Capital is problem for black firms

May 08, 1994|By Ian Johnson | Ian Johnson,Sun Staff Writer

After nearly nine years as a laser printer repairman, Ron Hoff decided to go into business for himself. But, like many budding black entrepreneurs, he ran up against the money wall.

"I had been running my own business part time after my regular job, but it was too much. I had to make a decision, to either give up my business or run it full time. But I couldn't get a loan to get started and was ready to give it up," Mr. Hoff said.

Unlike many black entrepreneurs, who fail for lack of financing, -- Mr. Hoff was able to take advantage of an innovative funding program. Working with the Council for Economic and Business Opportunity, Mr. Hoff devised a business plan and was given a $20,000 "micro-loan" -- the sort of small loan that many banks don't bother giving businesses, especially minority-owned enterprises.

The result: Mr. Hoff's business, A Better Laser Cartridge, is flourishing. The firm's revenues increased last year to $28,000, from $5,000 in 1992. This year, it is on track for $100,000 in revenues and the company's first annual profit.

The return to society has also been dramatic. Mr. Hoff is paying off his loan ahead of time and plans to hire a full-time employee to help him in his shop on Key Highway. The 33-year-old's long-term goal: $1 million in revenues by 1998 with some of the profits going to help young men who lack fathers.

As leaders of black businesses and government gather in Baltimore this Wednesday for the third annual Black Entrepreneurship in America conference, stories such as Mr. Hoff's are bound to be at the center of discussion. Black entrepreneurs are racking up impressive successes, but still are having to fight an uphill battle to do so.

Despite improvements in many banks' lending practices, for example, studies still show that blacks are excluded from mainstream sources of financing. The challenge to policy- makers meeting this week may well be to find a way to open up private financing, while implementing the sort of public programs that helped Mr. Hoff to bridge the gap.

"Whether it's making the transition to new technologies or becoming integrated into the world economy, the single key issue for black business is capital. The challenge is to use the smaller amount of wealth to form companies that are competitive with companies that started with more wealth," said Bill Bradford, a professor at the University of Maryland College Park who specializes in black businesses.

Black business people agree that capital is their No. 1 problem. According to a poll by the Roper Organization last year of black entrepreneurs, 83 percent said raising capital was a "very serious problem." The reason, they said, is that investors and banks see black businesses as high risk and have a negative view of blacks' business skills.

The most comprehensive study on bank lending practices showed that black businesses were one third less likely than comparable white firms to be approved for a business loan. That study, done in 1987 by the U.S. Commerce Department's Minority Business Development Agency, is probably not dated, experts say, because the recent recession caused banks to cut loans even more -- with minorities the first to feel the "credit crunch."

Many banks, however, point to new programs to lend to minorities, programs that analysts of black businesses say have helped make capital available.

NationsBank Corp., for example, runs a national resource center in Nashville, Tenn., that tries to increase the success rate of minority businesses through education and technical assistance. Locally, the bank has also continued programs originated by Maryland National Bank, which NationsBank recently acquired. Last weekend, NationsBank sponsored a workshop at Coppin State College aimed at black entrepreneurs and has dedicated part of its $10 billion community lending program to minority businesses.

Another source of money could come from the $4 trillion that pension funds control. Pension funds have been wary of investing in new businesses because the funds' mandate usually involves making cautious investments, but a few venture capital funds that invest in black businesses have scored some successes in prying loose some of the funds' capital.

Besides discrimination, other forces make black businesses' progress a hard slog.

One disadvantage crops up even before the first business plan is jotted down. Many blacks are at a financial disadvantage because black families have, on average, one quarter the wealth white families, according to Professor Bradford. That gives them less collateral when negotiating with a bank. Or, if they're thinking of taking out a second mortgage on their house to pay for their business, that lack of wealth means they probably have a smaller house and so can't get as much money on the mortgage.

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