Financing still a hurdle for black-owned firms

THE BALTIMORE SUN

Raymond V. Haysbert has lots of war stories from the days when the founders of Parks Sausage Co. were trying to make their mark, but few gall him more than the one about the time in the 1950s when a Baltimore bank wouldn't lend them $25,000 for inventory when they had $30,000 in the bank.

"We just weren't seen as valuable," he said. "When we started Parks Sausage, we had to guarantee a truck loan with our homes."

Obtaining financing for black-owned businesses is still hard, and that's why about 300 entrepreneurs are expected at the Hyatt Regency Baltimore today for the opening of the fourth annual Black Entrepreneurship in America conference, sponsored by Dow Jones & Co., which publishes the Wall Street Journal.

Scholars and entrepreneurs alike say the conference, which will focus on business-financing issues, is opening against a backdrop of profound change in black business. Eroding is the assumption that black business people are undertakers or grocers serving the black community. More and more, African-American entrepreneurs are springing from the traditional breeding grounds of entrepreneurs -- highly regarded colleges and prestigious corporations -- now that they are broadly open to blacks.

"The undercurrent is pretty simple, even though few people realize it: There's a significant number of African-American college graduates, with significant experience in the business world, who reached a certain point in life -- the late 30s or early 40s -- where they decided to set up their own business," said Tim Bates, a professor at Wayne State University in Detroit and pTC author of the book "Banking on Black Enterprise."

"As these people create businesses, because they're unprecedented, the whole of black business changes," he said. "Business formation doesn't go to Mom and Pop grocery stores and beauty parlors. Instead, they seek to compete in the broader marketplace. They're much less likely to be oriented to a black clientele."

They're much more likely to be bigger, too. The 200 companies in Black Enterprise magazine's list of 100 top black-owned industrial and service companies (plus a separate list of 100 black-owned auto dealerships) reached $11.7 billion in sales in 1994, up 14 percent in each of the last two years. At least 10 companies on the list have 1,000 or more employees.

Mr. Bates said the biggest growth in black business has come in business services, manufacturing and construction.

"During the 1980s, in these sectors, the sales of black-owned businesses quadrupled," he said.

It changes everything. Or does it?

"The theme will be, it's the best of times, and the worst of times," said Margaret Simms, a scholar at the Washington-based Joint Center for Political and Economic Studies who will kick off the conference with a "State of the Union" speech on black business ownership. "There are opportunities, but there are challenges in both the public and private environment."

Black business owners are still trying to sort out the impact of the Supreme Court's June decision that requires cities and states to show a compelling state interest to justify affirmative-action set-asides in public contracts, Dr. Simms said. But black entrepreneurs' toughest problems are the ones they share with other small business owners -- how to keep up with global competition and technological change.

And, of course, finding financing. People in the field agree that black entrepreneurs face special problems in finding the money to nurture new or growing businesses. Where they disagree is about how much -- not so much whether -- the disadvantages reflect racism past and present.

The biggest problem stems from past discrimination, Mr. Bates said. Put simply, blacks are poorer than whites, so fewer blacks have the savings to finance new ventures, and personal saving is the biggest source of equity for small new businesses. He said only 4 percent of black households have a net worth of more than $100,000, compared with 22 percent of white households and 25 percent of Asian households in the United States.

"The biggest difference you find is intergenerational wealth; whites with college education are a lot likelier to have wealthy parents," Mr. Bates said. "Most equity in small businesses comes from household net worth. Only 1 percent of start-ups [black- or white-owned] get any kind of venture capital equity."

Mr. Haysbert says he sees the same forces working among black entrepreneurs in Baltimore, and that it reflects past discrimination in access to jobs and education.

A strong back

"As far as a black person is concerned, in years past, demand was there for a good strong back," said the 75-year-old executive, who will receive an award at the conference. "There was no demand for black engineers or scientists. There was no demand for black entrepreneurs. So everyone went down to Sparrows Point [where Bethlehem Steel Corp.'s mill once employed nearly 30,000 workers] and got a so-called good job."

Where Mr. Bates and Mr. Haysbert diverge is about what happens today, and why.

Mr. Bates said low black wealth means black entrepreneurs are more likely to use personal debt such as credit-card borrowing to finance a start-up. But he said there are no comprehensive, reliable studies of blacks' rejection rates for commercial loans that would be comparable to the studies of mortgage-rejection rates that have been cited to support discrimination lawsuits against major banks.

Instead, scholars who study the difficulties that black business people encounter with financing have to sort out the effect of where the business is located, the wealth of the owner, and race as such. Mr. Bates said the credit problems black entrepreneurs face stem from "cumulative causation."

"Location tends to be a better predictor [of credit availability] than race, but they're so inherently related that it's artificial to think you can separate them," Mr. Bates said. "

He said there are indications that the rising breed of college-educated, corporate-trained black entrepreneur can get credit to start a business. Indeed, one of the speakers at the conference is Cleveland Christophe, a Citicorp veteran who now runs a black-oriented leveraged buyout fund and says his partners "are who we are and our networks are what they are."

But, Mr. Bates said, getting credit to start a business in the inner city, where nearby affluent customers are fewer and undercapitalized dreamers are often many, remains a hard job.

"If you ask Cleveland Christophe where his clients are, probably most of them are not in inner-city neighborhoods," Mr. Bates said. "You tend to see smaller, less promising, less well-capitalized businesses open in the minority community."

Mr. Haysbert says he's not sure there's much difference.

Pointing to the work of Harvard University scholar Michael Porter, he says population in inner cities is sufficiently high that business people can build profitable businesses there even though city dwellers tend to be poorer than suburbanites. Those businesses should have an easier time getting credit, he insists.

"Absolutely it's the same dynamic," Mr. Haysbert said. "It's beyond the numbers."

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