Four Changes the SBA Can Make to Help Minority Business Owners

Maria Contreras-Sweet has shown that she understands the importance of providing support to diverse businesses since assuming her new position as head of the Small Business Administration in April. "Capital is not reaching small-business owners equitably," she said in a June 10 speech at the Center for American Progress. "The face of entrepreneurship is changing in America. More of those faces today belong to women, Latinos, African-Americans, Asian Americans, Native Americans, veterans, seniors and business owners who are socially and economically disadvantaged. Too many in these groups cannot access the requisite expansion capital."

Now Contreras-Sweet must transform those sentiments into concrete actions. As soon as Contreras-Sweet took office, the Greenlining Institute, a racial justice nonprofit, and its coalition of 40 California nonprofits sent Contreras-Sweet a letter pushing for a clear agenda for diverse businesses, from micro to small, that are so critical to communities of color. In our letter, we outlined four essential priorities for these businesses: access to capital, capacity building, data collection and supplier diversity.   

Contreras-Sweet has already made good progress in recognizing that deficiencies in traditional underwriting have often hobbled minority small business owners' access to capital. The SBA’s Office of Capital Access is moving ahead with a new credit-scoring model that combines an entrepreneur’s personal and business credit scores.  Contreras-Sweet promises that this model will “make it easier and less time-intensive for banks to do business with the SBA” while ensuring “that risk characteristics—not socioeconomic factors—determine who is deemed creditworthy.” The SBA will also streamline and simplify the process of submitting key documents to the agency through a user-friendly electronic SBA lending platform.

Contreras-Sweet has also taken a meaningful first step toward ensuring that small-business owners receive much-needed entrepreneurial training and technical assistance. Noting that 80% of loan applications from Latino or African American businesses are for $150,000 or less, Contreras-Sweet has urged banks to partner with the micro-lenders or designated Community Advantage lenders that are best positioned to provide both lower amounts of credit and technical assistance to these companies.

A streamlined referral process from banks to these lenders should be developed in order to strengthen the pipeline to growth for diverse small businesses. This new infrastructure should include a requirement that lenders give feedback to denied businesses before referring them to the next organization. This will ensure that small businesses understand how they need to improve in order to better access capital in the future. While much work remains and many details must be clarified, the SBA’s new leader is pointing in the right direction.

Contreras-Sweet has also made clear she recognizes the importance of good data—including data on the race and ethnicity of borrowers and loan applicants—in tailoring the SBA’s programs to meet the real needs of small-business owners. Currently, demographic data on small-business lending is captured only for SBA lending, which has made it hard to uncover how and where diverse businesses access capital. We recommend that the SBA make this important data public. The SBA also has an opportunity to partner with the Consumer Financial Protection Bureau by sharing data collection best practices as the CFPB carries out its mandate to create standards for how small-business data should be collected and reported. 

The SBA can further improve its data by creating a more realistic definition of “small business.” In most cases it defines firms with fewer than 500 employees as small businesses that qualify for access to SBA assistance and inclusion in the agency’s data—not a terribly helpful definition in a country in which 96% of businesses have fewer than 50 employees. Instead of a one-size-fits-all approach to businesses ranging from zero to 500 employees, the SBA should set up a tiered classification that enables it to focus on, for example, the specific needs of neighborhood businesses that often have just a handful of employees.

Finally, it is important for the SBA to make sure that businesses owned by people of color have a fair shot at corporate contracts. As Contreras-Sweet pointed out in her CAP speech, “Small businesses that secure corporate contracts increase their revenue by an average of 250% and increase their hiring by an average of 150%." She pledged a concerted effort to encourage corporate CEOs to make purchases through small-business suppliers. To provide assurance that the playing field is truly level, diverse businesses should also be included in the SBA’s Small Business Procurement Scorecard, which measures how government agencies contract with small- and female-owned businesses when buying goods and services.

The SBA can play a leading role in making sure our economy’s slow recovery reaches all our communities, including those that are still getting back on their feet. The agency’s new administrator clearly recognizes the role diverse businesses can play. Now comes the hard part: turning that positive vision into programs that enable entrepreneurs from all backgrounds to grow, prosper and lift up their communities.

Orson Aguilar is executive director of The Greenlining Institute: www.greenlining.org.