Performance of African American Businesses
I, Dannel Bartholomew, declare that this paper entitled:
Performance of African American Businesses
Was written by myself independently, using the sources and information listed in the list of references. I am aware that my work will be published in accordance with 47b of Act No. 111/1998 Coll., On Higher Education Institution, as amended and in accordance with the valid publication guidelines for university graduates’ theses.
In Prague, 28 July 2019. Dannel Bartholomew
I dedicate this research to my mother Paula Bartholomew for her immense mutual support and encouragement throughout my educational journey.
I thank the Almighty God for enabling me to successfully go through this course and develop my research project. I acknowledge with great appreciation the tremendous assistance and willingness by my thesis supervisor, Professor Ali for guiding me throughout the course. A special thanks to Dr. Sheila Aird for keeping me motivated, I appreciate your resilience and guidance. I also acknowledge everyone who took part in helping me reach this educational level. I also sincerely wish to thank all the African American business community in New Orleans for their honest and immense support in dutifully aiding in data collection for my research work. Your dedication and sacrifice cannot be underestimated.
African American entrepreneurship, especially small and medium-sized enterprises (SMEs), has steadily risen since the end of racial segregation in the US and the enactment of the Civil Rights Act in 1964. Within the first five years of startup and operation, a majority of business enterprises owned by African Americans often experience poor performance. Previous literature on this topic has identified factors such as financial issues, historical injustices rooted in slavery and subsequent racism, and racially motivated adverse economic policies by the US government during the segregation period. The aforementioned factors have been identified as potential reasons for poor performance in African American business enterprises. This paper narrows in scope to evaluate how access to finance and other credit facilities interplay to oversee the poor performance of small to medium African American enterprises in their initial five years of startup. Further, this paper projects some recommendations that the US government can adopt to boost sustainability within the African Americans business environment since SMEs are a vital part of the overall US GDP.
Keywords: African American, entrepreneurship, finance, credit facilities.
CBO: Characteristics of Business Owners
GDP: Gross Domestic Product.
KFS: Kauffman Firm Survey
SMEs: Small and Medium Size Enterprises.
US: The United States of America.
CPA: Certified Public Accountant
Table of Contents
1.3.1 Factors Influencing Access to Finance and Other Credit Facilities by African American Businesses in the US. 5
1.5 The significance of Study 9
2.1 Determinants of Access to Credit 11
2.1.3 Capital Access Disparities 12
2.2.1 Racial Discrimination 14
2.5 General Reasons for Poor Performance of African American Business Enterprises in the US 16
3.3 Sample and Sampling Methods 24
3.4 Data Collection Procedures 24
3.6 Ethical and Logical Considerations 25
RESEARCH FINDINGS AND RESULTS 26
4.1 Background Information on the Sampled Target Population 26
4.2 Analysis of the Main Findings of the Research 26
4.3 Implications of the Main Research Findings 31
CONCLUSION AND RECOMMENDATIONS 34
5.1 Research Recommendations 35
5.2 Recommendations for Future Research 36
Appendix II: The Distribution of Startup Capital in New Orleans………………………….……………………….48
Over the past few decades, the United States has witnessed an increase in entrepreneurial spirit among African Americans. The increase in the small and medium-sized enterprises (SMEs) has been a major milestone in the history of the country since the enactment and implementation of desegregation laws. The notable increase in entrepreneurship practices in the US remains a great achievement for the African Americans population and the country at large. For instance, according to Ensari and Karabay (2014), an increase in the establishment of SMEs in a nation significantly contributes to economic growth and ultimately contributes to an increase in the overall GDP. Additionally, Cotei and Farhat (2017), argue that the ability of entrepreneurs to access capital influences the growth of their business enterprises. Also, entrepreneurs who have access to finance are more likely to engage in riskier but profitable business ventures, thus creating a good stream of profits for the business and taxes for the government. However, the inability to access sustainable capital presides over lagging of the business units, concerning performance and size. Essentially, the spirit of entrepreneurship has continued to rise among African Americans in the US. African American enterprises are widely spread across the US, and as such, they face unique challenges. Thus, there is a need for establishing access to finance significantly to improve the performance of African American enterprises. In this respect, this paper seeks to establish how access to financing affects the performance of African American businesses in the US. The findings will be supported by existing studies and data on the causal relationship between access to finance and performance of African American businesses.
1 .1 General Objectives
The overall goal of this study is to assess and evaluate how access to finances and other credit facilities affect the performance of African American businesses in the US.
1.1.0 Specific Objectives
The research study will be guided with the following specific objectives to assess the performance of African American business in the US.
- To investigate how access to finance and other credit facilities affect the performance of African American businesses in the US.
- To establish factors that influence access to finance and other credit facilities by African American businesses in the US.
1.2 Research Questions
- How does access to finance and other credit facilities affect the performance of African American enterprises in the US?
- What factors influence access to finance and other credit facilities to affect the performance of African Americans business enterprises in the US?
1.3 Background of the Study
The critical effect of racism and slavery among African Americans has continued to have a negative influence on the economic growth of this population in the United States. According to Forbes magazine (2018), African Americans struggle financially to solicit finances to start their business enterprises due to the unfortunate history of racism in the nation. Forbes magazine (2018), reiterates that the notion of going to college to secure job opportunities and business gaps in the US economy seems to be a nightmare among African Americans. This experience has created the need to engage in self-employment, where these populations depend upon SMEs to sustain and promote their livelihoods. In parallel to this, the wealth gap between whites African American is big. It is estimated that it would take African Americans more than 228 years to close the gap (Forbes, 2018). While some organizations such as the Association of Black Foundation Executives have been introduced to stabilize African Americans economically, they are yet to take root. This can be largely attributed to the lack of sufficient funding to engage in sustainable business activities.
A study by Gibson, Harris, Walker, and McDowell (2014) shows that African Americans start businesses at a higher rate but still fail at the same rate. Interestingly, more than 50% of African American men and women are more likely to start a business compared to their white counterparts. Gibson et al. (2014), show that a majority of these businesses are at the risk of failure due to the lack of good and sustainable sources of financing. Additionally, businesses owned by African Americans that get off the ground do not grow as fast compared to the ones owned by whites in the US. The high failure rates significantly contribute to the low number of African American-owned enterprises in the country. To that end, it is safe to say that the inability to access credit facilities from individual business lenders and financial institutions remains the key challenge facing African American entrepreneurs.
Historically, there has been a strong entrepreneurial spirit amongst the African American community in the US. The historical experiences of this population make their entrepreneurial journey unique. Their contributions demonstrate that they do not lack the entrepreneurial spirit, despite the racism and slavery exercised against them (Wingfield, & Taylor, 2016). Racial discrimination and slavery did not deter the African American community from being entrepreneurs, although they were significantly disadvantaged in starting businesses as compared to their white counterparts. Wingfield et al. (2014), maintain that the contributions of early African American entrepreneurs were essential as they provided necessary skills, tools, and motivation for others to start their businesses. Even though they were small, their earliest enterprises such as shoemaking, barbering, and blacksmithing were a significant influence to the expansion of their businesses in the early twentieth century (Fairlie, Morelix, Reedy, & Russell-Fritch, 2015). Notably, African American entrepreneurs perfected or specialized in their products and services. For instance, they engaged in barbering to foster businesses and skills that would be later passed down to other generations. Most of the learning practiced by African Americans was through apprenticeship since most of them were not allowed to attend schools owing to racism, segregation, and slavery trade practices against them in North America.
According to a study by Myers and Chan (2017), the high failure rate of minority entrepreneurs and fewer African American-owned enterprises is primarily caused by inadequate access to capital and credit facilities. The authors continue that African Americans often mention that “unless something changes to make things better and make more cash available, we’ll be where we are. I’m surviving. I pay one bill at a time. It’s a daily walk. It’s a faith walk.” Here, it is apparent that entrepreneurship remains an essential venture in the US since it immensely promotes economic growth and sustainable livelihoods. Given the noticeable differences between African Americans and whites about wealth and income measures, it is essential to consider the reason for these differences. The differences can be explained by examining the ease of accessing finances and other credit facilities by African American business owners, which is the main reason for the disparity.
Decker, Haltiwanger, Jarmin, and Miranda (2014), also argue that business ventures are a driving force in job creation and economic growth in the US. SMEs are especially essential in creating job opportunities for African American youth. The taxes collected by the government spur economic growth by increasing the GDP of Americans. Therefore, African American businesses significantly contribute to the US economy, although their enterprises face unique challenges in comparison to white-owned enterprises (Decker et al., 2014). As earlier mentioned, African Americans have little access to financial resources and this restricted access to capital has significantly affected the effective running of their business entities. African American owned businesses have a high chance of failing to access finances required to keep the business running, considerably affecting their performance. Although entrepreneurial spirit continues to grow among African Americans, several factors have hindered the access to quality financing of these business enterprises as discussed below.
1.3.1 Factors Influencing Access to Finance and Other Credit Facilities by African American Businesses in the US.
Previous research on the increase of SMEs in the US among African Americans and their subsequent failure to sustain themselves has been linked to several socio-economic, cultural, and political factors. Most of the factors that hinder access to finance and other credit facilities by these populations are attributed to their historical background. Among the factors include discrimination and the stereotypes held by society against them.
Financial Factors: The performance of African American-owned businesses in the US is generally affected by financial aspects such as credit scores, personal savings, market regulation, and assets. According to an article by Bates and Robb (2014), most African Americans entrepreneurs rarely keep systematic records of their enterprises, which is an element that has limited their ability to assess the performance of their businesses. Financing and lending organizations heavily rely on financial records and statements of a business to ascertain its viability for loans or access to capital financing. However, this remains a phenomenon that lacks among a majority of African American-owned business start-ups. Therefore, the inability of African Americans to have consistent financial statements clearly showing their creditworthiness has been a significant setback towards accessing capital financing from banks and other valid credit facilities in the US. Financial constraint is the main challenge in African American businesses since they have different types of finances from their white counterparts. Bates et al. (2014), state that most African-Americans are more likely to depend on loans from financial institutions as a start-up capital as compared to the whites who use their savings. The reliance on loans from financial institutions by African American entrepreneurs has limited the success of their business enterprises. Over-reliance on loan to finance businesses also means that African Americans will spend most of their profits repaying the loans they had secured as capital for their enterprises; at a time with exorbitant interest rates.
Insufficient Collateral: A majority of the African American population lacks sufficient collateral to access loans and other forms of business financing from financial institutions such as banks and individual business lenders. This financial obstacle has generally reduced the efficacy and sustainability of their start-ups. Lee and Drever (2014), maintain that the absence of collateral to access capital financing for businesses leads to poor performance and significant challenges in running successful business ventures. Thus, there is a need for African Americans to establish means by which they can access loan facilities for business start-ups. For instance, African American entrepreneurs can engage in business partnerships to accumulate enough collateral to access loan facilities to start their business enterprises.
Social Factors: The access to finance and other credit facilities among the African American community has been limited to social factors. Discrimination based on race, geographical location, and general stereotyping have significantly downplayed the ability of these business entrepreneurs to access finance and other credit facilities (Palia, 2016). There is rampant discrimination by financiers and bias in the lending market, which has lowered the chances of African American entrepreneurs in accessing funds at the same rate with their white counterparts. Additionally, Palia (2016) maintains that African American entrepreneurs are less likely to be given loans to establish business ventures as compared to their white counterparts. For instance, Palia (2016), mentions African American borrowers are vulnerable to rejection at a 17-33% higher rate in comparison to their white counterparts. Generally, the increased discriminative tendencies in the access to funding and other credit facilities against these populations need to be addressed to ensure that they record good financial statements.
Adverse Economic Policies: During the racial segregation era, the US government formulated and implemented adverse economic policies that have continued to play a major role in limiting the access to finance by African Americans. For example, the US government developed housing policies which were overtly racist and upheld models of systemic white supremacy. According to Fain (2017), African Americans were subjected to paying higher rents for apartments in the city compared to the mortgage paid by whites in the suburbs. This implies that African Americans could not accumulate equity to boost their standard of living. As discussed above, current literature suggests that Black people are less likely to have enough collateral or personal savings to start a business with the ideal loans from banking institutions. However, when studied in conjunction with the inability to access mortgages and build equity, it is apparent that scholars focusing on the surface level issue of Black people not having enough collateral highlight a symptom of systemic poverty and racism. Consequently, the root cause of why an entire population in the US would generally have much less to offer as collateral than their white counterparts has been overlooked.
The enactment and implementation of these adverse economic policies prompted African Americans to start small businesses such as barbering, beauty shops, pharmacies, small grocery shops, and blacksmithing to sustain their livelihoods. Also, they sought to serve their fellow African Americans. A study by Fain (2017), restates that during the decades of racial segregation, these populations struggled economically, reducing their ability to gain substantial financial power to invest in large scale businesses. However, after the end of racial segregation, the already established African America businesses started to collapse as a majority of them moved to urban centers and owned homes in the big cities. Urbanization meant that a smaller population with a low purchasing power of remained leaving behind with a struggling, small economy. Interestingly, these adverse economic policies exercised against African Americans during the US integration of the 1960s were insidiously supported by the US government. A majority of African American business owners and financially successful citizens crowded in different professions such as teaching, nursing, and social work, which brought the need to curtail their empowerment.
In general, financial constraints, insufficient collateral, social issues, and adverse economic policies are the most significant issues affecting African American business performance and business ownership. The factors have generally contributed to the inability for African American entrepreneurs to access finance and other credit facilities to start and maintain their businesses. Therefore, there is a need for the formulation of financial regulations that aim at protecting African Americans from exploitation by financial institutions. Notably, many African American borrowers may have limited exposure to financial management, banking, and credit procedures, which has created a potential environment for economic exploitation by financial institutions. The policies formulated should consider the plight of business borrowers, who unlike financial institutions, use personal knowledge in accessing financial matters. Crump, Singh, Wilbon, and Gibbs (2015), show that a majority of African American borrowers are not knowledgeable on financial issues, making them easily vulnerable to exploitation and discrimination. The government in collaboration with all other stakeholders in the financial sector need to formulate and implement policies which will oversee that African American entrepreneurs have equal rights with whites in accessing financial facilities regardless of their socio-cultural orientation and economic background. Furthermore, the US government should pass policies and regulations that will enhance business literacy among African American entrepreneurs. Further, business and financial management literacy will ensure that both the lenders and borrowers have standard knowledge of the market monetary policies and regulations.
Secondly, the access to credit and finance by African Americans can be improved by proper market regulation and implementation of laws that deter discrimination and biases in the credit market and by financiers. Despite the existing gap in several successful Native Americans and African American businesses, the current regulation has done little to correct the situation (Crump et al., 2015). Proper management should be adopted to help reduce the failure rate of African American entrepreneurs and improve the number of their owned enterprises. Also, proactive rules and management should be taken to prevent discrimination. The rules should aim to solve the issues in accessing finances and credit, such as lower loan limit, high interest, and a high loan application decline. For instance, the US government can legislate against discriminatory tendencies, provide a financial framework for equal access to loans regardless of race, and promote business literacy between lenders and borrowers; this will help both financers and financial institutions to identify the significance of collaborative efforts in enhancing business success.
1.4 Statement of the Problem
Capital is essential for the operational success of a business and its financial health. Financial strength determines the business strategy and processes that an enterprise will choose as they aim to make a profit from the capital invested. Without sufficient capital, entrepreneurs will always struggle to make start-up success. Hence, their respective entities will lack consistency in the market, causing poor financial performance that will lead to their closure. And, those small entities that will not close will struggle to keep their activities running. Even though access to start-up capital is a significant factor in the low number of successful African American owned businesses and low rates of entrepreneurship, it does not reflect an accurate picture of why the hurdles are unique to the African American. To understand why African American borrowers face unique obstacles in accessing finance and other credit facilities for their businesses, one has to consider and evaluate the specific factors that lead to reduced access to finance among African American business community. The economic and social experiences of African Americans will be essential considerations in developing a sound argument towards this study. This study will, therefore, shed light on how different financial, economic, and social factors interplay to affect the access to financing of African American owned businesses, thereby explaining the high rate of failure of entrepreneurship among the African American community and the overall performance of their companies in the US.
1.5 The Significance of the Study
The central importance of this study is to contribute to the already existing literature and body of knowledge on the performance of African American businesses within the first five years of start-up. Besides the performance of African American businesses within the first five years of start-up, this research study will go further to address and fill the existing literature gap on the performance of African American companies in the US. Importantly, the conclusion and findings from this study will be beneficial to African American business owners. It will enable them to understand the performance of their businesses and the unique challenges they face in accessing capital in the US business environment. The information for this research will be necessary for future planning and decision making.
Furthermore, this study will be beneficial to both business scholars, as it will form the essential foundation for future researchers who aim to study the factors affecting African American businesses and the performance of their enterprises in the US. In general, this study aims at contributing to the existing literature about entrepreneurial challenges that African Americans face in starting and managing their business entities. The research will address the different factors that have enhanced the stunted growth of African American businesses. At the same time, this research study will provide a guideline for policymakers to adopt recommendations to formulate policies and regulations that will promote equality in business. Finally, this work will be available in the school library and internet for scholars and other researchers to use as a frame of reference for additional studies in the area of African American businesses.
Under this section, a review of literature that includes the financial factors, insufficient collateral, social factors, and adverse economic policies as the driving force behind the massive failure of African American owned business enterprises will be covered. The literature review presented in this section generally assess the factors mentioned earlier and how they influence African American entrepreneurs’ access to capital.
2.1 Determinants of Access to Credit
2.1.1 Financial Factors
Financing disparities between Whites and African American entrepreneurs can be explained by exploring several financial factors such as credit scores, credit market expectations, and market regulation. Compared to the non-minority in America, African American entrepreneurs are more inclined to use loan facilities to develop their businesses due to financial constraints in terms of owning assets and capital.
2.1.2 Market Regulation
The financing issues exist due to lack of regulation in the capital markets, especially in the lending marketplace. According to the Consumer Financial Protection Bureau, the small business marketplace is not adequately regulated, affecting the opportunities available for African American entrepreneurs and women-owned businesses (Christensen, Hail, & Leuz, 2016). Lack of lending market place policy protection has allowed for abuse and exploitation of African American community borrowers. For example, Dymski (2006) states the existence of discrimination in the credit lending markets in the US can be attributed to the ambiguity of legal and theoretical definitions of what constitutes discrimination. Even though there are regulations in place to protect consumers from discrimination during lending, the lack of effective enforcement of these regulations creates gaps that allow discrimination. According to Mills and McCarthy (2014), there are six different agencies responsible for regulating financial authority. These agencies are marred with oversight challenges that have created gaps in the enforcement of legal policies and regulations. Furthermore, Mills et al. (2014) state that despite the SMEs forming a more profound part of the US competitive markets, the performance of African Americans business enterprises has significantly reduced America’s economic competitiveness on the international platform. The increase in market regulation policies has reduced the viability of African American businesses since it curtails wholesome exploration of different market opportunities in the US.
2.1.3 Capital Access Disparities
Although African American owned businesses contribute significantly to the US economy, many start-ups face unique hurdles in accessing capital to finance their business activities. Financial constraints are the most significant issue influencing African American business performance and business ownership. According to Fairlie, Robb, and Hinson (2010), the amount of personal wealth that an individual has before starting his or her own business is an indication of an individual’s success in business. This implies that African Americans, who are traditionally presumed to have less personal wealth, are already disadvantaged in accessing capital financing; this contributes to the poor performance and eventual collapse of African American businesses within the first five years. Wealth level among the Whites Americans ranges from eleven to fifteen times higher compared to African American and Hispanic families (Fairlie et al., 2010). The US is undoubtedly a cradle of business entrepreneurship and innovation; hence, this cradle of success should act as a motivation for business growth and expansion regardless of race.
However, Robb, and Fairlie (2007a) state that the capital access disparities between the natives and African Americans to access finance and other credit facilities has been a leading factor in poor performance and sustainability of African American businesses. African American-owned businesses are less likely to receive loans from financial institutions as compared to whites. Loan applications for African American entrepreneurs are more likely to be denied as they have lower personal wealth. This has continued to be thought of in connection to the historical racism of the US that purposefully subjugated African Americans (Robb et al., 2007a). Thus, without the generational accumulation of wealth, African American entrepreneurs are not able to offer the type of security or collateral for loans from banks and credit unions. Consequently, loan applications for African American owned businesses are more likely to be denied due to research that shows African American businesses failing at a higher rate compared to non-minority commercial units (Fairlie, & Robb, 2007b). While these policies may seem to be steeped in business acumen, there is a need for business scholars to account for the disparities that exist due to discrimination and bias. Lending discrimination is evident in the disbursement of loans to businesses. Loan denial makes it hard for the startup to operate.
The poor performance of an African American-owned business can be traced to the unique financial challenges the businesses face. Racial and social bias influence the uptake of credit in the American lending market. The lenders discriminate the borrowers based on the business type, geographical location, and race or ethnicity, which affects loan access and loan provision. African American business owners are more likely to be denied loans compared to white business owners. Despite creditworthiness, African American owned businesses have to overcome unique challenges to access bank and government loans. According to Fairlie et al. (2010), if the loan is approved, the lender is more likely to charge a higher interest rate than the rate charged to a white entrepreneur, or the lender will provide a loan of a lower amount than requested by the African American entrepreneur. A study by Fairlie et al. (2010) shows that minorities pay an interest rate of 7.8% on loans, while non-minority borrowers pay an average of 6.3% on credits. The disparity in the interest rates means that the African American entrepreneurs will have to pay vast sums of money, which significantly reduces their financial performance.
The higher interest charged on the few loan applications that are approved means that the cost of doing business for African American entrepreneurs is considerably higher, hence certainly cutting into the profit margins of their businesses (Fairlie et al., 2010). There is exists a lot of uncertainty about the success of a start-up because starting a business with a larger amount of capital reduces the overall profit margin of the businesses which negatively affects their performance (Fairlie et al., 2010). A study by the U.S Department of Commerce Minority Business Development Agency studied the disparity in capital access between minority and non-minority-owned businesses. The department noted that African Americans received a lower loan amount compared to native business borrowers. The average loan amount for minority business was $149,000, while the average amount for non-minority companies was $310,000, which is more than double (Fairlie et al., 2010). The disparities witnessed in the amounts of loan given to both the Native American entrepreneurs and the African American business owners have a significant impact on the overall sustainability of their startups. While many Native Americans will have a lot of capital at their disposal for expanding and diversifying their businesses, African Americans may struggle to keep their businesses running. This will be due to the payments to the loaned capital with higher interests, which reduce disposable income.
Another scenario is where loan applications are approved based on business location and ethnicity of the applicant. For instance, according to Wingfield et al. (2016), primarily white neighborhoods are considered to have better business climates, policies, and economic conditions, which increase the loan approval rate and amount. Capital disparities are witnessed where banks in the African American community offer fewer loan approvals and a lower loan amount, while banks in predominantly white neighborhoods offer larger loan amounts. The continued denial of African American access to loan facilities by lending institutions and giving preferential treatment to white business entrepreneurs contribute to the poor business performance of African American business. The African Americans fail to compete favorably in the market with their white-owned business entities.
2.2 Social Factors
Access to financing has been influenced by several social factors, including geographical clustering, discrimination, and biases. Attitudes to the African American community in the US have extended to financial institutions, and African American business owners suffer the effects. Some of the significant discriminatory social factors are discussed below.
2.2.1 Racial Discrimination
A significant factor affecting the performance of the African American business is racial discrimination by financial lenders. Regardless of business success or credit score, African American business owners experience racially motivated bias in the lending marketplace. The credit score is one observable feature which explains the poor outcome of African American and white borrowers. A credit score measures the risk involved in doing business with a potential borrower. Wingfield et al. (2016) maintain that the lack of assets and property has contributed to a low credit score among African Americans. In this case, lenders tend to shun away from offering them loans since the overall credit score of African Americans shows it is extremely risky doing business with them. Dymski (2006) states that besides being discriminated by financial lenders, African American owned start-ups have limited access to markets for their goods and services as they face discrimination from other businesses and consumers due to geographical location, racial and or ethnic issues.
Clustering is a significant issue that shapes the American enterprise and lending market. Research and studies show an increasing gap in the performance and loan access to business based on location. Research data shows that clustering exists in America where business performance, regulation, and access to finances are dependent on business location. Businesses located in white neighborhoods are more likely to perform better than those found in the minority neighborhoods as the locations are considered “favorable” (Fairlie, Robb, & Robinson, 2016). The reason for this disparity is because white neighborhoods have better business climates, policies, and economic conditions, which are preferred by lenders. Thus, they are favored by creditors and financial institutions.
A study done by Deskins and Ross (2018) found that difference in capital access between African Americans and non-minority business owners is linked to geographical differences, based on business climates, policies, and economic conditions. “An extensive literature examines why black entrepreneurship rates lag behind white, focusing on socioeconomic characteristics, intergenerational knowledge transfers, work experience, and credit access. Another literature examines how regulations affect entrepreneurial behavior, finding that a more heavily regulated economy deters start-ups” (Deskins et al., 2018, p.2). The market lenders have different expectations for different geographical locations, thus determining the business climate for specific geographic areas.
2.3 Historical Factors
2.3.1 Role of Family
Historical issues such as racism have an impact on the performance of the African American owned business. Historical issues affect business knowledge, asset ownership, and past success of the African American owned business (Wingfield et al., 2016). The lack of assets and business knowledge required in running a successful SME can be traced to historical issues among the minority community. According to Wingfield et al. (2016), the family plays a significant role in the performance of an African American owned business. Family factors include inheritance and the role of family members in the running of the business.
Studies show there is continued inequality in entrepreneurship rates among the African American community. African-American business owners are discriminated against by financial institutions and other lenders, including the government. For instance, according to Forbes Magazine (2018), white business owners accessed an average of $106,720 capital as compared to African Americans at $35,205 in 2016. Racial discrimination is high among the businesses located in African-American neighborhoods due to history, and only a few African American businesses turn out to be successful. (Deskins et al. (2018) maintain that most business lenders stereotype and discriminate African-American borrowers, resulting in lower loan limit, high interest, and a high loan application decline The stereotypes and discrimination exist because of the lack of a proper regulatory environment to foster more equitable chances for loan access in the lending market (Deskins et al., 2018). The decades of slavery and subsequent institutionalized racist policies and legal segregation of the US had a significant impact on the success of African American businesses, especially for the early African American entrepreneurs. Even though African Americans made every attempt to be involved in entrepreneurial activities, slavery and racism led to a low level of personal wealth, and it was challenging in accessing financing, thus limiting any opportunity of passing wealth to the next generation.
2.5 General Reasons for Poor Performance of African American Business Enterprises in the US
According to Fairlie et al. (2007b) many African American people have started many businesses, but only a few have been able to hold up. Palia (2016) states that the majority of African American open up businesses compared to their white counterparts, but most of their businesses tend to fail before they pick as compared to their white counterparts. Even though some of these businesses thrive, they hardly get off the ground and do not grow as quickly as the white-owned businesses.
African Americans tend to prefer doing business with family members and friends to help and create job opportunities for them (Fatoki, 2014). However, Fatoki (2014) further states that most of the African American business collapse in the first five years mainly due to mismanagement from inexperienced family members. For a business to be successful, one needs to engage qualified personnel; thus, the employed family members might not meet the required skills to help run the business.
Experience is an essential aspect to consider when deciding on the kind of business to venture in. Starting a business is always not as easy as most people may think and this is because there are many challenges one is likely to come across in the process of setting up the business (Bilal et al., 2015). African Americans lack sufficient basic ideas about the business enterprises they are to start; thus, they are likely to give up in the process, hence the collapse of the business. Bilal et al., (2015) state that most African American businesses collapse because they tend to start businesses without a good knowledge of the challenges that accrue with managing business enterprises. Once the obstacles overwhelm them, they risk closing down their startups in the short run.
Most of the businesses need to be marketed to reach the target customers. Marketing is one of the basic strategies that most business owners use to reach their target customers. Through online marketing, one can advertise the products in the market and be in a position to attract a broad audience and also reach their potential clients across the globe (Hackley, & Hackley, 2017). Also, Hackley et al. (2017) maintain that most African American business owners lack the knowledge about marketing and marketing skills, and therefore they end up selling their products to only those customers within their reach which in the long run give them less or no profits and hence the collapse of their businesses.
African American owned businesses suffer due to lack of exposure to media. Whites people own the media, and, therefore, they will only cover businesses owned by their fellow whites. Some African American businesses could be flourishing, but due to lack of exposure to media, they may not be able to make enough profits to sustain them hence end up failing (Bilal et al., 2015). Media in business plays an essential role in attracting customers and advertising, once they see products being advertised on televisions, newspapers or even hear them on radio, customers quickly look for those products and services. Therefore, if African American owned businesses are not covered by media, they may not get as many customers as their counterparts, and this, in the long run, will lead to their fall. Hackley et al. (2017) argue that some magazines such as Forbes magazine have been seen to give less exposure to successful African American who have more successful businesses compared to the white people who have lower entrepreneurial success.
Because they primarily serve a small customer base, comprised of fellow African Americans who have low purchasing power, African American owned SMEs are more prone to failure. Wingfield et al. (2016) state that it is difficult for whites to be attracted to small businesses owned by an African American when they can afford to visit a mega business such as malls and supermarkets operated by a fellow white. The type of business one owns dramatically contributes to success or failure, for instance, people will prefer to buy goods in supermarkets or generally larges shops as compared to a small business entity. Typically, African American businesses end up being restricted to only the Black community, which leads to their collapse.
Ensari et al. (2014) note that every business owner should have a consistent vision to be able to succeed. Most African American owned businesses do not have concrete plans for their business entities which makes it very hard for the clients to understand what is in the market and what they are selling. In most cases, African Americans start their businesses with only one aim of making profits without putting into consideration that the business might have challenges on the way. Additionally, Ensari et al. (2014) maintain that when starting a business, African Americans are always unprepared to face the difficulties that accrue with business management, this study is false since entrepreneurial skills are taught in schools. It is important to note that entrepreneurs always until their enterprises stable since most African Americans are not always ready with plans on how to face bad times in business when they are hit by challenges their businesses enterprises eventually collapse.
African American business owners need to educate themselves on how to run the business. Myers et al. (2017) state that most cases, African American assume that once you start a business, it will just run automatically. Business owners can enrich and diversify their knowledge on running the business by either reading newspapers, audiobooks, listening to business podcasts, or, since a significant percentage of those who run businesses have access to smartphones, they can Google and get more information from the internet. This will give them relevant information which will help them to grow and expand their businesses.
African American entrepreneurs do not have sufficient business knowledge and role models in the business. Having a mentor or someone to look up to is also an essential aspect of consideration when running a business. Business mentors will always give tips on how to run a successful business since they have been in the game for quite some time; most African American owned businesses rarely succeed because they lack mentors (Myers et al., 2017). African American tend to fear to approach their white counterparts due to inferiority insecurities. African Americans are potential to the Native Americans, thus their white colleagues may shun away from providing them with quality information for sustaining their business startups.
African Americans tend to avoid following due legal procedures and formalities in opening and operating their businesses. Operating a legal business is an added advantage since one is confident that their business adheres to rules and regulation, and this will enable it to stabilize (Besley, 2015). In research by Feagin and Imani (1994) on racial barriers to African American enterprises shows that African Americans do not have a business culture and tradition due to the economic frustrations they have been exposed to in the recent past. “Discrimination by white businesspeople and other whites, including massive violent attacks on African American businesses in cities like Tulsa, helped bring a decline in much black business activity in the decades before World War II” (Feagin et al., 1994).
2.5 Empirical Evidence
The availability of credit to start-ups and small business, based on their credit scores, has been examined in several studies. According to Bilal and Al Mqbali (2015), start-ups and small business are less likely to have their credit applications approved. An investigation by the Federal Reserve Board found that credit scores are different among ethnic and racial groups. The findings of the study are contrary to previous research that shows African American entrepreneurs face lending discrimination. For instance, a study by Crump et al. (2015) shows that minorities are more likely to be credit constrained and face stricter debt limits than non-minority counterparts. Also, according to Gibson et al. (2014), there are a higher loan application rejection rates among minority business owners looking to own. African American-business owners had to pay higher interest rates and experienced higher credit application denial compared to non-minority-owned businesses even when taking into consideration variances in creditworthiness and factors such as work experience, relationship with the financial institution, and owner’s education.
The social history of African American includes their vast experience, current circumstances, and future experiences that will impact the successful management of their business entities. It is impossible to understand the current business experiences of African American without first understanding the conventional ways African Americans were economically deprived. The existing constructs, especially from the media, business journals, and entrepreneurial technocrats, blame African Americans for their predicament but fail to understand the counterproductive and toxic environment in which they are supposed to be productive. According to Bates et al. (2014), African Americans have always had the entrepreneurial spirit that even social injustices such as racism and segregation could not break. The stigma of slavery and racism created myths of African American inferiority that affected the breakthrough of African American in business. According to Rogers-Vaughn (2016) from the 1800s, economists used American and European whites as a standard in business, assuming that genetic inferiority was responsible for poverty among African Americans. This created the notion that nothing good could come from the African American community making African American elite to move far away from African American communities. Such constructs made theorists, such as Franklin Frazer, believe that Black capitalism was a myth (Rogers-Vaughn, 2016). The failure of African American entrepreneurs was thought to be genetic inferiority, while practically, it was a failure by business sociologist and historians who killed the African American entrepreneurial spirit.
African American entrepreneurs have had to deal with social constructs to succeed in business. Such negative constructs still exist in the lending market today. Even though currently, there are equal rights for every American, the stigma of slavery and racism is still felt in accessing financing by African American community entrepreneurs. The historical experiences of African Americans make their entrepreneurial journey unique. According to Farlie et al. (2016), the existing literature ignores the contributions of early African American entrepreneurs. Regulations, exclusion, constraints, institutional laws, and discrimination have played a considerable role in shaping the current state of African American community entrepreneurial activities. Understanding these issues give a better understanding of why, regardless of contributions of early African American entrepreneurs, there are still low rates of the African American community in American today. According to Deskins et al. (2018), even though African Americans grabbed every opportunity to better themselves socially and economically in colonial America, racism and slavery frustrated their every attempt by the African Americans to break the York of poverty. Even though African Americans made every attempt to be involved in entrepreneurial activities, slavery and racism led to a low level of personal wealth, which was challenging in accessing capital financing thus limited any opportunity of passing wealth to the next generation among the African American populace.
This chapter outlines the research methodologies that were used in this research project. The chapter will discuss the research design, target population, population sample, sampling method, as well as data collection procedures and data analysis.
3.1 Research Design
The researcher adopted both quantitative and qualitative data analysis methods to establish how access to finance and other credit facilities affects the performance of African American businesses in the US. A qualitative data analysis method was adopted for this research project because it helps the researcher to establish particular traits of the study population. Importantly, qualitative data analysis helps the researcher to develop parameters for generalizability of the study findings to the entire population. The exploratory nature of qualitative data collection was a great feature that informed its choice as to a method of this projects research design; and this implies that qualitative data is all about enhancing a focus on gaining insights, motivations, and reasoning thus promoting the need for further research on the research topic.
3.2 Location of the Study
The study was conducted in New Orleans, Louisiana, a city in South US. New Orleans was a perfect city for this research because it is one of the cities with the highest number of African Americans in the US as shown in the diagram below (World Population Review 2019). The city is located along the Mississippi River in the Southeastern zone of Louisiana. New Orleans is also the most populous in Louisiana and a critical aspect of its economy is characterized by a major port, thus New Orleans is an economic and commercial hub for the US.
Figure 1.0: A pie chart showing the distribution of the population in New Orleans by race (World Population Review 2019). http://worldpopulationreview.com/us-cities/new-orleans-population/
Primarily, New Orleans is a commercial center in Louisiana. The manufacturing sector mainly plays a secondary role in the overall economy of the city. Since the city is a purely commercial centre, it is imperative to assess and evaluate the role of African American entrepreneurial spirit in the economic development of New Orleans.
3.3 Sample and Sampling Methods
The researcher designated the random sampling method. A sample size of 55 was determined from the large population of the African American businesses in New Orleans, Louisiana. Important to note, this study used a simple random sampling method to collect data. The researcher gave each respondent a population number and then used a table of random numbers to select respondents for the survey. For instance, the researcher used sixty respondents, the researcher used a table of random numbers to pick the study sample such as if first two numbers of on the random number table is 35, then the individual labeled “35”was chosen. This implies that the sample was selected by chance, and every member of the population had an equal opportunity to be chosen. Also, random sampling targeted the sample size population and eliminated biases that might be encountered throughout the study. Therefore, random sampling was generally considered in this as a method of choosing participants who met the inclusion criteria for this study. The target population of this research study was equally diverse such that all the businesses could not be studied; hence, a sample would represent the whole group.
3.4 Data Collection Procedures
The researcher employed several data collection methods during the research, which included: questionnaires, face to face interviews, and observation. Firstly, focusing on the observation method, the researcher used the participant observation technique in collecting data. Overt participant observation method was used where the researcher revealed his real identity and purpose of the research, this was necessary to create confidence and good rapport with the participants in the research survey. The photographing was used to collect the observable information, like the buildings and the overall and interview sessions. Secondly, the researcher used face to face interviews of the 55-sample size; the interviews were guided by the research parameters with the respondents about the African American Business in New Orleans, Louisiana. Mostly, the researcher used unstructured interviews, whereby he asked questions depending on the previous answers provided concerning business operations among African Americans. Undoubtedly, the researcher engaged all the 100 selected participants identified for the interview sessions. Lastly, the researcher in this study used questionnaires to collect data about the performance of African American businesses. The questions reflected the entire activities that take place in African American business. The questionnaire contained both close ended and opened ended questions to cover all aspect the research topic. The study was directly administered by the researcher.
3.5 Data Analysis
Qualitative data was collected and analyzed by the use of the grounded theory. The grounded theory approach was feasible for this research project because it allows the development and construction of theories based on the analysis of qualitative data, it operate inductively. The use of the grounded theory in this research was key since it provides a systematic approach to analyzing data for comparative analyses. In this case, started with the analysis of a single argument to formulate a hypothesis. The grounded theory is also feasible in assessing the efficacy of the study design adopted by the researcher, the data collected and the inferences made. The main reason that drove the research to employ the grounded theory data analysis method in this research was based on the need by the researcher to develop a theory for analyzing the general performance of African American businesses, identify common themes, patterns and relationships of the data collected for easy interpretation.
3.6 Ethical and Logical Considerations
During the entire process of data collection, the researcher considered the following steps: politely asking for permission from the business managers and management teams before carrying out the research about their businesses. Important to recall, based on the 100 participants, the researcher had the mandate to follow the right channel and ask for permission to research on how access to financial affected the operations of the African American businesses. Additionally, the researcher had to maintain privacy and confidentiality of the information collected. For example, based on this study the researcher is accountable to keep the information gathered safe and avoid leaking the information about the financing of the business, which is a most treasured objective of the study. Additionally, the researcher acknowledged all the relevant sources of the information that were used in the research to avoid instances of intellectual theft. Lastly, the researcher ensured he remained within the scope of the stipulated work plan to complete the research within the given period of time and present it for marking.
RESEARCH FINDINGS AND RESULTS
This chapter consists of an explanation of the findings of the study according to the specific research objectives. This section will provide a narrative analysis and grounded theory for the qualitative data collected in the field. Finally, an interpretation of the results will also be given under this section. The research was conducted between 6th May and 30th May, 2019. The researcher interviewed at least two respondents per day.
4.1 Background Information of the Sampled Target Population
The inclusion criteria for the target population under this research study was African Americans with retail and subsistence shops, African Americans who lived in New Orleans, African Americans aged twenty-four years and above with at least college education certification with at least three years’ experience in business. African American entrepreneurs were the best target group, since entrepreneurship is seen as a mechanism that supports economic growth, creation of wealth, and job creation opportunities among the minority African Americans. Their access to capital financing and other credit facilities remains a critical success factor in the formation and sustaining of their business enterprises. The pronounced disparities between African Americans and the Native whites on access to capital financing, calls for the need to explore those differences. This research paper provides an empirical analysis of whether African Americans experience difficulties in accessing finance and other credit facilities for their businesses thus affecting their performance.
4.2 Analysis of the Main Findings of the Research
The research uses the confidential and restricted-access version of the Kauffman Firm Survey (KFS), along with the collected data from questionnaires administered during the data collection exercise, to assess and explore how access to finance affects the performance of African American business enterprises in the US. The restricted KFS is a survey that was conducted by the Kauffman Firm with an objective of establishing how startup access capital markets in the US. The results of the survey indicate how businesses are organized among different races in the US and how they operate in their first five years of existence. Further, the KFS provides potential indicators for growth, survival and innovation among the startups. The significant research findings were as follows.
There were very few African Americans who owned business enterprises in New Orleans city. Out of the one hundred participants who took part in data collection, only 40 respondents were self-employed through SMEs, which translates to 40% of the sample size studied. Based on the analysis of the data collected, the low number of African American entrepreneurs was attributed to their inability to access financing and other credit facilities to start and successfully run their business entities. Further, the analysis of the results showed that African Americans who owned business enterprises registered lower sales volume as compared to other races in the US, a finding that is consistent with the KFS. Thus, their enterprises witnessed a slow growth in the profit margin. The 40% entrepreneurs had a small number of employees, smaller payrolls, and the closure rate of the businesses was significantly higher as compared to their white counterparts. In relation to the KFS, this research also showed that disparities in business revenues between the African Americans and the native entrepreneurs were huge. For instance, the African Americans realized an annual revenue income of approximately $7, 1250, while the average sales for the native white entrepreneurs were roughly $439,579 of the total sales, respectively.
The research study also established that African Americans business enterprises were aimed at serving a small local population. The low entrepreneurial development among African Americans was highly linked to financial capital constraints. The minority African Americans had less personal wealth that could act as a collateral to access capital financing from banks, and other credit facilities. African Americans with a good net worth have a higher chance of starting a business enterprise as compared to the Native American entrepreneurs. In line with the US Census Bureau (2012), this study found that African Americans had less personal wealth, which significantly contributed to liquidity issues and constraints, thus creating a substantial barrier to the minority African Americans to start off and sustain a business enterprise. Financial investors were more focused on assessing the amount of capital investment of African Americans in their business before giving them an additional incentive. Therefore, financial constraints were a major setback towards the excellent performance of Africa American entrepreneurs in the US.
The research further established that the distribution of business among African Americans was quite unevenly distributed as shown in figure 2.0 below. Based on the analysis of the qualitative data collected for this study, sole entrepreneurship was the best performing form of business entity among African Americans. The excellent performance of sole entrepreneurs among African Americans was attributed to factors such as good knowledge of the market, financial access and excellent business management skills. However, African Americans who engaged in business partnerships reported to have low business success. In this research the term low meant sales below $20 000 per year. The low business success among African Americans who engaged in business partnerships was attributed to poor business management skills among key partners, the role of the family in business which significantly reduced the growth of the business and insufficient networking as compared to their Native counterparts. For instance, a respondent in this research study noted that “Networking groups serve bigger businesses with money for marketing and advertising, which are typically White-owned, limiting our access to a competitive business environment”. The figure below gives a summary of the distribution of businesses among African Americans in sole proprietorship and business partnership and a forecast of the same for the year 2024 respectively.
Figure 2.0: A bar chart showing the distribution of business among different ethnic groups in New Orleans and a projected forecast to 2024.
Furthermore, the researcher found out that social factors such as racial differences heavily influenced the ownership of home equity, which is essential for providing access to startup capital among African Americans. Less than half of the African Americans interviewed owned their own homes. For instance, KFS reported that the median home equity among African Americans was approximately $45,000, whereas for white entrepreneurs it is $84,000. Important to note, homes provide collateral and home equity loans oversee the advancement of low-costing financing among entrepreneurs. Thus, the inability of African Americans to tap into home equity financing acted as a barrier to accessing capital financing for their business enterprises.
African Americans business entities collapsed in their first five years of their startup due to undercapitalization. From the sample size selected for this research project, eight out of ten African American entrepreneurs, which translates to 80%, reported to have closed down their enterprises in the first five years of establishment due to undercapitalization. The low amount of capital invested in the business enterprise limited African American entrepreneurs because it translated into lower sales volume, profits, and employment. The low performance of the African American businesses due to undercapitalization was a major cause towards their failure as compared to white-owned business enterprises that received optimal levels of startup capital. Undercapitalization of business enterprises was highly linked with the owner’s wealth. There was a high chance that African American enterprises were undercapitalized since they had less wealth and personal assets to act as collateral to cover business liabilities such as capital financing loans.
African Americans heavily depended on credit cards for startup capital, a business phenomenon that was not common among white entrepreneurs. As earlier mentioned, African Americans have insufficient equity to act as collateral to secure bank loans for business startups. A majority of the respondents in the survey, approximately 88%, reported having started their businesses with no capital, less capital, borrowed capital from friends or family, or in extreme cases loans with high-interest rates that made their enterprises unsustainable in the long run. Also, African American respondents in the survey solely relied on equity capital to finance their startups as compared to the white-owned business enterprises. Further, the respondents also reported that the loans received in the US as start up capital was significantly smaller in comparison to those obtained by their white counterparts. Although there was legislation for controlling equity capital, owner, and increased in business literacy among the African Americans, discrimination in access to loan facilities was still prevalent in the US. The over-reliance of African Americans on credit cards and less equity for capital financing was a significant setback to the sustainability of African American business enterprises.
The research also found out that the distribution of wealth among African Americans significantly limited their access to capital financing. 85% of the respondents reported to have been denied access to financial borrowing, a phenomenon they termed discrimination based on race. 45% of the respondents noted that they had been barred from accessing loan since they have less equity. This finding related with Bates, and Robb, (2016) research on Foundations and Trends in Entrepreneurship which states that “The fact that Black-owned firms had less access to financing than White-owned firms had is well established and not controversial. When Black business owners borrow for their businesses, they consistently borrow less than their White counterparts”. The diagram bellows shows the distribution of wealth among African Americans in comparison to other races and how it affects their access to capital financing from financial institutions and other business lenders.
Figure 3.0: Historical Distribution of Family Wealth in New Orleans
Historical factors were also reported as the primary cause of African Americans inability to access capital financing and other credit facilities. For instance, the adverse economic policies put in place to cripple African Americans economically were still practiced by business lenders and financial institutions. A more significant percentage of the African American entrepreneurs, approximately 94% of the respondents, reported having been exposed to racism and other discriminative tendencies “I got denied a lot of loans through traditional lending. I think a lot of it was because of my race. They made it hard. The conversations were confusing and at first I thought it was just the way they do business, but after a while, I figured they were trying to confuse me”. African American respondents reported to rent premises for their businesses which were charged expensively, thus reducing their overall income from their startups as compared to their white counterparts. An increase in rental levies for business houses reduced the economic viability of African American enterprises in the long run; this implies that African American entrepreneurs ended up making losses owing to the need to pay employees’ salaries, business house rent, and ensuring their enterprises had sufficient stock to cater for their small consumer market. Thus, the low profit margin of African American business contributed to the unsustainability of the general expenses of their enterprises.
Figure 3: A Chart Showing the History of African American Businesses in Contrast with Their White Counterparts
Another historical factor that adversely affects the excellent performance of African American enterprises is the urbanization of African Americans. For instance, 55% of the respondents in this survey acknowledged the movement of African Americans to urban centers after years of segregation adversely affected their business enterprises. Most of the entrepreneurs drew their vast customer base from the local Africa American residents in New Orleans since most of their enterprises were customized to serve their fellow African Americans. Urbanization of African Americans significantly reduced the customer base, the remaining local African American had low purchasing power, hence low sales, which oversaw the poor performance of their respective business entities.
4.3 Implications of the Main Research Findings
The research findings imply that the African American spirit of entrepreneurship still endures to date despite the many challenges that accrue with the management of their business enterprises. African Americans face an adverse business environment in the promotion of their trading activities. There is a need for government and other business lenders to promote business literacy among the African American population in New Orleans to ensure they have essential skills for running their business entities. A majority of the African American entrepreneurs are limited with access to finance and other credit facilities, thus promoting their poor performance in the overall business environment in the US.
Historical factors, such as geographical clustering, denied African American a chance to access loan facilities and other capital financing opportunities in the US. Generally, the research found out that many African Americans came from low social and economic regions in the US. Hence a majority are denied loan facilities due to this geographical clustering. The African American community needs to be empowered economically to ensure they accumulate sufficient personal wealth that can act as collateral for accessing capital financing for their business enterprise in New Orleans and the US at large.
African American businesses did not have a good family support as a majority of them which translated to 60% did not have business knowledge and heavily relied on employment from their fellow African Americans to sustain their livelihood. Therefore, the then existing difference in the business ownership between African Americans and the Natives prioritized the white Americans to have a sound family support in the business which promoted self-employment. Due to this priority in the African American business, the African Americans rarely fit under the conditions of the family business. Another important finding discovered during the research into this topic was, according to the estimates revealed by the Characteristics of Business Owners (CBO), they showed that African Americans were relatively disadvantaged with incorporating family in their businesses. The African American business owners had less family business knowledge, which limited them from accessing capital funding for their business.
In most cases, only 17.6 percent of the African business owners in New Orleans, Louisiana had attained at least college education level. Therefore, this level of education generally predicted the overall failure of the African business. Following the fact that 80% of the African American business owners were foreign-born, this elaborated the significance of the high fraction of the deteriorating African business as compared to the American owned company. Additionally, based on the overall failure of the African American businesses in the New Orleans as perceived in the data collected from the respondents is that the African invest less capital for their business startup as compared to the whites. Generally, this is the most profound reason for figuring out the entire poor business performance of African American owned commercial entities.
The difference in the capital input in business startup takes 57%-100% of the existing progression difference between the African and the American businesses. In other words, insufficient experience limited the African American business. For instance, a majority of them did not account for profits made and overall making of their business financial statements. Thus, the lack of financial statements due to business inexperience also limited their access to capital financing.
CONCLUSION AND RECOMMENDATIONS
Entrepreneurship is a crucial aspect in the economic development of the US. There has been substantial growth in the development of SMEs among the African American community, which has significantly aided in their development economically and socially. The GDP of the US to a large extent, also heavily relies on the enhancement and development of the SMEs, a critical success factor in spurring economic growth of the US. Several factors have been identified as essential problems towards the poor performance of the African American community in entrepreneurship, for instance, financial considerations, insufficient collateral for securing loans and the continued practice of adverse economic policies that were advanced by the US government during the segregation era to cripple the African American community economically.
The central importance of this study is to contribute to the already existing literature and body of knowledge on the performance of African American businesses within the first five years of start-up. Besides, the study on the performance of African American businesses within the first five years of start-up, this research study will go further to address and fill the existing literature gap on the performance of African American business enterprises in the US. This research study identifies that the poor access to finance and other credit facilities by the African American entrepreneurs has been a significant contributing factor to their poor performance and their subsequent closure within first five years of their startup. The African American community has developed a system of starting SMEs that do not attract significant capital financing from banks, business lenders, and other financial institutions in the US. Despite the different daunting challenges that accrue to African American entrepreneurs, their enterprises continue to stay in operation in different localities that are highly populated by the African Americans.
Capital is essential for the operational success of a business and its financial health. Financial strength determines the business strategy and processes that an enterprise will choose as they aim to make a profit from the capital invested. Without sufficient capital, entrepreneurs will always struggle to make start-up success. Hence their respective entities will lack consistency in the market; thus, poor financial performance that will lead to their closure. However, those small entities that will not close down will struggle to keep their activities running.
Further, African American entrepreneurs do not account for aspects such as rent, taxation and profit management while starting up the business hoping that what they will get from the business will cater for those expenses and therefore African American businesses end up collapsing when they do not make any profits. In the long run, their business fail to cater for these vital expenses hence leading to closure due to an increased financial crisis.
5.1 Research Recommendations
The researcher made the following recommendations. Firstly, there is need for the US government to pass legislation that will oversee equal access to capital financing by both African Americans in New Orleans and the indigenous whites. According to the research findings, African Americans still face low key racial discrimination in their quest to accessing loan facilities and other financial grants and loans to finance their enterprises. Important to note that, it is the mandate of the federal government of the US to make financial policies and regulations allowing the Africans American business owners to have equal chances of getting loans.
Secondly, according to the findings of the study, Africans should be economically empowered to increase their ability to start up their business. Once the African Americans are empowered, they will accumulate enough wealth and equity which will help them access loans and grants from business lenders and the government respectively. Since the loans and other financial grants are offered based on equity ownership and overall economy of the applicant’s geographical location, there is need for economically empowering the African Americans to spur their entrepreneurial spirit. For example, once African Americans have financial stability, they will have the ability to access funds from the lenders. To effectively establish the financial stability of African Americans in the US, the government should focus on the wealth creation among the minority groups, mainly on African Americans as a way of boosting their economic security.
Finally, there is need for fostering business literacy of the African Americans. This research study found out that 0nly 17.6 % of the Africans have at least college education level, this implies that only a small percentage of the entire African American population can sustain their businesses. The US government and other key stakeholders should implement an educational guideline that will assist African Americans in acquiring necessary business education. According to the research findings, it was reported that most of the African Americans had inadequate training and experience, thus reducing their knowledge on business management. Important to note that, due to the increased discrimination in loan allocation and access by business lenders, educated African Americans will be able to fight for their rights in accessing loan facilities. Moreover, education will be central in enriching their business literacy and experience. Hence, their businesses will be sustainable in the long run. Generally, basic business education will form the basis of the success of the African American business mostly in New Orleans in Louisiana.
5.2 Recommendations for Future Research
From the research inferences, the researcher recommends that the study should be expanded to ensure the following areas are covered, behavioral approaches in the African American business owners in New Orleans, Louisiana. There is need for future research on this study should focus on the behavioral type of question, for instance, goals, motivations, and growing perception of the African American business owners in New Orleans. In this case, it is significant for the researchers to cast out the several attributes of investors, banks, customers, and their competitors. Generally, this emphasizes the research on the overall perception of business stakeholders as well as the way the African business owners see themselves in the next five years.
Again, demographics is another crucial area that should be included in this research as it incorporates the marital status, number of children of the African business owners in the US. Additionally, demographic information that is considered to be vital in the research is the level of education obtained before and after the start of the businesses by the Africans American owners. Important to note, there is need to assess the significance of the demographic impacts and the firm owners on the overall business performance.
5.3 Limitations of the Study
The study was limited by several research methods applied in the collection of data. The potential limitations of the study included the research method design, geographical location, sample size, participant bias and researcher bias. The researcher, to some extends, had a predetermined outcome based on course readings. The use of qualitative data as a method of data analysis significantly outweighed the inferences and professional insights drawn from the research study. New Orleans, which generally multi-ethnic and multicultural society was not feasible as the best geographical location of the study. A majority of the residents in this area are indigenous Americans; thus, serving as a potential limitation in the generalizability of the research findings to other populations in different geographical locations. The research also used a limited sample size of the African American owners since it uses only sixty participants to come up with the results that may not be valid and applicable to the entire African American business community in the US. Participant bias was exacerbated by the predisposal to racism and other discriminative tendencies.
Appendix 1: Questionnaire
- How did you start your business?
- What are the specific goals of your business enterprise?
- How did you fund your start up your business and attain additional capital? Did you give up equity? Enter with a partner?
- Can you please talk about your business processes such as financing, advertising and strategy?
- Does your enterprise serve the local population? If no, which other specific geographical areas do you get your customers from?
- What are your top three challenges?
- Have you faced any bias/discrimination in pursuing your business endeavours?
- What motivates you when/if struggling?
- What are your measures of success- do they change over time?
- Do you entirely rely on your business as your source of income? If no, what other income generating activities do you engage in?
- Do you have an advisor or mentor to go to when unsure?
- What are your next steps? For example, you can outline your future prospects.
- Is there anything you would like to add that you believe I missed?
Appendix II: The Distribution of Startup Capital in New Orleans
The graph clearly shows that the racial factors have greatly contributed to huge disparity among the success of White owned firms as compared to African-African firms. For instance;
- Maggie (not her real name), a graduate in business administration and CPA, reported to have faced racial bias in her quest to start her own CPA firm in 1197. In both public accounting, she was the only African American woman in the profession. She failed to get opporunities to start and expand her venture, a phenomenon she attributed to her color.
- Antony (not his real name), pursued entrepreneurship directly after graduating. He funded his business through loans and familial financial support. Antony reported, “my top three challenges are sacrificing my previous lifestyle, garnering support from my own people and finding different sources for capital.” His company has become self-sustaining through his connections to finance it.
- Collins (not his real name) and his cousins began a fashion and design shop. Their maternal aunt was their mentor who relgiously guided and gave them confidence. Collins reported that having a mentor was an essential in ensuring they made the right decisions for their business growth. They look forward to establishing more partnerships with different organizations to expand their clientele base. They reported to have faced racial discrimination since their business was deemed to serve African Americans since its management comprised of Collins and his two cousins of African African descent.
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