Milken Reports on Women and Minority Challenges in Capital

During the past two weeks, the Milken Institute has issued two similar reports documenting the difficulties and successes minority- and women-owned business have accessing capital.

The Minority Business Challenge: Democratizing Capital for Emerging Domestic Markets presents new findings and several specific recommendations to sustain minority businesses growth. The findings include:

• Three growth gaps exist in the United States: “the gap between the current growth rate and the rate necessary to sustain future long term economic growth; the gap between the labor force growth and labor force participation; and, the gap between the growth of emerging domestic markets and current investment rates in those markets.”
• Without increased capital infusions into the minority and immigrant business communities, economic growth in the U.S. cannot be sustained. Minority-owned firms are growing at a rate six times faster than the average growth rate for all firms – annual sales growth reported by minority firms of 34 percent is more than twice the rate of all firms. Minority firms received only two percent of all private equity investments and only three percent of all Small Business Investment Company funding.
• Every level of financing for minority businesses – equity, mezzanine and senior debt – is experiencing capital gaps. Only $2 billion of the estimated $95 billion invested in the private equity market in 1999 was managed by companies focusing on entrepreneurs in traditionally underserved markets.

The report, released September 25, 2000, was funded by the Minority Business Development Agency within the U.S. Department of Commerce. Several of the report's seven recommendations correspond to or reiterate 

Clinton Administration objectives (e.g. “Implement the New Markets Initiatives.”) Other recommendations include:

• Encouraging minority business incubator creation
• “Establish a National Innovation Development program – patterned after the Small Business Innovation Program – directed at minorities to nurture and finance high-growth ventures”
• Encourage state and municipal minority entrepreneurship programs, based on the success of existing state-based seed funds
• Support more research into best practices of successful, innovative financial instruments currently used to increase capital and investment in minority-owned businesses
• Provide tax investments to encourage investment in minority-owned businesses.

Along with the growth of minority businesses described above, the past decade has seen an explosion of women-owned enterprises:

• The number of women-owned firms has doubled since 1987, employment has risen four-fold, and revenues have quintupled.
• Today, women own 38 percent of America’s small businesses, approximately 9.1 million businesses.
• While the Small Business Administration has nearly tripled the dollar value and number of loans awarded to women since 1992, women-owned firms still only receive “12 percent of all credit provided to small businesses in the U.S. economy. For the first nine months of FY 2000," 16 percent of SBA-backed loans were awarded to women.

Economic Prosperity, Women and Access to Credit: Best Practices in the Financial Markets, funded by the National Women’s Business Council, a Congressionally established federal advisory council, takes a different approach to present the challenges women face in securing investment capital and financing. After a brief discussion of the current state of lending and investment in women-owned businesses, the report presents several case studies and examples of private and public (mostly federal) programs and initiatives that have been successfully implemented to overcome the challenges.

Several recommendations are included in the October 4 report:

• Create new credit scoring models to incorporate data relevant to women and women-owned businesses 
• Amend Federal Reserve Regulation B – Equal Credit Opportunity Act to permit the collection of demographic information from borrowers Implement a national capital access program
• Financial institutions should pool standardized small business loans and sell them as securities to institutional investors; and 
• Increase appropriations and congressional support for the five-year Economic Census, which provides the only national data on women and minority business operations.

Both reports are available for download from the Milken website: http://www.milkeninstitute.org