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University of Arkansas, Fayetteville ScholarWorks@UARK Accounting Undergraduate Honors Theses Accounting 5-2018 Minority Entrepreneurship: How Access to Capital and Strategic Decisions Affect Success Thea Winston Follow this and additional works at: http://scholarworks.uark.edu/acctuht Part of the Accounting Commons, and the Entrepreneurial and Small Business Operations Commons Recommended Citation Winston, Thea, "Minority Entrepreneurship: How Access to Capital and Strategic Decisions Affect Success" (2018). Accounting Undergraduate Honors Theses. 33. http://scholarworks.uark.edu/acctuht/33 This Thesis is brought to you for free and open access by the Accounting at ScholarWorks@UARK. It has been accepted for inclusion in Accounting Undergraduate Honors Theses by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. Minority Entrepreneurship: How Access to Capital and Strategic Decisions Affect Success by Thea R. Winston Advisor: Dr. Barbara Lofton An Honors Thesis in partial fulfillment of the requirements for the degree Bachelor of Science in Business Administration in Accounting. Sam M. Walton College of Business University of Arkansas Fayetteville, Arkansas May 11, 2018 Table of Contents 1. Introduction • Abstract • Objective 2. Literature Review • Background Information • Conclusion 3. Context 4. Methodology • Design • Limitations 5. Research • Case A • Case B • Case C 6. Results • Analysis • Alternatives 7. Recommendations • Proposed Solution • Future Research 8. Conclusion Abstract Many researchers have discovered that entrepreneurship is a source of financial freedom that if done successfully will ensure wealth for generations. Accordingly, minorities have seized that opportunity in record numbers with hopes that they will become prosperous. However, in addition to the increased success rate of minority-owned businesses, there is a rise in the failure rate of minority-owned businesses specifically in the African-American community. In this thesis, I conducted a case study of three entrepreneurs at different stages that supports the theory that access to capital and strategic decisions affect the success of minority entrepreneurs even if they are not the only factors. This case study provides an in-depth and holistic understanding of issues that plague minority entrepreneurs. Introduction/Objective In 2012, over 8 million minority owned businesses contributed $1.38 trillion dollars in revenue and over 7.2 million jobs (Minority Business Administration, 2010). Despite these impressive numbers, minority owned firms, particularly African-American, continue to fail at an alarming rate. Starting a business is already a tough pursuit that many start and many more fail to achieve the level of success they envisioned if they even complete the start-up process. As such, it is considerably harder for minorities to complete such a daunting task as they face more barriers to entry and even more challenges once they start. According to Fairlie, Robb and Hinson (2008), the number of minority entrepreneurs rose rapidly in the last twenty years; however, their share in totality is still small and the rate at which they grow lags behind that of white-owned businesses. This is an inefficiency that yields many implications for these specific communities and society as a whole. In this thesis, I will analyze financial barriers minority entrepreneurs face attempting to start a business and the consequences this presents once in the industry in addition to how strategic decision making has an effect on the outcome of these pursuits. By the end of this study, I hope to have a better understanding of the effect of financial barriers on minorities’ entrepreneurial endeavors, their strategic endeavors and how it compares to those of their counterparts. Literature Review Financial Discrimination Start Up Capital Access to capital is one of the biggest factors affecting the ability of minority nascent entrepreneurs – those who wish to start a business, but have not done so. This was the case when research first ensued in 1969 and continues to be an issue today. In the study on the State of the Field done specifically regarding race by the Kaufmann Foundation (2017), many minority owners lacked wealth in comparison to their counterparts. While wealth is not seemingly a big factor, it becomes one when it affects your credit score which in turn affects your ability to attain equity to be used as collateral or to create funding. Furthermore, the lack of wealth means that minority entrepreneurs are forced to look outside of themselves for funding instead of being able to invest in themselves or have their family invest in their pursuits. This can be attributed not only to their lack of wealth but the liquidity of the wealth they do have. As a result, minority owners tend to enter industries with low equity costs, relative to their majority counterparts whose wealth, on average is 11 to 16 times higher allowing them to attain more external debt when needed (Fairlie, Robb, Hinson, 2010). Low equity costs, on the other hand, contribute to high failure rates for minority business owners. Wealth and equity, however, are not the biggest disparities associated with attaining capital. Inequalities become more apparent when minority owners attempt to apply for loans. According to Robb, Fairlie and Hinson (2010), first and foremost minority owned firms are simply less likely to apply for funding. This may be because of the stigma surrounding loans. It is hard to put the work in to applying for a loan when the assumption is that loans aren’t accessible or attainable. Their hesitations are not baseless. The following excerpt from Robb, Fairlie and Hinson’s study illustrates that, even when controlled for outside factors, lending discrimination is present. “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. 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 conducted 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.” In addition, research completed by Fairlie,Robb and Hinson shows that the denial rate for small minority business owners is three times higher than their white peers. Only 17% of small minority business owners will actually receive loans in comparison to the 23% of their majority counterparts. To continue analyzing the disparity in loan application, we can also observe the amount of loan received once owners have applied for loans. When receiving a loan, small minority businesses on average receive $149,000 which is less than half of what white small business owners receive. Additionally, faced with a higher interest rates, research demonstrates how minority owned businesses suffer from the lack of access to capital. This disparity increases as the size of the firm grows according to (cite the source of this assertion). During Operations Financial discrimination remains a barrier when minorities wish to expand after they have initially gotten their business operational. The same study (cite the authors and year again here) shows that disparities in access to capital grows after the first year of operations. Additionally, different challenges and different disparities are presented during operations. For example, Black-American owned firms generated sales of approximately $58,000 while a non-minority firm generated over 9 times that amount (McManus, 2010). This sales disparity can be explained by the fact that most of minority-owned businesses are in the lowest 20 sales industries while only 13.1% of minority owned businesses are in the top 20 sales industry (citation needed). In addition, there is disparity across specific industries. Minorities are disproportionally hurt by the cost of and lack of access to capital. The access to capital during start-up and operations doesn’t just make it hard to conduct business, but it negatively impacts the profitability of these businesses. African-American entrepreneurs are especially vulnerable. According to the Ewing Marion Kaufmann Foundation (2017), “While approximately 16 percent of minority-owned businesses report profits being negatively impacted by the cost and lack of access, only about 10 percent of non- minority-owned businesses report the same.” Strategic Decisions There are many other factors that contribute to the overall inefficient utility of minorityowned businesses. There is the lack of human and social capital. For example, minorities tend to have a lower education level than those of their majority counterparts which will eventually translate into a barrier for entrepreneurship (Fairlie, Robb, and Hinson, 2010) For some, there may be a language barrier or implicit bias from those who minorities seek to conduct business with. Minorities also pursue entrepreneurship at a younger age. Furthermore, minorities have a lack in social capital whether it comes from the lack of familial wealth and support or just the networks they have been socialized into (Roithmayr, 2014). According to Roithmayr, such external factors after being reproduced generation after generation become “locked-in” and hard to dissimilate. Therefore, while financial discrimination is not the only factor that contributes to the failure of minority business enterprises, I will argue that for some factors, they are circular. In addition, the Minority Business Development Agency (2010), has found that strategic decision-making and alliances affect the success of minority owned enterprises in comparison to that of the majority. The study suggests that in order to maintain comparatively with their majority counterparts, minorities business owners must continue to make themselves visible, form alliances and partnerships that benefit both parties and leverage government resources. The outcome of successfully implementing smart strategies are larger more successful businesses, more insightful leaders. Strategic decisions of minorities, which is arguably the second largest factor to consider when discussing the success or lack thereof in minority businesses, are important to analyze and improve upon in the coming years (Minority Business Development Agency, 2010). Another study (Lyon and Zhang, 2017) have found that women and minorities are more likely to benefit from entrepreneurial training than their counterparts. This study helps suggests that if minorities have the background and the education to make better strategic decisions, then they are more likely to be successful in the long run. Conclusion In conclusion, this literature review has given me a thorough understanding of previous research done on why minority-owned enterprises tend to fail more rapidly than those of their majority counterparts. Racial and gender discrimination can be observed when minorities attempt to gain access to capital whether to start up or to continue and expand current operations. This discrimination when it comes to financial matters lead to other implications that further the opportunity gap that is present between the success of firms owned by minorities and their majority counterparts. While I found that financial means are not the only cause for the failure of minority businesses, it is one of the more prevalent reasons and one of the reasons a policy change can help. Minority business enterprises are critical to the US Economy and the potential that isn’t being utilized is an inefficiency the US can’t afford to ignore. From this review, I have decided to conduct a case study that specifically focuses on the access to capital and strategic decisions of minorities, specifically African-Americans and further understand how it affects the success of their businesses. Context When performing a case study, it is important to consider the climate in which the case study is being performed whether that is political, social or financial. I will briefly describe each of the climates listed to provide context to the study. The political climate of the United States is currently very divided. There is a drastic polarization of the population forcing constituents to choose a side. There are smaller parties, but the majority of the power lies within the two major parties. Even more, there is an increasing amount of violence due to political differences. There is also a decreasing amount of trust in governmental institutions. The graphic below shows the change in trust from the population since 1979. The social climate of the United States is interesting considering the political climate. I will discuss specifically the social climate as it pertains to African-Americans as they are the focus of this study. Despite increasing violence and decreasing trust in governmental institutions, African-Americans are utilizing their voice arguably more than ever. Their voice is not just being used to speak out against discriminatory actions, but against poverty, the justice system, gender violence and many more important social issues. The financial climate of the United States is currently a positive economic picture according to FocusEconomics 2018. There is growth in employment and wages which is stimulating the economy and creating a healthy business environment. This environment is being risked by trade measures threatened by the current President, Donald Trump. According to FocusEconomics, the economy is currently consisting of majority service-oriented companies. Despite a changing global environment, the US remains the largest and, arguably, the most important economy in the world. This financial environment makes the period conducive to taking risk and pursuing entrepreneurship. Methodology Design Based on the findings reported in my literature review, I completed a case study to gain further understanding factors experienced by minority-owned business that may contribute to their success or failure. I have performed three in depth interviews of African-American entrepreneurs with different backgrounds and that are at different stages in their careers. The following interview questions were used. • • • • • • • • • • • How did you decide to start a business? What are the goals for your business? How did you fund your start up and attain additional capital? Did you give up equity? Enter with a partner? Can you talk a little bit about your business processes – Financing, Advertising, Strategy? What are the top 3 challenges? Have you faced any bias when pursuing your endeavors? What motivates you when/if struggling? Do you have an advisor or mentor to go to when unsure? What are your measures of success – do they change as company grows? Next steps? Is there anything you would like to add that you believe I missed? For this case, success is defined as the enterprise generating a steady stream of revenue and being self-sufficient. Failure being defined as the exact opposite – a scattered stream of revenue and reliance on outside capital to run. Limitations There are a few limitations to this case study. The first limitation is that the cases selected were limited to entrepreneurs I knew personally. Because of this, the study is subject to researcher bias which I attempted to reduce by controlling the questions. For each interview conducted, I asked the questions in the same order and in the same manner to minimize leading. Secondly, there is also response bias due to the personal relationship with each case. Some cases may be more inclined to share more candidly, while other cases may be hesitant to share their experience especially if they are struggling financially. Lastly, when conducting a case study, there is always interpretation bias. There is a tendency to present the information in such a manner that it supports the initial theory. While there is not a formal control to combat this specific type of bias, I aimed to remain as objective as possible when synthesizing and interpreting results. Research For each case, I will provide background information and then a summary of my account. Case A Case A is a 49 year-old African American woman. She was born in Lake Village, Arkansas where she attended school. She received her Bachelor of Science in Business Administration from the University of Arkansas in 1990 and later received a CPA following graduation. Her industry is in Public Accounting and she had years of experience before she decided to pursue entrepreneurship and start her own CPA firm in 1996. According to her, she decided to open her own firm because of time, opportunity and the desire for flexibility. She had recently left public accounting, the big 6 at the time, and went to work for a local firm in the Delta area of Arkansas. The level of services at that particular firm were below what she was accustomed to providing. Their knowledge base was limited, and she believed she had more to offer clients. Furthermore, she was starting a family. Entrepreneurship allowed flexibility while also allowing her to help her community. She focused on non-profits in the area that previously stayed in trouble on the financial end because of reporting. The goals for her business fluctuated as the amount of time she could dedicate changed as well; however, a few goals remained constant throughout her entrepreneurial career. She desired to maintain a controllable work-home balance especially with three children that were born in different times of her career. She had just left a career where she worked strenuous hours at times and she knew that was no longer what she desired. She also strived to develop more confident accountants/bookkeepers in the area specifically new graduates and moms, as she could relate to the challenges they would face in the work force. The hope to provide a positive work environment to new graduates and moms added a small aspect of social action to her career. This idea of helping the community pushed Case A when she was lacking motivation. Once she had made the decision to pursue entrepreneurship, she immediately started taking the appropriate steps. Initially, she started out of her home. This allowed her to keep start-up costs low and keep the price of her services low as she acquired no additional overhead. Furthermore, this allowed her to accrue more usable revenue as she retained more of her hourly rate. She saved most of her money and continued to grow her client base in the early years. Once the client base was sizable and she outgrew her home office, she rented a few places ranging in price. The first place she rented was from a family friend who charged her well below the going rate which allowed her to continue with her relatively low rate. After renting for a while, she decided it was time to open her own office. The fact that her husband was a lawyer and looking for his own space helped as well. They decided to finance their new business by applying for the intermediary relending program. They put together a well thought business plan and was soon accepted. The intermediary relending program was a federal program that gave the government 20% equity until their loans were paid off. Their first location was in Helena, Arkansas. The revenue from that location allowed them to open another location in Forrest City, Arkansas. Their success eventually allowed them to pay off their loans and completely own their own business. After discussing how she started and entered the market, we discussed her continuing business processes, specifically strategy. When Case A first entered the market, she strategically focused on the non-profit organizations in the area. The organizations were doing amazing work but were continuously losing funding due to unorganized and misstated financial statements. She targeted those businesses as she knew she could provide what they needed. She moved carefully because the rules in accounting are strict on how you can advertise. During the period when she was expanding her network, advertisement was almost considered taboo. Knowing this she relied heavily on word of mouth from previous clients. To reach outside of that network, she conducted seminars that extended her reach and helped grow her clientele. These seminars introduced businesses and organizations to the financial foundations they were missing to keep their funding. Case A said, “Once you teach people WHAT they need, then they know to come to you to get it done.” Because of this approach, she became more of a consultant than an auditor. This was her strategic plan and it made her successful in the area according to her measures of success. Her measures of success were very qualitative instead of quantitative. This is not unexpected when considering the nature of her goals when starting her business. She saw her staff grow in their field and go on to work in different companies in different positions. When she saw the growth in them, she considered that success. Of course, she wanted to be successful financially, which she was, but that was never the primary goal of her entrepreneurial endeavors. She found that as her life changed, as her firm grew, the measures of success changed as well, but seeing the growth of her staff as a success never wavered. Despite her success, she faced some challenges in her field. The one that she faced most often, both in public accounting and in starting her own firm was having tough clients. Tough is used to describe several clients that were challenges in different ways. She had some that didn’t want to comply with what was required. She learned the hard way about strategically selecting clients. She realized as her firm grew that she didn’t have to accept every organization that presented an opportunity. It was up to her to do the proper research and then decide if the client was worth pursuing. Tough clients were also the ones that were hard to work with specifically those that undermined her position because she was a Black woman. Another challenge she faced was making sure she was paid what she was worth. While she worked to keep the price of services relatively low, it was more than what many in the area were accustomed to paying. This made it difficult to attract new clients, but it was easy to retain them after seeing the quality of her services. As mentioned in her challenges, Case A faced bias as black woman – in public accounting and in her own business. During public accounting, she was often one of the only black women, if not the only black woman in that space. She faced bias from her peers who thought that she shouldn’t have been in her position. When starting her business, she didn’t receive opportunities sometimes because of her color. Once, she was working for a client and overheard an older white woman from management say that they didn’t want a person of color