Disparities in Capital Access between

Minority and Non-Minority-Owned Businesses:

The Troubling Reality of 

Capital Limitations Faced by MBEs

January 2010
Disparities in Capital Access between Minority and 

Non-Minority-Owned Businesses:

The Troubling Reality of Capital Limitations 

Faced by MBEs

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 Development Agency.

David Hinson

National Director 

Minority Business Development Agency 

Table of Contents

Preface .......................................................................................................................................................1

Executive Summary....................................................................................................................................3

Introduction.................................................................................................................................................7

The State of Minority Business...................................................................................................................9

Total Gross Receipts of Minority-Owned Businesses................................................................................ 10

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

1

Preface

Capital access remains the most important factor limiting 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 minority 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 it 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 parity 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 capital 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

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.1

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

as young non-minority firms. Greater capital 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 credit, 

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.

1 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).

3
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

• 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 - Although 

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. 

4
Capital Access Disparities

Loans

• 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 with 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 minority 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-minority 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-minority 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-minority high sales 

firms.

Equity

• 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 Competitive - 

Venture capital funds focused on investing in minority-owned firms provide returns that are 

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

provide attractive returns because the market is underserved.

5
Financial Investment

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

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

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

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

Minority firms had the most trouble obtaining external 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. 

6
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.3

 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.4

 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.5

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

survival rates, employment, and payrolls.6

 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 capital, as well 

as racial discrimination are responsible for these disparities in business performance.7

 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 2008.8

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 http://www.mbda.gov/index.php?section_id=6&bucket_id=789#bucket_852. 

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

D. Boston, “The Role of Black-Owned Businesses in Black Community Development,” in Jobs and Economic Development in Minority 

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

U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners (Washington, D.C.: U.S. Government Printing Office, 1997).

4 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.

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

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

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

7 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). 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. Fairlie and Robb, Race and Entrepreneurial 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
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.”9

 Banks are reluctant to lend to minority-owned firms and other businesses 

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

decline in the personal wealth of entrepreneurs has limited their ability to use this wealth 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 halted 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.10 Strong minority business growth directly impacts the reduction of inequality in 

earnings and wealth 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.13 Minority firms in the United States employed nearly 4.7 million paid workers in 2002,14 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 minority businesses the benefits of economic 

growth will be unevenly divided across the population.

9

 Board of Governors 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/SnLoanSurvey/200902/default.htm.

10 Board of Governors 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://federalreserve.gov/pubs/oss/oss2/2004/bull0206.pdf.

11 William D. Bradford, “The Wealth Dynamics of Entrepreneurship for Black and White Families in the U.S.,” Review of Income and Wealth 49 (2003): 89-116.

12 John Owens and Robert Pazornik, Minority Business Enterprises in the Global Economy: The Business Case. Prepared in collaboration with the 

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

13 Thomas D. Boston, “Generating Jobs through African American Business Development,” Readings in Black Political Economy, eds. J. 

Whitehead and C. Harris (Dubuque: Kendall-Hunt, 1999). Boston, “The Role of Black-Owned Businesses in Black Community Development.” 

14 U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners. U.S. Census Bureau, 2002 Economic Census: Survey of Business Owners.

8
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 patterns. 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.15

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 whites) at 11.3 percent. Asians have the next highest rate at 10.3 percent, which is similar to 

findings in previous studies.16 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 small-scale businesses are excluded because business ownership status is defined for the main job activity and only 

workers with at least 15 hours worked in the survey week are included in the sample. 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,” 

International Migration Review 23, no. 1 (1989). Don Mar, “Individual Characteristics vs. City Structural Characteristics: Explaining SelfEmployment Differences among Chinese, Japanese, and Filipinos in the United States,” Journal of Socio-Economics 34, no.3 (2005). Robert W. 

Fairlie, Estimating the Contribution of Immigrant Business Owners to the U.S. Economy, Final Report for U.S. Small Business Administration, (2008).

9

Percent of 

Workforce Sample Size

Total 10.1% 692,609

Non-Minority 11.3% 506,160

Native-American 7.6% 6,570

Asian/Pacific Islander 10.3% 33,700

Hispanic 7.9% 74,037

African-American 5.5% 61,957

Table 1

Notes: (1) The sample consists of individuals ages 20-64 who 

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

status is based on the worker's main job activity and includes 

owners of both unincorporated and incorporated businesses. (3) 

All estimates are calculated using sample weights provided by 

the Current Population Survey.

Business Ownership

Current Population Survey (2008)

Business Ownership Rates by Race/Ethnicity
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.17 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.18 

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.

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.

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

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

Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United 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 Owners (SBO) contains the most 

recent data. Preliminary data for the 2007 SBO will be published by the Census in 2010.

10

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 15,287,578 620,912 862,605 603,426 102,271

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

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

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

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

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 $390,722 $439,579 $74,018 $141,044 $292,214 $133,439

Table 2

Sales and Receipts by Ethnicity and Race

Survey of Minority-Owned Business Enterprises (1982-1997) and Survey of Business Owners (2002)

Includes 

C-Corps

Total number of 

firms

Total sales and 

receipts ($1,000)

All Firms

Non-Minority 

Owned Firms

Black-Owned 

Firms

HispanicOwned FirmsAsian and P.I.-

Owned Firms

Native Amer./ 

Nat. Alaskan

Sources: U.S. Census Bureau, Economic Census, Survey of Minority-Owned 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 held, 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 non-minority category is equal to all firms 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.

Mean sales and 

receipts
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.19 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.20

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.21 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 difficult 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 Development Agency, The State of Minority Businesses.

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

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

11
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 2002.22 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 lost.23

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.

22 U.S. Department of Commerce, Minority Business Development Agency, Characteristics of Minority Businesses and Entrepreneurs (2008).

23 Ibid.

12

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 15,287,578 620,912 862,605 603,426 102,271

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

1982 No N/A N/A 121,373 154,791 N/A N/A

1987 No 19,853,333 19,016,850 220,467 264,846 351,345 8,956

1992 No 27,403,974 25,531,104 345,193 691,056 N/A N/A

1997 No 29,703,946 27,122,185 378,346 838,738 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

1982 No N/A N/A 0.4 0.7 N/A N/A

1987 No 1.4 1.5 0.5 0.6 1.0 0.4

1992 No 1.6 1.7 0.6 0.8 N/A N/A

1997 No 1.6 1.8 0.5 0.7 1.6 1.1

1997 Yes 2.9 3.1 0.9 1.2 2.4 1.5

2002 Yes 2.5 2.8 0.6 1.0 2.0 0.9

Table 3

Employment Statistics by Ethnicity and Race

Survey of Minority-Owned Business Enterprises (1982-1997) and Survey of Business Owners (2002)

Sources: U.S. Census Bureau, Economic Census, Survey of Minority-Owned 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 held, 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 non-minority category is equal to all firms 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.

Includes 

C-Corps

Total number of firms

Mean number of paid 

employees

Non-Minority 

Owned Firms

Black-Owned 

Firms

HispanicOwned Firms

Total number of 

employees

Native Amer./ 

Nat. Alaskan

Asian & P.I.-

All Firms Owned Firms
13

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.24

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

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

1982 No N/A N/A 37,841 39,272 N/A N/A

1987 No 3,487,454 3,239,305 70,815 82,908 92,718 3,739

1992 No 3,134,959 2,823,264 64,478 115,364 N/A N/A

1997 No 3,277,510 2,860,580 63,010 151,571 185,357 26,075

1997 Yes 5,027,208 4,372,817 93,235 211,884 289,999 33,277

2002 Yes 5,172,064 4,512,577 94,518 199,542 323,161 24,498

1982 No N/A N/A $948 $1,240 N/A N/A

1987 No $299,176 $289,667 $2,761 $3,243 $3,502 $109

1992 No $523,574 $495,037 $4,807 $10,768 N/A N/A

1997 No $675,452 $628,500 $6,532 $15,391 $21,620 $4,108

1997 Yes $1,499,298 $1,395,150 $14,322 $29,830 $46,180 $6,624

2002 Yes $1,626,785 $1,504,917 $17,550 $36,712 $56,871 $5,135

1982 No N/A N/A $25,055 $31,573 N/A N/A

1987 No $85,786 $89,423 $38,990 $39,120 $37,770 $29,225

1992 No $167,011 $175,342 $74,547 $93,340 N/A N/A

1997 No $206,087 $219,711 $103,673 $101,540 $116,642 $157,543

1997 Yes $298,237 $319,051 $153,615 $140,785 $159,240 $199,063

2002 Yes $314,533 $333,494 $185,680 $183,980 $175,984 $209,620

1982 No N/A N/A $7,812 $8,010 N/A N/A

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 $29,381 $29,842 $23,277 $23,888 $25,352 $26,848

Table 4

Employment Statistics by Ethnicity and Race for Employer Firms Only

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

Payroll per employee for 

employer firms

Native Amer./ 

Nat. Alaskan

Total annual payroll for 

employer firms 

($1,000,000)

Sources: U.S. Census Bureau, Economic Census, Survey of Minority-Owned 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 held, 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 non-minority category is equal to all firms 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.

Includes 

C-Corps

Total number of employer 

firms

Mean annual payroll for 

employer firms

Non-Minority 

Owned Firms

Black-Owned 

Firms

HispanicOwned FirmsAsian & P.I.-

All Firms Owned Firms
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 $105,501, and Native Hawaiian and Pacific Islander owned firms had average receipts 

of $147,837.25

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

of Hispanic firms were $141,044 in 2002.26 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 SBO and SMOBE 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.27 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.28

Conditioning on employment, racial patterns 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: Black-, Asian-, and White-Owned Businesses in the United States.

26 Black and Hispanic firms 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 firms (Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in 

the United States). This finding indicates that higher average sales among non-minority-owned businesses are not being driven by a few businesses 

with very high revenues.

27 U.S. Department of Commerce, Minority Business Development Agency, Characteristics of Minority Businesses and Entrepreneurs.

28 Ibid.

14
The new compilation of Census Bureau data reported here and described more thoroughly in a recent 

publication29 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-, Asian-, and White-Owned Businesses in the United States.

30 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.

15

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.

31 The finding has generally been interpreted as providing evidence that 

entrepreneurs 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 Bureau32 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. 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. Evans and Linda S. Leighton, “Some Empirical Aspects of Entrepreneurship,” American 

Economic Review 79 (June 1989): 519-535. Bruce Meyer, “Why 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 Decisions and 

Liquidity Constraints,” RAND 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 Journal 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 Journal 106, no. 434 (1996): 60-

75. David G. Blanchflower and Andrew J. Oswald, “What Makes and Entrepreneur?” Journal of Labor Economics 16, no. 1 (1998): 26-60. 

Thomas A. Dunn and Douglas J. Holtz-Eakin, “Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from 

Intergenerational Links,” Journal of Labor Economics 18, no. 2 (2000): 282-305. Robert W. Fairlie, “The Absence of the African American 

Owned Business: An Analysis of the Dynamics of Self-Employment,” Journal of 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 of Economics 102, no. 1 (2000): 123-134. Mark P. Taylor, “Self-Employment and Windfall Gains in Britain: 

Evidence from Panel 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. 1 (2005). Robert W. Fairlie and Harry 

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

32 U.S. Census Bureau, Wealth and Asset Ownership, 2008 (accessed July 2009); available from http://www.census.gov/hhes/www/wealth/2002/

wlth02-1.html.

17
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 with 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 whites). 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 wealth 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 differences 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 study35 for men using the 

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

black/white 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.36 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.38 Apparently, 

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

33 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://www.census.gov/hhes/www/wealth/2002/wlth02-2.html.

34 Robert W. Fairlie, “Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of Self-Employment by Gender, Race and 

Education,” in The Life Cycle 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 of Self-Employment.”

36 Robert W. Fairlie, “Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of Self-Employment by Gender, Race and Education.”

37 Robert W. Fairlie and Christopher Woodruff, “Mexican-American Entrepreneurship,” University of California Working Paper (2009).

38 Magnus Lofstrom and Chunbei Wang, “Hispanic Self-Employment: A Dynamic Analysis of Business Ownership,” University of Texas at 

Dallas Working Paper (2006).

Median Net Worth

Total $58,905

Non-minority $87,056

Asian or Pac. Islander $59,292

Hispanic $7,950

African-American $5,446

Table 5

Median Household Net Worth by 

Ethnicity/Race, 2002

Source: U.S. Census Bureau, Housing and 

Household Economic Statistics Division (2008).

18
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.40 Ken Cavalluzzo and John Wolken also found in their study41 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.42 

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.43 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.44 In turn, 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.45 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.46 In contrast to these 

patterns, Asian firms are found to have higher startup capital levels and resulting business outcomes.47

39 Robert 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 controlling for 

owner and business characteristics.

41 Ken Cavalluzzo and John Wolken, “Small Business Loan Turndowns, Personal Wealth and Discrimination,” Journal of 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.

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

44 Timothy Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream (Washington, D.C.: Woodrow Wilson Center Press 

and Baltimore: John Hopkins University Press, 1997), and Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and WhiteOwned Businesses in the United States, provide two recent examples.

45 Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream.

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

47 Ibid.

19
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.48 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 CBO, Bates49 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 capital 

and more likely to rely solely on equity capital than white firms. Bates50 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

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

estimates from the CBO.52 The CBO 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 personal loans/credit” 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.

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

equity 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. Bradford55 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 minority 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 Mobility: An Illusive American Dream. Timothy Bates, “Financing Disadvantaged Firms.” Credit 

Markets for the Poor, eds. Patrick Bolton and Howard Rosenthal. (New York: Russell Sage Foundation, 2005).

50 Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream.

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

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

53 Milken Institute and the Minority Business Development Agency, The Minority Business Challenge: Democratizing Capital for Emerging 

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

54 Jeffrey Sohl, “The Angel Investor Market in 2008: A Down Year In Investment Dollars But Not In Deals,” Center for Venture Research, 2008 

(accessed July 17, 2009); available from http://wsbe.unh.edu/files/2008_Analysis_Report_Final.pdf.

55 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
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 Wolken57 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.58 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 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 African Americans grew when taking 

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

Lampani61 include additional geographic controls and continue to find a statistically significant difference in 

approval rates between African Americans and whites.

56 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 of Entrepreneurship Journal 8, no. 1 (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. 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. Pearce, (2005).

57 Cavalluzzo and Wolken.

58 G. Becker, The Economics of Discrimination, 2nd ed. (Chicago: University of Chicago Press, 1971).

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

60 Cavalluzzo, Cavalluzzo, and Wolken.

61 R. Bostic and K.P. Lampani, “Racial Differences in Patterns of Small Business Finance: The Importance of Local Geography,” Working Paper (1999).

21
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.62 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,63 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.64 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.65 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 

CBO66 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.67 

Lower levels of education obtained by Hispanics and African Americans partly limit their business 

ownership rates.68 According to an analysis of CPS data by Fairlie,69 6.0 percent of the black/white gap in 

self-employment entry rates is explained by racial differences in education levels. Similar estimates from 

the PSID are reported in another study.70 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

62 Timothy 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 African 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, eds. Patrick Mason and Rhonda Williams (Boston: Kluwer, 1997).

63 George Borjas and Stephen Bronars, “Consumer Discrimination and Self-Employment,” Journal of Political Economy 97, no. 3 (1989): 581‐605.

64 Daiji Kawaguchi, “Negative Self Selection into Self-Employment among African Americans,” Topics in Economic Analysis & Policy 5, no. 1 (2005): 1-25.

65 Bates, Race, Self-Employment & Upward Mobility: An illusive American Dream.

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

67 J. van der Sluis, M. van Praag and W. Vijverberg, Education and Entrepreneurship in Industrialized Countries: A Meta-Analysis, Tinbergen 

Institute Working Paper no. TI 03–046/3 (Amsterdam: Tinbergen Institute, 2004). Simon C. Parker, The Economics of 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 of Income Dynamics Data, C. Moutray, 

Working Paper (2007).

68 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 of 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
Americans.71 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. 72 The high 

rate of business ownership by Asians is in part due to their relatively high levels of education.73 These 

results, 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.74

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.75 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.76 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.77 Mexican American business owners, especially immigrants, 

have substantially lower levels of education. The single largest factor in explaining why Mexican immigrants 

and U.S. born 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.78 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.

71 Fairlie and Woodruff.

72 Lofstrom and Wang.

73 Fairlie, Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of 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 Businesses 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/chapters/c8221.pdf. 

75 Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream. U.S. Department of Commerce, Economic Statistics 

Administration and the Minority Business Development Agency. Astebro Thomas and Irwin Bernhardt, “Start-Up Financing, Owner 

Characteristics and Survival,” Journal of Economics and Business 55, no. 4 (2003): 303-320. Alicia Robb, The Role of Race, Gender, and 

Discrimination in Business Survival, Doctoral Dissertation, (Ann Arbor: University of Michigan Press, 2000). van der Sluis, 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). 

78 Robert W. Fairlie and Bruce D. Meyer, “Ethnic and Racial Self-Employment Differences and Possible Explanations,” Journal of Human 

Resources 31, no. 4 (1996): 757-793. Fairlie and Woodruff.

23
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.79 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 intergenerational link in business ownership is 

detrimental to disadvantaged minorities. In a study by Michael Hout and Harvey S. Rosen80 they note a 

“triple 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 study81 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.82 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.83 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.84

Related to the family business background constraint, previous research also indicates that the size 

and composition of social networks are associated with self-employment.85 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 difficult to identify their 

contributions to racial differences in business performance.86 Limited networks manifest themselves in

79 Bernard Lentz and David Laband, “Entrepreneurial Success and Occupational Inheritance among Proprietors,” Canadian Journal of 

Economics 23, no. 3 (1999): 563-579. Fairlie, “The Absence of the African American Owned Business: An Analysis of the Dynamics of SelfEmployment.” Thomas A. Dunn and Douglas J. Holtz-Eakin, “Financial Capital, Human Capital, and the Transition to Self-Employment; 

Evidence from Intergenerational Links,” Journal of Labor Economics 18, no. 2 (2000): 282-305. Michael Hout and Harvey S. Rosen, “SelfEmployment, Family Background, and Race,” Journal of Human Resources 35, no. 4 (2000): 670-692.

80 Hout and Rosen.

81 Fairlie, “The Absence of the African American Owned Business: An Analysis of the Dynamics of Self-Employment.”

82 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,” Journal of Labor Economics 25 (2007): 289-323. Fairlie-Robb, Race and 

Entrepreneurial Success: Black-,Asian-, and White-Owned Businesses in the United States.

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

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

85 W. David Allen, “Social Networks and Self-Employment,” Journal of Socio-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
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.87 Given these interactions and the inherent difficulty of measuring networks, it is 

difficult to identify their effects on business performance.

87 U.S. Department of Commerce, Minority Business Development Agency, Accelerating Job Creation and Economic Productivity: Expanding 

Financing Opportunities for Minority Businesses (2004).

25

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 wealth of the entrepreneur.

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.88 The decline in housing values is likely 

to further limit the amount of capital available to minority entrepreneurs.

88 Fairlie and Krashinsky.

27
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. 

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 United 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.89

89 Sohl.

28
	 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.

29
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 very 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
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 (SMOBE/SWOBE). 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 government 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-/Female-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 SBO/SMOBE 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

90 Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States. 91 Board of Governors 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); available from 

http://www.federalreserve.gov/pubs/bulletin/2006/smallbusiness/smallbusiness.pdf.

31
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.92 

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 

with 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 capital. Overall, 

among firms with 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.

92 U.S. Department of Commerce, Minority Business Development Agency, Characteristics of Minority Businesses and Entrepreneurs.

32
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 with 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

Table 6 

Personal/ 

family 

savings

Other 

personal/ 

family assets

Personal/ 

business 

credit card

Business 

loan from 

government

Government 

guaranteed 

bank loan

Business 

loan from 

bank

Outside 

investor

None 

needed

Total 51.9% 10.0% 12.2% 1.0% 0.8% 7.8% 2.0% 30.8%

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% n/a 7.2% 1.9%

Asian Total 61.4% 8.9% 9.6% 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%

Total 52.6% 10.3% 12.7% 2.3% 0.4% 5.2% 2.1% 29.9%

High Sales 66.5% 15.8% n/a n/a n/a 20.3% 4.0%

Low Sales 51.9% n/a 13.0% n/a n/a n/a n/a

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%

African-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% n/a n/a n/a 23.3% 5.1%

Low Sales 53.1% n/a 9.8% n/a n/a n/a n/a

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% n/a n/a n/a 29.2% 5.4%

Low Sales 53.5% n/a 8.8% n/a n/a n/a n/a

Total 54.6% 9.0% 8.8% 0.9% 0.7% 11.4% 2.7% 27.7%

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%

Survey of Business Owners (2002)

Sources of Capital Used to Start or Acquire the Business by Ethnicity/Race and Sales Level ($500,000 or more)

Notes: (1) Source: 2002 Survey of Business Owners, as reported in U.S. Department of Commerce, Minority Business Development 

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.

American-Indian and 

Alaska Native

Native Hawaiian and 

Other Pacific 

Islander

All Respondent 

Firms
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.

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.

 Table 7 

Personal/ 

family 

savings

Other personal/ 

family assets

Personal/ 

business 

credit card

Business 

loan from 

government

Government 

guaranteed 

bank loan

Business 

loan from 

bank

Outside 

investor

None 

needed

Total 30.8% 7.1% 15.5% 0.7% 0.3% 7.6% 1.3% 52.7%

High Sales 28.1% 9.8% 13.0% 1.1% n/a 29.7% n/a 40.7%

Low Sates 30.9% 7.0% 15.6% 0.7% n/a 6.7% 1.3% 53.2%

Asian Total 31.4% 5.3% 10.6% 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% n/a 5.7% 1.4% 54.3%

Total 28.6% 5.6% 13.6% 1.2% 0.9% 5.6% S 55.3%

High Sales 27.4% n/a 17.5% n/a n/a 23.4% n/a 42.0%

Low Sales 28.7% n/a 13.4% n/a n/a n/a n/a 55.9%

Hispanic Total 26.5% 4.4% 10.9% 0.5% 0.3% 5.2% 1.3% 58.4%

High Sales 26.8% 6.7% 13.2% 1.6% 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-American 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% n/a 56.0%

High Sales 27.4% n/a 11.8% n/a n/a 24.7% n/a 44.7%

Low Sales 29.0% n/a 11.2% n/a n/a n/a n/a 56.7%

Non-minority Total 25.0% 5.1% 11.7% 0.5% 0.3% 9.7% n/a 59.0%

High Sales 21.2% n/a 9.8% n/a n/a 30.2% n/a 48.8%

Low Sales 25.9% n/a 11.9% n/a n/a n/a n/a 60.1%

Total 25.5% 5.0% 11.4% 0.5% 0.3% 9.2% 1.2% 58.5%

High Sales

Low Sales

Native Hawaiian 

and Other Pacific 

Islander

All Respondent 

Firms

Notes: (1) Source: 2002 Survey of Business Owners, as reported in U.S. of Commerce, Minority Business Development 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. 

Survey of Business Owners (2002)

Sources of Capital Used to Finance Expansion or Capital Improvement of the Business by Ethnicity/Race and Sales Level ($500,000 or more)

American-Indian 

and Alaska Native

34
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.

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 minority/

Table 8 

Group 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

Minority $116,392 2.3 5.0% $1,969 17.2% $9,261 307

Equity Investmensts and Loan Amounts

Survey of Small Business Finances (2003)

Equity Investments Loans

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.

35
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.

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 turned 

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.93 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.

93 Blanchflower, Levine and Zimmerman. Cavalluzzo, Cavalluzzo and Wolken.

36

Table 9 

Group Denial Rate N N Interest Rate N

Total

Non-minority 12.3% 1,679 15.8% 3,685 6.4% 1,586

Minority 31.5% 218 29.5% 555 7.8% 175

Sales > $500,000

Non-minority 8.4% 1,212 12.2% 1,868 5.9% 1,168

Minority 14.9% 132 18.8% 248 6.2% 123

Sales < $500,000

Non-minority 16.0% 467 17.4% 1,817 6.9% 418

Minority 41.9% 86 33.4% 307 9.1% 52

Loan Denial Rates, Fear of Applying, and Interest Rates

Survey of Small Business Finances (2003)

Note: All estimates use sample weights provided by the SSBF.

Did not Apply: 

Fear of 

Rejection
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 with the 

existence of lending discrimination.94

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 equity 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 urbanicity, 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 minority firms compared 

to non-minority firms, but the difference is not statistically significant. The education level of the owner 

and experience is strongly associated with receiving equity capital. Having more business owners also 

increases the amount of new equity investments in the firm. The sales level does not predict equity 

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
Table 10 

(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 0.2649 0.5181

(0.0799) (0.1419) (0.1805) (0.3174)

D&B credit score: 51-75 -0.3684 -0.3061 0.1353 0.4900

(0.0773) (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

Specification

Linear Regressions for Log Equity Investments and Loan Amounts

Survey of Small Business Finances (2003)

Notes (1) OLS coefficient estimates and their standard errors (in parentheses) are reported. 

(2) All estimates use sample weights provided by the SSBF.

Log Equity Investments Log Loan Amount

38
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 partly 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.96 The regression estimates are taken from Table 10. The contribution from racial 

differences in the characteristics can thus be written as:

Where are means of firm characteristics of race j, is a vector of pooled coefficient estimates, 

and j=W or 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.

95 Alan S. Blinder, “Wage Discrimination: Reduced Form and Structural Variables,” Journal of Human Resources, 8, no. 4 (1973): 436-455. 

Ronald Oaxaca, “Male-Female Wage Differentials in Urban Labor Markets,” International Economic Review, 14, no. 3 (1973): 693-709. 96 Ronald Oaxaca and Michael Ransom, “On Discrimination and the Decomposition of Wage Differentials,” Journal of Econometrics, 61, no. 1 

(1994): 5-21.

39
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 contributions 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).

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.

Table 11 

(1) (2) (3) (4)

Sample All Firms Hi-Sales All Firms Hi-Sales

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

Specification

Decompositions for Log Equity Investments and Loan Amounts

Survey of Small Business Finances (2003)

Notes: (1) See text for more details on decompositions. 

 (2) Coefficient estimates used in decomposition are reported in Table 10. 

Log Equity Investments Log Loan Amount

40
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 firms 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 firms 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 formed 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 firms. It is useful to examine disparities in financing 

at the early stages of firm 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 SBO 

because the information is gathered in the first year of operations not retrospectively which for 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.

97 Andrew B. Bernard and Matthew J. Slaughter, The Life Cycle of a Minority-Owned Business: Implications for the American Economy

(Washington: Minority Business Development Agency, 2004).

41
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 external 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 patterns 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 nearly 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 minority 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

Table 12 

Total 

Financial Capital

Group % of firms Mean % of firms Mean % of firms Mean Mean

Startup capital (2004)

Non-minority 86.7% 46,007$ 38.1% 36,777$ 4.7% 7,607 

Minority 87.8% 41,154$ 33.6% 29,879$ 3.5% 2,984 

Subsequent capital (2005-2007)

Non-minority 65.3% 16,180$ 51.8% 25,365$ 5.4% 4,082 

Minority 68.4% 13,604$ 48.2% 13,783$ 6.7% 2,059

$ 

$ 

$ 

$ 

$ 

$ 

$ 

$ 

90,391 

74,017 

45,627 

29,447 

Sources of Startup and Subsequent Capital for New Business Ventures

Kauffman Firm Survey (2004-07) (2007 Dollars)

All estimates use survey weights provided by the KFS.

Internal Financing External Debt External Equity
Multivariate regressions on the log levels of start up capital are presented in Table 13. Even after 

controlling for numerous owner and firm 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 

external debt financing models. The owner’s credit rating is important for obtaining startup financing 

especially for external debt.

43
Table 13

Log of 2004 Log of 2004 Log of 2004 

Internal External External 

Coefficients Financing Debt Financing Equity Financing

Minority -0.0547 -0.276*** -0.0746*

(0.0797) (0.0965) (0.0386)

Female -0.161** -0.168* -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 -0.000427* -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 -0.0128*** -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 Liability Corp. 0.500*** 0.446*** 0.197***

(0.0925) (0.108) (0.0494)

Corporation 0.446*** 0.369*** 0.195***

(0.0946) (0.112) (0.0502)

Home Based -0.675*** -0.536*** -0.152***

(0.0732) (0.0846) (0.0396)

Comparative Adv. 0.146** 0.0555 -0.0574

(0.0701) (0.0825) (0.0401)

Intellectual Property 0.178** -0.0122 0.117**

(0.0851) (0.101) (0.0547)

High Credit Score 0.111 0.447*** 0.0169

(0.122) (0.152) (0.0741)

Low Credit Score -0.257*** -0.303*** -0.0242

(0.0724) (0.0836) (0.0403)

Constant 7.155*** 6.286*** 5.826***

(0.608) (0.720) (0.344)

Observations 3806 3806 3806

R-squared 0.234 0.122 0.051

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

2-digit industry dummies included

Linear Regressions for Startup Capital

Kauffman Firm Survey (2004)

44
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
Table 14

Log of Log of Log of

Internal External External 

Coefficients Financing Debt Financing Equity Financing

Minority 0.278*** 0.0125 0.0283

(0.0760) (0.0807) (0.0377)

Female -0.201*** -0.242*** -0.0997***

(0.0721) (0.0782) (0.0318)

Age -0.00465 0.0401** -0.00729

(0.0186) (0.0192) (0.00836)

Age Squared 0.000150 -0.000329 0.000129

(0.000198) (0.000204) (0.0000918)

HS Graduate 0.0598 -0.0992 -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) (0.0831)

Graduate Degree 0.198 -0.138 0.112

(0.242) (0.235) (0.0904)

Hours W orked 0.00948*** 0.00553*** 0.00155**

(weekly average) (0.00149) (0.00158) (0.000791)

Industry Experience -0.00405 -0.0112*** 0.000311

(years) (0.00330) (0.00362) (0.00180)

Start up Experience 0.256*** 0.0629 0.0390

(0.0638) (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)

Limited Liability Corp. 0.0775 0.186* 0.0623

(0.0862) (0.0951) (0.0397)

Corporation 0.0626 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. -0.106 -0.0805 0.0309

(0.0649) (0.0710) (0.0287)

Intellectual Property 0.402*** 0.145* 0.214***

(0.0828) (0.0881) (0.0511)

High Credit Score 0.168 0.348*** 0.0462

(0.117) (0.123) (0.0684)

Low Credit Score -0.137** -0.160** 0.0203

(0.0683) (0.0737) (0.0305)

Sales ($50-$18,000) 0.859*** 0.439*** 0.0436

(0.0835) (0.0838) (0.0346)

Sales ($18,001-$52,000) 1.203*** 1.028*** 0.0271

(0.0911) (0.0947) (0.0376)

Sales ($52,001-$121,000) 1.509*** 1.633*** 0.0287

(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 3806 3806 3806

R-squared 0.203 0.264 0.077

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

2-digit industry dummies included

Linear Regressions for Subsequent Capital

Kauffman Firm Survey (2005-07)

46
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 capital are explained by racial differences in owner and firm 

characteristics, including credit scores. The owner’s age provides the largest contributions to the gaps in 

internal 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 wealth. Credit scores only explain a small amount of the 

gap in startup capital.

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.

98 U.S. Small Business Administration, CDC/504 Program (accessed July 2009); available from http://www.sba.gov/financialassistance/

prospectivelenders/cdc504/index.html.

Table 15 

Internal 

Financing External Debt

External 

Equity

Internal 

Financing External Debt

External 

Equity

(1) (2) (3) (4) (5) (6)

Non-minority mean of dep 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 -0.0051

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 organization 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 -0.0007

Credit scores 0.0176 0.0271 0.0018 0.0116 0.0166 -0.0003

Hours Worked (week) -0.0639 -0.0286 -0.0035 -0.0287 -0.0168 -0.0047

Industry -0.0079 -0.0180 0.0070 0.0073 0.0075 0.0090

Sales n/a n/a n/a 0.1715 0.2256 0.0137

Total explained -0.0061 0.0098 0.0146 0.1930 0.2427 0.0509

Specification

Decompositions for Logs of Startup and Subsequent Capital

Kauffman Firm Survey (2004-07)

Notes (1) See text for more details on decompositions.

Startup Capital Subsequent Capital

47
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. 

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 return 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.

Table 16

FY 2005 FY 2006 FY 2007 FY 2008

SBA 7(a) Program

Total amount of loans ($000s) $13,998,331 $13,447,225 $13,211,731 $11,675,399

Jobs created 155,821 206,608 265,095 200,081

Jobs retained 506,312 583,562 599,852 449,190

Investment per job created or retained $21,141 $17,018 $15,275 $17,982

SBA 504 Program

Total amount of loans ($000s) $4,942,067 $5,610,828 $6,176,210 $5,117,079

Jobs created 85,540 89,601 97,280 79,274

Jobs retained 49,482 45,878 43,498 42,449

Investment per job created or retained $36,602 $41,415 $43,872 $42,039

Job Creation through Small Business Administration Loan Programs (2005-08)

Source: U.S. Small Business Administration (2009)

48

Table 17 

Total 

Financing 

2004-2007

Employment 

Creation by 

2007

Financing 

per Job

Minority $162,358 3.1 $52,374

Non-Minority $227,272 2.4 $95,492

Total $214,338 2.5 $85,055

Financing per Job Created among Young Firms

Kauffman Firm Survey (2004-07)

Source: Kauffman Firm Survey 2004-07.
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

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 difficulties 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

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About the Authors

Dr. Robert W. Fairlie

Dr. Robert W. Fairlie is a Professor of Economics at the University of California, Santa Cruz, Director of 

the UCSC Masters Program in Applied Economics and Finance, and adjunct researcher at RAND. He 

was a Visiting 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 journals in economics, public policy, management 

and demography. He has testified to the U.S. Congress, U.S. Department of Treasury and the California 

State Assembly regarding the findings from his research. Dr. Fairlie holds a Ph.D. and M.A. in Economics 

from Northwestern University and a B.A. 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.

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