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Support for small businesses: Identifying the needs of minority-owned firms - Robin Newberger

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Robin Newberger, Senior Business Economist, Community Development and Policy Studies, Federal Reserve Bank of Chicago, US at the OECD Conference on SMEs and the Urban Fabric, 15-16 April 2019, OECD Trento Centre, Italy.

Full event info: https://oe.cd/SMEs-Cities

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Support for small businesses: Identifying the needs of minority-owned firms - Robin Newberger

  1. 1. Support for Small Businesses: Identifying the Needs of Minority-Owned Firms Policy, Governance and Regulations SMEs and the Urban Fabric April 15-16 2019 Robin Newberger Community Development and Policy Studies Federal Reserve Bank of Chicago This presentation represents the views of the author and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.
  2. 2. Trends in Self-Employment - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 8,200 8,400 8,600 8,800 9,000 9,200 9,400 9,600 9,800 2000-01-01 2001-01-01 2002-01-01 2003-01-01 2004-01-01 2005-01-01 2006-01-01 2007-01-01 2008-01-01 2009-01-01 2010-01-01 2011-01-01 2012-01-01 2013-01-01 2014-01-01 2015-01-01 2016-01-01 2017-01-01 2018-01-01 Incorportated Unincorporated Incorporated and Unincorporated Self Employment (000s) Self-Employed Unincorporated Self Employed Incorporated Source: US Census, Current Population Survey Source: Katz and Krueger, 2016 https://krueger.princeton.edu/sites/default/files/akrueger/files/katz_krueger_cws_- _march_29_20165.pdf
  3. 3. Trends in Business Starts Source: Kauffman Indicators of Entrepreneurship https://indicators.kauffman.org/ Source: Economic Innovation Group based on Census Business Dynamics Statistics (share of businesses)
  4. 4. Differential Impacts by Geography Source: Economic Innovation Group based on Census Business Dynamics Statistics
  5. 5. Sales and Earnings Trends (NFIB) Source: National Federal Independent Business Owners Small Business Economic Trends, 2019
  6. 6. Less Lending to Small Businesses Source: Economic Innovation Group, Dynamism in Retreat (2017) 329,221,721 179,638,754 242,459,574 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Small Business Loans Issued Per Year Under $1 Million USD ($ 000) Source: FFIEC, CRA Small Business Lending
  7. 7. What Do Business Owners Say They Want? Source: Pepperdine Private Capital Market Report, 2018 Source: National Federal Independent Business Owners, 2019
  8. 8. What do Business Owners Say They Want? Source: Kauffman Foundation, 2018 State of Entrepreneurship Survey
  9. 9. Possible Interventions: • Increase population (immigration) • Develop new tools and definitions in antitrust enforcement • Increase public investment in basic R&D • Increase broadband access • Reduce volume of regulations • Address consolidation of banking sector
  10. 10. Reduce Volume of Regulations Source: World Bank, Doing Business 2019 http://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf
  11. 11. Trends in Business Starts: Minority-Owned Businesses Share of New Entrepreneurs Source: Kauffman Foundation, National Report on Early Stage Entrepreneurship. https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf
  12. 12. Younger Firms Source: Annual Survey of Entrepreneurs, 2016 (Note: Firms with Paid Employees) All White Black Asian Hispanic Minority Less than 2 years old 0.08 0.07 0.20 0.13 0.15 0.14 2 to 3 years in business 0.12 0.12 0.16 0.17 0.2 0.18 4 to 5 years in business 0.09 0.09 0.12 0.14 0.13 0.13 6 to 10 years in business 0.18 0.18 0.20 0.23 0.22 0.22 11 to 15 years in business 0.13 0.14 0.09 0.13 0.13 0.13 16 or more years in business 0.39 0.40 0.24 0.19 0.17 0.19 All Firms 0.80 0.02 0.09 0.06 Share of employer firms by age within race/ethnic group
  13. 13. (Lower) Profitability 64.6 62.1 59 50 0 10 20 30 40 50 60 70 White Asian Hispanic Black Business had profits Business had losses Business broke even Annual Survey of Entrepreneurs, 2016 United States Chicago Metro Source: Next Street 2019, using Survey of Business Owners (2012)
  14. 14. Source: Next Street 2019, using Survey of Business Owners (2012) Lower-Margin Industry Concentration (Chicago,2012)
  15. 15. Lower Revenues by Place Table 6. Small Business Revenue by LMI and ethnic/minority plurality of the neighborhoods No Employees 1 to 4 employees 5 to 19 employees more than 20 employees nonLMI median revenue 61,000 130,000 340,000 717,809 LMI median revenue 59,000 130,000 320,000 690,000 non LMI average growth rate 0.29 1.31 2.93 9.31 LMI average growth rate 0.08 0.56 0.13 0.66 Asian 64,000 140,000 290,000 673,867 Black, non-Hispanic 57,057 120,000 290,000 676,035 Hispanic/Latino 59,000 130,000 331,510 680,000 Non-Hispanic White 62,000 130,000 345,716 730,000 Source: Toussaint-Comeau and Newberger, 2019 (forthcoming) Five Cities: Atlanta, Baltimore Chicago, Houston and Los Angeles
  16. 16. Less Business Vibrancy by Place Distance to Purchases (Chicago) Source: JP Morgan Chase Institute, 2016Source: Economic Innovation Group Distressed Communities Index, 2018
  17. 17. Need for Owner/Personal Funding… Source: Federal Reserve Board, 2017 Source: Alicia Robb and Arnobio Morelix, 2016 (The Kauffman Foundation, Start-Up Financing Trends by Race)
  18. 18. …Yet Lower Wealth among African American Families Median Value of Net Worth for Families with Holdings (2016) Source: Survey of Consumer Finance, 2016 Lisa J. Dettling, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, and Jeffrey P. Thompson with assistance from Elizabeth Llanes, 2017
  19. 19. Higher Bank Loan Denial Rates for Minorities Source: Federal Reserve Board, 2017 Source: Alicia Robb, 2018
  20. 20. What Do Business Owners Say They Want? Source: Next Street, 2019
  21. 21. Recommendations Regulatory (National) • Strengthen Community Reinvestment Act • (Continue to) Offer government- guaranteed loans Regulatory (Regional/Local) • Promote neighborhood-based corridor strategies Private / Public / Nonprofit Sectors • Improve BSO service delivery • Target industry strategies • “Ecosystem” coordination • Diagnose financial health • Address financing needs • Increase social capital • Invest in neighborhood strategies • Support supplier diversity
  22. 22. Improve BSO Service Delivery: Diagnose Financial Health Knowledge of financial products: knowledge of accounts receivable, commercial banking, contract, equipment lease, inventory management, nonbank and trade credit financing. Obtaining financing: receipt of credit through business credit cards, bank loans, personal credit cards, vendors, equipment leases, and trade credit. Financial planning and oversight: number of employees, management experience, amount of available credit on a credit card, existence of a separate bank account for payroll, regular review of profitability, and use of a budget Federal Reserve Bank of Chicago, Pepperdine, et al Center for Financial Services Innovation
  23. 23. Improve BSO Service Delivery: Develop Local Business Ecosystem • Dedicated organization whose sole focus is aggregating and coordinating resources • Local multi-funder collaborative to provide steady flow of resources • Impact measurement efforts included • City government at the “business ecosystem” table Next Street, 2019
  24. 24. Address Financing Needs // Offer New Resources • Blackstone Inclusive Entrepreneurship Challenge (3-year, $3 million program as of 2017) • Chicago Entrepreneurs of Color Fund ($4 million JP Morgan; $2.5 million Fifth Third = $6.5 million) • New Voices Fund ($100 million from family-run conglomerate) • Chicago Community Loan Fund ($10 million long-term low-cost loan by JP Morgan) Source: Robb et al, 2018
  25. 25. Train Front-Line Personnel // Focus on Social Capital Source: Robb et al, 2018Source: Robb et al, 2018
  26. 26. Strengthen Neighborhood Assets Source: Toussaint-Comeau and Newberger, 2019 (forthcoming) Five Cities: Atlanta Baltimore Chicago Houston Los Angeles -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 0.25 non-employer businesses 20 + employees 5 to 19 employees 1 to 4 employees LMI Hispanic plurality neighborhoods Black plurality neighborhoods Asian plurality neighborhoods Unemployment Labor force participation Population Figure 10. Correlation estimates of the relationship between selected characteristics and having businesses in high LQ industries for the neighborhoods and the city neighborhood city -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 Labor Force Unemployment LMI Black plurality neighborhoods Asian plurality neighborhoods Hispanic plurality neighborhoods Atlanta Baltimore Chicago Houston Los Angeles Population Figure 8. Correlation estimates of the relationship between selected characteristics with business density and business revenue business density revenue
  27. 27. The Best Ways to Support and Sustain Minority-Owned Businesses? • Train for business “financial health” • Make improvements to ecosystem of small business service providers • Supplement with niche sources of capital • Support networks of minority financial service providers and financial professionals • Address regional and neighborhood issues by strengthening neighborhood assets and household wealth-building

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