no way to compete."); The Department 

a/Transportation's Disadvantaged Business Enterprise Program: Hearing Before the H 

Comm. on Transp. and Infrastructure, III th Congo 311 (2009) (statement of Joel Szabat, Acting 

Assistant Secretary, Transportation Policy, DOT) (relating comment from a female contractor in 

California who stated that "minorities and women have a much harder time getting capital, 

getting bonding, getting insurance ... in bonding ... women are still asked to have their husbands 

sign at the bank"); see also Washington Suburban Sanitary Commission by BBC Research & 

Consulting, WSSC 2005 Disparity Study - Summary and Recommendations, § 4 at 19-20 (2005) 

(continued ... ) 

37 
114 

Procurement Task Force, which was submitted to Congress, concludes that "[b]onding 

requirements and other financial tests can imBose an insurmountable barrier to [women-owned 

small businesses] seeking federal contracts." 65 Where prime contractors set the bonding 

requirement at an unnecessarily high level, moreover, it effectively excludes a greater percentage 

of minority- and women-owned businesses because those businesses are more commonly unable 

to secure the necessary levels of bonding due to the variety of discriminatory barriers that have 

been discussed thus far. 166 

Moreover, their inability to secure bonding prevents minority- and women-owned 

businesses from growing their companies to the point where they can take on the role of prime 

contractor. One congressional witness explained: "You have to have proof that you are capable 

and have the capacity to deliver to large scale-projects if, in fact, you want to be a prime. As a 

result of the inability to be bonded, you end up being a subcontractor, which limits your growth 

opportunities.,,167 

State and local disparity studies also identifY bonding requirements as a major obstacle to 

success for minority- and women-owned businesses. For example, one study found that 

"[0 ]btaining sufficient bonding (or bonding at all) is frequently cited as a major barrier" to 

( ... continued) 

(minority business owner reported that MBE firms get charged a higher rate for the same 

bondin~ as compared to white competitors). 

65. Opportunities and Challenges for Women Entrepreneurs on the 20th Anniversary of 

th~ Women's Business Ownership Act: Roundtable Before the S. Comm. on Small Business and 

Entrepreneurship, 1 10th Congo 67 (2008) (report of the NAWBO Procurement Task Force, 

FebruaI?;}~!~ Information Policy Affects Competitive Viability in Minority Contracting Before 

the Subcomm. on Information PoliCy, Census, and National Archives of the H Comm. on 

Oversight and Government Reform, 110th Congo 92 (2008) (statement of Anthony Brown, Chair, 

Goverurnent Affairs Committee of the AMAC, Senior Associate Partner, MGT of America); The 

Department of Transportation 's Disadvantaged Business Enterprise Programs: Hearing Before 

the H Comm. on Transportation and Infrastructure, 111 th Congo 311 (2009) (statement ofJ oel 

Szabat, Acting Assistant Secretary, Transportation Policy, DOT) ("Several California [DBE] 

contractors mentioned that prime contractors often imposed higher bonding or insurance 

requirements than the state required, blocking them from participation."). 

167 Women in Business: Leveling the Playing Field: Roundtable Before the S. Comm. on 

Small Business and Entrepreneurship, 1 10th Congo 26 (2008) (statement of Eydie Silva, 

Executive Director, State Office of Minority and Women Business Assistance); see also Kevin 

O'Brien, Ph.D., Bernard Goitein, Ph.D., and Camden Bucey, Disparity Study for the City of 

Peoria 32, 36 (2004) (concluding that lack of access to bonding was a factor that helped to 

explain why, from 1992-2001, no African-American-owned business in Peoria was able to obtain 

a contract as a prime contractor in any of the City'S 136 contracting projects; and there was only 

one project where a women-owned business was the prime contractor). 

38 
115 

contracting for minority- and women-owned businesses. 168 Specifically, that study concluded 

that "[m]inority fums often have difficulty obtaining bonding because they lack the experience 

bonding companies require.,,169 

Discrimination by suppliers is also still a problem. If a supplier charges minority- or 

women-owned businesses a higher price than it charges a majority-owned business, then the 

minority- and women-owned firms will have to include the higher price of supplies in their bid. 

This in tum limits the minority- and women-owned businesses' ability to compete. no The 

problem has a significant effect on minority- and women-owned businesses. For example, a 

disparity study in Memphis, Tennessee, found that 21.6% of the minority- and women-owned 

businesses surveyed stated that they had experienced at least one instance of discrimination by a 

supplier in the last five years.

17! Another study found that women-owned businesses reported 

"that they were often given a higher price for materials than their male-owned counterparts, and 

they believe that the higher prices were related to their gender.,,172 

Congress has also heard testimony about supplier discrimination. One egregious example 

occurred in Michigan: An African-American employee of a minority-owned business obtained a 

quote of$613 per tire for 16 new tires.!73 The minority business owner discovered that a white 

business associate had paid only $400 per tire.!74 He then called the supplier and "put on awhite 

voice" and was quoted $400.175 Congress aiso heard about an African-American mechanical 

contractor who solicited a quote for equipment from his non-minority-owned supplier which he 

then included in his bid.176 He then received a fax from the supplier that was intended for his 

168 Pennsylvania Advisory Comm. to the U.S. Comm'n 'on Civil Rights, Barriers Facing 

Minority- and Women-Owned Bus. in Pa. 18 (2002) ; 

169 Id. at 19. 

170 See National Economic Research Associates, Inc., Rac~, Sex, and Business 

Enterprise~' Evidence from Memphis, Tennessee 103 (2008) (concluding that "discrimination by 

commercial customers and suppliers against [minority- and women-owned businesses] operates 

to increase input prices and lower output prices for" those businesses), 

171 Id. at 259. 

172 CRA International for the San Mateo County Transit District and the Peninsula 

Corridor Joint Powers Board, Measuring Minority- and Woman-Owned Construction and' 

Professional Service Firm Availability and Utilization 139 (2008). 

173 The Department of Transportation's Disadvantaged Business Enterprise Programs: 

Hearing Before the H. Comm. on Transp. and Infrastructure, 111 th Congo 217 (2009) (statement 

of Chuck Covington, CEO, People's Transit). 174 Ibid. 

175 Ibid. 

176 Minority Entrepreneurship: Assessing the Effectiveness ofSBA 's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 1 10th Congo 39 (2007) (statement of Anthony W. Robinson, President, 

Minority Business Enterprise Legal Defense and Educational Fund). 

39 
116 

non-minority-owned competitor, quoting the competitor a lower quote. 177 When the minority 

business owner requested the lower price quote provided to his competitor, the supplier 

responded that it reserved the right to provide better pricing to their better customers.178 

Obviously - as a minority business owner testified - "no businessperson,. no matter how 

talented, can succeed if they are paying a race-based mark-up on supplies.,,179 

ill. 

Conclusion 

The discussion above surveys only a portion of the evidence that demonstrates that the 

race- and gender-based barriers facing minority-and women-owned :firms still exist. While some 

progress has been made, the U.S. Small Business Administration's 8(a) and Women-Owned 

Small Business programs, the DOT's Disadvantaged Business Enterprise program, and similar 

programs are still critical to prevent the federal government from becoming a "passive 

participant" in a system infected by race and gender discrimination. The government's 

obligation to ensure that tax money is spent fairly and equally requires these programs. 

177 Ibid. 

17B Ibid. See also Mason Tillman Assocs., State of New Jersey Construction Services 

Disparity Study, 2000-2002, Vol. 1 at 2-7 (2005) (African-American business owner reported 

. that one supplier demanded that she pay up front or pay a certain amount of money down before 

checking her business's credit rating; the supplier openly stated that the reason for this 

requirement was that his business was minority-owned arId the supplier claimed to have "had 

prior ex~erience with a minority vender that had not paid them"). 

79 The Department of Transportation 's Disadvantaged Business Enterprise Programs: 

Hearing Before the H Comm. on Transp. and Infrastructure, 111 th Congo 218 (2009) (statement 

of Chuck Covington, CEO, People's Transit). 

40 
117 

Appendix A 

Congressional Hearings Between 2006 and 2010 

Addressing Public Procurement and Minority- and Women-Owned Business Enterprises 

• Assessing Access: Obstacles and Opportunities for Minority Small Business Owners in 

Today's Capital Markets, Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 1 11th Congo (2010) 

• Infrastructure Investment: Ensuring an Effective Economic Recovery Program: Hearing 

Before the H Comm. on Transportation and Infrastructure, 111 th Congo (2009) 

• The Federal Aviation Administration Reauthorization Act of 2009: Hearing Before the H 

Subcomm. on Aviation of the H Comm. on Transportation and Infrastructure, 111 th 

Congo (2009) 

• Full Committee Hearing on the State of the SBA's Entrepreneurial Development 

Programs and Their Role inPromoting an Economic Recovery: Hearing Before the H 

Comm. on Small Business, 111 th Congo (2009) 

• Full Committee Hearing on Oversight of the Small Business Administration and its 

Programs: Hearing Before the H Comm. on Small Business, 1 11th Congo (2009) 

• The Department of Transportation 's Disadvantaged Business Enterprise Programs: 

Hearing Before the H Comm. on Transportation and Infrastructure, 111 th Congo (2009) 

• The Role of Small Business in Recovery Act Contracting: Hearing Before the S. Comm. 

on Small Business and Entrepreneurship, 111 th Congo (2009) 

• Trends Affecting Minority Broadcast Ownership: Hearing Before the H Judiciary 

Comm., 1 11th Congo (2009) 

• , Roundtable on Healthcare Reform: Small Business Concerns and Priorities: Hearing 

Before the S. Comm. on Small Business and Entrepreneurship, 111 th Congo (2009) 

• Doing Business with th~ Government: The Record and Goals for Small, Minority and 

Disadvantaged Businesses: Hearing Before the H Comm. On Transportation and 

Infrastructure, 111 th Congo (2009) 

• Minority Entrepreneurship: Evaluating Small Business Resources and Programs: 

Hearing Before the S. Comm. on Small Business and Entrepreneurship, 111 th Congo 

(2009) 

41 
118 

• The Minority Business Development Agency: Enhancing the Prospects for Success: 

Hearing Before the H Subcomm. on Commerce, Trade, and Consumer Protection of the 

H. Comm. on Energy and Commerce, IIIth Congo (2009) 

• Full Committee Hearing on SBA 's Progress in Implementing the Women's Procurement 

Program: Hearing Before the H. Comm. on Small Business, 1 10th Congo (2008) 

• Holding the Small Business Administration Accountable: Women's Contracting and 

Lender Oversight: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 11 Oth Congo (2008) 

• Diversity in the Financial Services Sector: Hearing Before the H. Subcomm. on. 

Oversight and Investigations of the H. Comm. on Financial Services, IIOth Congo (2008) 

• Military Base Realignment: Contracting Opportunitiesfor Impacted Communities: 

HearingBefore the H. Subcomm. on Government Management, Organization, and 

Procurement of the H. Comm. on OverSight and Government Reform, 1 10th Congo (2008) 

• Community Reinvestment Act: Thirty Years of Accomplishments, But Challenges Remain: 

Hearing Before the H. Comm. on Financial Services, 1 10th Congo (2008) 

• Doing Business with the Government: The Record and Goals for Small, Minority, and 

Disadvantaged Businesses: Hearing Before the H. Subcomm. on Economic Development, 

Public Buildings, and Emergency Management of the H. Comm. on Transportation and 

Infrastructure, 1l0th Congo (2008) 

• Subcommittee Hearing on Oversight of the Entrepreneurial Development Programs 

Implemented by the Small Business Administration and National Veterans Business 

Development Corporation: Hearing Before the H. Subcomm. on Rural and Urban 

Entrepreneurship of the H. Comm. on Small Business, 11 Oth Congo (2008) 

• Women in Business: Leveling the Playing Field: Roundtable Before the S. Comm. on 

Small Business and Entrepreneurship, 1 10th Congo (2008) 

• Subcommittee Hearing on Minority and Hispanic Participation in the Federal Workforce 

and the Impact on the Small Bu:;iness Community: Hearing Before the H. Subcomm. on 

Regulations, Health Care, and Trade of the H. Comm. on Small Business, 1 10th Congo 

(2008) 

• Opportunities and Challenges for Women Entrepreneurs on the 20th Anniversary of the 

Women's Business Ownership Act: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 1 10th Congo (2008) 

42 
119 

• Business Start-Up Hurdles in Underserved Communities: Access to Venture Capital and 

Entrepreneurship Training: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo (2008) 

• How Information Policy Affects Competitive Viability of Small and Disadvantaged 

Business in Federal Contracting: Hearing Before the H Subcomm. on Information 

Policy, Census, and National Archives of the H Comm. on Oversight and Government 

Reform, 11 Oth Congo (2008) 

• Full Committee Field Hearing on Participation of Small Business in Hurri(:ane Katrina 

Recovery Contracts: Hearing Before the H. Comm. on Small Business, 110th Congo 

(2007) 

• Minority Entrepreneurship: Assessing the Effectiveness ofSBA's Programs for the 

Minority Business Community: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 110th Congo (2007) 

• Full Committee Hearing on the Small Business Administration's Microloan Program: 

Hearing Before the H Comm. on Small Business, 110th Congo (2007) 

• Increasing Government Accountability and Ensuring Fairness in Small Business 

Contracting: Hearing Before the S. Comm. on Small Business & Entrepreneurship, 110th 

Congo (2007) 

• Diversifying Native Economies: Oversight Hearing Before the H Comm. on Natural 

Resources, 11 Oth Congo (2007) . 

• Expanding Opportunities for Women Entrepreneurs: The Future of Women 's Small 

Business Programs:. Hearing Before the S. Comm. on Small Business ·and 

Entrepreneurship, 11 Oth Congo (2007) 

• Federal Contracting: Removing Hurdles for Minority-Owned Small Businesses: Hearing 

Before the H Subcomm. on Government Management, Organization, and Procurement of 

the H Comm on Oversight and Government Reform, 11 Oth Congo (2007) 

• Full Committee Hearing to Consider Legislation Updating and Improving the SBA's 

Contracting Programs: Hearing Before the H. Comm. on Small Business, 11 Oth Congo 

(2007) 

• Mortgage Lending Discrimination: Field Hearing Before the H Comm. on Financial 

Services, 11 Oth Congo (2007) 

• Access to Federal Contracts: How to Level the Playing Field: Field Hearing Before the 

S. Comm. on Small Business and Entrepreneurship, 110th Congo (2007) 

43 
120 

• Preserving and Expanding Minority Banks: Hearing Before the H. Subcomm. on 

Oversight and Investigations of the H. Comm. on Financial Services, 1 lOth Congo (2007) 

• Reauthorization of Small Business Administration Financing and Entrepreneurial 

Development Programs: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 109th Congo (2006) 

• Northern Lights and Procurement Plights: The Effect of the ANC Program on Federal 

Procurement and Alaska Native Corporation: Joint Hearing Before the H. Comm. on 

Government Reform and the H. Comm. on Small Business, 109th Congo (2006) 

• Diversity: The GAO Perspective: Hearing Before the H. Subc'omm. on Oversight and 

Investigations of the H. Comm. on Financial Services, 109th Congo (2006) 

• Strengthening Participation of Small Businesses in Federal Contracting and Innovation 

Research Programs: Hearing Before the S. Comm. on Small Business and 

Entrepreneurship, 109th Congo (2006) 

44 
121 

AppendixB 

Studies and Reports 

• Frances Amatucci, Women Entrepreneurs Securing Business Angel Financing: Tales 

from the Field, Venture Capital (2004) 

• Ana Aparicio, Hispanic-Owned Business Enterprises in the Construction Industry of 

Greater Chicago: Responses and Personal Perspectives, for the City of Chicago MlWBE 

Program (2009) 

• Aria Aparicio, Women-Owned Business Enterprises in the Construction Industry of 

Greater Chicago: Responses and Personal Perspectives, for the City of Chicago MlWBE 

Program (2009) 

• Asian American Justice Center, Equal Access: Unlocking Government Doors for Asian 

Americans: Public ContraCting Laws and Policies (2008) 

• S. Ann Becker and Donn Miller-Kermani; Women-Owned Small Businesses in the 

Federal Procurement Market, Journal of Contract Management 131 (2008) 

• Dana Bible, Kathy Hill, Discrimination: Women in Bus'iness, J oumal of Organizational 

Culture, Communications and Conflict, Volume 11, No.1 (2007) 

• Lloyd Blanchard, Bo Zhao, and John Yinger, Do Credit Market Barriers Existsfor 

Minority and Women Entrepreneurs?, Center for Policy Research, Maxwell School, 

Syracuse University, Working Paper No. 74 (2005) 

• David. G. Blanchflower and Jon Wainwright, An Analysis of the Impact of Affirmative 

Action Programs on Self-Employment in the Construction Indl,Jstry, National Bureau of 

Economic Research, Working Paper 11793 (2008) 

• David G. Blanchflower, PhillipB. Levine, and David 1. Zimmerman, Discrimination in 

the Small-Business Credit Market, 85(4) Review of Economics and Statistics 930 (2003) 

• David. G, Blanchflower, Minority Self-Employment in the United States and the Impact 

of Affirmative Action Programs, National Bureau of Economic Research, Working Paper 

13972 (2008) 

• Boston Consulting Group, The New Agenda for Minority Business Development (2005) 

• Candida G. Brush et al., An Investigation of Women-Led Firms and Venture Capital 

Investmen, Prepared for the U.S. Small Business Administration, Office of Advocacy 

(2001) 

45 
122 

• Ken Cavalluzzo & John Wolken, Competition, . Small Business Financing, and 

Discrimination: Evidencefrom a New Survey, 75(4) Journal of Business 641 (2005) 

• Ken Cavalluzzo & John Wolken, Small Business Loan Turndowns, Personal Wealth, and 

Discrimination, 78(6) Journal of Business 2153 (2005) 

• Susan Coleman, Access to Debt Capitalfor Women and Minority Owned Small Firms: 

Does Educational Attainment Have an Impact, 9(2) Journal of Developmental 

Entrepreneurship 127 (2004) 

• Susan Coleman, The Borrowing Experience of Black and Hispanic-Owned Small Firms: 

Evidencefrom the 1998 Survey of Small Business Finances, 8 The Academy of 

Entrepreneurship Journal (2002) 

Susan Coleman, Is There a Liquidity Crisis For Small, Black-Owned Firms, Journal of 

Developmental Entrepreneurship (2005) 

• Ernst & Young, 2008 Catalyst Census of Women Corporate Officers and Top Earners of 

the Fortune 500, available at http://www.catalyst.org/file/24l/08_census_cotejan.pdf 

(last visited, April 29, 2010) 

• Robert W. Fairlie and Alicia M. Robb, Minority Business Development Agency 

Disparities in Capital Access between Minority and Non-Minority-Owned Businesses: 

The Troubling Reality of Capital Limitations Faced by MBEs, Prepared for the U.S. 

Department of Commerce (2010) 

• Robert W. Fairlie and Alicia M. Robb, Why are Black-Owned Businesses Less Successful 

Than White-Owned Businesses? The Role of Families, Inheritances, and Business 

Human Capital, 25 Journal of Labor Economics 289 (2007) 

• Robert W. Fairlie, Minority Entrepreneurship, The Small Business Economy, produced 

under contract with the SBA, Office of Advocacy (2005) 

• Cedric Herring, Barriers to the Utilization of Targeted Program Contractors: Results 

from Interviews of African American Contractors, for the City of Chicago MlWBE 

Program (2009) 

• Michael Hout and Harvey Rosen, Self-Employment, Family Background, and Race, 35 

Journal of Human Resources 671(2000) . 

• Insight Center for Community Economic Development, The Impact of State Affirmative 

Procurement Policies on Minority- and Women- Owned Businesses in Five States, Best 

Practices, Imperfections, and Challenges in State Inclusive Business Programs (2007) 

• Yvonne M. Lau, Profiles on Asian Americans in Construction -A Study for the City of 

Chicago MlWBE Sunset Project, for the City of Chicago MlWBE Program (2009) 

46 
123 

• Sang-Suk Lee and Diane Denslow, A Study on the Major Problems of US. WomenOwned Small Businesses, Journal of Small Business Strategy, IS (2) (2005) 

• Ying Lowrey, Minorities in Business: A Demographic Review of Minority Business 

Ownership, 298 U.S. Small Business Administration (2007) 

• Ying Lowrey, Dynamics of Minority-Owned Employer Establishments, 1997-2001,251 

U.S. Small Business Administration (2005) 

• Karlyn Mitchell & Douglas K. Pearce, Availability of Financing to Small Firms Using 

the Survey of Small Business Finances, 257 U.S. Small Business Administration (2005) 

• Pennsylvania Advisory Corom. to the U.S. Comm'n on Civil Rights, Barriers Facing 

Minority- and Women-Owned Bus. in Pennsylvania (2002) 

• Craig A. Peterson and James Philpot, Women's Roles on us. Fortune 500 Boards: 

Director Expertise and Committee Memberships, 72 Journal of Business Ethics 177 

(2007) 

• Myron Quon, Discrimination Against Asian American Business Enterprises: The 

Continuing Needfor Affirmative Action in Public Contracting, Asian American Policy 

Review 41 (2008) 

• Howard Rasheed, Capital Access Barriers to Government Procurement Performance: 

Moderating Effects of Ethnicity, Gender, and Education, Journal of Developmental 

Entrepreneurship (2004) 

• Elaine Reardon, 'Nancy Nicosia and Nancy Y. Moore, The Utilization of Women-Owned 

Small Businesses in Federal Contracting, Kauffman-RAND Institute for 

Entrepreneurship Public Policy (2007) 

• Alicia M. Robb, & Robert Fairlie, Access to Financial Capital Among U.S. Businesses: 

The Case of African American Firms Constraints, 613 Annals of the American Academy 

of Political and Social Science (September 2007) 

• Hal Salzman and Signe-Mary McKernan, Capital Accessfor Women, Profile and 

Analysis of US. Best Practice Programs, The Urban Institute (2007) 

• Jonathan Taylor, Income and Wealth Transfer Effects of Discrimination in Small 

Business Lending, 32(3/4) Review of Black Political Economy 87 (2005) 

• Siri Terjesen, Ruth Sealy and Val Singh, Women Directors on Corporate Boards: A 

Review and Research Agenda, 17 Corporate Governance: An International Review 320 

(2009) 

• Jon Wainwright, Disparity Study Methodology, National Cooperative Highway Research 

Program Report (2010) 

47 
124 

• u.s. Census Bureau, 2002 Survey of Business Owners, Advance Report on 

Characteristics of Employer Business Owners: 2002, available at 

http://www.census.gov/econicensus02/sbo/intro.htm (last visited April 29, 2010). 

• U.S. Census Bureau, Survey of Business Owners - Women-Owned Firms: 2002, available 

at http://www.census.gov/econisboI02/womensof.html (last visited April 29, 2010) 

• U.S. Department of Commerce, Minority Business Development Agency, Accelerating 

. Job Creation and Economic Productivity: Expanding Financing Opportunities for 

Minority Businesses (2004) 

• U.S. Department of Commerce, Minority Business Development Agency, Characteristics 

of Minority Businesses and Entrepreneurs, An Analysis of the 2002 Survey of Business 

Owners (2008) 

• U.S. Department of Commerce, Minority Business Development Agency, The State of 

Minority BlLfiness Enterprises, An Overview of the 2002 Survey of Business Owners, 

Number of Firms, Gross Receipts, and Paid Employees (2006) 

• U.S. Department of Corrimerce,Minority Business Development Agency, Accelerating 

Job Creation and Economic Productivity: Expanding Financing Opportunitiesfor 

Minority Businesses (2004) 

• U.S. Department of Commerce, Economics and Statistics Administration and the 

Minority Business Development Agency' Keys to Minority Entrepreneurial Success: 

Capital, Education and Technology (2002) 

• United States Department of Labor, Quick Stats on Women Workers, 2008, available at 

http://www.dol.gov/wb/stats/main.htm (last visited April 29, 2010) 

48 
125 

AppendixC 

A Sample of State and Local Government Disparity Studies 

Alabama 

• . City of Birmingham: Disparity Study Report, Prepared by Pendleton, Friedberg, Wilson 

& Hennessey, P.C. for the City of Birmingham, Alabama (2007) 

Alaska 

• Alaska Disadvantaged Business Enterprise Study - Availability and Disparity, Prepared 

by D. Wilson Consulting Group, LLC for the Alaska Department of Transportation and 

Public Facilities (2008) . 

Arizona 

A Comprehensive Study of the Pima County MwBE Program, Prepared by D.Wilson 

Consulting Group, LLC for the Pima County Procurement Department (2008) 

• A Comprehensive Disparity Study of the City of Tucson MWBE Program, Prepared by D. 

Wilson Consulting Group, LLC for the Pima County Procurement Department (2008) 

Availability Analysis and Disparity Study for the Arizona Department of Transportation: 

Final Report, Prepared by MGT of America for the Arizona Department of 

Transportation (2009) 

• The City of Phoenix Minority-, Women-Owned, and Small Business Enterprise Program 

Update Study, Prepared by MGT of America, Inc. for the City of Phoenix (2005) 

California 

• San Francisco Bay Area Rapid Transit District, Availability and Utilization Study, Final 

Report, Prepared by Mason Tillman Assoc. for the San Francisco Bay Area Rapid Transit 

District (2009) 

• Statistical Disparities in Minority and Female Business Formation and Earnings In and 

Surrounding San Francisco, California, Prepared by NERA Economic Consulting for the 

City of San Francisco, CA (2003) 

49 
126 

• Availability and Disparity Study for the California Department of Transportation, 

Prepared by BBC Research & Consulting for the California Department of 

Transportation (2007) 

• Measuring Minority- and Woman-Owned Construction and Professional Service Firm 

Availability and Utilization, Prepared by CRA International for the San Mateo County 

Transit District and the Peninsula Corridor Joint Powers Board (April 14, 2008) 

• Measuring Minority- and Woman-Owned Construction and Professional Service Firm 

Availability and Utilization, Prepared by CRA International for the Santa Clara Valley 

Transportation Authority (December 14,2007) 

• Alameda County Availability Study, Prepared by Mason Tillman Associates, Ltd. for the 

County of Alameda (October 2004) 

Colorado 

Colorado Department of Transportation Statewide Transportation Disparity Study, 

Prepared by D. Wilson Consulting Group, LLC for the Colorado Department of 

Transportation (2009) 

• Race, Sex, and Business Enterprise: Evidence from Denver,. Colorado, Prepared by 

NERA Economic Consulting for the City and County of Denver, Colorado (2006) 

• Colorado Department of Transportation Disparity Study Update, Prepared by MGT of 

America for the Colorado Department of Transportation (2001) 

Connecticut 

• The City of Bridgeport Disparity Study Regarding Minority Participation in Contracting, 

presented by Mason Tillman Associates, Ltd. for the City of Bridgeport Connecticut 

(August 2005) 

Florida 

• Statistical Disparities in Minority and Female Business Formation and Earnings In and 

Surrounding Jacksonville, Florida, Prepared by NERA Economic Consulting for the City 

of Jacksonville, FL (2003) 

• Multi-Jurisdictional Disparity Study Consultant Services: Hillsborough County Aviation 

Authority and City of Tampa, Prepared by Mason TiIIman Associates, Ltd. for the 

Hillsborough County Aviation Authority Office and City of Tampa, Florida (April 2006) 

50 
127 

• Broward County Small Disadvantaged Business Enterprise (SDBE) Study, Prepared by 

MGT of America for the Broward County Board of Commissioners (2001) 

Georgia 

Race, Sex, and Business Enterprise: Evidencefrom Augusta, Georgia, Prepared by 

NERA Economic Consulting for August-Richmond County Georgia (2009) 

• Consortium Disparity Study Update, Prepared by BBC Research & Consulting for the 

City of Albany, Georgia; Dougherty County, Georgia; Dougherty County School System; 

Albany Water, Gas & Light Commission; and Albany Tomorrow, Inc. (2008) 

• City of Atlanta Disparity Sfudy, Prepared by Griffin and Strong for the City of Atlanta 

(2006) 

• Georgia Department of Transportation Disparity Study, Prepared by Boston Research 

Group for the State of Georgia (2005) 

Idaho 

• A Study to Determine DBE Availability and Analyze Disparity in the Transportation 

Contracting Industry in Idaho, Prepared by BBC Research & Consulting for the Idaho 

Transportation Department (2007) 

Illinois 

•. Disadvantaged Business Enterprise Availability Study, Prepared by NERA Economic 

Consulting, for the Illinois Department of Transportation (2004) 

• Report on the City of Chicago's MWBE Program, Prepared by David Blanchflower, 

Ph.D., for the City of Chicago M!wBE Program (2009) 

• Disadvantaged Business Enterprise Study, Prepared by NERA Economic ConsultUig, for 

the Nortbeast Illinois Regional Commuter Railroad Corporation D/B/A Metra (2000) 

• Disparity Study for the City of Peoria, Prepared by Kevin O'Brien, Ph.D., for the City of 

Peoria (2004) 

• Race, Sex, and Business Enterprise: Evidence from the State of fllinois and the Chicago 

Metropolitan Area, Prepared by NERA Economic Consulting for the Illinois State Toll 

Highway Authority (2004) , 

51 
128 

Iowa 

• City of Davenport Disparity Study Regarding Minority and Women Participation in 

Contracting, Prepared by Mason Tillman Associates, Ltd. for the Davenport, Iowa (2009) 

Kansas 

• Kansas Department of Transportation Availability and Goal Setting Study, Prepared by 

MGT of America for the Kansas Department of Transportation (2001) 

Kentucky 

• Disparity Study for the Commonwealth of Kentucky, Prepared by Griffin and Strong for 

the Commonwealth of Kentucky (2000) 

Maryland 

Race, Sex, and Business Enterprise: Evidence from the City of Baltimore, Prepared by 

NERA Economic Consulting for the City of Baltimore, MD (2007) 

• Disadvantaged Business Enterprise Availability Studies Prepared for the Maryland 

Department of Transportation, State Highway Administration, Maryland Transit 

Administration, Maryland Aviation Administration, Prepared by NERA Economic 

Consulting for the Maryland Department of Transportation (2006) 

• The Prince George's County Government: Disparity Study Final Report, Prepared by 

DJ. Miller & Associates, Inc. for the Prince George' 5 Colinty Government (2006) 

• Race, Sex and Business Enterprise: Evidence from the State of Maryland, Prepared by 

NERA Economic Consulting for the Maryland Department of Transportation (2006) 

Massachusetts 

Race, Sex and Business Enterprise: Evidence from the Commonwealth of Massachusetts, 

Vol. I, Prepared by NERA Economic Consulting for the Massachusetts Housing Finance 

Agency (2006) 

Minnesota 

A Disparity Study for the City of Saint Paul and the Saint Paul Housing and 

Redevelopment Authority, Saint Paul, Minnesota, Prepared by MGT of America for the 

City of Saint Paul and the Redevelopment Authority of Saint Paul (2008) 

52 
129 

• Race, Sex and Business Enterprise: Evidence from the State of Minnesota, Prepared by 

NERA Economic Consulting for the Minnesota State Department of Transportation 

(2005) 

Missouri 

• Race, Sex, and Business Enterprise: Evidencefrom the St Louis Metropolitan Statistical 

Area 1979-2004, Prepared by NERA Economic Consulting for the Bi-State Development 

Agency (2005) 

• Disadvantaged Business Enterprise Availability Study, for the Missouri Department of 

,Transportation, Prepared by NERA Economic Consulting for the Missouri State 

Department of Transportation (2004) 

Montana 

• Disparity Study for the Montana Department of Transportation: Final Report, Prepared 

by D. Wilson Consulting Group, LLC for the Montana Department of Transportation 

(2009) 

Nevada 

• Availability and Disparity Study for the Nevada Department of Transportation, Prepared 

by BBC Research & Consulting for the Nevada Department of Transportation (2007) 

New Jersey 

.' State o/New Jersey Construction Services: Disparity Study 2003-2004, Prepared by 

Mason Tillman Associates, Ltd. for the New Jersey Disparity Study Commission (2006) 

• State of New Jersey Construction Services: Disparity Study 2000-2002, Prepared by 

Mason Tillman Associates, Ltd. for the New Jersey Disparity Study Commission (2005) 

• State of New Jersey Disparity Study of Procurement in Professional Services, other 

Services, and Goods and Commodities, Prepared by Mason Tillman Associates, Ltd. for 

the New Jersey Department of State (2005) 

Analysis of Essex County Procurement and Contracting: Final Report, Prepared by the 

University of Minnesota Disparity Study Research Team for the County of Essex 

Disparity Study Commission (2005) 

53 
130 

New York 

The State 0/ Minority- and Women-Owned Business Enterprises: Evidence from New 

York, Prepared by NERA Economic Consulting for the New York State Department of 

Economic Development (2010) 

• The City o/New York Disparity Study, presented by Mason Tillman Associates, Ltd. for 

the City of New York (2005) 

North Carolina 

• North Carolina Department o/Transportation Second Generation Disparity Study, 

Prepared by MGT of America, Inc. for the State of North Carolina (2004) 

• Measuring Business Opportunity: A Disparity Study 0/ NCDOT's State and Federal 

Programs, Prepared by Equant for the North Carolina DepartmentofTransportation (July 

27,2009) 

Ohio 

State o/Ohio Pre.dicate Study, Final Report, Prepared by D.J. Miller and Assoc. for the 

State of Ohio (2001) 

• A Second-Generation DisparityStudy, Prepared by MGT of America, Inc. for the City of 

Dayton, Ohio (2008) 

Oregon 

• Disadvantaged Business Enterprise Disparity Study, Prepared byMGT of America, Inc. 

for the Oregon Department of Transportation (2007) 

Pennsylvania 

Minority Business Shares 0/ Prime Contracts Approved by the Board 0/ Pittsburgh 

Public Schools, January-September 2005, Prepared by the University of Pittsburgh 

Center on Race and Social Problems (June 2006) 

• Commonwealth o/Pennsylvania Department o/General Services: Disparity Study in 

Building Construction and Building Design, Prepared by Mason Tillman Associates, Ltd. 

for the Commonwealth of Pennsylvania Department of General Services (August 2007) 

City of Philadelphia Fiscal Year 2006 Annual Disparity Study, Prepared by Econosult 

Corporation for the City of Philadelphia Department of Finance (May 30, 2007) 

54 
131 

• DisadvantagedBusiness Enterprise Availability Study: Purchasing, Prepared by NERA 

Economic Consulting for the Southeastern Pennsylvania Transportation Authority (2000) 

• Disadvantaged Business Enterprise Availability Study: Construction and Professional 

Services, Prepared by NERA Economic Consulting for the Southeastern Pennsylvania 

Transportation Authority (2000) 

• 

South Carolina 

• ' A Business Underutilization Causation Analysis Study for the City of Columbia, Prepared 

by MGT of America, Inc. for the State of South Carolina (2006) 

Tennessee 

• Race, Sex, and Business Enterprise: Evidence from Memphis, Tennessee, Prepared by 

NERA Economic Consulting for the Memphis-Shelby County Airport Authority 

(December 18, 2008) 

• State o/Tennessee Department o/Transportation, Prepared by Mason Tillman 

Associates, Ltd. for the Tennessee Department of Transportation (December 11,2007) 

• Final Report/or Development and Revision o/Small, Minority and Women Enterprise 

Program, Nashville International Airport, Prepared by Griffin & Strong, P .C. for the 

Metropolitan Nashville Airport Authority (September 19, 2007) 

• Metropolitan Government 0/ Nashville and Davidson County: Disparity Study Final 

Report, Prepared by Griffin and Strong for Nashville and Davidson County (December 

15,2004) 

Texas 

• A Historically Underutilized Business Disparity Study o/State Contracting 2009 Final 

Report, Prepared by MGT of America, Inc. for the State of Texas (2010) 

• The City 0/ Houston Disparity Study,Prepared by Mason Tillman Assoc., Ltd. (2006) 

• City 0/ Dallas Availability and Disparity Study, Prepared by Mason Tillman Assoc., Ltd. 

(2002) 

• Quantitative Analysis o/the Availability o/Minority- and Women-Owned Businesses and 

their Utilization by the Corpus Christi Regional Transportation Authority, Prepared by 

Jim Lee, Ph.D., for the Corpus Christi Regional Transportation Authority (November 

2007) 

55 
132 

Utah 

Race, Sex, and Business Enterprise: Evidence from the City 0/ Austin, Prepared by NERA 

Economic Consulting for the City of Austin, TX (May, 2008) 

San Antonio Regional Business Disparity Causation Analysis Study, Prepared by MGT of 

America for the City of San Antonio, Texas (April 6, 2009) 

• Race, Sex, and Business Enterprise: Evidencefrom the State o/Utah, Prepared by 

NERA Economic Consulting for the Salt Lake City Departments of Airports (2009) 

Virginia 

• A Procurement Disparity Study o/the Commonwealth o/Virginia, Prepared by MGT of 

America, Inc. for the Commonwealth of Virginia (2004) 

Washington 

• Race, Sex and Business Enterprise: Evidencefrom the State o/Washington, Prepared by 

NERA Economic Consulting for the Washington State Department of Transportation 

(2005) 

Washington, D.C. 

• Washington Suburban Sanitary Commission 2005 Disparity Study: Summary and 

Recommendations, Prepared by BBC Research & Consulting for the Washlngton 

Suburban Sanitary Commission (2005) 

Wisconsin 

• City o/Wisconsin,Study to Determine the Effectiveness o/the City's Emerging Business 

Enterprise Program, Prepared by Mason Tillman Associates, Ltd. For the City of 

Milwaukee, Wisc. (2007) 

56 
133 

Chair LANDRIEU. Let me begin, Mr. Hinson, with you. You mentioned in your testimony that you are considering the viability of 

a private managed investment fund. You touched on that briefly. 

Will you take this opportunity to go into a little bit more detail 

about how the Department of Commerce is contemplating this effort? Is it precedented in any way, and if so, what is the precedent? 

Mr. HINSON. Right. Madam Chair, thank you for that question. 

In the capital markets, there are a number of private equity 

funds. There are a number of institutional investors that focus on 

the market for investing in minority-owned companies. What we 

are contemplating is really coalescing sources of capital that to 

date have not coalesced around these particular companies and 

these unique industries. Through the structure of a public-private 

partnership, we look to bring these people together under the auspices of the Department of Commerce, to get them focused and in 

relationship with the companies that have a need for that capital. 

So what we are looking at is a public-private partnership structure, and we are still in the design phases of that right now. But 

the idea is simply to take sources of capital that to date do not necessarily focus on these particular market sectors and expose them 

to the economic value proposition of investing in these companies. 

Chair LANDRIEU. Thank you. 

Mr. Hedgespeth, the Small Business Investment Companies, 

SBICs, are supposed to bridge some of the gaps, as you know, between minority and non-minority businesses seeking venture capital. 

You mentioned this, but it is worth repeating. There is an alarming trend in lack of access and decline in the SBIC venture capital 

going to minority and women-owned businesses. In 1998, the percentage was 26 percent. The most recent data, it has dropped to 

7.19 percent. In the same timeframe, for women as well it dropped 

from 6 percent to 2.8 percent. 

How do you explain this trend by the SBIC program in making 

investments to minority and low income areas, and what steps is 

the SBA taking to address this trend, try to reverse it and move 

it in the opposite direction? 

Mr. HEDGESPETH. Those trends are in fact partly reflective of the 

fact that SBICs have been trending towards larger investments in 

their investment companies. One of the things that we have done 

to try and offset this trend, because very often the minority firm 

is at an earlier stage in their capital need than the typical majority 

firm that is looking for mezzanine financing, is we have in recently 

promulgated regulations required that 25 percent of SBIC investments go towards lower dollar investments. 

We are also going to be continuing our efforts to broaden the outreach of our SBIC program in finding funds that specifically work 

with, and target, the areas that are comparable and complementary to our mission of increasing access to underserved markets 

and minority entrepreneurs. 

Chair LANDRIEU. Both of you may want to comment about this. 

The Senator from Maine and I have a bill pending, with unanimous 

support from this Committee—I believe it is unanimous—to raise 

the limits for small loans from $35,000 to $50,000. The current 

limit for the express loans is $35,000. Do you think that that will 
134 

help, and if so, would you care to comment if that is the right 

amount, or should we be pushing it even higher? 

Maybe, Mr. Hinson, we will start with you and then Mr. 

Hedgespeth. 

Mr. HINSON. There is certainly no doubt that increasing the loan amount is helpful. Anecdotally, though, $35,000 as a base is generally ineffective in helping the firms get through tough economic 

times and certainly grow. Many of these firms are operating very 

leanly. So they do not necessarily generate, in and of themselves, 

enough capital to add an additional person. So they are not necessarily going to stimulate job growth. From our perspective, a $50,000 level would be a welcome addition. But practically speaking, I would recommend and propose 

that you consider something more along the lines of a $100,000 

level, possibly even a $200,000 level, so firms can obtain the capital 

to not only continue to function during times when credit is very 

tight, but also be in a position to add on that additional employee 

today that they anticipate they will need for tomorrow. 

Chair LANDRIEU. Mr. Hedgespeth. 

Mr. HEDGESPETH. Well, as the Administration has proposed raising the limit in our microloan program from $35,000 to $50,000, 

and we are delighted by the support it enjoys from this Committee. 

We think it is a very, very critical evolution of our microloan program that especially reflects the current reality where many businesses that were bankable 2 years ago, that need that $35,000 to 

$50,000 of capital, businesses, landscaping companies employing 

10, 20 people, who had a banking relationship and now do not have 

one, are increasingly turning to our microloan intermediaries for 

that working capital gap. And we would like to be able to allow 

them to meet that need. 

Chair LANDRIEU. Finally, if I could, Mr. Hedgespeth, I sent a letter to Administrator Mills, asking for her to give consideration to 

fill the position of Associate Administrator for Minority Small Business and Capital Ownership, considering the importance based on 

testimony from both of you with the focus of getting capital into the 

hands of minority-owned businesses, current businesses as well as 

potentially new businesses. Increased capital access could help create jobs. We could use those jobs right now in the United States 

of America and particularly use them in the communities and 

neighborhoods that have experienced even a sharper economic 

downturn. 

So what do you have to report to me about the opportunity to potentially fill this position and even get a sharper focus? Not that 

I do not believe the Administrator is herself focused, and you and 

this Administration, that have surely demonstrated their commitment, but this would give the extra push from a specific focus. And 

what do you think about the filling of this position as a possibility? 

Mr. HEDGESPETH. Well, Administrator Mills did receive your letter, and shares your concern and interest in moving very swiftly to 

fill this position. While I cannot speak to details at the moment, 

I can inform you that we believe we have an extremely qualified 

candidate identified, and you should be looking forward to some direction or some announcements in the near future. 

Chair LANDRIEU. Thank you. 
135 

Ranking Member Snowe. 

Senator SNOWE. Thank you. 

Mr. Hedgespeth and Mr. Hinson, do you ever coordinate between 

SBA and your agency, especially when it comes to the Small Business Development Centers and Minority Business Development 

Centers? I know we have more than a thousand nationwide under 

SBDCs. So is anything happening in that regard, so we can coordinate, not duplicate, efforts, that might provide a synergy that 

would be important? 

Mr. HINSON. Thank you, Senator Snowe. 

Yes, we do collaborate quite a bit. Oftentimes, many of the 8(a) 

firms, while they are still in 8(a) status, will come to us. We work 

together on various events. 

Certainly, we have worked very closely together when it comes 

to the economic stimulus activity relative to minority-owned firms. 

We have done quite a number of joint events. We have reached out 

to the various Federal agencies as a team. I work very closely with 

Associate Administrator Joe Jordan in that respect. 

So our activities are very coordinated. Taking into consideration, 

though, that we do have different business models and different 

structures, I think we have done a very good job at coordinating 

our activities. 

Senator SNOWE. But it is not formalized, I gather. Is it done on 

an ad hoc basis? 

Mr. HINSON. It is not formalized to the extent that we have necessarily signed MOUs, if you will. We are actually looking at some 

formalization from our side, and I think that SBA is looking at formalization from their side too. Interesting, we are moving in that 

direction. 

Senator SNOWE. Yes. Do you analyze the cost of creating a job 

with each of your agencies? I know there are different numbers 

with respect to that, but I do not know whether the goals are different that account for the cost per job to create. 

Mr. HEDGESPETH. That is not something that I think we have focused on. We have really focused on ways to be more efficient and 

making sure that the firms that we do touch really are supported 

by all the programs offered by both SBA and the Commerce Department, and being much more intentional about tracking the success of our firms as they move through our counseling process, contracting opportunities and also then opportunities for capital support. 

Mr. HINSON. From our vantage point, we actually can give a 

number of the cost per job. We focus, our operation focuses on return on investment. Right now, our ROI is 94 times. That means 

for every dollar of taxpayer money that goes into our agency, we 

produce $94 of economic output. 

We track very closely new job creation. We do not track yet, but 

we are going to begin to track, jobs saved. So it is an easy calculation for us relative to determining the cost per job. 

Senator SNOWE. I would appreciate those numbers for the Committee, if you have the numbers of jobs created. I mean that would 

be helpful as a measurement. Do you have them, Mr. Hedgespeth? 

Mr. HEDGESPETH. We certainly have numbers, in fact, of how 

much it costs for us to deliver our services. 
136 

Senator SNOWE. You do? Yes. I think that would be helpful to 

sort of guide us in how things are working in that respect. 

Mr. HEDGESPETH. We will provide you with that information. 

Senator SNOWE. Okay. I appreciate that. 

Mr. HEDGESPETH. Thank you so much. 

Senator SNOWE. Now in terms of the existing programs under 

SBA, we have the microloan program and now you have indicated 

that we should increase the amount to maybe $100,000, $200,000 

because the accumulation of wealth is an issue with minorityowned businesses and also, obviously, having the funds to sustain 

it. So you think it would be worthwhile in that regard to increase 

the loan limit, at least for a temporary period of time, for example? 

Do you think that would be helpful? 

Mr. HINSON. I think it would be helpful. Many of the minority 

firms—let me give you a scenario. We have firms, for example, that 

get government contracts from certain cities. Because of the issues 

that cities face with their specific budgets, they may not pay these 

firms for six months. Okay? So imagine you had done the work 

today, but you do not get your money for six months. In the absence of having working capital available, which banks are not necessarily providing to this sector of companies, these companies go 

out of business. 

So the very entity that should be supportive is actually running 

them out of business, and this particular funding mechanism provides a necessary bridge to make them—if the size is large enough, 

it provides them a bridge to keep their operation going while they 

are waiting to execute on their receivables. 

Mr. HEDGESPETH. If I could follow on, on that, Senator Snowe, 

there has been a proposal from the Administration to increase, 

temporarily increase the size of our SBA Express Loan to a million 

dollars. That is perfectly complementary with what my colleague 

here says in terms of providing a key source of working capital to 

that larger firm that is trying to bridge those contracting payment 

issues, which is really critical right now in terms of adding jobs 

and keeping jobs. 

Senator SNOWE. So what could happen in terms of the 7(a) and 

the 504 loan programs to improve the amount, or the percentage, 

going to minority-owned businesses? 

Obviously the microloan program has worked in providing access 

to capital to minority communities. So we can build on that. But 

what about the fact that 24 percent of all 7(a) and 504 loans go to 

minority-owned businesses? What more can we do to increase that 

number? 

Mr. HEDGESPETH. Well, as you mentioned in your opening remarks, sustaining the Recovery Act fee relief and higher guarantees is a very important thing to do. 

We are also just strongly focused on increasing the number of 

points of access for borrowers. The number of participating lenders, 

as a result of the Recovery Act initiatives, has grown substantially. 

Over a thousand lenders, I believe at our last count, are making 

SBA loans who were not making SBA loans just a couple of years 

ago. 

We continue to look for outlets in credit unions, ways to work increasingly with the CDFI fund and our colleagues there, to increase 
137 

the number of those mission-focused lenders who already carry a 

double bottom line of serving underserved communities and doing 

so profitably. 

Trying to find ways for our 7(a) program, not just the microloan 

program, to work more effectively with those partners, those are 

the things we are doing. 

Senator SNOWE. Yes, I know, to that point, lenders that have not 

been participating in the SBA programs have now come back into 

the program, and I congratulate you and the Administrator for 

making that happen. 

If there are 16,000 institutions, between banks and credit unions, 

what more can be done to attract and to target new lenders into 

the market? I mean how many lenders do we have overall in the 

SBA programs? 

Mr. HEDGESPETH. Lenders that currently have an executed 

agreement with us in 7(a) number about 5,000. Some of those are 

really not focused on small business lending, but many are, and we 

are working along with trade associations that reflect the broader 

banking community to try and reach those institutions. 

But, more importantly, we really want to try and work with institutions who already serve the minority and inner city neighborhoods and underserved markets, where there really is the sweet 

spot for SBA programs, and be much more intentional about identifying them and working to bring them back into the fold. Our field 

operation is very focused on this. It is their number one objective 

for the year. We are extending our outreach to community credit 

unions because we believe they have already proven to be a good 

source for making inroads into these communities, recognizing that 

community banks have a critical role to play in making more capital accessible to minority communities. 

Senator SNOWE. Thank you. 

Chair LANDRIEU. Can I just interrupt here? 

I know that you all think I was kidding about this, but we actually carry this number with us. It should motivate us to do more 

because actually there are 7,544 credit unions in the United States 

and there are 7,948 Federally chartered banks, which is 15,000 

plus roughly. There are only 2,200 SBA lenders. 

In Louisiana, where I carry these numbers, there are 232 credit 

unions, there are 156 banks, and only 38 SBA lenders. I have my 

staff keep a map of Louisiana up, showing what banks in our state 

are SBA lenders and where they are, where those loans are being 

made, and there are huge geographic areas that are not even 

touched. 

This is something that I am going to really drill down on with 

this Committee because when we look out at what both Commerce 

and the SBA do, their jobs and missions are to use the framework 

and the skeleton that is out there, which are the banks, and the 

credit unions. 

When you lay on top of that all of the financing that we have 

given to minority business centers, our women-owned business centers, the volunteer SCORE chapters that are out there, many organizations that we do not directly fund, but indirectly encourage. 

For example, chambers of commerce, minority business councils, 

and city halls. You have departments at the state level. We really 
138 

have to think about how we can push through some of these programs and funding to reach the network that is out there, to reach 

where the businesses are, in small places, neighborhoods, rural 

areas and urban centers. 

So I thank my staff for keeping this. I am going to provide it to 

all the members of our Committee. 

And yes, you are correct, we have a thousand new lenders since 

the Ranking Member and I led the effort to eliminate the fees and 

increase the loan rate. While we have gone up 1,000 the number 

is actually down from 1999. I think we now may be getting back 

up to that level. We have to figure out a better way to get our 

banks involved, particularly our community banks, in this effort, 

and we are going to work on that. 

Any further comments? 

We will get our second panel. Okay, thank you all very much, 

and we appreciate your testimony. 

If our second panel will please come forward, and to save time 

I am going to introduce them as they are moving to the table. 

Our first witness is Mr. Robert Johnson, the Chairman and 

Founder of RLJ Companies, an innovative business network which 

owns or holds interests in a diverse portfolio of companies in banking, private equity, real estate, hospitality, professional sports, film 

production, et cetera. He has been named by USA Today as one of 

the most influential black leaders in the past 25 years, and of 

course, Founder of BET. 

Ms. Natalie Cofield, President of NMC Consulting Group, will be 

our next witness. Ms. Cofield operates a boutique consulting firm 

with the mission of increasing entrepreneurship and business development opportunities and improving business programs for aspiring business owners. 

Ms. Margaret Henningsen, the Founder and Vice President of 

Legacy Bank, is our next witness. An advocate for empowering 

women and minorities, Legacy Bank provides services to thousands 

of the underserved, has funded more than a thousand small business, commercial and economic development loans, or has processed those loans. 

Mr. Paul Hudson is Chairman and CEO of Broadway Federal, 

the largest and only publicly owned African American bank west 

of the Mississippi. We are excited to have you here, Paul, to hear 

from you. 

And finally, Dr. Robert Fairlie, Professor of Economics at the 

University of California in Santa Cruz, who has done extensive research on entrepreneurship technology, inequality, and labor economics. Thank you for joining us. We have a copy of your book, and 

our staff has been using that to prepare for this hearing. 

If we can begin with Mr. Johnson and we ask you to limit your 

testimony to five minutes each, and then we will have a round of 

questions. 

Mr. JOHNSON. 

STATEMENT OF ROBERT L. JOHNSON, FOUNDER AND 

CHAIRMAN, THE RLJ COMPANIES 

Mr. JOHNSON. Good morning, Madam Chairwoman Landrieu and 

Ranking Minority Member Snowe. I appreciate the opportunity to 
139 

appear before the Committee to discuss the challenges and opportunities minority small business owners face in today’s economic 

climate. 

As an entrepreneur, I know firsthand the challenges minority entrepreneurs face. I also know the talent, dedication, determination 

and vision that minority entrepreneurs possess in their desire to 

become a part of, and a contributor to, the American dream. But 

the simple fact of economic reality in America is that minority 

Americans are significantly and disproportionately underrepresented in access to capital to start and fund entrepreneurial enterprises due to years of racial and economic discrimination. 

The Committee should make note of a recent study by the Economic Policy Institute which found that the medium net worth for 

African Americans was $11,800 compared with $118,000 for whites. 

When home equity was subtracted, African Americans had $300 in 

net assets while whites had $36,000. This gap is likely to widen as 

unemployment stagnates and as the mortgage crisis costs some 

black families their home. 

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 within the minority community. 

In my opinion, there are two crucial political and philosophical 

issues that first must be confronted and resolved before capital can 

be effectively directed to minority Americans in this society. 

The first question is: Why do federal, state governments and 

major U.S. corporations define minority ownership as owning or 

holding 51 percent equity? The answer usually offered is a 51 percent equity climate prohibits so-called minority front companies, or 

shams, from gaining access to government preferences. 

But why do we assume minority companies are fronts? The answer is painfully obvious, and it is partially why we are all here 

today. We know that minorities as a whole lack access to capital 

and therefore are unlikely to raise sufficient equity capital to control a company without outside financial assistance. But whose 

fault is that? 

Think about this for a moment. As a business person, your goal 

is to grow in scale and value. How do you accomplish this if your 

company cannot raise outside equity, if it exceeds your 51 percent 

ownership requirement. 

Why not the debt market, you might ask. Lenders have only one 

goal—a repayment of debt with interest as quickly as possible. On 

the other hand, and I know this to be a fact, strategic equity partners seek to combine investment and operational synergies with 

the minority company to maximize long-term growth in value. 

I suggest we let the market relationship decide and base ownership not only on equity control but other factors. Such other factors 

could be: Is the minority the founder of the company? Is the minority the key revenue driver of the company based on his or her intellectual capital, so-called sweat equity? What about considering voting control in different classes of stock to give more votes to the 

minority, or board control where the minority has the right to appoint the board majority? 
140 

Or, simply drop the equity requirement from 51 percent to 10 

percent to recognize what we all agree is the true problem: the disparity in capital access that minorities face when launching a business. 

This leads me to my second point. Is there a compelling national 

interest for helping minority business and what are its limitations? 

If the goal is to foster minority business as opposed to just small 

businesses, how do we address the Supreme Court’s compelling national interest test? The Court ruled that any government-sponsored economic preference to minority businesses should be narrowly tailored so as not to cause reverse discrimination. Justice 

O’Connor, writing for the majority in the Adarand case, stated that 

there was no compelling national interest in favoring a minority 

contractor for highway construction jobs over a majority. If this 

precedent dictates our approach to minority business development, 

it will forever, in my opinion, restrict minority access to government-sponsored business opportunities. 

We agree that due to past discrimination minorities cannot compete on capital formation, on experience or scale without capital 

and are unlikely to win most competitive bids without an advantage or a preference. 

In conclusion, let me state that I do not have ready a politically 

acceptable answer to these philosophical quandaries, but I am 

enough of a business person to know that the free marketplace, left 

to its own devices, will not solve this problem. 

I do not believe the government can promote minority ownership 

by placing restrictions on their startup potential, by requiring an 

unconditional 51 percent ownership. 

I do not believe that government can say it is critically important 

to have minority business succeed in the marketplace and, on the 

other hand, declare there is no compelling national interest to favor 

these businesses. 

I hope that I provided some framework for a debate, and I know 

I am committed to work with this Committee to achieve a viable 

consensus on how to grow and expand minority business ownership 

and opportunities in America. Thank you. 

[The prepared statement of Mr. Johnson follows:] 
141 

/, theRLJ 

,/ companies 

Assessing Access: Obstacles and Opportunities for Minority Small Business 

Owners in Today's Capital Markets 

Testimony before the U.S. Senate 

Committee on Small Business & Entrepreneurship 

April 15,2010 

Robert 1. Johnson 

Founder & Chairman, The RLJ Companies 

Good Morning Madam Chairwoman Landrieu, ranking minority member Snowe and 

distinguished members of the Committee, my name is Robert Johnson and I appreciate the 

opportunity to appear before the Committee to discuss the challenges and opportunities minority 

small business owners face in today's economic climate. 

Many of you may know me as the entrepreneur who founded and built Black 

Entertainment Television (BET) on a $500,000 investment. When I created BET, I did so 

because I saw an opportunity to provide consumers with programming content that was not 

available on existing cable channels. Since selling BET in 2001 to Viacom for $3 billion, I have 

focused my attention on and invested in industries where minority ownership and the opportunity 

to create value in the urban market is warranted. 

As an entrepreneur, I know first-hand the challenges minority entrepreneurs face. I also 

know the talent, dedication, determination and vision that minority entrepreneurs possess in their 

desire to become a part of and a contributor to the American Dream. 

But the simple fact of economic reality in America is due to years of racial and economic 

discrimination minority Americans are significantly and disproportionately underrepresented in 

access to capital to start and fund entrepreneurial enterprises. 

This Committee should know and make note of these compelling statistics: A recent 

study by the Economic Policy Institute found that the median net worth for African Americans 

was $11,800 compared with $118,000 for whites. When home equity was subtracted, African 

Americans had $300 in net assets while whites had $36,000. In metro Orlando, where my bank 

Urban Trust is headquartered, about 47 percent of African Americans are homeowners, 

compared to 74 percent of whites. This gap is likely to widen even more as the mortgage crisis 

costs black families their homes. 

Robert L. Johnson, Founder & Chairman, The RLJ Companies 

Assessing Access: Obstacles & Opporrunitiesjor Minority Small Business in Today's Capital Markets 

US, Senate Committee on Small Business & Entrepreneurship * April 15, 201 0 
142 

Without question the lack of access to capital and capital fonnation are the principal 

factors holding back opportunities for minority businesses and as a consequence wealth creation 

within the minority community. 

Please note that I said "capital access" and not capital itself. As we all know, there is an 

abundance of investment capital in the U.S. economy and when minorities have access to capital 

on competitive tenns and conditions they have proven to be quite successful. 

Therefore, if we stipulate that access to capital is a core business necessity in the creation 

of value, wealth, and jobs, then the critical question is what is the political philosophy which 

underpins how and why we should direct capital to minority enterprises? 

In my opinion, there are two crucial political and philosophical issues that first must be 

confronted and resolved before capital can be effectively directed to minority Americans in this 

society. 

The first philosophical question is: Why do the Federal Government, state 

governments and major U.S. corporations define minority ownership as owning or holding 

51 % equity ownership in a company in order to be defined as a minority-owned 

enterprise? 

The answer that is usually offered is this 51 % structural requirement prevents so-called 

minority "front companies or shams" from gaining access to government subsidies or set-asides. 

But why do we assume minority companies are fronts? The answer is painfully obvious and it is 

partially why we are all here today. We know that minorities as a whole lack access to capital 

and therefore are unlikely to raise sufficient equity capital to control a company without outside 

financial assistance. But whose fault is that? 

The 51 % minority ownership provision is a true contradiction or a catch-no In other 

words, the government and major corporations in an effort to ensure that minority companies are 

"true minority companies" place a barrier to their growth based on the fact that to be a minority 

company you must control and own 51 % of the equity. 

Think about this for a moment: As a minority business person your goal is to grow in 

scale and value. How do you accomplish this if your company cannot raise outside equity ifit 

exceeds your 51 % ownership requirement? 

Raising equity capital, as we all know, requires that you give up commensurate equity to 

the outside investors based on the value of the company. If minorities are constrained in their 

equity raise they are therefore limited in their potential to obtain outside growth capital. 

You might ask, why not raise capital in the debt market. Ifminority companies are forced 

by the 51 % rule to raise debt to preserve their equity stake it is likely to be more expensive than 

equity capital and it further deprives the minority owner from seeking strategic partners who 

would be aligned in an equity raise. 

Robert L, johnson, Founder & Chairman, The RLJ Companies 

Assessing Access: Obstacles & Opportunities far Minority Small Business in Today's Capital Markets 

U.S. Senate Committee on Small Business & Entrepreneurship It AprillS, 2010 
143 

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. 

More importantly, if minority companies can only grow through debt instruments, they 

run the risk of losing their company entirely ifthere are significant swings in interest rates or if 

debt covenants are so restrictive that they retard growth. 

I suggest we let market relationships decide if a minority company is real or not and base 

the test of ownership not on equity control but other factors that determine true control in a 

business. Such factors could be: Is the minority the founder of the company? Is the minority the 

key revenue driver in the company based on his or her intellectual capital, i.e. Oprah Winfrey? 

What about considering such factors as voting control in different classes of stock that 

give more votes to the minority? Board control where the minority has the right to appoint the 

majority of the board members is another example. Or we could simply drop the equity 

requirement from 51 % to say 10%. 

This would recognize something we all agree is the true problem which is the disparity in 

capital access that minorities face when launching a business. We could also use a combination 

of the aforementioned factors to define minority ownership if we insist on having minorityownership criteria. 

Placing a 51 % equity hurdle rate on minority companies retards their ability to grow and 

could restrict their value at sale or exit. For example, if we imply that 51 % minority ownership 

adds value, could a non-minority argue that they should pay less for the company because upon 

acquisition it loses its status as a minority company? Or conversely, could a white-owned 

company argue that a minority acquirer should pay more because the minority will get the 

benefit of changing the company's status to a minority-owned company? 

As you can see, the arbitrary 51 % equity requirement for minority companies is 

politically based, not market-place based and needs to be thoroUghly reexamined and/or 

eliminated. 

This leads me to my second and final point. Is there a compelling national interest for 

helping minority businesses and what are its limitations? 

If the goal is to foster minority businesses as opposed to small businesses, irrespective of 

race or net worth, how do we address the Supreme Court's compelling national interest test? The 

Court has ruled that any government-sponsored economic preference to minority businesses 

should be "narrowly tailored" so as not to cause reverse discrimination. This ideology was 

embedded in law in the 1995 Supreme Court decision in the so-called Adarandi case. 

1 [Adarand Constructors. Inc. v, Pena, 63 US£. W 4523 (US. June 12, J995)} - under strict scrutiny. a racial or 

ethnic classification must serve a 'tcompelling interest' and must be "narrowly tailored" to serve that interest. 

Robert L,johnson, Founder & Chairman, The RLf Companies 

Assessing Access: Obstacles & Opportunities for Minority Smail Bllsiness in Today's Capital Markets 

us. Senate Committee on Small Business & Entrepreneurship * April 15. 2010 
144 

Justice O'Conner, writing for the majority, stated that there was no compelling national 

interest in favoring a minority contractor for a highway construction job over a majority 

company. Ifthat Court precedent dictates our approach to minority business development it will 

forever, in my opinion, restrict minority access to government-sponsored business opportunities. 

We agree that due to past discrimination minorities can't compete on capital formation, 

can't compete on experience or scale without capital, and are therefore unlikely to win most 

competitive bids when there is no advantage or preference given to being a minority enterprise. 

If we truly want to create more minority companies of size and scale then we must 

confront this compelling national interest test. 

You may not agree, but I can make a number of cases where there are compelling reasons 

why minority companies should be granted government advantages. For example, there are no 

large minority banks of national reach, yet minorities represent the largest group of the unbanked 

and underbanked and those most in need of transparent financial products and services at 

reasonable costs and financial literacy. 

There is no national mortgage loan servicer that is minority-owned. Think what this could 

mean today ifthere was an experienced minority loan servicer company. It is possible this 

company would likely understand the challenges of minority homeownership and could engage 

these consumers in positive mortgage modification efforts and foreclosure prevention. Without 

question, sustaining and increasing minority homeownership is, in my opinion, a compelling 

national interest. 

The film production industry is one of the few areas where we have a positive trade 

balance with the rest of the world; yet, there are no major minority film companies exporting 

film content. Why not use the tax preferences to favor minority film companies to aid the 

exportation of American culture from a minority point of view to the rest of the world. I find that 

a compelling national intcrest since African Americans have a huge influence on overall U.S. 

culture, and I believe the world would benefit from exposure to that culture. 

I could provide other examples, but the fundamental question is how will we define 

whether or not it is in our country's best interest to make minority businesses a true 

participant in the U.S. economy? 

In conclusion, let me state that I don't have a ready politically acceptable answer to these 

philosophical quandaries, but I am enough of a business person to know that the market place 

will not resolve them without defining the role of government in fostering minority ownership. 

The free marketplace left to its own devices simply will not solve this problem. 

I don't believe the government can say we want minority companies to grow as large as 

possible and then place restrictions on their growth potential by requiring an "unconditional 51 % 

ownership." I don't believe the government can say it's critically impcrtant to have minority 

businesses succeed in this society and on the other hand declare there is no compelling national 

interest to favor these businesses. 

Robert L, Johnson, Founder & Chairman, The RLf Companies 

Assessing Access: Obstacles & Opportunities for Minorir;y Small Business in Today's Capital Marke~ 

U.s. Senate Committee on Smal1 Business & Entrepreneurship" April 15, 2010 
145 

I hope that I have provided some framework for a debate and I know I am committed to 

work with this Committee to achieve a viable consensus on how to grow and expand minority 

business ownership and opportunities in America. 

Thank you. 

### 

5 

Robert L. Johnson, Founder & Chainnan, The RLJ Companies 

Assessing AcC"ess: Obstacles & Opportunities/or Minority Small Business in Today's Capital Markets 

U.s, Senate Committee on Small BUSiness & Entrepreneurship * April 15, 2010 
146 

Chair LANDRIEU. Thank you, Mr. Johnson. As usual, you have 

accomplished the mission you set out to do. Do not worry. 

Ms. Cofield, we would love to hear from you, and I want to recognize that your family is from Natchitoches and you are a graduate 

of Southern University. We are very proud to have you today. 

STATEMENT OF NATALIE COFIELD, PRESIDENT, NMC 

CONSULTING GROUP, INC. 

Ms. COFIELD. Good morning, Chairwoman Landrieu and Ranking 

Member Snowe. 

My name is Natalie Madeira Cofield, President of the NMC Consulting Group, headquartered in Washington, D.C. Thank you for 

the opportunity to testify on behalf of aspiring and existing entrepreneurs of color, more specifically those who seek or have sought 

to obtain financing. It is an honor and a privilege to serve as a 

voice of millions of American minority business owners who struggle with the harsh reality that business ownership or expansion 

may not be an option for them due to undercapitalization, lack of 

social capital and lack of financing. 

As a champion for small business, I would be remiss if I did not 

highlight the contribution that the more than 4 million minorityowned businesses make to the U.S. economy, employing more than 

4.7 million and producing more than $668 billion in annual gross 

revenues. What these statistics do not show, however, is the overarching impact that these business owners have on their communities—providing valuable support, examples of success and philanthropic investments, all of which support more viable and economically self-sufficient neighborhoods and ethnic groups. 

Unfortunately, the number of businesses owned by Americans 

classified as minority is not as many as it could or should be. More 

specifically, only 18 percent of all U.S. firms are classified as minority-owned, and when considering African Americans, this number is roughly 5.3 percent for a population that represents 12 percent of the country. 

This is not solely due to incomplete business plans or unfeasible 

concepts, but because of factors that have made the playing field 

inequitable. It makes it necessary that government programs exist 

and critical that these programs are improved. 

I have identified three factors that I believe have impact on 

issues for access to credit disparities: 

Insufficient capital infusion—an historical disparity in the sufficient disposable income that weakens the ability to provide initial 

business seed capital and results in the immediate need for financing. 

Insufficient access or social capital—a social relationship or bond 

between people, personal or professional, that transfers into human 

or economic capital. Minorities have often had a dearth of more developed social networks that makes accessing angel investment 

from family, friends, colleagues and external private investors increasingly difficult, as many people do not have access to someone 

who has legacy or substantial existing disposable assets. 

Then insufficient or inadequate financing—historical antagonistic 

practices in the areas of lending, such as excessive interest rates, 
147 

higher required down payments, higher fees, higher declinations 

and lower approved amounts. 

This is shown in a case study of a client of mine. These obstacles 

have been evidenced by Jennifer King. She is an African American 

woman and disabled veteran who served proudly in the U.S. Navy. 

The daughter of a low income single mother who came from generations with minimal financial access, she was the only one of her 

four siblings to attend college. 

After college, she joined the Navy where she was exposed to various cultures that led her to devise a concept for her business. In 

2006, she incorporated, and with a 740 credit score rating and a 

completed plan, was denied a meeting with a major bank because 

of the amount of capital that she requested—$500,000 with a 

$100,000 capital injection. 

She was an African American woman who was fluent in Arabic, 

who wanted to create a business marketed toward the diplomatic 

community. It was too difficult to sell. She met with Federal credit 

unions and was denied an SBA loan because she could not come 

up with the required 25 percent down payment, and this is during 

a time where even home mortgages were going for zero percent 

down. This was compounded by the fact that her home equity line 

of credit was not permissible to cover the 25 percent down payment, working capital that she would need to actually obtain this 

loan, and this was to be her only source of financing. 

She met with the Veterans Corporation and was informed that 

they did not offer loans, though their web site stated so in 2008. 

She submitted her information for the SSBIC and never heard back 

as of April 12th. She even tried to pay for social capital by hiring 

someone to find angel investment, but the monthly retainer was 

too significant to afford. She did not qualify for MBDA and, most 

disappointedly, was told by SCORE that it was their job to convince her not to start her business in an attempt to weed out the 

serious entrepreneur. 

In an effort to improve her standing and the possibility of starting her business, she enlisted the partnership of another woman 

veteran. Her white business partner’s experience was the opposite. 

She came from a family with a legacy of home ownership, investments and financial access. 

And I would like to actually just point out that based on a study 

from the Insight Center for Community and Economic Development, the median wealth for single black women is only $100. For 

single Hispanic women, it is $120. This compares to over $41,000 

for single white women. 

This support allowed her to bring to the concept $100,000 in nondebt-backed assets at the onset. Then the economic recession 

began. Unfortunately, five years later, the lack of sufficient capital, 

lack of social capital, insufficient financial terms coupled with the 

recent economic downturn and its impact on her biggest asset, her 

home, has stalled her significantly. Today, she is a participant in 

my PROSPECTUS program. 

This is not unlike thousands of African Americans and other minorities pushing toward the pursuit of entrepreneurship. 

Chairwoman Landrieu, as a young woman, if she came to you for 

your advisement, you would have advised her to go to college and 
148 

graduate school, to serve her country proudly, to purchase a home, 

to maintain stellar credit and to dream of an opportunity to leave 

her legacy. You would have encouraged her to participate in the 

American dream—all things that she did. If she cannot break the 

generational issues of lack of financial access, then who can? 

Furthermore, we must ask ourselves, what could this one woman 

do with her dream if only she was able to obtain financing? She 

could be one more person who could create new jobs. She could be 

one more person to inspire those depressed by past and current 

conditions. And she could be one more person to testify that the 

American dream is obtainable and real. 

[The prepared statement of Ms. Cofield follows:] 
149 

Fm:MyFax. Natalie CDfield To:NMC CDnsulting Group Testimony (12022245819) 11:57 04/14/10GMT-04 Pg 02-<17 

NMC Consulting Group, Inc. 

Assessing Access: Obstacles and Opportunities 

for Minority Small Business Owners in Today's 

Capital Markets 

Testimony to the US Senate Committee on Small Business & 

Entrepreneurship 

Natalie M. Cofield, MFA 

President, 

NMC Consulting Group, Inc. 

April 15, 2010 

NMC Consulting Group 11875 I St. NW I Suite 500 IWashington, DC 20006 

O~/1~/2010 12:00PM 
150 

Fm:MyFax. Natalie Cofield To:NMC ConsulUng Group TesUmony (12022245619) 11 :67 04/14/1 OGMT.()4 Pg 03-07 

Good Morning Chairwoman Landrieu, Ranking Member Snow and fellow 

esteemed members of the US Senate Committee on Small Business & 

Entrepreneurship. My name is Natalie Madeira Cofield, President of the NMC 

Consulting Group, hcadquartcred in Washington, DC. 

Thank you for the opportunity to testify on behalf of aspiring and existing 

entrepreneurs of color-more specifically, those who seek or have sought to obtain 

financing. It is an honor and a privilege to serve as the voice of millions of 

American minority-business owners who struggle with the harsh reality that 

business ownership or expansion may not be an option for them due to undercapitalization, lack of social capital and lack of financing. 

The NMC Consulting Group, Inc. is a boutique consulting firm that operates with 

the mission of increasing entrepreneurship and business development 

opportunities and improving economic programs targeted toward people of color, women and youth. 

As a champion for small business, I would be remiss if I did not highlight the 

contribution that the more than four (4) million minority-owned businesses 

make to the US economy -employing more than 4.7 million and producing more 

than $668 billion in annual gross revenues'. 

What these statistics do not show however, is the overarching impact that these 

business owners have on their communities; providing valuable support, 

examples of success and philanthropic investments - all of which support more 

viable and economically self-sufficient neighborhoods and ethnic groups. 

Unfortunately, the number of businesses owned by Americans classified, os minority is not as many as it could or should be. More specifically, only 18% of all 

US finns are classified as minority owned and when considering AfricanAmericans this number is roughly 5.3% for a popUlation that represents 12% of 

the country". 

This is not solely due to incomplete business plans or unfeasible concepts, but 

because of factors that have made the playing field inequitable, and makes it 

necessary that government programs exist and critical that these programs are improved. 

1 All data: US Department of Commerce Minority Business Development Agency. The 

State of Minority Business Report. August 2006. 

2 US Department of Commerce Minority Business Development Agency. 2006. The 

State of African American Business Report 2008. 

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THREE FACI'ORS FOR ACCESS TO CREDIT DISPARITIES 

1. Insufficient Capital Infusion (Wealth): A historical disparity in 

sufficient disposable income that weakens the ability to provide initial 

business seed capital and results in the immediate need for financing or 

credit. 

2. Insufficient Access (Social Capital): A social relationship or bond 

between people (personal or professional) that transfers into human or 

economic capita)3. MinoJities have often had a dearth of more developed 

social networks that makes accessing angel investment from friends, 

family, colleagues and external private investors increasingly difficult, as 

many individuals do nol have access to people who have legacy 01' 

substantial existing disposable assets. 

3. Insufficient or Inadequate Financing: Historical antagonistic 

practices in the areas of lending such as excessive interest rates, higher 

required down-payments, higher fees, higher declinations and lower 

approved loan amounts - that result in significant disparities in access to 

and obtaining equitable financing 

CASE-STUDY OF MINOlUIT CAPITAL ACCESS DISPAlU1Y4 

These obstacles are evidenced by the story of an NMC Consulting Group client, 

Jennifer King, an African-American woman and disabled-veteran who served 

pl'Oudly in the US Navy. 

The daughter of a low-income single mother, who came from generations with 

minimal financial access, she was the only one of her four siblings to attend 

college. After college she joined the Navy where she was exposed to various 

cultures that lead her to devise the concept for her business. 

1 Cofield, Melody A. Building Social Capital in Multi-cultural Community: The Process 

and Related Outcomes Produced. Diss. St. John Fisher College, 2010. Print. 

4 Case study based on multiple interviews conducted beginning March 20 - April 12, 

2010. Case study based on the experiences of/enniCer King. 

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In 2006 she incorporated her company. And, with a 74o-credit score ratings and 

a completed plan she was declined a meeting with a major bank because of the 

amount of capital that she requested, $500,000 with a $100,000 capital 

injection6• She was an Mrican American woman who was fluent in Arabic, who 

wanted to create a business marketed toward the diplomatic community- it was too difficult a sell. 

She met with federal credit unions and was declined an SBA loan because she 

could not come up with the required 25%7 down payment - an unfavorable rate 

during a time when even home mortgages were 0% down. This was 

compounded by the fact that a home equity line of credit was not permissible to 

cover the 25% down payment (working capita\) required for an SBA loan. This 

was to be her only source of financing. 

She met with The Veteran Corporation and was informed that they did not offer 

loans though their website in 200B explicitly stated so. 

She submitted her information to the SSBIC and never heard backS, 

She even tried to pay for social capital by hiring someone to find angel 

investment but the monthly retainer was too significant to afford9, 

She did not qualify for the Minority Business Development Agency and most 

disappointingly, was told by SCOllli that it was their job to convince her not to 

start her business in an attempt to weed out the serious entrepreneur. 

In an effort to improve her standing and the possibility of starting her business 

she enlisted the partnership of another woman veteran. Her white business 

partner's e""perience was the opposite; she came from a family with a legacy of 

5 Credit scores above 700 are typically viewed as good credit ratings. The range for 

credit is between 450 - 850 (based on experian.com) 

6 Between 2006 - 2007 the financial request was $500,000· $800,000 ($100,00 in 

capital injection), In 2008 this increased to $2M based on partnership and increased 

capital injection. 

7 Loan financing terms vary by financial institution. Loan to value terms average 

between 10%·30% minimum requirements (dependent upon loan size and 

institution). 

B As of April 12, 2010 

9 $2,500 monthly retainer fee 

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homeownership, investments, and financial accesslO• This support allowed her 

to bring to the concept $100,000 in non-debt backed assets at the on-set. 

Then the economic recession began. 

Unfortunately, roughly five years later, lack of sufficient capital infusion, lack of 

social capital, insufficient financial tenns coupled with the recent economic 

downturn and its impact on her biggest asset, her home, has. stalled her 

significantly. Today she is a participant in PROSPECTUS the NMC Consulting 

Group's nine-week entrepreneurship-training program and business competition 

because she has not given up her dream. 

CONCLUSION 

This is not unlike thousands of Mrican Americans and other minorities pushing 

toward the pursuit of entrepreneurship. Minority finns are awarded fewer loans 

(17% vs. 23% for non-minority firms) are awarded smaller loans ($149,000 vs. 

$310,000) and as demonstrnted by this eXllmple ure denied at higher rotes with 

almost half of all loans being declined (42%)". 

Chairwoman Landrieu, as a young woman if she came to you for your advisement 

you would have encouraged her to go college and graduate school, to serve her 

country proudly, to purchase a home, to maintain stellar credit, and to dream of 

an opportunity for her to leave a legacy, You would have encouraged her to 

participate in the American Dream. All things she did. 

If she can't break the generational issues of lack of financial access, then who 

can? 

10 Related Statistics: The median wealth ror single black women Is only $100; ror 

single Hispanic women, $120. This compares to just over $41,000 for single White 

women. Married rates are $167,00 to $31,500 (Black) and $18,000 (Hispanic). 

Chang. Mariko. "Lifting as We Climb: Women of Color, Wealth and America's 

Futurc".lnsight Center for Community & Economic Development, March 2010. 

II Falrlc, Dr. Robert and Alicia M. Robb, Ph.D, Disparities in Capital Access between 

Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital 

Limitations Faced by MBE. US Department of Commerce, Minority Business 

Development Agency,/anuary 2010. 

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And furthennore, we must ask ourselves, what could this one woman do with her 

dream if only she was able to obtain financing? 

She could be one more person who could create new jobs. She could be one more 

person to inspire those depressed by past and current conditions. She could be one morc business owner contributing to the tax bllSC in her state and in this 

country to SUppOlt the social service programs that exist. She could be one more person to testify that the American Dream is obtainable and real. 

Again, thank you for this opportunity to speak today and I am happy to asnswer any questions. 

04/1*/2010 12:00PM 
155 

Chair LANDRIEU. Thank you, Ms. Cofield, for your passionate and 

compelling testimony. We really appreciate it, and it will be a very 

important part of this record. 

Ms. Henningsen. 

STATEMENT OF MARGARET HENNINGSEN, FOUNDER AND 

VICE PRESIDENT, LEGACY BANK 

Ms. HENNINGSEN. Good morning, Chair Landrieu, Ranking Member Snowe and members of the Committee. I am Margaret 

Henningsen, Vice President and Founder of Legacy BanCorp and 

Legacy Bank. I welcome the opportunity to speak to the Committee 

on assessing access and opportunities and obstacles for minority 

small business owners. 

I will share with you how we grew and how the success of the 

small businesses we finance makes Legacy Bank successful. I will 

also speak to how those same small businesses are now struggling 

to survive and thus affecting the success of Legacy Bank. My testimony will also focus on the need for capital to keep those businesses going and how the current economic conditions could very 

well signal the end of a decade of strong growth in minority business communities. In the two years since I last testified before this 

Committee, the situation facing minority businesses has drastically 

changed. 

I began thinking about starting a bank in the mid-nineties as a 

result of the lack of capital for minority entrepreneurs who were 

seriously underserved and a significant number of people who were 

underbanked in Milwaukee. I was joined in this effort by co-founders Deloris Sims and Shirley Lanier. 

We were three black women in our fifties who recognized the 

need for greater access and pent-up demand for commercial capital, 

for minority and women-owned businesses in our target market. 

Our research supported our contention that the opportunities were 

out there, and there was a need for a bank that could guide those 

entrepreneurs to the right resources for success. 

Legacy is a State charter commercial bank located in Milwaukee. 

Our charter was granted in July of 1999 by the Wisconsin Department of Financial Institutions after we raised $7.5 million in capital. We were the first women in the history of the state to form 

a bank holding company and charter a commercial bank. Our bank 

provides financing for existing and startup businesses, commercial 

real estate, home purchases, home equity loans and a variety of retail products, including products for underbanked and unbanked 

consumers. 

Ironically, we celebrated our 10th Anniversary in 2009 with assets of over $225 million during 1 of our nation’s worst economic 

downturns. This was no small feat, as some predicted that we 

would not survive given the location of our bank and the market 

we wanted to serve. For six of our nine years, Legacy Bank 

achieved nearly double-digit growth every year and consistently exceeded our annual goals for net income. Our growth has been 

fueled by the never-ending demand for loans in our community and 

surrounding areas as more people, particularly minorities, strive to 

achieve their dream of being an entrepreneur and having a successful small business. 
156 

Many of the major businesses around today were small businesses that a financial institution took a chance on. Even some of 

the largest financial institutions started out as small community 

bank servicing a niche market, in particular, underserved neighborhoods that needed financial services and the opportunity to access capital. This is the model for Legacy Bank. 

We have a niche market in an underserved community and have 

been touted as a national model for community banking in underserved areas. Until the last 13 months, we were growing by providing financial services to that community and beyond. That 

growth has come to a standstill as the economic conditions have 

made it nearly impossible for us to continue financing in our market. 

Our existing customers who took advantage of every opportunity 

we could offer, have used up all of their resources as well as whatever we could provide. It is inevitable that those same successful 

businesses will not survive. As the credit crunch has accelerated, 

we have seen a major increase in the number of existing and startup businesses, especially minorities, coming to Legacy, needing 

capital to survive. For the first time, we have had to turn down 

some of those customers, both existing and new. 

The need for capital must be addressed. It must be swiftly developed and available to those once successful businesses that are now 

struggling in minority and underserved communities. To ignore the 

lack of opportunity that now exists would be devastating as the opportunities for employment and economic success have all but disappeared. In the same fashion that large banks and financial institutions and major corporations have received relief, small businesses must be included in that plan. It is a major issue that opportunities being publicized by the Small Business Administration 

are too little too late. 

The loan requirements for collateral and cash from borrowers 

who need the most help are unrealistic when the businesses are 

struggling to survive, yet being asked to meet credit and cash requirements that are nearly impossible. We encouraged and educated our customers to be prepared, but nothing could have prepared them for this economic crisis that was not of their doing. 

Data demonstrate the fact that many minorities who become, or 

want to become, small business owners are often first general entrepreneurs. These enterprising owners did not have the benefit of 

family members handing down a business or providing them with 

the necessary training and coaching that is so crucial for business 

success. At Legacy, we have found that when financial training and 

business coaching are provided, along with funding, businesses can 

succeed. The process of working with owners to strengthen their 

business is part of our banking model, but we have been unable to 

overcome the credit crunch that is so adversely affecting our customer base. 

Many banks argue that small business loans are too small, but 

that not enough money can be made from them, they involve too 

high of a risk, or that the borrowers lack the skills or are unprepared to run a successful firm. 

What we have found is that many of our customers have excellent ideas, good locations, a customer base, and the drive and te-
157 

nacity to make their businesses succeed, plus a Plan B in case A 

does not work. Once they are given the opportunity, access to capital, training, coaching to make these businesses work, they have 

been successful, as supported by our double-digit growth serving 

this customer base. 

There is risk involved. There is no doubt about that. But that is 

true no matter who is borrowing the money, as evidenced by the 

number of corporations that are failing, struggling and/or being 

bailed out. 

Let me share lending data with you. 

Chair LANDRIEU. Please wrap up in about 30 seconds, if you do 

not mind. 

Ms. HENNINGSEN. Oh, okay. Well, one thing I do want to say that 

is really important is in the last 15 months our lending has declined to less than $2 million, in the last 2 quarters, down from 

about $34 million in the year prior to that. In the first quarter of 

2010, we did no new lending, only renewals. Much of our time and 

funding has gone to our existing customers, trying to keep them in 

business. 

[The prepared statement of Ms. Henningsen follows:] 
158 

TESTIMONY FOR MARGARET HENNINGSEN 

Founder, Vice President, Legacy Bank, WI 

Before the 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

Assessing Access: Obstacles and Opportunities for Minority Small Business Owners in 

Today's Capital Markets 

April 15, 2010 

Chairman Landrieu, Ranking Member Snowe, and members of the Committee, I am Margaret 

Henningsen, Vice President and Founder of Legacy Bancorp and Legacy Bank. I welcome the 

opportunity to speak to the Committee on assessing access and opportunities and obstacles for 

minority small business owners. I will share with you how we grew and how the success of the 

small businesses we finance make Legacy Bank successful. I will also speak to how those same 

small businesses are now struggling to survive and thus affecting the success of Legacy Bank. 

My testimony will also focus on the need for capital to keep those businesses going, and how the 

current economic conditions could very well signal the end of a decade of strong growth in 

minority business communities. In the two years since I last testified before this committee, the 

situation facing minorities businesses has drastically changed. 

I began thinking about starting a bank in the mid 90s as the result ofthe lack of capital for 

minority entrepreneurs, who were seriously underserved, and a significant number of people who 

were under-banked in Milwaukee. I was joined in this effort by co-founders Deloris Sims and 

Shirley Lanier. We were three Black women in our 50s who recognized the need for greater 

access, and pent up demand for commercial capital for minority and women owned businesses in 

our target market. Our research supported our contention that the opportunities were out there 

and there was a need for a bank that could guide those entrepreneurs (both existing and future) to 

the right resources for success. 

Legacy is a state chartered commercial bank located in Milwaukee, Wisconsin. Our charter was 

granted in July of 1999 by the Wisconsin Department of Financial Institutions after we raised 

seven and a half million dollars in capital. We were the first women in the history of the state to 

form a bank holding company and charter a commercial bank. Our bank provides financing for 

existing and start-up businesses, commercial real estate, home purchases, home equity loans and 

a variety of retail products including products for under-banked and unbanked consumers. 

Ironically, we celebrated our tenth anniversary in 2009 with assets of over two hundred and 

twenty five million during one of our nation's worst economic downturns. This was no small feat 
159 

as some predicted that we would not survive given the location of our bank and the market we 

wanted to serve. 

For six of our first nine years, Legacy Bank achieved nearly double digit growth every year and 

has consistently exceeded our annual goals for net income. Our growth has been fueled by the 

never ending demand for loans in our community and surrounding areas as more people, 

particularly minorities, strive to achieve their dream of being an entrepreneur and having a 

successful small business. Many ofthe major businesses around today were small businesses that 

a financial institution took a chance on. Even some of the largest financial institutions started out 

as small community banks serving a niche market in particular underserved neighborhoods that 

needed financial services and the opportunity to access capital. That is the model for Legacy 

Bank. We have a niche market in an underserved community and have been touted as a national 

model for community banking in underserved areas. Until the last thirteen months we were 

growing by providing financial services to that community and beyond. That growth has come to 

a standstill as the economic conditions have made it nearly impossible for us to continue 

financing in our market. Our existing customers, who took advantage of every opportunity we 

could offer, have used up all of their resources as well as whatever we could provide. It is 

inevitable that those same successful businesses will not survive. As the credit crunch has 

accelerated, we have seen a major increase in the number of existing and start-up businesses, 

especially minorities, coming to Legacy needing capital to survive. For the first time, we have 

had to tum down some of those customers both existing and new. 

The need for capital must be addressed. It must be swiftly developed and available to those once 

successful businesses that are now struggling businesses. In minority and underserved 

communities to ignore the lack of opportunity that now exists would be devastating as the 

opportunities for employment and economic success have all but disappeared. In the same 

fashion that large banks/financial institutions and major corporations have received relief, small 

businesses must be included in that plan. It is a major issue that opportunities being publicized 

by the Small Business Administration is too little too late. The loan requirements for collateral 

and cash from borrowers who need the most help are unrealistic when the businesses are 

struggling to survive yet being asked to meet credit and cash requirements that are nearly 

impossible. We encouraged and educated our customers to be prepared. But nothing could have 

prepared them for this economic crisis that was not of their doing. 

Data demonstrates the fact that many minorities, who become or want to become small business 

owners, are often first generation entrepreneurs. These enterprising owners do not have the 

benefit offamily members handing down a business or providing them with the necessary 

training and coaching that is so crucial for business success. At Legacy, we have found that when 

financial training and business coaching are provided along with the funding, businesses can 

succeed. The process of working with owners to strengthen their business is part of our banking 

model but we have been unable to overcome the credit crunch that is so adversely affecting our 

customer base. 
160 

Many banks argue that small business loans are too small, that not enough money can be made 

from them, that they involve too high of a risk, or that the borrowers lack the skills, or is 

unprepared, to run a successful firm. What we have found is that many of our customers have 

excellent ideas, good locations, a customer base and the drive and tenacity to make their 

businesses succeed plus a Plan B in case A does not work. Once they are given the opportunity, 

access to capital, training, coaching to make these businesses work they have been successful as 

supported by our double digit growth serving this customer base. There is risk involved but 

that is true no matter who is borrowing the money as evidenced by the number of corporations 

that are failing, struggling and/or being bailed out. 

Let me share lending data with you. From July 2007 to June 2008 Legacy Bank financed 392 

loans. Of those, 269 were loans categorized as minorities and or loans in underserved areas. The 

dollar volume of those loans was almost $35 million. Do the math - we made and continue to 

make money from minority and underserved lending. These loans are good investments in solid 

companies. More than half of these loans went to start-ups or newer businesses needing capital to 

grow. From March 2008 thru June 2008, our loan numbers spiked as fewer lenders would take a 

look at small business loans and so more of these businesses came to us. Legacy bank loaned 

money to 122 businesses during that time period. The last fifteen months our lending has 

declined to less than two million in the last two quarters of 2009 and the first quarter of 20 1 O. 

Much of our time and funding has gone to our existing customers trying to keep them in business 

and for the first time in eight years, we operated at a loss. 

Our loan losses and delinquency rate have grown at a rate much faster than we anticipated. We 

find ourselves struggling right along with our customers. At Legacy we say "No margin, No 

mission." We strive to maintain a balance between the margin and the mission but it has become 

a challenge. 

Despite the challenges we are facing, we stilI believe that lending to minorities and doing 

business in underserved communities is good. We provide customers with the training they need 

to be successful and we are rewarded with our own success. However, during this economic 

crisis their remains a great need for relief for small businesses. 

Legacy and other banks like Legacy cannot do this alone. Help, support, and resources, in the 

fonn of more funding for entrepreneurial training and lending programs that support underserved 

communities, MUST be a priority for this Committee. The micro loan program; a streamlined 

application and approval process for SBA loans; rethinking the requirements related to assets and 

collateral in underserved markets, grants for training as well as other financial support to 

minorities and under served communities will increase the capacity and survival of small 

businesses. 
161 

Employment in our target market increases because of our small business lending with more than 

2,500 jobs being created or sustained by Legacy Bank c.ustomers. This creates economic 

development, generates taxes, and is good for the city, county and state. 

Our companies provide their employees with money to spend on needed services, buy homes, 

acquire other assets, and build wealth. All of which strengthens a community and tum it from 

underserved to a productive and thriving area. 

Senator Landrieu, Ranking Member Snowe, and members of the Committee, I appreciate the 

opportunity to testify here today and would be glad to answer any questions. 
162 

Chair LANDRIEU. Thank you very much for that real-life, up-todate and compelling testimony. 

Mr. Hudson. 

STATEMENT OF PAUL HUDSON, CHAIRMAN AND CEO, 

BROADWAY FEDERAL BANK 

Mr. HUDSON. Thank you, Chairwoman Landrieu and Ranking 

Member Snowe and Senator Cardin. Thank you for inviting me to 

appear before you today. 

Minority small business owners use the term capital even when 

they are really talking about debt financing. I have heard that 

today a lot. This word capital has got many meanings. This is 

based on certain realities in our community which include the following: 

The primary source of funds to finance minority business operations and expansion is often in the form of debt, short-term debt. 

These sources include credit card debt, loans collateralized by personal and business assets which is most often the business owner’s 

personal residence, and loans from family members and friends. 

Capital, on the other hand, is a foreign commodity in minority 

communities. The lack of capital in minority communities results 

from past discriminatory policies and practices that created a 

wealth gap. Minorities have substantially less wealth than the rest 

of Americans. The lack of wealth accumulation within minority 

communities has resulted in limited investable capital from local 

sources for minority business owners. 

As a result of this broader definition of capital within minority 

communities, I have found that minority business owners often 

blur the distinction between short-term debt and longer-term equity. For purposes of this statement, I will address both the access 

to both sources of financing. 

For all my adult life, minority business owners have complained 

about the obstacles to capital, to accessing capital. Based on my experience, there are five major obstacles: 

The lack of wealth accumulation within minority communities— 

this has meant limited opportunities to access local sources of capital. Local networks of friends, associates and organizations are 

often the connectors between business owner and investor. The 

lack of local sources of capital has historically contributed to the 

unequal access to capital by minorities. 

Redlining—and I know Dr. Fairlie is going to talk about redlining extensively, and a lot of people have talked about redlining, 

but it is clear that minorities have a different standard when they 

face bankers today. 

The third factor is minority business owners do not have a nexus 

to investment networks, which is another byproduct of discrimination and segregation. I am often asked about making an equity investment in a small business even though we are a bank, not a private equity fund. The financial network of most borrowers does not 

extend to angel investors and more traditional equity funds outside 

minority communities. Thus, Broadway Federal Bank, the local 

community bank, is the logical and often the only financial option. 

The fourth factor, minority businesses are often not organized or 

structured in a way that facilitates investment. Many small minor-
163 

ity business owners are organized as sole proprietorships with a 

strong preference for ownership control, which gets back to Mr. 

Johnson’s point. 

Finally, some minority business owners lack the financial sophistication to source investment opportunities, prepare investment 

materials and structure investment terms, which I know the SBA 

has the wealth centers that are working on that, with technical assistance. 

In addition to the above obstacles, the current economy has 

weakened the balance sheets and income statements of minority 

small businesses, and the depressed economy, as Senator Snowe, 

has resulted in the steepest lending since 1942. 

Broadway Federal Bank, as a small minority business, provides 

a case study of the possibilities and creative solutions to providing 

capital opportunities for minority small businesses. In the last 30 

years, minority businesses have grown larger and more mature. 

Broadway is 63 years old, with assets slightly in excess of $500 

million, annual gross revenues of close to $30 million. 

Minority businesses make an important contribution to the economy and job creation. Broadway is a Certified Community Development Financial Institution based on its delivery of financial services and products to underserved communities. 

Thirdly, but the most important part of this case study or example, is that the U.S. Treasury invested $15 million of capital—not 

loans, not debt—$15 million of capital in Broadway under the 

Troubled Asset Relief Program in the form of preferred shares at 

a dividend of 5 percent. That additional capital support net lending 

in 2009 of $109 million—$15 million of capital, $109 million of 

loans primarily invested in commercial operations in urban minority communities. 

I make the following recommendation for the Committee’s consideration: I think the TARP program provides an excellent example 

of what can be done in America and how government can play a 

role in supporting the rebound of this economy. Allocate $10 billion 

of stimulus funds to the Small Business Administration for capital 

investments in small minority businesses. The capital fund investment should be targeted to support job creation and economic 

growth in low and moderate income communities. The SBA should 

develop investment criteria to maximize job creation and minimize 

investment default. 

And I think it is important that the SBA contract with minority 

asset managers to help source and manage small business investments, and to provide the technical assistance and business education. 

I thank you for your interest in the plight of minority small business owners and for your commitment to identify and implement 

solutions to the obstacles to accessing capital and technical assistance by small businesses. 

I appreciate the opportunity to contribute. Thank you. 

[The prepared statement of Mr. Hudson follows:] 
164 

U.S. Senate Committee 

Small Business and Entrepreneurship 

PAUL C. HUDSON 

Chairman, CEO 

Broadway Federal Bank, Los Angeles, CA 

Statement Submitted 

Thu~da~ApriI15,2010 

Chairman Landrieu and Committee members, thank you for 

inviting me to appear before you today and for the opportunity to 

provide my perspective on both the obstacles and opportunities that 

minority small business owners have in accessing capital and 

technical assistance. 

Capital 

Minority small business owners use the term capital, even when 

they are really talking about debt financing. This is based on certain 

realities in our community, which include the following. 

1. The primary source of funds to finance minority business 

operations and expansion is often in the form of debt. These 

sources include credit card debt, loans collateralized by 

personal and business assets, which is most often the business 

owner's personal residence and/or loans from family members 

and friends. 

2. Capital is a foreign commodity in minority communities. The 

lack of capital in minority communities results from past 

discriminatory policies and practices that created a wealth gap. 

Minorities have substantially less wealth than the rest of 
165 

Americans. 1 The lack of wealth accumulation within minority 

communities has resulted in limited investable capital from local 

sources for minority business owners. 

As a result of this broader definition of capital within minority 

communities, I have found that minority business owners often blur 

the distinction between short term debt and longer term equity. For 

purposes of this statement, I will address access to both sources of 

financing. 

Access to Capital 

Obstacles 

For all of my adult life, minority business owners have 

complained about the obstacles to accessing capital. Based on my 

experience, there are five major obstacles. 

1. The lack of wealth accumulation within minority communities. 

This has meant limited opportunities to access local sources of 

capital. Local networks of friends, associates and organizations 

are often the connectors between business owner and investor. 

The lack of local sources of capital has historically contributed 

to the unequal access to capital by minorities. 

2. Redlining of minority communities and minority business 

owners by financial institutions due to race and income and 

collateral disparities caused by discriminatory practices. Many 

studies have shown that African American borrowers and small 

businesses owned by African Americans were less likely than 

1 Meizhu Lui, March, 2009, "Laying the Foundation for National Prosperity. The Imperative of Closing the 

Racial Wealth Gap." 

2 
166 

their white counterparts to have their commercial loans 

approved, even when borrower traits, including credit history 

were controlled for statistically.2 

3. Minority business owners do not have a nexus to investment 

networks, which is another by product of discrimination and 

segregation. I am often asked about making an equity 

investment in a small business, even though we are a bank not 

a private equity fund. The financial network of most borrowers 

does not extend to angel investors or more traditional equity 

funds outside the minority community. Thus, Broadway Federal 

Bank (Broadway), the local community bank, is the logical and 

often only finance option. 

4. Minority businesses are often not organized or structured in a 

way that facilitates investment. Many small minority businesses 

are organized as sole proprietorships with a strong preference 

for ownership control, which limits the investment vehicles and 

opportu n ities. 

5. Some minority business owners lack the financial sophistication 

to source investment opportunities, prepare investment 

materials and structure investment terms. This impairment 

coupled with limited access to a network of financial resources 

also impacts their ability to identify and retain consultants and 

advisors to assist them. The lesser degree of financial literacy 

2 Faith Ando, 1988, "Capital Issues and Minority-Owned BuSiness", The Review of Black Political 

Economy; Ken and Linda Cavalluzzo, 2002, "Competition, Small Business Financing, and 

Discrimination: Evidence from a New Survey." Journal of Business 75(4): 641-79; David 

Blanchflower, Philip Levine, and David Zimmerman, 2003, "Discrimination in the Small Business 

Credit Market." Review of Economics and Statistics. 

3 
167 

is not due to a lack of ability or intelligence, but reflects limited 

access to financial education and technical assistance. 

In addition to the above obstacles, the current economy has 

weakened the balance sheets and income statements of minority 

small businesses, thereby reducing the number of investment grade 

opportunities. The depressed economy has also contributed to the 

steepest drop in lending since 1942, exacerbating the problem of 

access to credit for minority small businesses.3 

Opportunities 

Broadway, as a small minority business, provides a case study 

of the possibilities and creative solutions to providing capital 

opportunities for minority small businesses. 

1. In the last thirty years, minority businesses have grown larger 

and more mature. Broadway is 63 years old with assets slightly 

in excess of $500 million and annual gross revenues of close to 

$30 million. 

2. Minority businesses make an important contribution to the 

economy and job creation. Broadway is a certified Community 

Development Financial Institution based on its delivery of 

financial services and products to underserved communities 

and its support of economic development in minority 

communities. 

3 Whitehouse, Mark, March 15,2010, Wall Street Journal, "Loan Squeeze Thwarts SmallBusiness Revival" 

4 
168 

3. The U.S. Treasury invested $15 million of capital in Broadway 

under the Troubled Asset Relief Program in the form of 

preferred shares at a dividend of 5%. The additional capital 

supported net new lending in 2009 of $109 million, the majority 

of which was invested in commercial operations in urban 

minority communities. If the capital is not repaid in five years, 

then the dividend yield increases to 9%. 

Recommendations 

I make the following recommendations for the Committee's 

consideration. 

1. Allocate $10 billion of Stimulus Funds to the Small Business 

Administration (SBA) for capital investments in small and 

minority businesses (the "Capital Fund"). The Capital Fund 

investments should be targeted to support job creation and 

economic growth in low to moderate income communities. 

2. SBA should develop investment criteria to maximize job 

creation and minimize investment default. 

3. In lieu of a minimum number of years in operation, require 

applicants with less than the minimum operational history to 

accept technical assistance training and business education 

prior to receipt of funds. 

4. SBA should receive a current dividend and participate in the 

appreciation of the business' value that results from the SBA 

5 
169 

investment. SBA should incorporate many of the 

characteristics of Treasury's investment model. 

5. Contract with minority asset managers to help source and 

manage small business investments and to provide technical 

assistance and business education. 

Thank you for your interest in the plight of minority small business 

owners and for your commitment to identify and implement solutions 

to the obstacles to accessing capital and technical assistance by 

small businesses. I appreciate the opportunity to contribute to this 

important conversation. 

6 
170 

Chair LANDRIEU. Thank you, Mr. Hudson. 

Dr. Fairlie. 

STATEMENT OF ROBERT W. FAIRLIE, PH.D., PROFESSOR OF 

ECONOMICS, UNIVERSITY OF CALIFORNIA, SANTA CRUZ 

Dr. FAIRLIE. Yes, thank you, Chair Landrieu, Ranking Member 

Snowe and Senator Cardin. It is an honor to testify before you on 

the important topic of access to capital for minority businesses. 

I am a Professor of Economics at the University of California, 

Santa Cruz, and I have studied small business and entrepreneurship for nearly 20 years. I have been asked to briefly discuss the 

findings of my research on this topic. As we will see, I am going 

to present a number of numbers that have been discussed sort of 

briefly, from other panelists and also from members of the Committee. 

The U.S. economy has lost more than 8 million jobs since the 

start of the recession in December, 2007. The national unemployment rate is hovering around 10 percent now which is surprising 

because only a couple of years ago it was down around less than 

5 percent. 

Small businesses have been hit extremely hard by the downturn. 

The rate of businesses filing for bankruptcies in the U.S. increased 

by more than 150 percent since mid-2007. The financial crisis certainly contributed to the rapid increase in business closings over 

this period. All indicators, including the recent survey of loan officers by the Federal Reserve, indicate extremely tight credit conditions for small businesses and entrepreneurs. Minority-owned businesses are being hit especially hard by the current financial crisis. 

Extensive research of mine and others indicates that minority 

businesses face substantial barriers to entry, growth and survival 

even in more promising or favorable economic conditions. Minority 

firms are more vulnerable because they are generally smaller and 

have fewer resources to draw on in difficult economic times. The 

average minority-owned business has revenues of $170,000 per 

year, which is only about 38 percent of the level for non-minority 

businesses. Minority-owned businesses also hire fewer employees 

and have lower profit levels on average. 

Of the many factors responsible for these disparities in business 

performance, access to financial capital is perhaps the most important. A large number of studies show that limited access to capital 

hinders the formation and growth of minority-owned businesses. 

One of the major roots of the problem is the extremely high level 

of wealth inequality between minorities and non-minorities. 

Estimates of median net worth from the Census Bureau here are 

displayed in Figure 1. As you can see from this figure, half of all 

African American families have less than $5,500 in total wealth, 

and half of all Latino families have less than $8,000. If you look 

at the red column here, that shows you the level of wealth among 

non-minority owned families, which is 11 to 16 times higher at 

$87,000. 

These disparities in wealth are also substantially higher than 

disparities in total income. So African American and Latino families have income levels that are 60 to 70 percent of non-minority 

levels. 
171 

Now why are these levels of wealth important, these disparities 

in wealth? Well, these low levels of wealth among minorities translate into fewer startups and undercapitalized businesses because 

an entrepreneur’s wealth is important because it is often invested 

directly into the business or used as collateral to obtain business 

loans. Entrepreneurs also frequently are required by investors to 

invest their own money in the business as an incentive. 

Further limiting the ability of minority entrepreneurs to obtain 

financial capital is racial discrimination in lending markets. Several studies have examined whether minority firms face discrimination in obtaining business loans. The main finding from this literature is that minority-owned businesses are more likely to experience loan denials, pay higher interest rates and are less likely to 

apply for loans because of a fear of rejection. 

Using the latest data from the Federal Reserve, I conducted a 

similar analysis recently. You can see in this figure, Figure 2 here, 

that minority firms are twice as likely to be denied a loan application, they are twice as likely to not apply for a loan out of fear of 

rejection on that loan, and minority firms that do obtain loans pay 

1.5 percentage points higher interest rates on those loans than 

non-minority firms. 

These disparities do not disappear even after controlling for the 

age, experience and education of the owner of the firm, the creditworthiness, size, industry, age and location of the firm, which is 

consistent with the existence of lending discrimination. 

The end result is that minority-owned businesses have substantially lower levels of financial capital in their businesses. Figure 3 

displays estimates from Federal Reserve data indicating that minority firms have much lower levels of equity investments and loan 

amounts than non-minority firms. Minority-owned businesses have 

an average of $3,400 of equity investments in their business and 

$46,500 in loans; non-minority businesses have values of equity 

and loan investments that are more than twice that level. 

Again, these disparities do not disappear even after we control 

for the characteristics and owner of the firm. 

I have used data from other sources and find similar patterns of 

low levels of financial capital among minority businesses. 

Minority-owned businesses contribute greatly to the U.S. economy. Businesses owned by minorities produce nearly $700 billion 

in total sales. Minority firms employ 5 million workers with an annual payroll of $120 billion. These jobs are located across the nation, with many of them located in minority and economically depressed communities. 

Often overlooked, however, is that minority business owners also 

create a job for themselves. When added up, that represents an additional 4 million jobs that are created by these businesses in the 

economy. 

In closing, although minority-owned businesses contribute greatly to the economy, there remains a lot of untapped potential among 

this group of firms. As I have discussed, minority entrepreneurs 

are constrained by limited wealth, high loan denial rates, high interest rates and lending discrimination. Barriers to growth such as 

these, for any group of business owners in the country, limit total 

U.S. productivity. These barriers have a negative effect on job cre-
172 

ation and innovation, and will restrict our country’s ability to move 

out of the recession and remain competitive in the global economy. 

Thank you for the opportunity to present the findings from my 

research. I look forward to hearing your comments and questions. 

[The prepared statement of Dr. Fairlie follows:] 
173 

Assessing Access: Obstacles and Opportunities for Minority Small Business Owners in 

Today's Capital Markets 

U.S. Senate Committee on Small Business & Entrepreneurship 

April 15, 2010 

Testimony by: 

Robert W. Fairlie 

Professor of Economics 

University of California, Santa Cruz 
174 

Thank you, Chair Landrieu, Ranking member Snowe, and members of the Committee. It 

is an honor to testify before you on the important topic of access to capital for minority 

businesses. I am a Professor of Economics at the University of California, Santa Cruz 

and have studied small businesses and entrepreneurs for almost 20 years. I have been 

asked to briefly discuss the findings from my research on the topic.! 

Financial Crisis and Recession 

The U.S. Economy has lost more than 8 million jobs since the start of the recession in 

December 2007. The national unemployment rate is hovering around 10 percent, which 

is twice as high as it was only a couple of years ago. Small businesses have been hit 

extremely hard by the downturn. The rate of businesses filing for bankruptcies in the 

United States increased by more than 150 percent from the rate in mid 2007. 

The fmancial crisis has certainly contributed to the rapid increase in business closings. 

An extensive body of research shows that access to financial capital is paramount to the 

success of small businesses. Although downward trends have been slowing, all 

indicators continue to reveal extremely tight credit conditions for entrepreneurs. In its 

latest survey oflending officers, the Federal Reserve reports that commercial banks "have 

yet to unwind the considerable tightening that has occurred over the past two years. ,,2 

Home equity, often used to help finance business starts, has also declined substantially 

because of the drop in housing prices. 

The State of Minority-Owned Businesses 

Minority-owned businesses are being hit especially hard by the current fmancial crisis 

and recession. Extensive research of mine and others indicates that minority businesses 

face substantial barriers to entry, growth and survival even in more favorable economic 

conditions. Minority firms are more vulnerable because they are generally smaller and 

have fewer resources to draw on in difficult economic times. The average minorityowned business has revenues of $170,000 per year, which is only 38 percent of the level 

for non-minority businesses. Minority owned firms also hire fewer employees and have 

lower profit levels. 

Barriers Faced by Minority-Owned Businesses 

Of the many factors responsible for these disparities in business performance, access to 

fmancial capital is perhaps the most important. A large number of studies show that 

limited access to capital hinders the formation and growth of minority-owned businesses. 

One of the major roots of the problem is the extremely high level of wealth inequality 

IThe findings presented here are summarized from Robert Fairlie and Alicia Robb, Race and 

Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States 

Cambridge: MIT Press (2008). Robert Fairlie and Alicia Robb, Disparities in Capital Access 

between Minority and Non-Minority-Owned Businesses: The Troubling Reality o/Capital 

Limitations Faced by MBEs., U.S. Department of Commerce, Minority Business Development 

Agency, January 2010. 

2 Board of Governors of the Federal Reserve System, The January 2010 Senior Loan Officer 

Opinion Survey on Bank Lending Practices (2010). 
175 

found between minorities and non-minorities. Estimates of median net worth from the 

Census Bureau are displayed in Figure 1. 

Figure 1; Medjan Household Wealth and Income 

U,S. Cen5U$ Bu",,,u,2D(l.4,l008 

Half of all African-American families have less than $5,500 in total wealth, and half of 

all Latino families have less than $8,000. These levels of wealth are one-eleventh to onesixteenth the levels of wealth held by non-minorities ($87,000). These disparities in 

wealth are also substantially larger than disparities in income. African-American and 

Latino income levels are 60 to 70 percent of non-minority levels. 

These low levels of wealth among minorities translate into fewer startups and 

undercapitalized businesses because an entrepreneur's wealth is often invested directly in 

the business or used as collateral to obtain business loans. Entrepreneurs are also 

frequently required by investors to invest their own money in the business as an 

incentive. 

Further limiting the ability of minority entrepreneurs to obtain financial capital is racial 

discrimination in lending practices. Several studies have exanlined whether minority 

firms face discrimination in obtaining business loans.3 TIle main finding from this 

3 David G. Blanchflower, P. Levine, and D. Zimmerman, "Discrimination in the Small Business 

Credit Market," Review of Economics and Statistics 85, no. 4 (2003): 930-943. Ken Cavalluzzo, 

Linda Cavalluzzo, and John Wolken. "Competition, Small Business Financing, and 

Discrimination: Evidence from a New Survey," Journal of Business 75, no. 4 (2002): 641-679. 

Ken Cavalluzzo and John Wolken, "Small Business Loan Turndowns, Personal Wealth and 

Discrimination," Journal of Business 78, no. 6 (2005): 2153-2177. Lloyd Blanchard, John Yinger 

and Bo Zhao, "Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?" 

Syracuse University Working Paper (2004). Susan Coleman, "The Borrowing Experience of 

Black and Hispanic-Owned Small Firms: Evidence from the 1998 Survey of Small Business 

Finances," The Academy of Entrepreneurship Journal 8, no. I (2002): 1-20. Susan Coleman, 

"Borrowing Patterns for Small Firms: A Comparison by Race and Ethnicity." The Journal of 

Entrepreneurial Finance & Business Ventures 7, no. 3 (2003): 87-108. K Mitchell and D.K 

Pearce, Availability of Financing to Small Firms using the Survey of Small Business Finances, 

U.S. Small Business Administration, Office of Advocacy (2005). R. Bostic and KP. Lampani, 

2 
176 

literature is that minority-owned businesses are more likely to experience loan denials, 

pay higher interest rates, and are less likely to apply for loans because of a fear of 

rejection. Figure 2 reports estimates from an analysis that I conducted with Federal 

Reserve data. 

Figure 1: Loan Denia!, Fear of Applying for Loans, lind Int~rest Rate!; 

Federal ReservE!, Survey of Small Bus/ne.lls Finllnees, 2003 

Old not Apply i'e"'()fR")6C~!;m 

These data show that minority firms are twice as likely to be denied a loan application 

and are twice as likely to not apply for a loan because of a fear of rejection. Minority 

firms that do obtain loans pay one and half percentage points higher interest rates on 

those loans than non-minority firms. These disparities do not disappear even after 

controlling for the age, experience and education ofthe owner, and the creditworthiness, 

size, industry, age and location of the firm, which is consistent with the existence of 

lending discrimination. 

The end result is that minority-owned businesses have substantially lower levels of 

financial capital invested in their businesses. Figure 3 displays estimates from Federal 

Reserve data indicating that minority firms have much lower levels of equity investments 

and loan amounts than non-minority firms. 

Figure 3: Average Equity Investmen15 antI LJJ.>I.n SiresFederlll ReServe, Survey of Small 6uS:lness Finances, 2003 

"Racial Differences in Patterns of Small Business Finance: The Importance of Local Geography," 

Working Paper (1999). 

3 
177 

Minority-owned businesses have an average of $3,400 of equity investments and $46,500 

in loans. Non-minority owned businesses have values of equity and loan investments that 

are more than twice as large. Again, these disparities do not disappear after controlling 

for the characteristics of the owner and firm. I have used data from other sources and 

find similar patterns of low levels of financial capital among minority-owned businesses. 

The Potential of Minority-Owned Businesses 

Minority-owned businesses contribute greatly to the U.S. economy. Businesses owned 

by minorities produce nearly $700 billion in total sales. Minority firms employ 5 million 

workers with an annual payroll of $120 billion. These jobs are located across the nation 

with many of them located in minority and economically-depressed communities. 

Minority business owners also create jobs for themselves. When added up that represents 

an additional 4 million jobs in the economy. 

In closing, although minority-owned businesses contribute greatly to the economy, there 

remains a lot of untapped potential among this group offirms. As I have discussed, 

minority entrepreneurs are constrained by limited wealth, high loan denial rates, high 

interest rates, and lending discrimination. Barriers to growth, such as these, for any 

group of business owners in the country limit total U.S. productivity. These barriers have 

a negative effect onjob creation and innovation, and will restrict our country's ability to 

move out of the recession and remain competitive in the global economy. 

Thank you for the opportunity to present the findings from my research on this topic. 

look forward to hearing your comments and questions. 

4 
178 

Race and Entrepreneurial Success 

Black-, Asian-, and White-Owned Businesses in the United States 

Robert W. Fairlie and Alicia M. Robb 

The MIT Press 

Cambridge, Massachusetts 

London, England 
179 

© 2008 Massachusetts Institute of Technology 

All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage 

and retrieval) without permission in writing from the publisher. 

For information about special quantity discounts, please e-mail (speciaLsaleS@mitpress 

.mit.edu). 

This book was set in Palatino on 3B2 by Asco Typesetters, Hong Kong. 

Printed and bound in the United States of America. 

Library of Congress Cataloging-in-Publication Data 

Fairlie, Robert W. 

Race and entrepreneurial success: Black-, Asian-, and white-owned businesses in the 

United States I Robert W. Fairlie and Alicia M. Robb. 

p. cm. 

Includes bibliographical references and index. 

ISBN 978-0-262-D6281-7 (hardcover: alk. paper) 

1. Minority business enterprises-United States. 2. African American business 

enterprises. 3. Asian American business enterprises. 4. Entrepreneurship-United 

States. 5. Small business-United States. 6. Success in business-United States. 1. Robb, 

Alicia M. II. Title. 

HD2358.5.U6F35 2008 

338.6'420890973-dc22 2008005535 

10 9 8 7 6 5 4 3 2 1 
180 

Contents 

Preface ix 

1 Introduction 1 

Racial Patterns in Business Outcomes 1 

Outline of This Book 7 

Main Findings of the Research 9 

2 Racial Disparities in Business Ownership and Outcomes 13 

Racial Differences in Business Ownership 14 

Recent Trends in Business Ownership 15 

Racial Trends over the Twentieth Century 20 

Explanations for Racial Differences in Business Ownership 21 

Trends in the Number of Minority-Owned Businesses 27 

Comparison of SBO/SMOBE and CPS Estimates 29 

Racial Patterns and Trends in Business Outcomes 33 

Racial Differences in Business Outcomes: Evidence from the CBO 41 

Estimates from Other Business-Level Data Sources 45 

Differences across Asian and Latino Groups 45 

Conclusions 47 

3 The Determinants of Small Business Success 49 

Education 51 

Family-Business Background 53 

Evidence from the CBO on Intergenerational Links in Business 

Ownership 54 

Work Experience in Family Businesses 56 

Business Inheritances 56 

Intergenerational Links, Family-Business Backgrounds, and Business 

Success 58 
181 

vi 

Other Forms of Business Human Capital 59 

Identifying the Determinants of Business Outcomes: Regression 

Results 61 

Educational Effects 66 

The Effects of Family-Business Background on Outcomes 67 

Other Forms of Business Human Capital 69 

Profits 70 

Gender Issues 71 

Examining the Sensitivity of Results to Alternative Sample 

Definitions 77 

Correcting for Missing Data: Multiple Imputation 80 

Startup Capital 81 

Industry 84 

Startup Capital and Industry Estimates 87 

Age of the Business 90 

Conclusions 91 

Appendixes 93 

Contents 

Estimating the Intergenerational Transmission in Business 

Ownership 93 

4 Why Are African American-Owned Businesses Less 

Successful? 97 

Racial Differences in Education 99 

Family-Business Background 101 

Racial Differences in Family-Business Experience 103 

Racial Differences in Business Human Capital 106 

Financial Capital 107 

Black/White Differences in Wealth 108 

Family Wealth 112 

Lending Discrimination 113 

Differential Types of Financing 114 

Racial Differences in Startup Capital 117 

Industry Differences 119 

Identifying the Causes of Black/White Differences in Business 

Outcomes 121 

Differences between Male and Female Business Owners 125 

Contributions from Startup Capital and Industry Differences 130 

Other Potential Explanations: Consumer Discrimination 132 

Networks 133 
182 

Contents vii 

Conclusions 136 

Appendixes 138 

Nonlinear Decomposition Method 138 

5 Why Are Asian-Owned Businesses More Successful? 145 

Social Capital and Ethnic Resources 147 

Human, Financial, and Other Types of Capital 149 

Educational Differences 149 

Family-Business Experience 151 

Differences in Business Human Capital 153 

Wealth Differences 155 

Types of Financing 155 

Startup Capital 158 

Industry Differences 159 

Hours Worked 161 

Asian Subgroups 163 

Identifying the Causes of Asian/White Differences in Business 

Outcomes 167 

Conclusions 172 

Appendix 173 

6 Conclusions and Implications 175 

Financial Capital 177 

Family-Business Experience 179 

Human Capital 181 

Policy Implications 182 

New Policy Ideas 185 

Data Appendix 189 

The Survey of Business Owners (SBO) and the Survey of MinorityOwned Business Enterprises (SMOBE) 190 

The Characteristics of Business Owners (CBO) 197 

The Current Population Survey (CPS) 199 

Individual- versus Business-Level Data 201 

Additional Data Sources for Studying Minority-Owned Businesses 203 

Summary 204 

Notes 207 

References 215 

Index 231 
183 

Preface 

Interest in entrepreneurship is growing around the world. Although 

our understanding of what leads to entrepreneurial success has 

improved, we know less about why some racial groups succeed in 

business while others struggle. In writing this book, we were interested 

in figuring out why Asian American-owned businesses perform relatively well on average and the businesses owned by African Americans 

typically do not perform as well. An important concern is whether 

these racial patterns in business performance are both a symptom and 

cause of broader racial inequalities in the United States. Along the 

way, we also became very interested in exploring the more general 

question of why some small businesses succeed and others fail and 

how success is related to the human-capital, financial-capital, and 

family-business background of the entrepreneur. 

The main goal of the book is to provide a comprehensive comparative analysis of the performance of African American-, Asian 

American-, and white-owned businesses in the United States. We hope 

that it will serve as a useful informational source for policymakers and 

business leaders as well as a valuable research and instructional tool 

for professors and students. In researching the book, we were surprised to learn that there were no studies or reports in the literature 

that provided thorough information on recent trends in minoritybusiness ownership rates and outcomes. We present a new compilation of data on minority entrepreneurship over the past few decades 

as well as a detailed analysis of confidential data from the U.S. Census 

Bureau. We hope that anyone interested in learning more about racial 

trends in business ownership and outcomes, the determinants of successful entrepreneurship, and the causes of racial disparities in business performance will find what they need in this book. 
184 

x Preface 

We started this research project many years ago when we applied to 

the Center for Economic Studies to use the confidential and restrictedaccess Characteristics of Business Owners data. Given a project of this 

length, there are many people to thank for providing comments, suggestions, and criticisms. We thank Timothy Bates, Ken Brevoort, 

Anthony Caruso, Ken Couch, Mark Dorns, Tom Dunn, Lingxin Hao, 

Brian Headd, James Jarzabkowski, Leora Klapper, Lori Kletzer, 

Rebecca London, Ying Lowrey, Justin Marion, Kevin Moore, Richard 

Moore, Chad Moutray, Charles Ou, Robert Strom, Valerie Strang, 

Kathryn Tobias, John Wolken, and Donald Wittman. 

We also thank participants at the numerous conferences, workshops, 

and seminars at which we presented the research discussed in this 

book. They include the American Economic Association Meetings; 

Baruch College; Board of Governors of the Federal Reserve System; 

California State University Moss Landing Marine Laboratory; Consulate General of Sweden at the University of Southern California; 

Dartmouth College; Federal Reserve System's Community Affairs Research Conference; Harvard University; National Academy of Sciences 

Panel on Measuring Business Formation, Dynamics, and Performance; 

National Bureau of Economic Research Workshop on Entrepreneurship; 

United States Association for Small Business and Entrepreneurship 

Meetings; RAND; United States Small Business Administration; SBA 

and the Kauffmann Foundation Conference on Entrepreneurship in 

the Twenty-first Century; University of Amsterdam Entrepreneurship 

and Human Capital Conference; University of California at Santa 

Barbara; University of California at Santa Cruz; University of Maryland; University of North Carolina Minority Entrepreneurship Boot 

Camp; University of North Carolina Research Conference on Entrepreneurship among Minorities and Women; University of Washington 

Business Diversity Conference; Urban Institute; Yale University. 

We thank Bill Koch, Garima Vasishtha, Oded Gurantz, and Matt Jennings for providing excellent research assistance. We are also grateful 

for funding from the Russell Sage Foundation and Kauffman Foundation. The views expressed here are solely ours and do not necessarily 

reflect the views of either foundation. Finally, we thank Rebecca London, Zoe and Jessica Fairlie, and Mark Doms for their patience and 

support during the past several years of writing this book. 
185 

Race and Entrepreneurial Success 
186 

4 Why Are African American-Owned Businesses 

Less Successful? 

African Americans are less likely to own businesses than whites, and 

their businesses are less successful on average than are white-owned 

businesses. The evidence presented in chapter 2 indicates that black 

businesses have lower revenues and profits, hire fewer employees, 

and are more likely to close than white-owned businesses. In most 

cases, the disparities are large. For example, average sales among black 

firms are roughly one fourth that of white firms, and black firms hire 

one third the number of employees on average as white firms. The 

relative underperformance of black-owned businesses is alarming 

because of the implications of successful business ownership for economic advancement, job creation, and income equality. 

In the previous chapter's exploration of the determinants of business 

outcomes, several owner and firm characteristics are identified as 

predictors of success. Human capital, financial capital, and familybusiness backgrounds are found to improve business outcomes. Do 

black business owners have lower levels of education, less access to 

startup capital, and more disadvantaged family backgrounds than 

white business owners? Can these factors explain why black-owned 

businesses have lower survival rates, profits, employment, and sales 

than white-owned businesses? 

The single most important factor determining business success is 

startup capital. We find that higher levels of startup capital are associated with lower closure probabilities, higher profits and sales, and 

more employment. Therefore, less access to capital for black business 

owners compared with white owners may partly explain why blackowned businesses have worse outcomes than white-owned firms, on 

average. Previous research indicates that low levels of wealth limit 

business creation among blacks (Fairlie 1999, 2006) and low levels of 

startup capital increase closure rates among black-owned businesses 
187 

98 Chapter 4 

(Bates 1997; Robb 2000). There is also a large body of evidence indicating that black businesses face lending discrimination (Blanchflower, 

Levine, and Zimmerman 2003; Cavalluzzo, Cavalluzzo, and Wolken 

2002). Given these findings, we suspect that racial differences in wealth 

and startup capital contribute substantially to differences in business 

outcomes, but we do not know the extent of their contribution. 

Another determinant of success in small business is the owner's education level. After controlling for other factors, firms with more highly 

educated owners have lower closure probabilities, higher profits and 

sales, and more employment. Therefore, if black business owners have 

lower education levels than white business owners, disparities in education levels could explain why black-owned businesses underperform 

relative to white-owned firms, on average. 

Building on the finding in the previous literature that the children of 

business owners are more likely than the children of nonbusiness owners to become business owners, we examine whether the businesses 

created by the children of business owners are also more successful. 

In the previous chapter, we find that previous work experience in a 

family member's business and previous work experience in a business 

providing similar goods and services have large positive effects on 

business outcomes. These findings suggest that the lack of opportunities for black owners to acquire important general and specific business 

human capital may limit their ability to create successful businesses. In 

fact, there is evidence in the previous literature indicating that current 

differences between blacks and whites in business ownership rates are 

partly determined by racial differences in business ownership in the 

previous generation (Fairlie 1999; Hout and Rosen 2000). Although the 

intergenerational transmission of business ownership is important in 

creating racial disparities in rates of business ownership, we do not 

know if it also contributes to racial disparities in business outcomes 

conditioning on ownership. In particular, can these disparities explain 

why black-owned businesses lag behind white-owned businesses in 

survival rates, profits, employment, and sales? 

Several recent studies have examined the reasons behind the lack of 

black-owned businesses and find that relatively low levels of education, assets, and parental self-employment are partly responsible (see 

Bates 1997, Fairlie 1999, and Hout and Rosen 2000 for a few examples 

reviewed in chapter 2). Although these results are informative, they do 

not shed light on why the average performance of black-owned firms 

lags behind that of white-owned firms. We know much less about 
188 

Why Are African American-Owned Businesses Less Successful? 99 

why black-owned firms have lower outcomes relative to white-owned 

businesses. This is partly due to the small number of datasets that 

identify the race of the owner, additional owner characteristics, and 

business outcomes. 

We use data from the Characteristics of Business Owners (CBO) to 

examine the role that financial capital and human capital play in contributing to racial disparities in business outcomes, such as closures, 

profits, employment size, and sales. We also examine the role that 

intergenerational links in self-employment play in contributing to racial differences in business outcomes. Do black business owners have 

limited opportunities for the acquisition of general and specific business human capital from working in family-owned businesses and 

the receipt of business inheritances, in addition to less education and 

access to financial capital? We build on findings from the previous 

chapter on the determinants of business success and use a special decomposition technique to identify the underlying causes of differences 

in outcomes between black and white firms. The decomposition technique identifies whether a particular factor is important and identifies 

how much it explains of the gap in a particular outcome. This allows 

the relative strengths of the factors to be compared. 

The confidential and restricted-access CBO microdata are useful for 

this analysis because they are one of the only nationally representative 

datasets containing a large enough sample of black firms and detailed 

information on family-business backgrounds. For example, the CBO 

appears to be the only nationally representative dataset containing information on previous work experience in businesses owned by family 

members. Overall, the detailed information on both the characteristics 

of the owner and the business available in the CBO is important for 

exploring additional potential causes of the racial differences in business outcomes. 

Racial Differences in Education 

Over the twentieth century, blacks made considerable progress in educational attainment. Figure 4.1 displays estimates of the percentage of 

black and white adults age twenty-five and over who have completed 

four or more years of high school. In 1940, only 7.7 percent of blacks 

completed four years of high school or more. By 2004, more than 80 

percent of blacks had high school educations. The percentage of blacks 

who completed at least four years of college also increased markedly 
189 

100 Chapter 4 

100 

--- White high school 

90 --D- Black high school 

--.- White college 

80 ---6- Black college 

70 

!'l 

:; 

"0 60 <l:: 

..... 

0 

'" 50 Ol 

co 

C 

Q) 40 1: 

'" 0.. 

30 

20 

10 

0 

1940 1950 1960 1970 1980 1990 2000 

Year 

Figure 4.1 

Educational attainment by race, U.S. Census Bureau estimates (1940 to 2004) 

over the period. Only 1.3 percent of blacks were college educated in 

1940, but nearly 20 percent were college educated by 2004. Although 

blacks have made considerable progress both in absolute terms and 

relative to whites, large disparities in educational attainment remain. 

In 2004, 85.8 percent of whites had at least four years of high school, 

and 28.2 percent had at least four years of college. Racial parity in educational attainment has not yet occurred. 

Racial disparities in educational attainment are smaller for business 

owners than the general population but remain large. Figure 4.2 displays estimates of educational attainment by race from CBO microdata. Black business owners are more likely to be high school 

dropouts and are less likely to be college graduates. Black business 

owners, however, are equally likely to have graduate school degrees 

as white business owners. Overall, 26.2 percent of black business owners have at least a college education compared with 33.3 percent of 

white business owners. 

In the previous chapter, we find that the education level of the 

owner is an important predictor of business success. Therefore, the 
190 

Why Are African American-Owned Businesses Less Successful? 101 

40 

35 

30 Ul 

E 

u:: 25 .... 

a 

(l) 20 0> 

l3 

c 

OJ 15 e 

0... " 10 

5 

0 

High school 

dropout 

Figure 4.2 

High school Some 

graduate college 

• White-owned firms 

[] Black-owned firms 

College 

graduate 

Graduate 

school 

Owner's level of Education 

Owner's education level by race, Characteristics of Business Owners (1992) 

racial disparities in education levels displayed here suggest that differences between black and white owners in education levels may contribute to racial differences in business outcomes. Boyd (1991) finds 

that close to one third of the gap in the earnings between selfemployed Asian Americans and blacks is explained by disparities in 

education levels. Blacks may have less of the general and specific 

knowledge and skills that are useful for running a successful business 

because of lower levels of formal education. Lower levels of education 

among blacks may also limit business opportunities because they provide less of a positive signal to potential customers, lenders, or other 

businesses. The decomposition technique employed below will allow 

us to examine whether and how much racial differences in education 

can explain of racial disparities in the business outcomes available in 

the CBo. 

Family-Business Background 

Regression estimates from the CBO indicate that family-business backgrounds are important for small business success. In particular, working in a family member's business, perhaps through the acquisition of 

general and specific business human capitat improves the future success of businesses owned by these individuals. The estimated effects 
191 

102 Chapter 4 

are large in magnitude: they increase outcomes anywhere from 15 to 

40 percent. Given these results and the extensive literature addressing 

concerns with the African American family (Wilson 1987; Tucker and 

Mitchell-Kernan 1995; Wilson 2002), it is useful to explore the relationship between race, families, and business success. 

Recent estimates indicate that blacks are 40 percent less likely to be 

married than are whites and that black women are nearly 80 percent 

more likely to have a nonrnarital birth than are white women (U.s. 

Census Bureau 2001; National Center for Health Statistics 2003). As a 

result, 53.3 percent of black children live with only one of their parents 

compared with 21.5 percent of white children (U.s. Census Bureau 

2001). The high incidence of single black parents is likely to have adverse educational, economic, and emotional outcomes for this group of 

children (McLanahan and Sandefur 1994; Seltzer 1994; Amato 2000). 

The loss of resources associated with having one parent missing from 

the household may be especially detrimental to the future outcomes of 

black children. 

One area in which the lack of exposure to both parents may be limiting is in business ownership. As noted above, previous research indicates that the probability of self-employment is substantially higher 

among the children of the self-employed than among the children of 

the non-self-employed (Lentz and Laband 1990; Fairlie 1999; Dunn 

and Holtz-Eakin 2000; Hout and Rosen 2000). These studies generally 

find that an individual who had a self-employed parent is roughly 

two to three times as likely to be self-employed as someone who did 

not have a self-employed parent. The high incidence of growing up 

in a single-parent family and the strong intergenerationallink in selfemployment may limit business ownership opportunities for blacks. If 

black children are less likely to live with both parents, they will have a 

lower likelihood of being exposed to a self-employed parent and fewer 

chances to work in a family business. 

Although the high rates of black children currently growing up in 

single-parent families may have a detrimental effect on future business 

ownership rates and business outcomes, historical estimates of singleparent family rates contribute to current differences in business outcomes. The earliest reported data from the U.s. Census Bureau, which 

are for 1960, indicate that black children were more than twice as likely 

to live in single-parent families as white children. In 1960,21.9 percent 

of black children lived in single-parent families compared with 7.1 percent of white children (U.s. Census Bureau 2005b). On average, these 
192 

Why Are African American-Owned Businesses Less Successful? 103 

children would be forty-two years old at the time of the CBO survey. 

N early half of the sample of black business owners in the CBO is under 

the age of forty-five, suggesting that historically high levels of singleparent households may be contributing to the lower outcomes of the 

current generation of business owners. Marriage rates among current 

black business owners are also lower than marriage rates among white 

business owners: 77 percent of white owners are married compared 

with 68 percent of black owners. 

Concerns about the negative consequences of weak family ties on 

business opportunities among blacks are not new. In fact, nearly forty 

years ago, Nathan Glazer and Daniel Patrick Moynihan made the argument that the black family "was not strong enough to create those 

extended clans that elsewhere were most helpful for businessmen and 

professionals" (Glazer and Moynihan 1970, p. 33). More recently, Hout 

and Rosen (2000) note a "triple disadvantage" faced by black men in 

terms of business ownership. They are less likely than white men to 

have self-employed fathers, to become self-employed if their fathers 

were not self-employed, and to follow their father in self-employment. 

Furthermore, Fairlie (1999) provides evidence from the Panel Study 

of Income Dynamices (PSID) that current racial patterns of selfemployment are in part determined by racial patterns of selfemployment in the previous generation. Thus, there is some concern 

that the lack of a strong family-business background may limit opportunities for black business success. 

Racial Differences in Family-Business Experience 

Previous research indicates that the relatively low likelihood of having 

a self-employed parent limits blacks' chances of becoming a selfemployed business owner. We know less, however, about whether 

blacks and whites differ in prior work experience in family businesses 

and their likelihood of receiving business inheritances and whether 

these patterns contribute to the lower outcomes by black firms relative 

to white firms, on average. Black and white business owners indeed 

have different family-business backgrounds. Table 4.1 reports the percentage of owners who had a family member who was a business 

owner and the percentage of owners who worked for that family member.! More than half of all white business owners had a self-employed 

family member owner prior to starting their business. In contrast, approximately one third of black business owners had a self-employed 
193 

104 Chapter 4 

Table 4.1 

Family business background by race, Characteristics of Business Owners (1992) 

White- BlackAll Owned Owned 

Firms Firms Firms 

Had a self-employed family member prior 51.6% 53.1% 33.6% 

to starting firm 

Previously worked in that family member's 43.6% 43.9% 37.4% 

business (conditional) 

Previously worked in a family member's 22.5% 23.3% 12.6% 

business (unconditional) 

Inherited their businesses 1.6% 1.7% 1.4% 

Sample size 38,020 15,872 7,565 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships, and subchapter S corporations, have 

sales of $500 or more, and have at least one owner who worked at least twelve weeks 

and ten hours per week in the business. (2) All estimates are calculated using sample 

weights provided by the Characteristics of Business Owners. 

family member. Black business owners are much less likely to be part 

of a family with business experience. 

Although family members may include spouses and siblings in addition to parents, these results are consistent with Hout and Rosen's 

(2000) finding of a lower probability of self-employment among the 

children of self-employed parents (the "intergenerational pickup rate 

with respect to self-employment") for blacks than for whites. As mentioned previously, this represents one of the three disadvantages in 

business ownership faced by blacks, according to Hout and Rosen. 

To see the similarity with Hout and Rosen's finding, we can use 

equations (3.1) and (3.2) from this chapter's appendix and evidence on 

long-term trends in black and white self-employment rates. As displayed in figure 2.2, business-ownership rates have not changed substantially over time and thus across generations for either whites 

or blacks. This implies that self-employment rates are roughly in a 

long-term steady-state relationship in which the current generation's 

self-employment rate is similar to the previous generation's selfemployment rate. If we also assume that there exists a one-to-one 

matching of parents to children, the intergenerational pickup rate 

equals the probability of a business owner having a self-employed parent as indicated in equation (3.2). Using this equation, we find that the 

intergenerational pickup rate for blacks is approximately 0.330, whereas the intergenerational pickup rate is 0.531 for whites and 0.516 for 
194 

Why Are African American-Owned Businesses Less Successful? 105 

all firms. The black! total ratio for the probability of having a selfemployed family member is 0.632, which is in the range of Hout and 

Rosen's (2000) estimates. Therefore, the CBO data provide support for 

the hypothesis that blacks are less likely to become business owners 

than whites, even for those individuals who have self-employed 

parents. 

Family businesses may provide important opportunities for acquiring general and specific business human capital (Lentz and Leband 

1990). Estimates from the CBO indicate that conditional on having a 

self-employed family member, black business owners were also less 

likely to have worked for that person than were white business owners. As shown in table 4.1, 37.4 percent of black business owners who 

had a self-employed family member worked for that person's business, 

whereas 43.9 percent of white business owners who had a selfemployed family member worked for that person's business.2 Finally, 

black business owners overall were much less likely than white business owners to work for a family member's business. The unconditional rate of working in a family member's business was 12.6 percent 

for blacks and 23.3 percent for whites. 

Black business owners were slightly less likely to inherit their businesses than were white owners: 1.4 percent of black owners inherited 

their firms compared with 1.7 percent of white owners. All rates of 

inheritance are very low and suggest that racial differences in inheritances cannot explain much of the gaps in small business outcomes. 

We also find that only 4.3 percent of white owners and 2.0 percent of 

black owners acquired the business through a "transfer of ownership! 

gift" and had a self-employed family member prior to starting their 

business. These upper-bound estimates of direct parent-to-child transfers or gifts of businesses that are not inheritances combined with the 

estimates of business inheritances suggests that only a small percentage of all existing businesses are acquired from parents. They are also 

confirmed by estimates from the 1998 Survey of Small Business Finances (SSBF), which indicate that 4.2 percent of whites and 4.0 percent of blacks inherited or received their business as a gift. 

Overall, black business owners have a relatively disadvantaged 

family-business background compared with white business owners. 

The lack of family-business experience may contribute substantially to 

the relative lack of success of black-owned businesses because of limited opportunities to receive the informal learning or apprenticeshiptype training that occurs in working in a family business. Family 
195 

106 Chapter 4 

businesses provide an opportunity for family members to acquire general business human capital and in many cases also provide the opportunity for acquiring specific business human capitaL The impact of 

racial differences in these opportunities on racial differences in small 

business outcomes will be explored using a special decomposition 

technique shown later in the chapter. 

Racial Differences in Business Human Capital 

Having prior work experience in businesses whose goods and services 

were similar to those provided by the owner's business is found to be 

an important determinant of business success. If blacks have less prior 

work experience in a similar business, then they may have had less of a 

chance to acquire the skills that are specific to a type of work or industry that are useful for running a successful business. Black business 

owners may also have less prior management experience than white 

business owners. The results from our regression analysis, however, 

do not provide clear evidence on the effects of having prior work experience in a managerial capacity on business outcomes. 

Table 4.2 reports estimates of the percentage of black and white 

firms with owners who previously worked in a business with similar 

goods and services and who have previous work experience in a managerial capacity. Black business owners have less work experience in a 

similar business prior to starting or acquiring their businesses than 

whites. Half of all white business owners have this type of work experience, compared with 43.1 percent of black business owners. The difTable 4.2 

Types of prior work experience by race, Characteristics of Business Owners (1992) 

White- BlackAll Owned Owned 

Firms Firms Firms 

PreViously worked in a business with similar goods/ 50.1% 50.4% 43.1% 

services 

Previous work experience in a managerial capacity 55.2% 55.6% 47.1% 

Sample size 38,020 15,872 7,565 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships, and subchapter 5 corporations, have 

sales of $500 or more, and have at least one owner who worked at least twelve weeks 

and ten hours per week in the business. (2) All estimates are calculated using sample 

weights provided by the Characteristics of Business Owners. 
196 

Why Are African American-Owned Businesses Less Successful? 107 

ference in prior work experience at a business with similar goods and 

services may translate into black owners having less specific business 

human capital than white owners on average. 

Black business owners are also less likely to have prior work experience in a managerial capacity than are white business owners. The percentage of black business owners with prior managerial experience is 

47.1 percent compared with 55.6 percent for whites. Although there is 

a racial difference in managerial experience, the findings from our regression analysis in chapter 3 are mixed on the importance of this type 

of experience in predicting business success. Thus, it is difficult to predict whether lower levels of prior managerial experience among black 

business owners lead to worse outcomes relative to white businesses. 

Financial Capital 

An important limiting factor for the performance of black firms may be 

access to financial capital. Relatively low levels of wealth among blacks 

and the existence of liquidity constraints in U.s. financial markets may 

limit the ability of black entrepreneurs to raise the optimal levels of 

capital needed to start businesses. As discussed in chapter 2, there is 

evidence in the literature that low levels of assets among blacks are 

one of the major causes of low rates of business creation. Estimates 

from both the CPS and PSID indicate that roughly 15 percent of the 

white/black gap in business entry rates is due to wealth disparities 

(Fairlie 1999, 2006). 

Very little previous research focuses on the related question of 

whether low levels of personal wealth and liquidity constraints also 

limit the ability of black entrepreneurs to raise startup capital. Undercapitalization likely leads to lower survivability, profits, employment, 

and sales. Indeed, we find in the previous chapter that the level of 

startup capital is a strong predictor of business success. If startup capital levels are influenced by entrepreneurial wealth, then a strong link 

between racial inequality in wealth and racial disparities in business 

outcomes is expected. Related to this issue and potentially exacerbating the problem is that black entrepreneurs may face discrimination in 

the lending market, which would also limit their ability to invest in 

their businesses. 

Racial inequality in wealth may also have an effect on the continuing 

success of businesses. If business owners cannot freely borrow to offset 

periods of low sales, then those owners with fewer financial resources 
197 

108 Chapter 4 

may be more likely to close. In addition, access to personal or family 

wealth may allow owners to avoid potential liquidity constraints in 

expanding existing businesses. Even if black business owners are able 

to obtain adequate startup capital, future limitations in accessing financial capital may result in less successful businesses. 

Some suggestive evidence on racial differences in access to financial 

capital is provided by published estimates from the CBO (U.S. Census 

Bureau 1997). The CBO questionnaire asks owners with unsuccessful 

businesses from 1992 to 1996 why their businesses were unsuccessful. 

Black business owners are twice as likely as all business owners to report "lack of access to business loans/ credit" as a reason for closure 

(16.2 percent compared with 8.3 percent). They are also nearly three 

times more likely than all business owners to report "lack of access to 

personal loans/credit" as a reason for closure (8.8 percent compared 

with 3.3 percent). Capital constraints appear to be more relevant for 

black entrepreneurs than for white entrepreneurs. 

To further explore this hypothesis, we first document and discuss 

the causes of racial differences in wealth in the United States. We next 

review the findings from the literature on lending discrimination 

against black-owned businesses. Finally, we present estimates of 

black/white differences in startup capital from the CBO. We argue 

that racial differences in startup capital capture racial differences in access to capital. Low levels of startup capital invested in black-owned 

businesses partly reflect racial inequality in personal and family wealth 

and may also result from discrimination in the lending market. 

Black/White Differences in Wealth 

Racial inequality in the accumulation of wealth in the United States 

stands in stark contrast to wage and earnings inequality. For example, 

median weekly earnings for full-time black workers are 80 percent of 

median weekly earnings of full-time white workers (U.S. Bureau of 

Labor Statistics 2004). The median net worth of whites, on the other 

hand, is nearly eleven times higher than the median net worth of blacks 

(see table 4.3). The median level of net worth, defined as the current 

value of all assets minus all liabilities on those assets, for black households is only slightly more than $6,000. Remarkably, that estimate 

implies that if you add home equity, savings, retirement accounts, mutual fund accounts, and other assets, 50 percent of all black households 

in the United States have less than $6,166 in net worth. The median 

level of net worth among white households is $67,000. Large racial dif-
198 

Why Are African American-Owned Businesses Less Successful? 109 

Table 4.3 

Median value of assets for households by race, u.s. Census Bureau Estimates (1983 to 

2000) 

Total 

1983 $32,667 

1988 $35,752 

1991 $36,623 

1993 $37,587 

1995 $40,200 

1998 $41,681 

2000 $46,506 

White 

$39,135 

$43,279 

$44,408 

$45,740 

$49,030 

$52,301 

$58,716 

White 

non-Latino Black 

$59,700 

$67,000 

$3,397 

$4,169 

$4,604 

$4,418 

$7,073 

$5,490 

$6,166 

Source: U.s. Census Bureau estimates from various years of the Survey of Income and 

Program Participation. 

ferences in net worth are also found using other datasets and within 

age groups, education levels, and marital statuses (Blau and Graham 

1990; Oliver and Shapiro 1995; Scholz and Levine 2004; Altonji and 

Doraszelski 2001). 

Examining the full distribution of wealth reveals a more pronounced 

inequality than what is revealed by a comparison of medians (figure 

4.3). Forty-five percent of blacks have net worth of less than $5,000. 

Less than one fifth of all whites have net worth below this level. At the 

top of the distribution, only 2.7 percent of blacks have a value of net 

worth that is at least $250,000. Among whites, 22.2 percent have values 

of net worth in this range. Comparing asset distributions makes it 

strikingly clear: most blacks have very low levels of wealth, and relatively few have high levels of wealth when compared with whites. 

The single largest asset held by most households is their home. Estimates of home ownership reported in table 4.4 indicate that only 46.8 

percent of all black households own their own homes. For whites, 73.0 

percent own their own home. Among home owners, blacks have much 

less equity in their homes than whites. The median home equity 

among black homeowners is $35,000, whereas the median home equity 

among white homeowners is $64,200. Blacks are clearly less likely to 

own their own homes, and among those who own a home, they have 

less equity in their homes. This is due to a combination of lower home 

values and lower equity/debt ratios in their homes. 

Estimates from the SIPP indicate that wealth inequality has 

decreased only slightly in the past two decades. In 1983, the white/ 
199 

110 Chapter 4 

3Sr---------------------------~========~ 

'" "0 

30 

:g 2S 

Q) 

:l '" :i! 20 

~ 15 co 

C 

e 10 Q) 

a.. 

5 

o 

• White non-Latinos 

[j Blacks 

Negative $1- $5,001}- $10,001}- $2S,OOI}- $SO,OOI}- $100,Q01}- $2SO,Q01}- $500,000+ 

or zero $4,999 $9,999 $24,999 $49,999 $99,999 $249,999 $499,999 

NetWorth 

Figure 4.3 

Distribution of net worth by race, U.s. Census Bureau Estimates, Survey of Income and 

Program Participation (2000) 

Table 4.4 

Home ownership and median home equity by race, U.S. Census Bureau Estimates from 

the Survey of Program and Income Participation (2000) 

Percentage with own home 

Median equity in own home among homeowners 

Total 

67.2% 

$59,000 

White 

non-Latino 

73.0% 

$64,200 

Black 

46.8% 

$35,000 

Source: U.s. Census Bureau estimates from various years of the Survey of Income and 

Program Participation. 

black ratio of median asset levels was 11.5. By 2000, the ratio dropped 

to 9.5. However, some of this decrease may have been due to the large 

increase in the white Latino population in the 1980s and 1990s. Latinos 

have very low levels of net worth, which are only slightly higher than 

black levels. If white non-Latinos are used to calculate the white/black 

ratio of median net worth, we find a ratio of 10.9. In either case, racial 

wealth inequality is extremely large and does not appear to be disappearing quickly. 

As expected, a large percentage of the racial gap in wealth accumulation is due to differences in permanent or lifetime income, family 

composition, and other demographic characteristics. Income differ-
200 

Why Are African American-Owned Businesses Less Successful? 111 

ences between blacks and whites alone explain a large part of the gap 

(Scholz and Levine 2004). Racial differences in inheritances and gifts 

also appear to contribute to the wealth gap measured in mean levels 

(Menchik and Jianakoplos 1997; Gittleman and Wolff 2004; Avery and 

Rendall 1997, 2002). The contribution to the racial gap in median levels 

of net worth is likely to be smaller, however, as most households do 

not receive inheritances (Scholz and Levine 2004). Other types of intergenerational transfers may also be important in contributing to the 

racial wealth gap. Racial differences in parental wealth explain part of 

the wealth gap (Conley 1999). Charles and Hurst (2002) find that 42 

percent of white families receive assistance from their family for a 

down payment on a home compared with only 10 percent of black 

families. 

Lower levels of asset accumulation among blacks may also be due to 

differences in investment types (Scholz and Levine 2004), lower rates of 

return on assets within asset types (Menchik and Jianakoplos 1997), 

and higher participation rates in welfare programs and public housing, which have asset restrictions. Finally, racial differences in selfemployment partly explain racial differences in asset accumulation 

(Menchik and Jianakoplos 1997; Altonji and Doraszelski 2001). This 

finding, however, begs the question of whether self-employment 

increases asset accumulation or wealth increases self-employment as 

discussed in previous chapters. 

The consequences of racial wealth inequality are severe. Low asset 

levels affect the ability of black families to smooth their consumption 

over fluctuations in income due to job loss and other negative labormarket outcomes. Wealth inequality also translates into political, social, residential, and educational inequality. Current asset levels, and 

not only current and future income, are important for home purchases 

and financing education. Through inheritances and intergenerational 

transfers, black/white wealth inequality is also transmitted to future 

generations. 

Racial inequality in wealth is also likely to have negative consequences for business formation and success through its effects on access to financial capital. Clearly, lower levels of wealth among blacks 

are likely to translate into less access to startup capital. Business creation is often funded by owner's equity, and investors frequently require a substantial level of owner's investment of his or her own 

capital as an incentive and as collateral. Racial differences in home equity may be especially important in providing access to startup capital. 
201 

112 Chapter 4 

Homes provide collateral for business loans, and home equity loans 

can provide relatively low-cost financing. 3 Thus, lower levels of wealth 

can lead to inadequate access to financial capital, which in tum can 

both limit business creation and result in undercapitalized businesses. 

Family Wealth 

Lower levels of parental wealth may also limit access to financial capital for black entrepreneurs. Black families have less to pass on to their 

children through inheritances. This in tum will result in lower wealth 

holdings and access to startup capital among the current generation of 

blacks. The lower likelihood of receiving inheritances and the smaller 

amount of inheritances that are received may also have a direct effect 

on business success for blacks. The receipt of inheritances among business owners is associated with higher survival rates and higher sales 

among surviving businesses (Holtz-Eakin, Joulfaian, and Rosen 1994a). 

Business owners also tum to family members for loans and equity 

financing. Family members may provide business loans with favorable 

terms. From the other side, investing in a child's, sibling's, or relative's 

business may be an attractive option because of the extra information 

and trust. 

The CBO includes information on whether owners receive personal 

loans from family members to finance their business ventures.4 Estimates from our CBO sample indicate that family loans are not a common source of startup capital among small business owners. Only 6.4 

percent of all owners borrowed capital from their family for starting or 

acquiring the business. Furthermore, a similar percentage of black and 

white owners borrowed from their families. Given that startup capital 

levels are lower for black businesses as noted below, this implies that 

black owners borrow a smaller total amount from family members 

than white owners. 

Bates (1997) provides estimates of borrowing startup capital from 

family members from the 1987 CBO. Among firms that borrow startup 

capital, he finds that 21.2 percent of black firms borrow from family 

members and that the average amount borrowed is $18,306. A larger 

percentage of white borrowers obtained loans from family members 

(26.8 percent) and for a higher average amount ($35,446). However, 

for capital needs of established firms, evidence from the SSBF paints a 

different picture. Over 10 percent of firms owned by blacks obtained 

loans from family and friends, compared with less than 6 percent of 

white-owned businesses (Bitler, Robb, and Wolken 2001). 
202 

Why Are African American-Owned Businesses Less Successful? 113 

Lower levels of family wealth among blacks may limit their ability to 

obtain sufficient startup capital or ongoing financing. Consequently, 

blacks may start fewer businesses, and for those black businesses that 

do start, they may be smaller than what would be optimaLs Thus, racial differences in family wealth may contribute to racial differences in 

business outcomes. 

Lending Discrimination 

An additional factor that might explain differing rates of startup capital 

by race is lending discrimination. Much of the recent research on the 

issue of discrimination in business lending uses data from the Survey 

of Small Business Finances (SSBF).6 The main findings from this literature are that minority-owned businesses experience higher loan denial 

probabilities and pay higher interest rates than white-owned businesses even after controlling for differences in credit-worthiness and 

other factors (Cavalluzzo, Cavalluzzo, and Wolken 2002; Blanchflower, 

Levine, and Zimmerman 2003; Coleman 2002, 2003; Blanchard, Yinger, 

and Zhao 2004; Cavalluzzo and Wolken 2005; Robb and Fairlie 2006). 

Using the 1993 National Survey of Small Business Finances (NSSBF), 

Cavalluzzo, Cavalluzzo, and Wolken (2002) find that black business 

owners are more likely than whites to have unmet credit needs and 

more likely to have been denied credit, even after controlling for many 

factors related to creditworthiness. Blanchflower, Levine, and Zimmerman (2003), using the 1993 SSBF and 1998 SSBF, find that blacks pay a 

higher interest rate on loans obtained. They also find that concerns 

over whether a loan application would be denied prevented some prospective borrowers from applying for a loan in the first place. The disparities between the denial rates between whites and blacks are greater 

when including these individuals with those that actually applied for a 

loan. Bostic and Lampani (1999) include additional geographic controls 

but also find a statistically significant difference in approval rates between blacks and whites. 

Using the 1998 SSBF, Cavalluzzo and Wolken (2005) find substantial unexplained differences in loan denial rates between African 

American- and white-owned firms. They also find that while greater 

personal wealth is associated with a lower probability of denial, a large 

difference in denial rates between blacks and whites remains, even 

after controlling for personal wealth. Finally, they find that denial rates 

for blacks increase with lender-market concentration, which is consistent with Becker's (1971/1957) classic theories of discrimination. 
203 

114 Chapter 4 

Cavalluzzo and Wolken (2005) estimate the magnitude of contributions from group differences in characteristics to racial gaps in loan 

denial rates and find that group differences in credit history differences 

explain most of the difference in denial rates. When examining specific 

loan types, Mitchell and Pearce (2004) find that black firms faced significantly greater loan-denial probabilities than white-male-owned 

firms on both relationship bank loans and transaction bank loans. 

Using the 1998 SSBF, Robb and Fairlie (2006) focus on more established businesses-those five years and older. They find that established black-owned business are still significantly less likely than 

white-owned businesses to be approved for loans, to pay a higher rate 

of interest on approved loans, and not to apply for credit when needed 

because of fear that the loan application would be denied. They also 

find that blacks are more likely than whites to be denied trade credit 

and to rely on credit cards for borrowing purposes. Older, moreestablished black-owned businesses appear to also face significant barriers in accessing financial capital. 

Although it is difficult to prove without a doubt that lending discrimination exists, the evidence from the literature is consistent with 

the existence of continuing lending discrimination against blackowned firms. Black firms are more likely to be denied loans and pay 

higher interest rates and are less likely to borrow from banks for 

startup or continuing capital. Lending discrimination may have a direct effect on business outcomes because it limits access to loans that 

can help a business "weather a storm" or diversify into new products 

or markets. 

Although most of the evidence from this literature focuses on existing black businesses, lending discrimination may also severely limit access to startup capital, discouraging would-be minority entrepreneurs 

and jeopardizing the scale and longevity of their businesses. 

Differential Types of Financing 

Black and white entrepreneurs differ in the types of financing they use 

for their businesses. Although these differences are likely to be caused 

by many factors, they may be partly due to differences in personal 

wealth and lending discrimination. Focusing on startup capital differences, there is evidence of less use of banks by black entrepreneurs for 

startup capital. Published estimates from the CBO indicate that only 

6.6 percent of black firms received business loans from banking or 

commercial lending institutions (see table 4.5). Nearly twice that 
204 

Why Are African American-Owned Businesses Less Successful? 115 

Table 4.5 

Sources of borrowed and equity capital by race, Characteristics of Business Owners 

(1992) 

Sources of borrowed capital for owner: 

Personal loan using home mortgage! equity line of 

credit 

Personal credit card 

Personal loan from spouse 

Personal loan from family 

Other personal loan 

Sources of nonborrowed capital for owner: 

None (100 percent borrowed capital) 

Use of owner's personal! family physical assets 

(building, motor vehicle, equipment, etc.) 

Proceeds from the sale of owner's personal assets 

Owner's personal! family savings 

Other source 

Sources of borrowed capital for firm: 

Business loan from banking or commercial lending 

institution 

Government-guaranteed business loan from banking 

or commercial lending institution 

Business loan from federal, state, or local government 

Business loan from investment company! profit or 

nonprofit private source 

Business loan from previous owner 

Business trade credit from supplier 

Other business loan 

Percentage 

All 

Firms 

5.0% 

3.0 

1.2 

6.1 

7.1 

6.6 

18.5 

2.5 

40.7 

3.9 

11.7 

0.4 

0.3 

0.6 

1.9 

0.9 

1.6 

WhiteOwned 

Firms 

5.0% 

2.9 

1.1 

5.8 

7.1 

6.8 

19.1 

2.4 

40.5 

3.7 

12.1 

0.4 

0.3 

0.6 

1.9 

0.9 

1.6 

BlackOwned 

Firms 

3.5% 

3.8 

1.5 

4.6 

5.6 

4.4 

14.1 

1.7 

35.1 

7.7 

6.6 

0.7 

0.3 

0.5 

0.6 

0.6 

0.9 

Source: Characteristics of Business Owners (1992) are reported in U.s. Census Bureau 

(1997). 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships, and subchapter S corporations and 

that have sales of $500 or more. (2) White category is equal to the total minus all minority 

groups. (3) More than one source of capital can be reported for each firm. 
205 

116 Chapter 4 

percentage of white firms received bank loans for startup capital. 

Blacks are also less likely to use a home equity line for startup capital 

than are whites, which may be partly due to the lower rates of home 

ownership reported above. Blacks are also less likely than whites to 

use equity or nonborrowed sources of startup capital and to have loans 

from other sources (except government-backed loans). On the other 

hand, black business owners are more likely to use credit cards for 

startup funds than are white business owners? 

In studies using the 1987 CBO, Bates (1997, 2005) conducts a thorough comparison of differences between black and white firms in their 

use of startup capital. Bates finds that black firms were more likely to 

start with no capital, less likely to borrow startup capital, and more 

likely to rely solely on equity capital than white-owned firms. In his 

sample of male-owned firms started in the past ten years, he finds that 

29 percent of black firms used borrowed funds for startup capital compared with 37 percent of white firms. Focusing on startup funding 

from financial institutions, he also finds that black-owned firms receive 

less in startup capital from banks on average than white-owned firms. 

Among firms borrowing startup capital, he estimates that the average 

black firm borrowed $31,958 from financial institutions compared with 

$56,784 for white firms. 

Bates also explores whether disparities in levels of startup capital are 

partly due to differences in equity startup capital. He finds that black 

firms receive $2.69 per dollar of equity capital invested in loans from 

financial institutions. This is lower than the $3.10 per dollar of equity 

investment for white firms. After controlling for other owner and business characteristics, he finds a roughly similar-sized difference between 

black and white debt per equity dollar invested. These differences are 

not large, however, suggesting that an important hurdle to obtaining 

loans from financial institutions for black entrepreneurs is low levels 

of equity financing in addition to differential treatment by financial 

institutions (Bates 2005). In fact, from a pooled sample of black and 

white firms, Bates (2005) finds that loans received by black firms borrowing startup capital are significantly smaller than those received by 

white firms even after controlling for equity capital and owner and 

business characteristics such as education and industry. Racial differences in personal wealth, which are not measured in the CBO, may be 

a key factor in explaining the remaining black/white differences in 

business loans. 
206 

Why Are African American-Owned Businesses Less Successful? 117 

For older, more established firms, these racial differences in financing patterns continue. Using data from the 1998 55BF, Robb and Fairlie 

(2006) find that black firms are less likely than white firms to have 

credit lines, equipment loans, business mortgages, motor vehicle loans, 

or trade credit. They are also less likely to use business credit cards, use 

personal credit cards for business purposes, or hold checking accounts. 

In fact, the only types of loans that they hold more frequently than 

white firms are capital leases and a catch-all category of "other" loans. 

Blacks are more likely than whites to borrow through the use of credit 

cards and trade credit (carrying balances on those lines of credit and 

paying interest on those balances), which often have higher interest 

rates than conventional loans. 

Overalt these racial differences in types of financing for startup or 

continuing capital may be the result of many different factors. For example, we cannot rule out the possibility that the lower likelihood of 

acquiring capital from financial institutions among black businesses is 

due to a lower evaluated probability of success for these businesses. 

However, the patterns are consistent with large racial differences in 

personal wealth and lending discrimination. 

Racial Differences in Startup Capital 

Black-owned businesses have very low levels of startup capital relative 

to white-owned businesses (figure 4.4). Fewer than 2 percent of black 

firms start with $100,000 or more of capitat and 6.5 percent have between $25,000 and $100,000 in startup capitaL Nearly two thirds of 

black businesses have less than $5,000 in startup capital. Although a 

large percentage of white firms also start with little capitat a higher 

percentage of white firms start with large amounts of capital than 

black firms. 

Racial disparities in startup capital may reflect differences in the 

potential success of firms and thus ability to raise capital by firms. In 

other words, some black entrepreneurs may have difficulty raising capital because their businesses are predicted to be less likely to succeed. If 

so, banks and other investors will rationally decline to invest in these 

businesses. Of course, an alternative explanation is that black business 

owners invest less startup capital in their businesses because they have 

less access to capitaL This may be due to having lower levels of personal and family wealth to borrow against or use as equity financing 

but may also be due to lending discrimination. Evidence favoring these 
207 

118 

80 

70.6% 

70 

60 U) 

§ 

u:: 50 ..... 

0 

<l) 40 Cl 

l':! 

c: 

<l) 30 " a; 

"- 20 

10 

0 

Less than $5,000 

Figure 4.4 

Chapter 4 

• White-owned firms 

o Black-owned firms 

1.7% 

$5,000-$24,999 $25,000-$99,999 $100,000+ 

Startup Capital 

Startup capital by race, Characteristics of Business Owners (1992) 

explanations is provided by the finding that black-owned firms have 

lower levels of startup capital across all major industries (U.S. Census 

Bureau 1997). Thus, racial disparities in startup capital do not simply 

reflect racial differences in the industries of these firms. In addition, 

the finding that personal wealth decreases the probability that an existing firm is denied a loan is consistent with racial disparities in wealth 

contributing to racial differences in startup capital. 

What are the likely consequences of these racial disparities in startup 

capital? The literature on minority business ownership provides evidence that access to financial capital limits opportunities for blacks to 

start businesses as discussed in chapter 2. A much smaller literature 

indicates that racial differences in wealth or startup capital affect business success. Using earlier CBO data, Bates (1989, 1994, 1997) finds evidence that black-owned businesses have substantially lower levels of 

startup capital than white-owned businesses. He also finds that startup 

capital levels are strongly positively associated with business survival. 

These two findings indicate that racial disparities in startup capital 

contribute to racial differences in survivaL 

Robb (2000) provides additional evidence on the importance of 

startup capital using employer firms from the 1992 CBO linked to the 

1992 to 1996 Business Information Tracking Series (BITS). Estimates 

from regression models indicate that the level of startup capital has a 
208 

Why Are African American-Owned Businesses Less Successful? 119 

negative and statistically significant effect on the probability of business closure. Black-employer firms are also found to have substantially 

lower levels of startup capital than white-employer firms. Thus, racial 

disparities in the amount of capital used to start the business result 

in higher closure rates among black-employer firms relative to whiteemployer firms. 

Our estimates also indicate that racial disparities in startup capital 

contribute to worse outcomes among black-owned businesses. In the 

multivariate regressions reported in chapter 3, we find a strong positive relationship between startup capital and business success. Higher 

levels of startup capital are associated with lower closure probabilities, 

higher profits, more employment, and higher sales. In addition, estimates from the 1992 CBO indicate that blacks have substantially lower 

levels of startup capital. Thus, black/white differences in startup capital appear to contribute to racial disparities in business outcomes. 

What we do not know from these findings, however, is how much 

these racial differences in startup capital contribute to differences in 

business outcomes relative to racial differences in other factors such as 

education, business human capital, and family-business backgrounds. 

Using individual-level data, Fairlie (1999, 2006) provides some evidence on this question. Focusing on the causes of the higher annual 

rate of exit from self-employment for blacks than whites, estimates 

from the CPS indicate that racial differences in personal wealth explain 7.3 percent of the gap. Estimates from the PSID indicate that 

1.8 to 11.1 percent of the male black/white gap in exit rates from selfemployment is explained by differences in asset levels. The use of 

individual-level data, the focus on transitions out of self-employment, 

and the inclusion of personal wealth, however, make it difficult to 

draw conclusions about whether racial disparities in access to startup 

capital contribute to racial differences in business outcomes. The 

decompositions estimated below provide evidence on the relative importance of racial differences in startup capital to racial disparities in 

business outcomes. 

Industry Differences 

Racial differences in industry distributions may also contribute to differences between blacks and whites in small business outcomes. Some 

industries, most notably retail and services, have higher business turnover rates than others (Robb 2000; Reynolds and White 1997). Those 
209 

120 

Table 4.6 

Industry distribution by race, Characteristics of Business Owners (1992) 

Agricultural services 

Construction 

Manufacturing 

Wholesale trade 

Retail trade 

Finance, insurance, and real estate 

Transportation, communications, and public utilities 

Personal services 

Professional services 

Uncoded industry 

Sample size 

WhiteOwned 

Firms 

2.7% 

12.5% 

3.4% 

3.6% 

14.7% 

10.1% 

3.9% 

25.9% 

19.3% 

3.9% 

15,872 

Chapter 4 

BlackOwned 

Firms 

1.7% 

7.1% 

1.7% 

1.1% 

14.5% 

6.1% 

8.5% 

32.8% 

20.8% 

5.7% 

7,565 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorshlps or self-employed persons, partnershlps, and subchapter S corporations, have 

sales of $500 or more, and have at least one owner who worked at least twelve weeks 

and ten hours per week in the business. (2) All estimates are calculated using sample 

weights provided by the Characteristics of Business Owners. 

with higher capital requirements for entry, such as manufacturing and 

wholesale, typically have lower turnover rates. Estimates from the 

CBO reported in chapter 3 indicate differences in business outcomes 

across industries, although the differences are somewhat mixed in the 

regression models that control for other owner and firm characteristics. 

One consistent result, however, is that firms in personal services have 

worse outcomes. 

Black and white firms concentrate in different industries. Table 4.6 

reports estimates of industry distributions by race from CBO microdata. Black firms are underrepresented in construction, manufacturing, 

wholesale trade, agricultural services and finance, insurance, and real 

estate relative to white firms. Black firms are more concentrated in 

transportation, communications and public utilities, and personal services than white firms. These industries generally have worse business 

outcomes than the previous industries, but as noted above the regression results provide mixed evidence on which industries are associated 

with worse outcomes. 

Black and white firms may concentrate in different industries for 

several reasons. First, capital constraints may limit which industries an 
210 

Why Are African American-Owned Businesses Less Successful? 121 

individual can enter due to higher capital requirements of certain 

industries (Bates 1997). In addition, industry choice may be constrained due to a lack of relevant skills and discrimination (Boden 

1996; Boden and Nucci 2002; Robb 2000). Discrimination may occur 

directly in self-employment through limited opportunities to penetrate 

networks, such as those in construction (Bates 1993a; Feagin and Imani 

1994; Bates and Howell 1997). While differences in entrepreneurial 

ability may lead to different choices of industries, differences in industry concentrations may simply reflect differences in preferences. 

Overall, the estimates presented here suggest that black/white differences in industry distributions may contribute to racial differences 

in business outcomes. However, these industry differences may result 

from different constraints, preferences or abilities, which affect the interpretation of our results. A concern is that industry choice may simply be a measure of business success, implying that black firms have 

limited entry into certain industries because they are less successful 

and not because the industry concentration of black firms leads to less 

success. 

Identifying the Causes of Black/White Differences in Business 

Outcomes 

The estimates reported above indicate that black business owners have 

less family-business experience, lower levels of education, and lower 

levels of startup capital than white business owners and differ along 

several additional dimensions. These owner and firm characteristics 

are important determinants of small business outcomes. Taken together, these results suggest that racial differences in family-business 

background, education, and startup capital contribute to why blackowned businesses have worse outcomes on average than white-owned 

businesses. The impact of each factor, however, is difficult to summarize. In particular, we want to identify the separate contributions from 

racial differences in the variables included in the regressions. 

The most common approach used to quantify these contributions 

is the technique of decomposing racial differences in mean levels of 

an outcome into those due to different observable characteristics or 

"endowments" between racial groups and those due to different effects 

of characteristics or "coefficients" of groups. The technique is commonly attributed to Blinder (1973) and Oaxaca (1973). The BlinderOaxaca decomposition technique is especially useful for identifying 
211 

122 Chapter 4 

and quantifying the separate contributions of group differences in measurable characteristics, such as education, experience, and geographical 

location, to racial gaps in outcomes. The technique is easy to apply and 

requires only coefficient estimates from linear regressions for the outcome of interest and sample means of the independent variables used 

in the regressions. We use this technique for the log sales specification, 

which is estimated using a linear regression. 

The Blinder-Oaxaca technique, however, cannot be used without 

modification to decompose racial differences in the three other 

outcomes-closure, profits, and employment. This is because each of 

these business outcomes is binary (they take on the values of either 0 

or 1), and their specifications are estimated with logit regressions instead of linear regressions. Instead, we use a decomposition technique 

that takes into account the nonlinearity of the logit regressions used to 

estimate the other outcomes. This technique is described in the appendix to this chapter and Fairlie (1999, 2005) in more detail. 

Table 4.7 reports estimates from this procedure for decomposing the 

black/white gaps in small business outcomes (see also Fairlie and 

Robb 2007). We first discuss the results for the more simplified model 

that does not include startup capital or industry. The underlying regression estimates are taken from table 3.5, and the means for black 

and white firms are reported in table 4.A. The separate contributions 

from racial differences in each set of independent variables are 

reported. As noted above, the black/white gaps in small business outcomes are large. Black firms are more likely to close and have lower 

profits, employment, and sales than white firms. Racial differences in 

the male/female ownership of the firm contribute significantly to the 

gaps in small business outcomes. The large contributions are the result 

of a higher percentage of black-owned firms than white-owned firms 

also being female-owned and of female-owned firms having lower 

business outcomes than male-owned businesses, on average. Similar 

to the previous chapter, we calculate separate decompositions by gender and discuss the results below. 

Lower marriage rates among blacks also contribute to the black/ 

white gaps in small business outcomes. Sixty-eight percent of black 

owners are married compared with 77 percent of white owners. 

Spousal income may act as a buffer against downturns in sales for the 

business and allow the owner to stay in business longer. 

Although racial disparities in education are smaller for business 

owners than for the general population, low levels of education among 
212 

Why Are Mrican American-Owned Businesses Less Successful? 123 

Table 4.7 

Decompositions of black/white gaps in small business outcomes, Characteristics of Business Owners (1992) 

Specification 

(1) (2) (3) (4) 

Dependent variable Closure Profits Employer LnSales 

Black mean 0.2696 0.1410 0.1121 9.4241 

White mean 0.2282 0.3004 0.2067 10.0680 

Black/white gap -0.0414 0.1594 0.0946 0.6439 

Contributions from racial differences in: 

Sex -0.0032 0.0253 0.0083 0.0689 

7.7% 15.9% 8.8% 10.7% 

Marital status -0.0037 0.0044 0.0042 0.0166 

8.9% 2.8% 4.4% 2.6% 

Education -0.0027 0.0056 0.0023 0.0156 

6.5% 3.5% 2.4% 2.4% 

Region -0.0033 0.0032 -0.0050 0.0139 

8.0% 2.0% -5.3% 2.2% 

Urban -0.0026 -0.0060 0.0051 -0.0154 

6.3% -3.8% 5.4% -2.4% 

Prior work experience 0.0011 -0.0017 -0.0008 -0.0011 

-2.7% -1.1% -0.8% -0.2% 

Prior work experience in a managerial 0.0061 0.0016 0.0042 0.0178 

capacity -14.7% 1.0% 4.4% 2.8% 

Prior work experience in a similar -0.0025 0.0036 0.0017 0.0277 

business 6.0% 2.3% 1.8% 4.3% 

Have a self-employed family member -0.0037 0.0017 -0.0004 -0.0070 

8.9% 1.1% -0.4% -1.1% 

Prior work experience in a family -0.0048 0.0027 0.0053 0.0412 

member's business 11.6% 1.7% 5.6% 6.4% 

Inherited business -0.0002 0.0005 0.0002 0.0021 

0.5% 0.3% 0.2% 0.3% 

All included variables -0.0200 0.0409 0.0251 0.1910 

48.3% 25.7% 26.5% 29.7% 

Notes: (1) The samples and regression specifications are the same as those used in table 

3.5. (2) Contribution estimates are mean values of the decomposition using 1,000 subsamples of whites. See text for more details. 
213 

124 Chapter 4 

black business owners relative to white business owners appear to 

have a negative effect on business outcomes. As noted above, the differences are large. For example, 27 percent of black business owners 

have a college education compared with 33 percent of white business 

owners. These educational differences, however, do not translate into 

very large effects: racial differences in the education level of the owner 

explain from 2.4 to 6.5 percent of the black/white gaps in business outcomes. Black business owners are less educated on average than are 

white business owners, but these educational differences do not appear 

to be an extremely large hindrance to operating successful businesses. 

Although black-owned businesses have a different regional distribution and are more likely to be located in urban areas than are whiteowned businesses, racial differences in geographical locations do not 

appear to contribute substantially to the gaps in small business outcomes. Racial differences in the amount of prior work experience and 

management experience have either small effects or mixed effects on 

gaps in the different business outcomes. 

As reported in table 4.1, black business owners are much less likely 

to have a self-employed family member than are white business owners. This difference, however, does not contribute to racial disparities 

in profits, employment, and sales. The only exception is that racial differences in having a self-employed family member explain about 9 percent of the black/white gap in closure rates. The contribution of group 

differences in parental self-employment to racial differences in small 

business outcomes appears to be smaller than the contribution to rates 

of self-employment and entry into self-employment. Estimates from 

the PSID indicate that racial differences in the probability of having a 

self-employed father explain 8 to 14 percent of the black/white gap in 

the entry rate into self-employment and 4 to 6 percent of the gap in the 

self-employment rate (Fairlie 1999). 

The explanatory power of racial differences in prior work experience 

in a family member's business is stronger. With the exception of the 

profits specification, racial differences in this variable explain 5.6 to 

11.6 percent of the black/white gaps in small business outcomes. Apparently, the lack of work experience in family businesses among future black business owners, perhaps by restricting their acquisition of 

general and specific business human capital, limits the successfulness 

of their businesses relative to whites. 

Racial differences in prior work experience in a business providing 

similar goods and services consistently explain a small part of the gaps 
214 

Why Are African American-Owned Businesses Less Successful? 125 

in outcomes. Although the coefficient estimates in the small business 

outcome regressions are generally similar in magnitude to coefficient 

estimates on the family-business work-experience variable, the contributions from racial differences are somewhat smaller. The racial disparity in the percentage of owners who worked in a family member's 

business is larger than the disparity in the percentage of owners who 

worked in a business with similar goods and services. Black owners 

appear to acquire less specific business human capital from working in 

similar business prior to starting their own businesses. 

Black-owned businesses are less likely to be inherited than whiteowned businesses, and inherited businesses are generally more successful than noninherited businesses, but racial differences in business 

inheritances explain virtually none of the gaps in small business outcomes. The overall likelihood of business inheritances (1.6 percent) is 

too small to playa major role in explaining racial differences in business outcomes. 

This finding is interesting in light of the finding in the literature that 

blacks are less likely to receive inheritances and typically receive much 

smaller inheritances than whites. As noted above, there is recent evidence suggesting that the lack of inheritances among blacks is an 

important factor explaining why blacks have asset levels that are substantially lower than white levels (Menchik and Jianakoplos 1997; 

Gittleman and Wolff 2000; Avery and Rendall 1997, 2002). Furthermore, the receipt of inheritances is a major determinant of starting and 

remaining in business (Holtz-Eakin, Joulfaian, and Rosen 1994a, 1994b; 

Blanchflower and Oswald 1998), suggesting that lower levels of inheritances among blacks contribute to lower rates of business ownership. 

With regard to business inheritances, however, they are apparently 

not very important in explaining differences in business outcomes. 

Differences between Male and Female Business Owners 

We also investigate whether the causes of racial differences in business 

outcomes are similar for male- and female-owned businesses. As noted 

in chapter 3, male firms tend to have lower closure rates, higher profit 

rates, higher employer rates, and more sales than female firms. In 

terms of owner characteristics, however, there are many similarities 

between the sexes. We also found that estimates from separate sets 

of business outcome regressions that the determinants of business 

outcomes do not differ substantially between men and women. The 
215 

126 Chapter 4 

remaining question then is whether the explanations for black/white 

disparities in business outcomes differ between male- and femaleowned businesses. 

Tables 4.8 and 4.9 report estimates from separate decompositions for 

racial differences in business outcomes for men and women, respectively. Mean characteristics are reported in table 4.10. Estimates from 

the CBO indicate that black firms have higher closure rates, have lower 

profits, are less likely to have employees, and have lower sales than 

white firms for both male- and female-owned businesses. These disparities in outcomes are large for both sexes. 

Turning to the explanatory factors, we find that lower levels of education among blacks explain part of the gaps in business outcomes 

for men but not for women. In contrast, estimates from the decompositions indicate roughly similar patterns for the family-businessbackground variables. Racial differences in having a self-employed 

family member explain very little of the gaps in business outcomes, 

whereas having prior work experience in a family member's business 

explains part of the gaps. Racial differences in business inheritances explain virtually none of the gap for either men or women. 

For additional explanatory factors, we find that racial differences in 

management experience continue to have inconsistent explanatory 

power across specifications. Racial differences in prior work experience 

in similar businesses contribute to the black/white gaps in business 

outcomes for men but not to the gaps for women. Racial differences in 

marital status explain a much larger portion of the disparities in business outcomes for women than for men. Black female business owners 

are less likely to be married than are white female business owners, 

and this marital status is associated with better business outcomes. 

The contribution estimates from racial differences in region and urban 

status are similarly inconsistent across specifications. 

Overall, the decompositions indicate some differences in the results 

for men and women, but the main findings for the family-businessbackground variables are similar. Racial differences in prior work 

experience in family businesses explain part of the gaps in business 

outcomes, whereas racial differences in having self-employed family 

members and business inheritances have little explanatory power. We 

continue to group men and women in the remaining analyses. A more 

extensive analysis of these patterns, however, is beyond the scope of 

the current analysis. 
216 

Why Are African American-Owned Businesses Less Successful? 127 

Table 4.8 

Decompositions of black/white gaps in small business outcomes for men, Characteristics 

of Business Owners (1992) 

Specification 

(1) (2) (3) (4) 

Dependent variable Closure Profits Employer Ln Sales 

Black mean 0.2496 0.1902 0.1310 9.6709 

White mean 0.2189 0.3661 0.2311 10.3259 

Black/white gap -0.0306 0.1759 0.1001 0.6550 

Contributions from racial differences in: 

Marital status -0.0005 0.0007 0.0004 -0.0034 

1.7% 0.4% 0.4% -0.5% 

Education -0.0065 0.0086 0.0038 0.0315 

21.1% 4.9% 3.8% 4.8% 

Region -0.0009 0.0020 -0.0024 0.0265 

3.0% 1.1% -2.4% 4.1% 

Urban -0.0032 -0.0067 0.0059 -0.0141 

10.5% -3.8% 5.9% -2.1% 

Prior work experience 0.0000 -0.0034 -0.0005 -0.0023 

0.0% -1.9% -0.5% -0.4% 

Prior work experience in a managerial 0.0094 0.0023 0.0047 0.0206 

capacity -30.7% 1.3% 4.7% 3.2% 

Prior work experience in a similar -0.0040 0.0067 0.0022 0.0355 

business 13.2% 3.8% 2.2% 5.4% 

Have a self-employed family member -0.0002 0.0017 -0.0001 -0.0113 

0.7% 1.0% -0.1% -1.7% 

Prior work experience in a family -0.0057 0.0016 0.0052 0.0416 

member's business 18.5% 0.9% 5.2% 6.4% 

Inherited business -0.0003 0.0006 0.0014 0.0057 

0.8% 0.4% 1.4% 0.9% 

All included variables -0.0119 0.0142 0.0206 0.1304 

38.8% 8.1% 20.5% 19.9% 

Notes: (1) The samples and regression specifications are the same as those used in table 

3.8. (2) Contribution estimates are mean values of the decomposition using 1,000 subsamples of whites. See the text for more details. 
217 

128 Chapter 4 

Table 4.9 

Decompositions of black/white gaps in small business outcomes for women, Characteristics of Business Owners (1992) 

Specification 

(1) (2) (3) (4) 

Dependent variable Closure Profits Employer Ln Sales 

Black mean 0.2968 0.0767 0.0865 9.0901 

White mean 0.2475 0.1693 0.1563 9.5221 

Black/white gap -0.0494 0.0926 0.0697 0.4321 

Contributions from racial differences in: 

Marital status -0.0120 0.0061 0.0091 0.0364 

24.2% 6.6% 13.0% 8.4% 

Education 0.0048 0.0024 -0.0001 0.0183 

-9.8% 2.6% -0.2% 4.2% 

Region -0.0070 0.0038 0.0007 -0.0040 

14.1% 4.1% 1.0% -0.9% 

Urban 0.0001 -0.0054 0.0030 -0.0189 

-0.2% -5.8% 4.3% -4.4% 

Prior work experience 0.0016 -0.0016 -0.0022 -0.0047 

-3.2% -1.7% -3.2% -1.1% 

Prior work experience in a managerial 0.0012 0.0007 0.0046 0.0103 

capacity -2.5% 0.7% 6.6% 2.4% 

Prior work experience in a similar 0.0002 -0.0003 -0.0002 0.0078 

business -0.5% -0.4% -0.2% 1.8% 

Have a self-employed family member -0.0122 0.0025 -0.0010 -0.0005 

24.6% 2.7% -1.4% -0.1% 

Prior work experience in a family 0.0003 0.0045 0.0050 0.0353 

member's business -0.7% 4.8% 7.2% 8.2% 

Inherited business 0.0006 0.0002 -0.0017 -0.0050 

-1.2% 0.2% -2.4% -1.2% 

All included variables -0.0222 0.0128 0.0171 0.0752 

44.9% 13.9% 24.6% 17.4% 

Notes: (1) The samples and regression specifications are the same as those used in table 

3.9. (2) Contribution estimates are mean values of the decomposition using 1,000 subsamples of whites. See the text for more details. 
218 

Why Are African American-Owned Businesses Less Successful? 129 

Table 4.10 

Means of selected variables by gender, Characteristics of Business Owners (1992) 

Male Female 

White- Black- White- BlackOwned Owned Owned Owned 

Firms Firms Firms Firms 

Firm no longer operating in 1996 (closure) 0.2189 0.2496 0.2475 0.2968 

Net profit of at least $10,000 0.3661 0.1902 0.1693 0.0767 

One or more paid employees 0.2311 0.1310 0.1563 0.0865 

Log sales 10.3319 9.6719 9.5245 9.09 

Female-owned business 0.0000 0.0000 1.0000 1.0000 

Married 0.7850 0.7240 0.7540 0.5750 

Never married 0.1014 0.0892 0.1040 0.1293 

High school graduate 0.2678 0.2135 0.2597 0.2357 

Some college 0.3013 0.3384 0.3350 0.3476 

College graduate 0.1864 0.1150 0.2165 0.1484 

Graduate school 0.1450 0.1490 0.1153 0.1366 

Northeast 0.0665 0.0191 0.0597 0.0198 

Midatlantic 0.1493 0.1368 0.1420 0.1244 

East North Central 0.1699 0.1347 0.1598 0.1479 

West North Central 0.0861 0.0353 0.0817 0.0299 

South Atlantic 0.1501 0.3215 0.1794 0.3319 

East South Central 0.0519 0.0892 0.0517 0.0656 

West South Central 0.1031 0.1496 0.0934 0.1371 

Mountain 0.0650 0.0168 0.0713 0.0156 

Urban 0.7251 0.8756 0.7556 0.9040 

Prior work experience: 1 year 0.0673 0.0785 0.0776 0.0539 

Prior work experience: 2 to 5 years 0.1651 0.1536 0.1621 0.1451 

Prior work experience: 6 to 9 years 0.1525 0.1500 0.1471 0.1372 

Prior work experience: 10 to 19 years 0.2936 0.3096 0.3047 0.3206 

Prior work experience: 20 years or more 0.2661 0.2396 0.2407 0.2389 

Prior work experience in a managerial capacity 0.5707 0.4776 0.5231 0.4594 

Prior work experience in a similar business 0.5420 0.4611 0.4226 0.4005 

Have a self-employed family member 0.5289 0.3257 0.5113 0.3249 

Prior work experience in a family member's 0.2514 0.1392 0.2019 0.1092 

business 

Inherited business 0.0157 0.0109 0.0130 0.0162 

Startup capital: $5,000 to $24,999 0.2596 0.2403 0.1919 0.1710 

Startup capital: $25,000 to $99,999 0.1188 0.0780 0.0904 0.0463 

Startup capital: $100,000 and over 0.0520 0.0187 0.0383 0.0143 

Agricultural services 0.0312 0.0250 0.0176 0.0074 

Construction 0.1712 0.1116 0.0351 0.0176 
219 

130 Chapter 4 

Table 4.10 

(continued) 

Male Female 

White- B1ack- White- BlackOwned Owned Owned Owned 

Firms Firms Firms Firms 

Manufacturing 0.0352 0.0189 0.0281 0.0142 

Wholesale 0.0388 0.0132 0.0302 0.0087 

FIRE 0.0949 0.0598 0.1097 0.0616 

Trans., communications, and public utilities 0.0459 0.1229 0.0240 0.0309 

Personal services 0.2367 0.3287 0.3071 0.3280 

Professional services 0.1771 0.1541 0.2269 0.2767 

Uncoded industry 0.0407 0.0575 0.0364 0.0569 

Sample size 7,425 4,588 6,857 2,243 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships, and subchapter S corporations, have 

sales of $500 or more, and have at least one owner who worked at least twelve weeks 

and ten hours per week in the business. (2) All estimates are calculated using sample 

weights provided by the CBO. 

Contributions from Startup Capital and Industry Differences 

Table 4.11 reports the results of decompositions that include startup 

capital and industry. We exclude these variables from the first set of 

decompositions because of concerns over endogeneity as discussed in 

chapter 3. The regression estimates are taken from table 3.14. 

Black-owned firms clearly have less startup capital than whiteowned firms. For example, 8 percent of black-owned businesses had at 

least $25,000 in startup capital compared with nearly 16 percent of 

white-owned businesses. These racial differences in startup capital explain a substantial portion of the black/white gaps in small business 

outcomes. The contribution estimates range from 14.5 to 43.2 percent 

for the different outcomes. Clearly, lower levels of startup capital 

among black-owned firms are associated with less successful businesses. These lower levels of startup capital are likely to be related to 

difficulty in obtaining funding because of low levels of personal wealth 

and possibly lending discrimination. Black levels of wealth are one 

eleventh white levels. The result is that black/white differences in 

startup capital are the single most important factor in explaining racial 

differences in business outcomes. 

Black-owned businesses appear to be overrepresented in less successful industries relative to white-owned businesses. Racial differences 
220 

Why Are Mrican American-Owned Businesses Less Successful? 131 

Table 4.11 

Decompositions of black/white gaps in small business outcomes, Characteristics of Business Owners (1992) 

Specification 

(1) (2) (3) (4) 

Dependent variable Closure Profits Employer Ln Sales 

Black mean 0.2692 0.1414 0.1116 9.4221 

White mean 0.2288 0.3003 0.2065 10.0615 

Black/white gap -0.0404 0.1590 0.0948 0.6394 

Contributions from racial differences in: 

Sex -0.0019 0.0231 0.0060 0.0562 

4.7% 14.6% 6.3% 8.8% 

Marital status -0.0030 0.0055 0.0041 0.0118 

7.5% 3.5% 4.3% 1.8% 

Education -0.0031 0.0045 0.0013 0.0066 

7.8% 2.8% 1.4% 1.0% 

Region -0.0031 0.0035 0.0010 0.0160 

7.6% 2.2% 1.0% 2.5% 

Urban -0.0012 -0.0078 0.0021 -0.0277 

2.9% -4.9% 2.2% -4.3% 

Prior work experience 0.0014 -0.0021 -0.0010 -0.0032 

-3.5% -1.3% -1.1% -0.5% 

Prior work experience in a managerial 0.0065 0.0005 0.0018 0.0035 

capacity -16.1% 0.3% 1.9% 0.5% 

Prior work experience in a similar business -0.0029 0.0042 0.0022 0.0277 

7.1% 2.6% 2.3% 4.3% 

Have a self-employed family member -0.0032 0.0001 0.0009 -0.0128 

7.8% 0.0% 1.0% -2.0% 

Prior work experience in a family member's -0.0032 0.0019 0.0033 0.0246 

business 7.9% 1.2% 3.4% 3.8% 

Inherited business -0.0001 0.0005 0.0000 0.0007 

0.1% 0.3% 0.0% 0.1% 

Startup capital -0.0175 0.0231 0.0350 0.1512 

43.2% 14.5% 36.9% 23.6% 

Industry -0.0083 0.0112 0.0092 0.0633 

20.5''10 7.0% 9.7% 9.9% 

All included variables -0.0395 0.0683 0.0658 0.3179 

97.7% 42.9% 69.4% 49.7% 

Notes: (1) The sample and regression specifications are the same as those used in table 

3.14. (2) Contribution estimates are mean values of the decomposition using 1,000 subsamples of whites. See the text for more details. 
221 

132 Chapter 4 

in industry composition explain from 7.0 to 20.5 percent of the black/ 

white gaps in small business outcomes. In particular, black-owned 

firms are more likely to be located in personal services, which have 

worse outcomes on average than other industries. These findings are 

consistent with Robb (2000). The results are difficult to interpret, however, because of the joint decision between business ownership and 

industry. 

Overall, racial differences in the explanatory variables explain a large 

percentage of the total black/white gaps in small business outcomes. 

They explain nearly 50 percent of the racial gap in profits and employment and nearly 70 percent of the total gap in log sales. Nearly 100 percent of the black/white gap in business closure rates is explained by 

racial differences in the explanatory variables. Although we employed 

relatively parsimonious specifications focusing on well measured and 

less endogenous owner and firm characteristics, our models performed 

quite well in explaining racial disparities in business outcomes. These 

factors are likely to be several of the most important inputs into the 

prod uction process of the firm. 

Although the decompositions explain most of the black/white gaps 

in business outcomes, it is useful to consider the remaining or "unexplained" portion of the gaps. The "unexplained" portion of the racial 

gaps may be due to lending discrimination and consumer discrimination against black-owned firms, the omission of important unmeasurable factors such as risk aversion, or the inability to accurately measure 

racial differences in access to capital. We now briefly discuss some of 

these factors. 

Other Potential Explanations: Consumer Discrimination 

Although the decomposition technique reveals several explanations for 

black/white differences in business outcomes, we discuss a few additional explanations, which are difficult to identify using the technique 

or cannot be measured with the CBO. One potential explanation for 

the remaining racial differences in business outcomes is consumer discrimination against black-owned firms. Black firms may have difficulty 

selling certain products and services to nonblack customers limiting 

the size of their markets and resulting success. Discriminating customers could be individuals, other firms or the government. Using microdata from the 1980 Census, Borjas and Bronars (1989) explore whether 

the large variance in self-employment rates across racial groups are 
222 

Why Are African American-Owned Businesses Less Successful? 133 

partly due to consumer discrimination. They find that blacks negatively select into self-employment, with the most able blacks remaining 

in the wage and salary sector, whereas whites positively select into 

self-employment and negatively select into wage and salary work. 

These findings are consistent with the most-able minorities avoiding 

potential discrimination by white consumers by working in wage and 

salary jobs instead of starting businesses. Kawaguchi (2004) finds that 

among African Americans, low wage and salary earners are the most 

likely to enter into business ownership, whereas both low-and highearning whites are the most likely to enter self-employment. He notes 

that this finding is consistent with the theoretical predictions of consumer and credit-market discrimination against blacks. However, in 

contrast to these results, Meyer (1990) does not find evidence supporting the consumer discrimination hypothesis. Using data from the 1987 

Characteristics of Business Owners (CBO), he finds that black businesses are relatively more common in industries in which white customers more frequently patronize black businesses. 

More generally, black-owned firms may face limited market access 

for the goods and services that they produce (Bates 1997). This may be 

partly due to consumer discrimination by customers, other firms, or 

the government in addition to redlining. But it may also be due to the 

types, scale, and locations of black firms. Published estimates from the 

CBO indicate that black-owned businesses serve smaller geographical 

areas than white-owned businesses on average (table 4.12). Black firms 

are more likely than white firms to report that their neighborhood is 

the geographic area that best describes where the business's goods and 

services are sold. Black owners are less likely to report larger geographical areas as markets for their goods and services. Furthermore, 

they are much more likely to sell to a minority clientele than are white 

businesses (figure 4.5), which may reflect more limited market access. 

As expected, market access or penetration is both a cause and consequence of success in business making it difficult to interpret racial differences in these measures. More successful black firms are likely to 

expand to larger market areas. 

Networks 

Racial differences in networks may also contribute to the lack of success among black businesses. Previous research indicates that the size 

and composition of social networks is associated with self-employment 
223 

134 Chapter 4 

Table 4.12 

Market area of small businesses by race, Characteristics of Business Owners (1992) 

Percentage 

White- BlackAll Owned Owned 

Firms Firms Firms 

Geographic area that best describes marketplace: 

Neighborhood 32.8% 31.6% 45.2% 

City / county 53.8 54.1 51.9 

Regional (adjoining counties or states) 24.5 25.7 14.7 

National 6.8 7.0 4.7 

International 2.0 1.8 1.3 

SOUfce: Characteristics of Business Owners (1992) as reported in U.S. Census Bureau 

(1997). 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships, and subchapter S corporations and 

that have sales of $500 or more. (2) White category is equal to the total minus all minority 

groups. 

80 

70 

60 Ul 

E 

u: 50 .... 

0 

Q) 40 tll 

co 

C 

Q) 30 ~ Q) 

a.. 20 

10 

0 

Figure 4.5 

25% 26-50% 51-75% 

or less 

• White-owned firms 

CJ Black-owned firms 

76-90% More than 

90% 

Minority customers served by the business (percentage), Characteristics of Business 

Owners (1992) 
224 

Why Are African American-Owned Businesses Less Successful? 135 

(Allen 2000) and that having close friends and neighbors in business 

and being a member of a business network are positively associated 

with outcomes among nascent entrepreneurs (Davidsson and Honig 

2002). If minority firms have limited access to business, social, or family networks or have smaller networks then they may be less likely to 

enter business and create successful businesses. These networks may 

be especially important in providing financing, customers, technical assistance, role models, and contracts.s These same networks, however, 

are likely to also be useful for finding employment in the wage and 

salary sector creating a dampening effect on self-employment. 

In an earlier study, Fratoe (1988) finds that black business owners 

are less likely to have business role models, obtain loans from other 

family members, and use family members as unpaid labor. Social networks may be especially important in industries such as construction, 

where deals are often made in informal settings (Feagin and Imani 

1994). If minorities are blocked from these industries perhaps due to 

discrimination, then their business networks may be restricted (Bates 

1993b; Feagin and Imani 1994; Bates and Howell 1997). Examining the 

retail industry in New York, Rauch (2001) finds evidence that African 

American businesses were less able to organize "mutual self-help" 

than immigrant businesses. 

Ethnic and racial groups may differ not only in the size of their networks but also in their ability to transfer information related to running a business among coethnics. There is evidence that experience as 

an employee of a small business and transfers of information are important (Meyer 1990). Strong patterns of industry concentrations for 

businesses owned by many ethnic groups are consistent with this 

explanation (Fairlie and Meyer 1996). The industry concentration of 

black businesses has become more similar to white businesses over 

time, however, while the there has been no convergence in rates of 

business ownership (Fairlie and Meyer 2000). 

A major limitation of these explanations is that they are difficult to 

analyze empirically. The problem is that success in business for some 

groups may simply create larger and more efficient business and social 

networks. Thus, it is difficult to identify the direction of causation between networks and success. Coethnic networks may also create a 

multiplier effect whereby small differences in initial business success 

between groups may lead to large differences in future business success. This point is related to the argument noted above that the lack of 

black traditions in business enterprise is a major cause of current low 
225 

136 Chapter 4 

levels of black business ownership (Du Bois 1899; Myrda11944; Cayton 

and Drake 1946; Frazier 1957). 

Conclusions 

African Americans have levels of wealth that are one eleventh those of 

whites. The median level of net worth, defined as the current value of 

all assets minus all liabilities on those assets, for black households is 

only $6,166. This disparity in personal wealth appears to have two 

major consequences for business success. First, low levels of wealth 

limit business formation among blacks. In fact, roughly 15 percent of 

the black/white gap in business creation rates is due to racial differences in assets (Fairlie 1999, 2006). Second, black entrepreneurs who do 

start businesses invest much less capital at startup on average than 

white entrepreneurs. For example, estimates from the CBO microdata 

indicate that the percentage of black-owned firms starting with at least 

$25,000 in capital is roughly half the percentage of white-owned firms 

starting with at least $25,000 in capital. 

Lower levels of startup capital among black businesses limit their 

ability to grow and succeed. Specifically, we find that racial disparities 

in startup capital contribute to higher failure rates, lower sales and 

profits, and less employment among black-owned businesses. Estimates from nonlinear decompositions indicate that racial differences in 

startup capital explain from 14.5 to 43.2 percent of the gaps in small 

business outcomes. Startup capital disparities are the most important 

explanatory factor in contributing to racial differences in business outcomes. Limited access to financial capital among black entrepreneurs, 

which appears to be caused by wealth inequality and possibly lending 

discrimination, is a major reason for less successful black businesses. 

Racial differences in family-business backgrounds are also an important factor. Previous research indicates that the probability of business ownership is substantially higher among the children of business 

owners than among the children of nonbusiness owners and that 

current racial patterns of self-employment are in part determined by 

racial patterns of self-employment in the previous generation (Lentz 

and Laband 1990; Fairlie 1999; Dunn and Holtz-Eakin 2000; Hout and 

Rosen 2000). The CBO microdata allow us to build on these findings 

by exploring whether the intergenerational transmission of business 

ownership is also important in creating racial disparities in business outcomes conditioning on ownership. 
226 

Why Are African American-Owned Businesses Less Successful? 137 

Estimates from the CBO indicate that black business owners have a 

relatively disadvantaged family-business background compared with 

white business owners. Black business owners are much less likely 

than white business owners to have had a self-employed familymember owner prior to starting their business and are less likely to 

have worked in that family member's business. Only 12.6 percent of 

black business owners had prior work experience in a family member's 

business compared with 23.3 percent of white business owners. Racial 

differences and overall rates of business inheritances are much smaller. 

The percentage of business owners inheriting their firms was 1.4 percent for blacks and 1.7 percent for whites. 

Estimates from linear and nonlinear decompositions indicate that the 

lower likelihood of having a self-employed family member prior to 

business startup among blacks than among whites does not generally 

contribute to racial differences in small business outcomes. Instead, the 

lack of prior work experience in family businesses among future black 

business owners, perhaps by restricting their acquisition of general and 

specific business human capital, limits the successfulness of their businesses relative to whites. With the exception of the profits specification, 

racial differences in this variable explain 5.6 to 11.6 percent of the gaps 

in small business outcomes. Providing some additional evidence on the 

importance of limited opportunities for acquiring business human capital, racial differences in prior work experience in similar businesses 

also consistently explain part of the gaps in small business outcomes. 

Furthermore, the combination of these two factors suggests that racial 

differences in opportunities to acquire business human capital in general contribute substantially to the differential success of black- and 

white-owned businesses. 

Inherited businesses are generally more successful than noninherited 

businesses, but racial differences in business inheritances explain virtually none of the gaps in small business outcomes. The likelihood of 

business inheritances among black and white owners (under 2 percent) 

is just too small to playa major role in explaining racial differences in 

business outcomes. 

We also examine the contributions of other factors to racial differences in small business outcomes. Lower levels of education among 

black business owners relative to white business owners explain a 

modest but nontrivial portion (2.4 to 6.5 percent) of the black/white 

gaps in business outcomes. Although black-owned businesses have a 

different regional distribution and are more likely to be located in 
227 

138 Chapter 4 

urban areas than are white-owned businesses, racial differences in geographical locations do not appear to contribute substantially to the 

gaps in small business outcomes. Racial differences in the amount of 

prior work experience and management experience have either small 

effects or mixed effects across specifications. Finally, racial differences 

in industry composition explain part of the gaps in business outcomes, 

but these results are difficult to interpret because industry differences 

may reflect different preferences or constraints on entry into more profitable industries. 

Overall, the relatively simple empirical models of business outcomes 

do quite well in explaining the black/white gaps in business outcomes. 

Although there are many unmeasurable factors that may explain outcome disparities as discussed above, we explain 50 to 100 percent of 

the differences in business outcomes using the human capital, financial 

capital, family business background, and other owner and firm characteristics available in the CBO. In comparison, decompositions of earnings differences between blacks and whites typically explain no more 

than half of the gap unless a measure of ability is included (Altonji 

and Blank 1999). 

Our estimates indicate that blacks are less likely than whites to have 

previous work experience in a family member's business and are less 

likely to have previous work experience in a similar business. The relative lack of opportunities for acquiring general and specific business 

human capital apparently has a negative effect on the outcomes of 

black-owned firms. This finding has important policy implications. 

Most minority-business-development policies currently in place, such 

as set-asides and loan-assistance programs, are targeted toward alleviating financial constraints not toward providing opportunities for 

work experience in small businesses. To break the cycle of low rates 

of business ownership and relatively worse business outcomes being 

passed from one generation of blacks to the next, programs that directly address deficiencies in family-business experience, possibly 

through an expansion of apprenticeship-type entrepreneurial training 

programs, may be needed in addition to programs focused on improving access to financial capital. 

Appendixes 

Nonlinear Decomposition Method 

In this appendix, we describe the decomposition techniques used in 

this chapter to identify the causes of black/white differences in busi-
228 

Why Are African American-Owned Businesses Less Successful? 139 

ness outcomes. These techniques decompose intergroup differences in 

mean levels of an outcome into those due to different observable characteristics or "endowments" across groups and those due to different 

effects of characteristics or "coefficients" of groups. We describe the 

standard Blinder-Oaxaca technique, which is used for dependent variables that are estimated with linear regressions, such as log sales. An 

alteTIlative nonlinear decomposition technique due to Fairlie (1999, 

2005a) is also described. The technique is useful for decomposing racial 

differences in binary outcomes, such as closure, having profits of 

$10,000 or more, and having employees. Logit regressions are estimated to identify the determinants of these business outcomes. This 

nonlinear technique has broader applications for identifying the causes 

of racial, gender, geographical, or other categorical differences in 

any binary dependent variable in which a logit or probit model is 

used. SAS programs are available at (people.ucsc.edu/-rfairlie/ 

decomposition), and Stata programs are available by entering "ssc install fairlie" in Stata. 

For a linear regression, the standard Blinder-Oaxaca decomposition 

of the white/black gap in the average value of the dependent variable, 

Y, can be expressed as 

(4.1) 

where Xj is a row vector of average values of the independent variables and pj is a vector of coefficient estimates for race j. Following 

Fairlie (1999), the decomposition for a nonlinear equation, such as 

Y = F(XP), can be written as 

(4.2) 

where N j is the sample size for race j. This alteTIlative expression for 

the decomposition is used because Y does not necessarily equal 

F(XP).9 In both (4.1) and (4.2), the first term in brackets represents the 

part of the racial gap that is due to group differences in distributions 

of X, and the second term represents the part due to differences in 

the group processes determining levels of Y. The second term also 

captures the portion of the racial gap due to group differences in 
229 

140 Chapter 4 

unmeasurable or unobserved endowments. Similar to most previous 

studies applying the decomposition technique, we do not focus on this 

"unexplained" portion of the gap because of the difficulty in interpreting results (for more discussion, see Jones 1983 and Cain 1986). 

To calculate the decomposition, define yj as the average probability 

of the binary outcome of interest for race j and F as the cumulative distribution function from the logistic distribution.lO Alternatively, for a 

probit model F would be defined as the cumulative distribution function from the standard normal distribution. 

An equally valid method of calculating the decomposition is to use 

the minority coefficient estimates, pM, as weights for the first term and 

the white distributions of the independent variables, X W, as weights 

for the second term. This alternative method of calculating the decomposition often provides different estimates, which is the familiar index 

problem with the Blinder-Oaxaca decomposition technique. A third alternative is to weight the first term of the decomposition expression using coefficient estimates from a pooled sample of the two groups (see 

Oaxaca and Ransom 1994, for example). We follow this approach to 

calculate the decompositions. In particular, we use coefficient estimates 

from a logit regression that includes a sample of all racial groups. 

Using the pooled coefficients from a sample of all racial groups has 

the advantage over using the white coefficients because it captures the 

determinants for all groups and are more precisely estimated (because 

of the larger sample and more heterogeneity of firms). They are also 

preferred over the minority coefficients because they are less likely to 

be influenced by discrimination. The goal of the decomposition is to 

estimate how much differences in owner or firm characteristics explain of the racial gap in business outcomes given a nondiscriminatory 

environment. 

The first term in (4.2) provides an estimate of the contribution of racial differences in the entire set of independent variables to the racial 

gap in the dependent variable. Estimation of the total contribution is 

relatively simple as one needs only to calculate two sets of predicted 

probabilities and take the difference between the average values of the 

two. Identifying the contribution of group differences in specific variables to the racial gap, however, is not as straightforward. To simplify, 

first assume that NB = Nw and that there exists a natural one-to-one 

matching of black and white observations. Using coefficient estimates 

from a logit regression for a pooled sample, p', the independent contribution of Xl to the racial gap can then be expressed as 
230 

Why Are African American-Owned Businesses Less Successful? 

NB 

1 "'F(A' XWpA. XWpA*) F(A* XBpA* XWpA.) 11 B ~ IY. + 1i 1 + 2i 2 - IY. + Ii 1 + 2i 2 . 

N i=1 

Similarly, the contribution of X2 can be expressed as 

NB 

1 "'F(A* XBpA. XWpA.) F(A* XBpA* XBpA*) B ~ IY. + Ii 1 + 2i 2 - IY. + Ii 1 + 2i 2 . 

N i=1 

141 

(4.3) 

(4.4) 

The contribution of each variable to the gap is thus equal to the change 

in the average predicted probability resulting from sequentially 

switching the white characteristics to black characteristics one variable 

or set of variables at a time.12 A useful property of this technique is 

that the sum of the contributions from individual variables will be 

equal to the total contribution from all of the variables evaluated with 

the full sample. 

In practice, the sample sizes of the two groups are rarely the same 

and a one-to-one matching of observations from the two samples is 

needed to calculate (4.3) and (4.4). In this example, it is likely that the 

black sample size is substantially smaller than the white sample size. 

To address this problem, first use the pooled coefficient estimates to 

calculate predicted probabilities, "Yi, for each black and white observation in the sample. Next, draw a random subsample of whites with a 

sample size equal to NB and randomly match it to the full black sample. The decomposition estimates obtained from this procedure depend on the randomly chosen subsample of whites. Ideally, the results 

from the decomposition should approximate those from matching the 

entire white sample to the black sample. A simple method of approximating this hypothetical decomposition is to draw a large number of 

random subsamples of whites, match each of these random subsamples of whites to the black sample, and calculate separate decomposition estimates. The mean value of estimates from the separate 

decompositions is calculated and used to approximate the results for 

the entire white sample. All of the decompositions reported in this 

chapter use 1,000 random subsamples of whites to calculate these 

means. 
231 

142 

Table 4.A 

Means of selected variables, Characteristics of Business Owners (1992) 

Firm no longer operating in 1996 (closure) 

Net profit of at least $10,000 

One or more paid employees 

Log sales 

Female-owned business 

Married 

Never married 

High school graduate 

Some college 

College graduate 

Graduate school 

Northeast 

Midatlantic 

East North Central 

West North Central 

South Atlantic 

East South Central 

West South Central 

Mountain 

Urban 

Prior work experience: 1 year 

Prior work experience: 2 to 5 years 

Prior work experience: 6 to 9 years 

Prior work experience: 10 to 19 years 

Prior work experience: 20 years or more 

Prior work experience in a managerial capacity 

Prior work experience in a similar business 

Have a self-employed family member 

Prior work experience in a family member's business 

Inherited business 

Startup capital: $5,000 to $24,999 

Startup capital: $25,000 to $99,999 

Startup capital: $100,000 and over 

Agricultural services 

Construction 

Manufacturing 

Wholesale 

WhiteOwned 

Firms 

0.2282 

0.3004 

0.2067 

10.07 

0.3268 

0.7650 

0.1020 

0.2651 

0.3123 

0.1962 

0.1353 

0.0643 

0.1469 

0.1666 

0.0847 

0.1597 

0.0518 

0.0999 

0.0670 

0.7351 

0.0707 

0.1641 

0.1507 

0.2973 

0.2578 

0.5552 

0.5030 

0.5231 

0.2352 

0.0148 

0.2374 

0.1095 

0.0475 

0.0269 

0.1261 

0.0330 

0.0360 

Chapter 4 

BlackOwned 

Firms 

0.2696 

0.1410 

0.1121 

9.42 

0.4261 

0.6780 

0.1200 

0.2230 

0.3423 

0.1292 

0.1437 

0.0194 

0.1315 

0.1403 

0.0330 

0.3259 

0.0792 

0.1443 

0.0163 

0.8877 

0.0680 

0.1500 

0.1445 

0.3143 

0.2393 

0.4699 

0.4353 

0.3254 

0.1264 

0.0132 

0.2107 

0.0645 

0.0168 

0.0175 

0.0718 

0.0168 

0.0112 
232 

Why Are African American-Owned Businesses Less Successful? 

Table 4.A 

(continued) 

Finance, insurance, and real estate 

Transportation, communications, and public utilities 

Personal services 

Professional services 

Uncoded industry 

Sample size 

WhiteOwned 

Firms 

0.0987 

0.0389 

0.2616 

0.1937 

0.0391 

14,282 

143 

BlackOwned 

Firms 

0.0609 

0.0834 

0.3287 

0.2060 

0.0572 

6,831 

Notes: (1) The sample includes businesses that are classified by the IRS as individual proprietorships or self-employed persons, partnerships and subchapter 5 corporations, have 

sales of $500 or more, and have at least one owner who worked at least twelve weeks 

and ten hours per week in the business. (2) All estimates are calculated using sample 

weights provided by the CBO. 
233 

Chair LANDRIEU. Thank you, Dr. Fairlie. 

Let me just say I think this has been one of the most interesting, 

thought provoking panels and most professionally executed panels 

that I have ever heard in my time in the Senate. I have been here 

almost 14 years. I really appreciate the work that went into your 

presentations, to try to elicit the appropriate response from not 

only this Committee but the members of Congress. 

I am going to start, Mr. Fairlie, with you because I was just 

sharing with Senator Cardin that I think Americans would be absolutely shocked to hear the statistic here, that average African 

American families have less than $5,500 in wealth compared to average white families, that have an average of $87,058. That is what 

you have testified. 

Could you explain a little bit in more detail for people who, after 

hearing that, are still not going to want to accept that, a little bit 

more detail about it? 

Are you talking about home equity and home ownership, or are 

you just talking about wealth in either the stock market or bank 

accounts, all of the above? Could you just give a little bit more clarification to that? 

Dr. FAIRLIE. Yes, I would be happy to. I have studied this issue 

for numerous years. I actually found it one of the most depressing 

statistics, just kind of frankly, when I was doing research for a 

book of mine. 

What I am referring to is total wealth as measured by the Census Bureau. It includes all of an individual’s assets, subtracting off 

the debt that they own on it. So it would include their home, subtracting off the mortgage that is still owned on that home. It would 

include savings accounts, stock market accounts, things like that, 

minus any debt that you have on a credit card or anything else. 

So it basically includes the total wealth that is added up. 

Now certainly there are a lot of very wealthy families that are 

minorities, but the median level I think is a very good statistic because it tells you the 50th ranked family for each group. So the 

50th ranked family, if you kind of ranked all African Americans by 

wealth, comes out at $5,500. The average Latino family comes out 

at $8,000. So there are much, much lower levels, one-eleventh to 

one-sixteenth what you find for non-minority families. 

I have also looked at kind of the historical patterns in this data. 

There are not clear trends showing gains in wealth accumulation 

among minorities relative to whites, and I found that is also a very 

sort of depressing and kind of surprising statistic. 

Now the statistics only go back to 1984. That is when the Federal Government started collecting these data on wealth. So it is 

not that we have a long history of data in this area, but it just 

shows you we have not made a lot of improvement, at least over 

the kind of recent history, in terms of wealth. 

Chair LANDRIEU. You also had some interesting statistics, I think 

in your research, about the level of education. It is in your book, 

‘‘Race and Entrepreneurial Success.’’ You mentioned you found evidence that a business owner’s education level is an important determinant in business outcomes. Do you mind just elaborating on 

that? 
234 

Dr. FAIRLIE. Yes. So, in that research, what I found is when I 

focused specifically on African American business owners I found 

that about 20 percent of African American business owners had a 

college degree or higher education level, and among whites it was 

28 percent that had a college degree or higher. So I thought, well, 

there are these big differences in education levels among the owners. Can they have an impact on the success of the business? 

What I found is that education was one of the most important 

determinants of a firm in terms of the level of sales the firm has, 

the profit levels of the firm, whether or not the firm closes, and 

also whether or not the firm hires employees. So what I found, sort 

of putting all of that together, is that it was hindering African 

American growth in terms of the firms and their success. 

Chair LANDRIEU. Ms. Cofield, your testimony was very compelling. Could you please describe a little bit in more detail your business and how many clients that you have? 

You gave a very detailed description of one of your clients. Is 

that the nature of your business, to advise individual potential 

business owners and entrepreneurs? 

Ms. COFIELD. Sure. Yes. My company is a boutique company here 

in Washington, D.C., and I actually have a program called PROSPECTUS which is a nine-week entrepreneurship training program for aspiring and existing entrepreneurs. In our cohort now we 

have a small cohort of 11 entrepreneurs, and they are at every 

stage from feasibility to actually looking for capital. And her case 

study is just one of the many that I have come across during my 

years as an entrepreneur, but also working in business development here in Washington, D.C. and in Los Angeles, as well as New 

York. 

Chair LANDRIEU. Thank you. 

Finally, to Mr. Johnson, you probably laid out one of the more 

compelling thoughts. Senator Cardin was not here when you did, 

but I know he is familiar with your testimony. You said that you 

really think the 51 percent requirement for equity, to determine 

whether the firm is truly a minority firm, actually is a great hindrance. Do you want to just elaborate on that? I know you did not 

have that much time in your testimony—because I am very interested and had not actually thought about that before, I have to say, 

and I think you have made an excellent point. 

Mr. JOHNSON. Thank you, Senator. The 51 percent requirement 

is a political decision. It has nothing to do with the marketplace. 

If someone has a good business idea and they can attract capital, 

capital will flow to that idea and that opportunity. That is the way 

capital works. 

But what happened when there was a move to create so-called 

black capitalism or the opportunities for minorities, the feeling 

came in some political quarters, we have to prevent so-called 

shams or fronts. So the idea was to put a threshold requirement 

of 51 percent on the assumption that no one would put money into 

a minority company if the minority controlled it because obviously 

you are not going to put money in a company you do not have any 

influence over. 

So that level of threshold became the norm. It started with the 

government and then moved to corporations. 
235 

What that does, though, is it limits a minority’s ability to attract 

investment capital because most investors, when they invest in a 

company have two things in mind. One, to grow the investment as 

large as they can, and obviously if they can acquire more equity in 

the company they would like to do so, particularly if the company 

is growing and if they bring some assets that help the company 

grow. At the same time, they also want to have an exit strategy 

in case they want to leave the company. 

But if the company has this 51 percent minority requirement, it 

is going to always depress both the opportunity to attract outside 

equity and the ability to get an exit because who is going to buy 

into a company where they can never get a so-called path to control. 

And my argument is go to the real marketplace. You take a person like Jamie Dimon at JPMorgan Chase, probably owns less than 

1 or 2 percent of the stock, but you know he controls that company. 

You take a person like Oprah Winfrey. She is the rainmaker for 

that company. Oprah could go public and sell 90 percent of her 

ownership of that company, and only with 10 you would know she 

would still be the controlling revenue force and leader of that particular enterprise. 

So my argument is if we could eliminate as a controlling factor 

that 51 percent. Look to other factors. Two sources of voting control: Stock A and B, A votes 10, B votes 1. Board control where the 

minority can say I have gained board control from the investor, so 

I do have a significant control. Put these factors in or just simply 

go to 10 percent to reflect the economic reality where white Americans have about 90 percent more capital than African Americans. 

But to continue that, in my opinion, will always limit minority 

companies to being small, and it would limit outside investors 

wanting to acquire a stake in a company they never control. 

Chair LANDRIEU. It serves as a ceiling as opposed to a launching 

pad. 

Mr. JOHNSON. Absolutely. I mean that is a problem. 

Chair LANDRIEU. Senator Snowe. 

Senator SNOWE. Thank you. 

And I thank all of you. You are trailblazers in your respective 

spheres, and I appreciate your testimony very much. It is very 

helpful and illuminating and, as the Chair indicated, startling. It 

does provide, I think, a reinforcement of how we ought to do things 

better with respect to the resources that we have at the Federal 

level, and certainly through the SBA and the Commerce Department. 

Mr. Johnson, to your point, because you made some interesting 

arguments about some of the criteria that are utilized in SBA programs—the SBA should respond to the questions you raised in 

your testimony. 

Madam Chair, we ought to get a response from the SBA because 

these are issues that could be hindrances and barriers to opening 

the doors for entrepreneurship. 

You have made a very compelling case in that regard. 

Mr. JOHNSON. Yes, Senator, I think the issues I see are we have 

talked about raising the amount of lending that could go into a mi-
236 

nority business. Have we always thought about raising the level at 

which you could qualify for an SBA loan? 

I mean part of the problem is there is a cap on net worth. That 

may take out a lot of very competent minority business men and 

women who have succeeded despite the odds, but they are not eligible for any kind of Federal assistance because we have politically 

said, again, that: If you happen to be a $500,000 minority guy or 

woman, you have great business experience. You have succeeded 

against the odds. You are not eligible for any government assistance. But you are still a minority, and you still face many of the 

same things that the professor talked about—higher interest rates 

on whatever borrowing you might get, a limit on the amount you 

can borrow. 

In some cases, because of net worth levels, like the 51 percent 

concept, we have taken some of the best players off the field. 

And I think you could get a better result, and my feeling is that 

in terms of the SBA or the approach I would take if I were doing 

this I would simply take the level of money and create a private 

investment fund that would be charged, and they would get a fee 

for this, but they would be charged with making loans to minority 

business. 

So you get really good people who know how—Natalie—to say, 

okay, I have got $2 million, or I have got $10 million or $100 million from the government. My job is to go to out a lot of micro businesses by investing in those companies. 

That is the way I would approach it, rather than having in some 

cases the government do it. I am not a big fan of the government 

doing everything. So these are things that I think. 

And then that goes to this other issue of this compelling national 

interest test on the court ruling. You cannot reverse discriminate. 

Well, if you do not reverse or at least preferences or advantages, 

you will forever limit the growth of minority business in terms of 

scale and size. They just will not get there. 

Senator SNOWE. Well, that is very helpful in that regard. We will 

explore that. I think it is very useful. 

You yourself started out in 1979, and that was just at the onset 

of another recession. What recommendations or what strategies did 

you use, and what would you recommend to entrepreneurs today, 

and small businesses, to survive, if not thrive? 

Mr. JOHNSON. Senator, when I started, believe it or not, interest 

rates were around 18 percent. 

Senator SNOWE. I know it well. It was my first time in the 

House, so it is etched in my memory. 

Mr. JOHNSON. My story sort of comes under the exception to the 

rule. I mean I had a chance to be in an industry, the cable industry, at a time when it was coming out of the foothills and going into 

the urban markets and happened to meet a unique entrepreneur 

in the name of John Malone of Liberty Media, a cable company 

that really believed in backing entrepreneurs, and he backed myself, John Hendricks over at Discovery, even Ted Turner. But that 

was a unique opportunity and a unique relationship. 

The problem is, and the tragedy of it is, it is almost impossible 

to duplicate and put into a sort of institutionalized process. 
237 

So what happened is I was able to get the social contact by working as a lobbyist at the National Cable Television Association. The 

industry was expanding into urban markets. I came up with the 

idea of Black Entertainment Television. The industry needed minority programming in urban markets. Malone was an entrepreneur who supported me, and I was able to grow with an industry from the bottom up and grow my company. So when I started 

BET on a half a million dollar loan from John Malone, I sold it in 

2001 for $3 billion to Viacom because I grew with the industry. 

At that particular point in time, that was the strategy of what 

I implemented—finding strategic partners. Every business I have 

now I have always taken this model. If most African Americans 

could find a strategic partner like a Malone, if we could go out and 

match up minority entrepreneurs with majority strategic partners 

and supporters, you could change dramatically the number of 

large-scale minority businesses. 

Senator SNOWE. That is interesting, yes. And developing a network too, absolutely. 

Mr. JOHNSON. That is exactly it. 

Senator SNOWE. Well, Ms. Henningsen and Mr. Hudson, from 

your perspectives, listening to what Mr. Johnson has had to say, 

and from your experiences, what can we do through SBA to help 

target these resources more effectively for minority-owned businesses? 

You have set a model, both in terms of the profitability and also 

the social responsibility. So what does that say to other lenders? 

What could we do to encourage other lenders to create similar systems? 

Ms. HENNINGSEN. Well, the model is a simple one. First of all, 

we took the position that we wanted our businesses to survive. So 

we were a little bit rough and tough with them when they came 

in to get the financing, but I frankly believe that is the only reason 

some of our businesses are where they are now and are sort of surviving. But even our strongest businesses, we find are in trouble 

and need that extra boost. But the educational piece was extremely 

important in making sure that the small business owners knew 

what they were doing. 

The partnering concept Mr. Johnson talked about, we are big 

with that. As a matter of fact, we have taken some of our most successful businesses, and when new entrepreneurs have come to us 

we have said we want you to sit down and talk to this business 

owner and get a feel for what you are facing. And as entrepreneurs 

ourselves, we have been able to say to them, these are the issues. 

But at the end of the day, right now what our small businesses 

need is money to keep them going. We have a lot of businesses that 

had Plan B, but we are down to Plan Z now. I am not kidding. 

With the way these businesses are struggling, people’s homes, their 

family’s homes are tied up in some of these businesses. 

As the founder of the bank, this has been the worst 15 months 

of my life because even though we have what I would describe as 

a good replicable model, I do not believe anyone was prepared for 

what we are going through right now, but the model does work. 

Senator SNOWE. It does work. These are unusual times. 
238 

Mr. HUDSON. Just quickly, I would agree with I do not support 

a 51 percent requirement. I agree with joint ventures and partnerships. I even probably agree with the fact that asset limits, minimal asset limits or maximum asset limits, prohibit attraction of 

successful, potential successful businesses. 

I think where you have to be concerned is that there is a nexus 

to low income communities, minority communities. There is some 

way you have to have a nexus to those investments and jobs and 

economic development in low income communities. So that is where 

you have to think through how do you ensure that your dollars are 

being reinvested and that the benefits are going back into low income communities. 

Senator SNOWE. Thank you. 

Chair LANDRIEU. Let me just say in conclusion that Ranking 

Member Snowe and I are going to be very influential in the building of this next Jobs 3 Bill. We had Jobs 1 and Jobs 2, and we will 

build a Jobs 3 bill. 

Much of the testimony that you all have put on the table today, 

I will do my very best to have as a core and part of this Job 3 Bill 

as we focus on getting our eyes and our hearts on Main Street, 

from Wall Street, and get our hearts and minds on these neighborhoods that are chronically underserved, a community that still 

faces extraordinary discrimination. Even though it is a lot more 

subtle, it still exists, and it has to be corrected. 

These capital markets must work for all Americans. They just 

have to. 

While government does, Mr. Johnson, have a limited role, it 

could have a very muscular and important role to play in righting 

injustices. 

So it has been very illuminating and instructive. I thank you 

very much, and the meeting has come to a close. 

[Whereupon, at 11:45 a.m., the Committee was adjourned.] 
(239) 

APPENDIX MATERIAL SUBMITTED 
240 

Small Business Committee testimony for Warren Brown 

04.15.10 

warren@cakelove.com 

Thank you for the invitation to address this committee. My name is 

Warren Brown, I am the founder and owner of CakeLove, a local 

chain of retail bakeries that specializes in cakes and cupcakes 

baked from scratch. Starting my business wouldn't have been 

possible without SBA loan guarantees for the financing I secured 

through a local community bank. CakeLove has grown from one to 

seven (7) retail bakeries over the past eight (8) years and I am 

thankful to the SBA for continuing to support my business's growth. 

The background to my start-up includes an unusual career change 

that captured the attention of a lot of Washingtonians. Prior to 

opening my bakery, I was a litigator for the Office of Inspector 

General of the Department of Health and Human Services from 1998 

to 2000. I left the practice of law to pursue my passion for baking 

and a dream of starting my own business. 

I prepared myself for the difficult work of starting-up a business by 

covering all of the basics: I developed and wrote a business plan; I 

reached out to community resources like the SCORE program at the 

SBA for advice and critiques; I attended lectures on business and 

spoke with other entrepreneurs about the challenges common to 

any new business; and, I tested a lot of recipes. 

Nothing is easy about starting a business, but if there is one area 

that's the biggest hurdle it's the financing. I spoke directly with 

lending officers at community banks to get an understanding of 

exactly what they required in order to evaluate my loan 

application. Having a law degree helped me navigate the somewhat 

complex network of people and institutions that exist to facilitate 

business growth and development. I hope that future generations of 

aspiring entrepreneurs learn the dynamics of business development 

and continue to have access to financing in order to pursue their 

dreams. 
241 

I am thankful that the SBA supported my business's growth over the 

past eight years-and I look forward to growing more with their 

support in the future. Without the SBA my business would not be 

where it is today. When I began my business, I didn't have collateral 

to back-up the loans that got my business off the ground. The SBA's 

guarantee offered the protection my bank needed to close the loan 

which launched my business. 

Today CakeLove employees over seventy (70) people and operates 

seven (7) store front locations. Now we bake more cakes and 

cupcakes than ever before which has allowed me to grow beyond 

baking: I hosted a television show about desserts, I speak at 

colleges, high schools and conferences around the country about my 

entrepreneurial experience, CakeLove partnered with small IT 

companies to develop an online store and a Mobile App, and I've 

written two cookbooks-the latest celebrates regional baking around 

America. 

CakeLove also enjoys being a supportive corporate citizen and 

proudly partners with charitable organizations to raise awareness 

and reach their fund raising goals. We support our local community 

with in-kind charitable contributions of baked goods, baking 

lessons, cash donations, and volunteer efforts. 

I am thankful to the SBA for their assistance in helping me start 

CakeLove bakery. Their loan guarantees have helped me not just 

pursue my dream and passion, they helped launch a retail bakery 

that continues to grow and provide jobs and opportunity and inspire 

people to learn more about baking and following their own dream. 

2 
242 

Testimonial of: 

Mr. Nyein Min 

President 

Wunna Contracting Corporation 

14811 Palmerston Sq 

Centreville, VA 20120-1807 

Tel: 703-996-8881 

Email: nmin@wunnacontracting.com 

For the hearing entitled 

"Assessing Access: Obstacles and Opportunities for Minority Small Business Owners in 

Today's Capital Markets" on April 15, 2010 before the 

United States Senate Committee on Small Business & Entrepreneurship 

Submitted electronically to monisha.smith@sbc.sentate.gov on April 29, 2010 

My name is Nyein Min and I am the President of Wunna Contracting Corporation 

(Wunna). I wish to share the following experiences with the United States Senate 

Committee on Small Business and Entrepreneurship to help draw attention to the 

discrimination that Asian American business owners, such as myself, continue to face. 

I am a civil engineer. Wunna is a contracting company that I started in 2007. I came to 

the United States in 1986 from my native country of Burma, also known as Mynmar. I 

came to the United States for economic opportunity. I moved to northern Virginia in 

1989. 

I am a certified Disadvantaged Business Enterprise (DBE) through the Commonwealth of 

Virginia's Department of Transportation (VDOT). I worked for VDOT for 18 years. I 

decided to start my own company in 2007 because I saw how many contracting 

opportunities there are through VDOT. I formalized a group of Burmese engineers to do 

research work together and then ask for government grants. I have done some projects 

for the airport and also some highway projects. 

As a business owner, I have faced discrimination in trying to get bank loans. I feel that I 

am not getting the loans because I am Asian American. I show the loan officers my 

balance sheets and accounting statements. They told me they don't understand me when I 

speak. When they tell me that, I don't know what else to say to them. Everything they 

need to know is in my accounting statements and balance sheets but they still won't give 

me a loan. I know my balance sheets and accounting statements are all accurate because I 

have multiple accountants examine them for me. I know White business owners who 

have the same qualifications as I do but they still manage to get the loans. Without a 

bank loan I cannot perform more contracts I have received through VDOT. To obtain 
243 

and perform contracts there are man power, equipment, bonding and management 

requirements. These requirements can be very costly and will require financing. Right 

now I am able to get some loans from the Small Business Administration (SBA). 

Without the SBA loan I wouldn't have any financing at all. The Department of 

Transportation also has a short term loan assistance program that helped me start my 

business. I do not have any other connections for accessing working capital. 

One difficulty that minority contractors face is that large federal highway contracts are 

often given to large unqualified corporations, such as Lockheed Martin and other 

engineering firms. Lockheed then gives lots of subcontracts to small minority firms, but 

these contracts are for very small amounts of money. Even minority firms that have the 

capability to perform these contracts don't get prime contracts. 

Delta Railroad, due to a 30% DBE requirement, gave me a subcontract for VDOT Metro 

Tysons Project. From the contract, I received $6 million for concrete pouring and Delta 

received $75 million. 

I had to apply for financing through the SBA because I was unable to get loans from 

banks. My white friends looked at the value of my contracts and advised me that I 

shouldn't have any problems getting the necessary loans. 

When I went to the bank, I provided all of the required paperwork but was still denied the 

loan. I was told because I did not have enough years in the business, I did not have 

enough equity in my business, and I did not have enough cash in my balance sheet. The 

bank told me that they thought I was trying to expand my business too quickly and I 

responded that I see a lot of business opportunities and thought it was a realistic time to 

expand my business. 

The bank also told me that I don't have enough cash flow in my business, but I do not 

think white businesses would have the same problem with the same cash flow as mine. 

Because I am Asian American, I feel that the white companies don't want me in their 

territory. They often ask why I am bidding on these contracts and I answer, "Because I 

am qualified." White firms with more contacts, more resources, and more family 

businesses who have the same qualifications as me get a lot more contracts than I do. 

The only time I am approached by white companies is if the project has a DBE 

requirement. 

I also feel discrimination on the Smithsonian Zoo project. I bid $620k, but Fort Myer, a 

white-owned firm, won the project with a bid of $820k. A bid depends on the technical 

proposal and the price proposal. The Smithsonian told me that Fort Meyer's technical 

proposal was better. I rebid with a revised technical proposal, but was told the same 

reason. Fort Myer got a contract more than $1 million. 

I believe my technical proposal was good enough. The person who created my technical 

proposal has a PhD and Fort Meyer doesn't have anyone like that. I was very surprised 
244 

by the rejection and so was my lawyer. It is very expensive for me to fighting, especially 

because I will probably lose anyways. 

Sometimes I am told that I should change the name of my company. People have told me 

that "Wunna" is a funny name and I should pick a name that is more American. But I tell 

those people that Wunna is a Burmese name, and most importantly it is my son's name. 

Even if people don't know what Wunna means, they can look and see that I have a good 

business and that I am very qualified. 
245 

Senator Mary Landrieu 

Chairperson 

Senate Small Business Committee 

Washington, DC 20500 

April 18, 2010 

RE: Submission to Record-April 15, 2010 Hearing 

Senator Landrieu: 

We applaud you and Ranking Member Senator Snowe on holding the hearing, "Assessing 

Access: Obstacles and Opportunities for Minority Small Business Owners in Today's Capital 

Markets." 

Our firm has been embroiled in litigation with SBA and the SBIC program for seven years. The 

District Court ruled on March 29, 2010, that SBA could stand trial for discrimination in the SBIC 

program. The statistics you and Senator Snowe cited in your remarks and the lack of access to 

capital outlined in the hearing is one of high desperation in minority and underserved 

communities. 

I thank God that at the same time you were holding hearings, District Judge Gladys Kessler was 

ordering SBA to mediate a settlement in this matter admonishing them to "get serious". The 

statistics should alarm and cause outrage to you and your colleagues on both sides ofthe aisle. 

It is our hope that the mediation will permit our case to be a guide to you and the Committee and 

your colleagues to correct disparities that we have suffered seeking to be an SBIC and also 

correct the program with legislation that offers guidance to SBA arising for Judge Kessler's 

Order. 

The Court has spoken and tremendous direct, indirect, and anecdotal evidence has been gathered. 

We respectfully enter the attached ruling and Order for the record and ask that it be considered in 

your legislative deliberations. Also, we attach an article, for the record, that came out in the New 

York Times an the same day as the hearing. 

Sincerely, 

C. Earl Peek 

Managing Partner 

170l Pennsylvania Avenue, Suite 300 Washington, DC 20006 

Phone (877) 342-8227 Fax (202) 580-6559 www.DiamondVenturesLLC.com 
246 

~~ .... 

You_ the Boss 

Art 

APRIL 15, 2010, 5:45 PM 

S.B.A. Faces Potential Discrimination Trial 

By ROBB MANDELBAUM 

The Small Business Administration could be headed to court to defend itself 

against accusations of discrimination in its investment financing programs. 

On March 29, a federal judge in Washington ruled against the S.B.A's motion 

for summary judgment in a lawsuit filed by a would-be venture capital fund. 

The fund, Diamond Ventures, which is based in Atlanta and run by two 

African-American men, planned to invest in poor, largely black communities 

in the Southeast. 

Diamond brought the lawsuit in 2003, after trying, unsuccessfully, for two 

years to win licenses to participate in the S.B.A.'s New Markets Venture 

Capital program, as well as to be a traditional small-business investment 

company. Both programs allow venture capitalists to leverage money 

borrowed at low rates from the federal government to make long-term 

investments in start-up companies. The New Markets initiative was created in 

2000 to reach to low-income neighborhoods, but the Bush administration 

opposed it as redundant and it was defunded within a few years. 

The S.B.A.'s mission, of course, is partly to extend opportunities for financing 

to companies that cannot otherwise get it, particularly in disadvantaged 

communities. And the agency has a strong track record in guaranteeing loans 

to low-income and minority borrowers. The agency rejected Diamond, 

however, ostensibly because its founders were unqualified to manage a 

venture fund, even though they had experience in commercial lending and 

community development. 

Diamond, in its lawsuit, charges that the S.B.A.'s screening practices 

"discriminate on the basis of race by disproportionately eliminating qualified 

African-American-controlled S.B.I.C.'s and qualified African-American 

managers who would participate in S.B.I.C. management if not for the 

discriminatory practices." 

The Supreme Court has ruled that in some circumstances, a practice need not 

be intentional to discriminate if it disproportionately, and adversely, affects 

minorities, which is known as having a "disparate impact." In opposing the 
247 

S.B.A.'s motion for a summary judgment, which could have ended the case 

before it had gone to trial, Diamond presented evidence that less than 1 

percent of all licensed Small Business Investment Companies in 2003 were 

owned and controlled by blacks entrepreneurs. Moreover, black-owned 

S.B.LC.s received only a small share of S.B.LC. funding dollars. 

In her March decision dismissing the agency's request, the federal judge, 

Gladys Kessler, did not assess the validity of Diamond's evidence. But she did 

conclude that the evidence was substantial enough that "a reasonable jury 

could conclude that defendant is liable for disparate impact discrimination on 

the basis of race." 

For C. Earl Peek, one of Diamond's principals, the ruling, limited though it is, 

represents a significant victory in a legal battle to which he has devoted much 

of the last seven years. Mr. Peek, a C.P.A. by training (with a year and a half of 

law school under his belt), wrote the initial complaint himself. He eventually 

moved from Atlanta to Washington to more closely follow the lawsuit. 

Mr. Peek said in an interview that the process of becoming an S.B.I.C.left 

minority (in the ethnic sense) investment managers defeated. "Women or 

minorities who are now in private equity but who wanted to be S.B.I.C.'s have 

totally disregarded the S.B.A. and either joined a larger firm or found money 

elsewhere," he said. 

He also chided the agency's bureaucracy for having little taste for investing in 

poor communities. S.B.A. officials would testify before Congress about 

investing in low and moderate income communities, he said, "but in the 

depositions, the staff career people said that this was not the objective of the 

program." One agency analyst reviewing Diamond's paperwork, Mr. Peek 

claimed, "actually wrote in our application that investing in minority 

communities was not a viable strategy." 

Mike Stamler, S.B.A.spokesman, declined to comment on the case and said by 

e-mail that the agency did not track how many S.B.LC.'s were minority-owned 

because that "is not relevant to the qualifications for running a small business 

investment company." But he added that the "S.B.A. absolutely is committed 

to licensing minority applicants as S.B.I.C.'s, and is working diligently to 

expand growth of the program by attracting management teams from more 

locations and from teams that are more representative of the population." 
248 

According to Mr. Stamler, 20 percent of the S.B.I.C. portfolio's investments in 

2009 were made in low- or moderate-income areas. Eleven percent of the 

investments financed businesses owned by women, minorities or veterans. 

Diamond is seeking an S.B.I.C. license, access to the S.B.I.C. debentures it 

would receive upon raising private capital (in this case $100 million in 

government-backed loans), and damages of up to $17 million, according to 

Mr. Peek. It also wants changes in the way the S.B.A. evaluates S.B.I.C. 

candidates. 

At a conference on Thursday, Judge Kessler ordered the parties into 

mediation, telling them, according to Mr. Peek, that it is "time to get serious." 

If the litigants cannot reach an agreement, the case could go to trial as early as 

this fall, Mr. Peek said. 

Coincidentally, at the same time that lawyers for the S.B.A. and Diamond 

Ventures met in Judge Kessler's courtroom, the Senate Small Business 

Committee convened a hearing on "obstacles and opportunities for minority 

small-business owners in today's capital markets." 

"Isn't God good?" Mr. Peek said. 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 1 of 14 

UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLUMBIA 

DIAMOND VENTURES, LLC, 

Plaintiff, 

v. 

SANDY K. BARUAH, ACTING 

ADMINISTRATOR, SMALL 

BUSINESS ADMINISTRATION, 

Defendant. 

CIVIL ACTION NO. 03-1449 (GK) 

MEMORANDUM OPINION AND ORDER 

In this case brought under the Equal Credit Opportunity Act ("ECOA"), Plaintiff, Diamond 

Ventures, LLC ("Diamond"), claims that the Small Business Administration ("SBA") discriminated 

against it as a minority-owned company when it failed to license it as a Small Business Investment 

Company ("SBIC"). Defendant moves for summary judgment pursuant to Rule 56 of the Federal 

Rules of Civil Procedure, which Plaintiff has opposed. Upon consideration of the parties' 

submissions and the entire record, and for the following reasons, the Court will deny Defendant's 

motion. 

I. BACKGROUND 

SBICs are privately owned companies the SBA licenses to provide financing and conSUlting 

services to small businesses. See 15 U.S.C. § 681 et seq. In December 2001, Diamond submitted 

to the SBA a Management Assessment Questionnaire ("MAQ") dated December 7,2001, to obtain 

a Participating Securities SBIC license. Defs Mot., Declaration of Harry Haskins ("Haskins Dec!.") 

[Dkt. No. 90-2] ~ 20. The MAQ was referred to SBA Financial Analyst Karen Ellis for review . .!Q. 

Subsequently, Diamond submitted a revised or amended MAQ dated March 29, 2002 . .!Q. ~~ 20-21. 
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Case 1:03-cv-01449-GK Document 112 Filed 03/29/10 Page 2 of 14 

Diamond proposed "to focus on funding businesses in inner city low income areas with high African 

American populations." 2nd Am. Compl. [Dkt. No. 47] ~ 57. By letter of April 24, 2002, Diamond 

submitted another amended MAQ and requested the SBA to review Diamond as a Debenture 

Securities Licensee, rather than as a Participating Securities Licensee. Haskins Decl., Ex. 4 (sealed). 

Ellis recommended against inviting Plaintiff for an interview, and on June 4, 2002, 

Defendant's Investment Committee unanimously adopted her recommendation, effectivelyrejecting 

Diamond's proposal for an SBrc license. Haskins Ex. 6; see 2nd Am. Compl. ~ 14 ("The SBA does 

not accept SBrc license applications from those who have not been invited."). Defendant explained 

its decision in a detailed letter to Plaintiff dated July 23,2002. Haskins Dec!., Ex. 7. Following a 

meeting with Plaintiff in September 2002, Defendant agreed to review another MAQ submitted by 

Diamond, in October, 2002, Haskins Dec!. ~ 32, and assigned it to SBA Analyst Stephen Knott for 

review, Haskins Dec!. ~ 33. Knott also recommended against inviting Plaintiff for an interview, and 

the Investment Committee again unanimously adopted the recommendation . .k\. ~ 34. Defendant 

explained its decision in a detailed letter dated February 25,2003. Haskins Decl., Ex. 11.' 

Earl Peek, who was a member of Diamond's management team, filed this civil action pro se 

on June 30, 2003. His second amended complaint filed on December 12,2003, substituted Diamond 

Ventures, LLC, as the proper plaintiff. The parties commenced discovery in June 2004 following 

the Court's denial of Defendant's Rule l2(b)(6) motion to dismiss on the ground that Defendant is 

In its first MAQ, Plaintiff applied for a Participating Securities License which allows 

SBrcs "to invest SBA guaranteed funds and issue instruments based on an equity interest in its 

clients or 'portfolio' companies." 2nd Am. Comp. ~ 12-13. In its third MAQ submitted on April 

24, 2002, Plaintiff applied for a Debenture Securities License which allows SBrcs to loan money 

to companies at "a stated rate of interest." rd. This was later clarified to mean a Debenture, not a 

Participating Securities, application. Plaintiff challenges Defendant's rejection of its application for 

a Debenture License. 2nd Am. Comp!. ~ 25. 

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not a creditor within the meaning ofECOA. See Memorandum Opinion and Order of June 8,2004 

[Dkt. No. 25]. Defendant has not renewed the foregoing argument as a basis for dismissal or 

summary judgment. 

Defendant filed its Motion for Summary Judgment on October 30, 2008 and briefing was 

completed on March 26, 2009. 

II. STANDARD OF REVIEW 

Summary judgment is warranted only "if the pleadings, the discovery and disclosure 

materials on file, and any affidavits show that there is no genuine issue as to any material fact and 

that the movant is entitled to judgment as a matter oflaw." Fed. R. Civ. P. 56(c); see Celotex Corp. 

v. Catrett, 477 U.S. 317 (1986). As a general rule, "[i)n deciding whether there is a genuine issue 

of fact before it, the court must assume the truth of all statements proffered by the party opposing 

summary judgment." Greene v. Dalton, 164 F.3d 671, 674 (D.C. CiL 1999). All reasonable 

inferences that may be drawn from the facts must be drawn in favor of the nonmoving party. 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). The non-movant, however, "may not 

rest upon the mere allegations or denials of his pleading, but. .. must set forth specific facts 

showing that there is a genuine issue for trial." M., 477 U.S. at 248. 

"A dispute over a material fact is 'genuine' if 'the evidence is such that a reasonable jury 

could return a verdict for the non-moving party' .... Factual disputes that are irrelevant or 

unnecessary will not be counted." Arrington v. United States, 473 F.3d 329,333 (D.C. CiL 2006) 

(quoting Anderson, 477 U.S. at 248). A fact is "material" ifit might affect the outcome of the case 

under the substantive governing law. Anderson, 477 U.S. at 248. When facts are not controverted 

in opposition to a summary judgment motion, the Court "may assume that facts identified by the 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 4 of 14 

moving party in its statement of material facts are admitted." Local Civil Rule 7(h). When facts are 

disputed, however, "credibility detenninations, the weighing of the evidence, and the drawing of 

legitimate inferences from the facts, are jury functions, not those of a judge." Anderson, 477 U.S. 

at 255. The Supreme Court has consistently emphasized that "at the summary judgment stage, the 

judge's function is not . .. to weigh the evidence and detennine the truth of the matter, but to 

detennine whether there is a genuine issue for trial." M. at 248. Our Court of Appeals has warned 

that in cases alleging discrimination, summary judgment "must be approached with special caution." 

Aka v. Washington Hospital Center, 116 F.3d 876, 879-80 (D.C. Cir. 1997), rev'd on other grounds, 

156 F.3d 1284 (D.C. Cir. 1998) (en banc) (citation and internal quotation omitted). 

III. ANALYSIS 

ECOA makes it unlawful for any creditor to discriminate against any application, with 

respect to any aspect ofa credit transaction ... on the basis of race .... " 15 U.S.C. § 1691(a). The 

purpose of ECOA is to prohibit "credit decisions based on factors such as ... race which are 

irrelevant to creditworthiness." Miller v. Am. Express Co., 688 F.2d 1235, 1238 (9th Cir. 1982). 

Pursuant to the Small Business Investment Act, the SBA licenses SBlCs to "stimulate and 

supplement the flow of private equity capital and long-tenn loan funds" to small businesses. 15 

U.S.C. § 661. In general, SBICs raise their own financing capital by, among other vehicles, issuing 

securities backed or guaranteed by the SBA. Thus, in the event an SBIC defaults on its commitment 

to security holders, the SBA guarantees payment and the SBlC becomes indebted to the SBA for 

repayment. Haskins Decl. ~~ 5-8. Upon receipt of an application for an SBIC license, the SBA 

Administrator must detennine whether the applicant meets certain private capital requirements and 

whether its management "is qualified and has the knowledge, experience, and capability necessary 

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Case 1:03-cv-01449-GK Document 112 Filed 03/29/10 Page 5 of 14 

to comply with this chapter." 15 U.S.C. § 68l(c)(3). Consideration is given to "the need for and 

availability of financing for small business concerns in the geographic area in which the applicant 

is to commence business," the business reputation of the applicant's owners and management and 

the probable success of proposed operations, "including adequate profitability and financial 

soundness." ,!Q. 

The "first step" in the process is "the [applicant's] submission of an MAQ, which seeks 

information primarily on the proposed business strategy of the SBIC and the qualifications of the 

individuals who will manage the prospective SBIC." Haskins Decl. '\I 12. If a majority of 

Defendant's Investment Committee votes in favor ofthe MA Q, the "prospective management team 

is invited for an interview. If that is successful, [the team] receives what is commonly referred to 

as a 'go-forth' letter formally inviting them to submit a formal SBIC License Application." ,!Q. '\115. 

A. Disparate Impact Discrimination 

The Supreme Court has ruled that "Title VII ... prohibits ... both intentional discrimination 

. . . as well as, in some case, practices that are not intended to discriminate but in fact have a 

disproportionately adverse effect on minorities (known as 'disparate impact')." Ricci v. DeStafano, 

U.S. 129 S. Ct. 2658, 2672 (2009) (parenthesis in original).2 

To demonstrate disparate impact, Plaintiff "must offer statistical evidence of a kind and 

degree sufficient to show that the seemingly neutral practice in question has caused the exclusion 

of applicants for [ credit] because of their membership in a protected group." Watson v. Fort Worth 

Because the District of Columbia Circuit has "express[ ed] no opinion about whether 

a disparate impact claim can be pursued under ECOA," this Court will follow the D.C. Circuit's lead 

and "[a]ssum[ e] without deciding that a disparate impact claim is cognizable under ECOA." Garcia 

v. Johanns, 444 F.3d 625,633 n. 9 (D.C. Cir. 2006). 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 6 of 14 

Bank and Trust, 487 U.S. 977, 994 (1988). Moreover, "a showing of a [specific or particular 

practice) is an integral part of the plaintiff's ... case in a disparate-impact suit." Wards Cove 

Packing Company, Inc. v. Antonio, 490 U.S. 642,657 (1989). Finally, as recently as last year, the 

Supreme Court re-affirmed that a defendant may be liable for disparate impact discrimination 

provided the plaintiff can prove that the challenged practice is not job related, is not consistent with 

business necessity, or that there existed an equally valid, less-discriminatory alternative that served 

defendant's needs but that it refused to adopt. Ricci, 129 S. Ct. at 2678. 

Plaintiff can avoid summary judgment by presenting "data showing that the [SBA approved 

debenture licenses to African American owned businesses) at rates far below their numbers in the 

applicant pool and the general population." Holcomb v. Powell, 433 F.3d 889, 899 (D.C. Cif. 2006) 

(citations omitted). "Under Title VII disparate impact analysis, an employment test with an adverse 

impact on racial minorities is prohibited unless the test is 'demonstrably a measure of job 

performance.'" Rudder v. District of Columbia, 890 F. Supp. 23, 40 (D.D.C. 1995) (quoting Griggs 

v. Duke Power Co., 401 U.S. 424,436 (1971)). On summary judgment, however, the question is 

not whether the practice is legitimate but rather "whether the plaintiffTJ [has) cast such doubt on 

[defendant's) credibility that a reasonable juror could regard it as pretext and infer a discriminatory 

motive, or that a reasonable factfmder could conclude it was inconsistent with business necessity or 

achievable in a nondiscriminatory way." Anderson v. Zubieta, 180 F.3d 329, 345 (D.C. Cir. 1999). 

B. Plaintiff's Allegations of Specific Practices Causing Disparate Impact 

Plaintiff alleges that the SBA discriminated against it by denying its application for an SBIC 

Debenture License. The SBA denies such discrimination and responds, basically, that the License 

was denied because Plaintiff could not meet the agency's qualifications. In particular, the SBA 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 7 of 14 

claims that the Plaintiff lacked sufficient experience in the area of venture capital investments and 

exits from such investments, that there was inconsistency between Plaintiff's Business Plan and 

Investment Strategy, that Plaintiff's management team had not demonstrated a history of working 

together as a cohesive team on any venture related projects, and that only two of the four team 

members had worked together at all previously. 

It is clear that the SBA has proffered legitimate, non-discriminatory reasons for its denial of 

Plaintiff's SBIC license application. Therefore, the question becomes whether Plaintiffhas produced 

sufficient evidence for a reasonable fact-finder to conclude that the SBA's reasons were not the 

actual reasons, but only a pretext to mask intentional discrimination against Plaintiff on the basis of 

race. See Bradyv. Office of the Sergeant at Arms, 520 F.3d 490, 494 (D.C. Cir. 2008). 

Plaintiff proffers much evidence in opposition to Defendant's justification for denying its 

application, only some of which the Court need address at this time. 

First, it offers the testimony oftwo qualified experts who have both rendered opinions that 

Plaintiff was in fact qualified to be licensed as an SBIC.3 Expert Report of Dr. Timothy Bates 

("Bates Report"), at 66, Ex. G to Declaration of Jaime W. Luse ("Luse Dec!.") (Diamond "ranks as 

a particularly highly qualified SBIC applicant"); Expert Report of Edward Cleveland ("Cleveland 

Report"), Ex. H to Luse Dec!. at 9 ("this team will be very successful and a model for the program 

in coming years"). 

Second, Plaintiff presents a comparison of the areas in Diamond's final MAQ which were 

criticized by Knott, with other applications that received go-forth letters or licenses and contained 

The question of the respective qualifications of Diamond's experts is one of the many 

disputed material acts which must be resolved by the jury. 

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Case 1:03-cv-01449-GK Document 112 Filed 03f29f10 Page 8 of 14 

material in their MAQs similar to that which Diamond presented, and were not criticized. In 

particular, Plaintiff asserts that this comparison shows that the SBA praised non-minority led firms 

planning to invest in LMI4 areas that are not known to have high-minority populations and that 

Plaintiff was criticized for proposing to invest in LMI areas with high African American populations 

such as those in portions of the Southeast United States. Again, the accuracy of the facts relied 

upon--andfor ignored--in these comparisons, as well as the final conclusions to be drawn from the 

comparisons, are issues which only a jury can resolve. 

Third, Plaintiff offers evidence that while venture capital and equity experience may be 

useful proxies (or substitutes) for race, there is no study validating them as a reliable predictor of 

success for SBICs. 

Fourth, the main thrust of Plaintiffs argument is that the SBA's "five year rule'" (which the 

Court will assume is, in fact, either an absolute or de facto requirement)6 results in a disparate impact 

on African American owned or managed firms, and that Defendant cannot prove that such 

requirement is job-related, or consistent with business necessity, or that there are no valid, less 

discriminatory alternatives. See Ricci, 129 S. Ct. at 2678. 

When evaluating whether Plaintiff has sufficient evidence to survive summary judgment, it 

is necessary to view the SBA's insistence on meeting this "five year requirement" against what 

Plaintiffs expert has described as a "long, detailed history" of interacting with both African 

None of the papers submitted by the parties define the acronym "LM!." 

The SBA requires that each SBI applicant have at least two principals each of whom 

has five years or more of experience in venture capital investing. 

This assumption comports with the requirement that all inferences be drawn in favor 

of the non-moving party. See Anderson, 477 U.S. at 248. 

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American funds and minority-oriented venture capital funds in an atmosphere of "antagonism and 

distrust." Bates Report, at 54 (citing Final Report. An Analysis of the SSBIC Program: Problems 

and Prospects (Bates, 1995)).7 See also, United States Commission on Civil Rights Evaluation 

Publication, Ten Year Check-Up: Have Fedcral Agencies Responded to Civil Rights (June 12, 

2003). 

In particular, Dr. Bates reports that the SBA is aware that only two African American 

controlled SBICs, both owned by one firm, have ever been licensed, out of a total of approximately 

350 in existence in 2003. Batcs Report, at 47. Furthermore, thc SBA's own statistics show that in 

Fiscal Year 2002, "50% or more Black-Owned" firms rcceived only 2.55% of total Regular SBIC 

financings, and 0.49 percent of funding from Regular SBIC funding dollars; and in Fiscal Year 2003, 

"50% or more Black-Owned firms received only 5.37% of total Regular SBIC financings and 

1.64[% 1 of Regular SBIC funding dollars." Ex. Rand S to Luse Dec!. Ifthese figurcs are correct, 

no more than 0.86% of SBICs in 2003 were African American owned and controlled. 

Fifth, Plaintiff offers Dr. Bates' report as "reliable statistical disparate impact evidence" "to 

show that the seemingly neutral practice in question has caused the exclusion of applicants"because 

of their race. Watson, 487 U.S. at 994. In this case, the expert's task is made that much more 

difficult because of the failure of SBA to record the race of SBIC applicants who fail to obtain 

licenses. Because of that failure, it is virtually impossible to determine the number of minority and 

It should be noted that the SBA itself commissioned this Report from Dr. Bates who 

is the Distinguished Professor of Economics at Wayne State University. Both the SBA and the 

Department of Justice have retained Dr. Bates, at different times, to consult about the existence of 

racial discrimination in the marketplace. 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 10 of 14 

non-minority applicants who applied to the program and were rejected.' However, the Supreme 

Court has spoken directly to this difficulty, stating that "in cases where [such J statistics will be 

difficult if not impossible to ascertain, ... certain other statistics--such as measures indicating the 

racial composition of 'otherwise-qualified applicants' for at-issue jobs--are equally probative .... " 

Wards Cove, 490 U.S. at 651; see Malave v. Potter, 320 F.3d 321,326 (2d Cir. 2003) (finding "error 

for the District Court to have rejected out of hand [plaintiff's] statistical analysis" where data on the 

number of qualified Hispanic applicants was not available to conform to "the preferredmethodology 

described in Ward's Cove" (emphasis in original». 

Based on data gathered from surveying 24 minority venture capitalists who are members of 

the National Association of Investment Companies ("NAlC"), Bates Report at 12, Dr. Bates wrote 

that the SBA "require[ s J principal work experience in investment banking and mainstream venture 

capital investing fields in which very few minorities were traditionally able to obtain such 

experience," iQ. at 72, "while downgrading the actual work experience" in "commercial banking and 

local economic development" that most "often typifies principals of minority-oriented [venture 

capital] funds." Id.' Dr. Bates concludes that the "result is a popUlation of SBICs where only a 

fraction of I % of the funds are owned and controlled by African Americans." Id. Dr. Bates 

While it is true that the SBA does keep statistics on the race of successful applicants, 

it is hard to believe that in this day and age any federal agency fails to keep statistics on those who 

apply and are not successful. 

There is no question that the SBA raises many challenges to the methodology used 

by Dr. Bates in his "comparability analysis." Both sides spend many pages in their briefs arguing 

about the analysis and the validity of the comparisons. Again, however, the evaluation of expert 

testimony is clearly within the province of the jury. No issue could be more "material" to the final 

verdict it will render in this case than the weight it does, or does not, accord to Plaintiff's statistical 

evidence--especially in light of the absence of relevant racial statistics from the SBA. 

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"believe[s] that nearly all of the profit-oriented [venture capital] funds serving black and Hispanic 

(but not Asian) firms are NAIC members." Bates Report at 12 (parenthesis in original). It appears 

that he identified 24 such firms as qualified SBIC applicants, see iQ. at 12-13 (excluding 12 "funds" 

that "were largely newer funds that had not completed or recently completed fundraising and had not 

yet made VC investments"). Dr. Bates reports that "[t]he 23 [sic] minority-oriented funds 

extensively discussed [] are run by principals of diverse racial backgrounds, but most are African 

Americans: 28 of the 39 principals were African Americans, three were Hispanic, three were Asian 

and five were white." M. at 45. 

Although Defendant has concluded that venture capital experience is part and parcel of 

running a successful SBIC, ~ Haskins Dec!. ~~ 5, 13-15; Def.'s Ex. 4, Declaration of Darryl 

Hairston ("Hairston Dec!.") ~ 9, it has not proffered any empirical evidence linking the equivalent 

of ten years' venture capital experience (at least two principals each with five years ' experience) to 

the success of an SBIC. 

There is no question that "[u]nder Title VII disparate impact analysis, an employment test 

with an adverse impact on racial minorities is prohibited unless the test is 'demonstrably a measure 

of job performance. '" Rudderv. District of Columbia, 890 F. Supp. 23, 40 (D.D.C. 1995) (quoting 

Griggs v. Duke Power Co., 401 U.S. 424, 436 (1971)). The SBA has offered no such evidence. 

Indeed the SBA has acknowledged that "successful [SBIC] managers usually have many years of 

experience in venture capital or related fields." Hairston Dec!. ~ 9 (emphasis added). In addition, 

Hairston, SBA Deputy Associate Administrator for Management and Administration, who "was also 

involved in creating and implementing the initial versions ofthe [MAQ] process," Hairston Dec!. 

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Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 12 of 14 

~ 3, acknowledges the "relevan[cy)" to debenture SBICs of commercial lending and economic 

development experience. lQ.. ~ 10-11. 

Plaintiff has suggested that Defendant modify its evaluative criteria for SBICs to place work 

experience in the commercial banking and local development fields (where African Americans have 

had relevant experience) on equal footing with the venture capital experience that principals of 

African American firms have traditionally lacked. See Bates Report at 46 (prior to 1999, principals 

of only one minority-owned venture capital fund had prior work experience in investment banking 

prior to joining the minority fund). Summary judgment "is not appropriate" if, as here, Plaintiff 

shows "that there is an alternative that can satisfy the employer's need in a nondiscriminatory 

fashion." Anderson, 180 F.3d at 344. There is no evidence that Defendant has ever considered this, 

or any other alternative, to substitute for or alleviate the disparate impact ofthe "five year rule." 

Sixth, Plaintiff offers the Report of the SBA Inspector General, issued March 20, 2003, 

concluding that "[t]he Division's evaluation of the application [of Diamond] and the decision to deny 

were not accomplished in accordance with the existing SBA procedures and criteria." OIG Report, 

Ex. CC to Luse Dec\. at 2.10 

Seventh, Plaintiff also offers the following evidence of what it calls "direct evidence of direct 

discriminatory conduct." While that evidence, by itself, would not suffice to convince a reasonable 

10 Presumably, the jury will also be informed that the Inspector General concluded that 

no decision made by SBA regarding Plaintiff was based on the race of Plaintiff's principals. 

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Case 1:03-cv-01449-GK Document 112 Filed 03/29/10 Page 13 of 14 

jury of direct discrimination, 11 it may still be presented to the jury for its consideration on the issue 

of disparate impact. 

In view of Plaintiff s evidence that the challenged "five year rule" disproportionately 

excludes African American firms from securing SBIC licenses, the absence of any statistical or other 

kinds of evidence showing a "demonstrable relationship" between the challenged criteria and an 

SBIC's success, Plaintiff's suggested nondiscriminatory alternative solution, the SBA' s history vis-avis involvement of African American owned funds into its programs, and the numerous material 

facts in dispute,l2 the Court finds that genuine issues of material fact exist with regard to Plaintiff's 

disparate impact claim and that Plaintiffhas offered sufficient evidence from which a reasonable jury 

could conclude that Defendant is liable for disparate impact discrimination on the basis of race. 

Accordingly, it is 

ORDERED that Defendant's Motion for Summary Judgment [Dkt. No. 90] is denied; and 

it is 

11 See, for example, the early comments of Leonard Fagan, whose job was simply to 

intake MAQs filed by email to the Investment Division, but e-mailed that the MAQ was "weak," and 

noted that Peak was a "frat brother" of another SBA employee who was African American, and the 

comments of Karen Ellis, who reviewed Plaintiff's first MAQ, that Peek "had a sense of entitlement 

about being in the program," and "knew that all along I didn't think he was going to get an interview 

[to receive a go-forth letter] ... I had told them [Diamond] that probably since the day [I] started 

reviewing the MAQ," and her denials of knowing the racc of the applicants when the MAQ she was 

reviewing contained that information. 

12 See Diamond Ventures's Statement of Genuine Issues and Statement of Facts [Dkt. 

No. 102]. 

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Æ 

Case 1 :03-cv-01449-GK Document 112 Filed 03/29/10 Page 14 of 14 

FURTHER ORDERED that the parties shall appear for a Status Conference on April 15, 

2010, at 10:45 a.m. 

March 29, 2010 

Copies via ECF to all counsel of record 

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/s/ 

GLADYS KESSLER 

United States District Judge