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Capital Constraints and Industry Mix Implications for African-American

Business Success

Article in The Review of Black Political Economy · February 2015

DOI: 10.1007/s12114-015-9210-9

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Rev Black Polit Econ (2015) 42:355–378
DOI 10.1007/s12114-015-9210-9

Capital Constraints and Industry Mix Implications

for African-American Business Success

Lucy J. Reuben & Pamela E. Queen

Published online: 5 February 2015

# Springer Science+Business Media New York 2015

Abstract Although not universally appreciated, African-Americans have a long histo-

ry of entrepreneurial achievements against the odds. African-Americans are more likely
to start a business, yet, are less likely to succeed. Well-documented discriminatory
practices by industry sectors exclude minorities from lucrative business opportunities.
This paper examines participation of African-American owned businesses in key
industries to assess implications for revenue generation and hiring potential. While
the numbers of African-American owned businesses are increasing; and these firms are
providing greater contributions to the socio-economic progress of African Americans
and potentially other disadvantaged groups, evidence that African-American owned
businesses suffer adversely from unequal access to capital markets and institutional
barriers is prevalent. A wealth gap between African-American owned business and
non-minority business owners exists and for some industries has widened, as survival
of African-American owned business is threaten.

Keywords Capital constraints . African-American business owners . Entrepreneurship .

Financial performance . Access to capital . Minorities . Business disparities

Introduction and background

Business entrepreneurship has an important role to play in improving the socio-

economic well-being of African-American (AA) families and communities. At its best,
entrepreneurship is associated with innovation, productivity, economic growth and
higher living standards for entrepreneurs and the communities they serve. In general,
entrepreneurs have greater wealth and higher incomes than employees with higher
family income associated with entrepreneurship and business ownership. Moreover, it

L. J. Reuben
Fuqua School of Business, Duke University, 100 Fuqua Drive, Durham, NC 27708, USA

P. E. Queen (*)
Earl G. Graves School of Business and Management, Morgan State University, 1700 East Cold Spring
Lane, Baltimore, MD 21251, USA
e-mail: pamela.queen@morgan.edu
356 Rev Black Polit Econ (2015) 42:355–378

is widely asserted that entrepreneurship is the primary source of job creation in the U.S.
economy with new business start-ups creating about half of new job growth and the
other half created by the expansion of existing businesses as they create new branches
and subsidiaries (Reynolds 2007). Recent federal government agency studies credit
small businesses with creating 65 %–90 % of the economy’s net new jobs, and credit
small firms for their support or employment of underserved demographics. Both the
Bureau of Labor Statistics and the U.S. Census Bureau attribute new job creation to
employment by small business with these firms employing higher shares of individuals
with lower educational attainment (high school degree or less), and individuals aged 65
or older (Headd 2010).
Consequently, for decades, government policy makers at every level (federal, state
and local) have enacted legislation and developed programs aimed at providing
financial and other support mechanisms to bolster and benefit the small business sector.
Thus, it is important to promote significant business entrepreneurship for improving the
socio-economic status of the African-American community. We limit this discussion to
for-profit entrepreneurship, acknowledging that there are also opportunities in the non-
profit sectors for positive returns to entrepreneurial activities.
Indeed, there is notable evidence that significant propensity for entrepreneurship
exists in African American communities. For example, the most recent available U.S.
Economic Census Survey of Business Owners (U.S. Census Bureau, 2007 Survey of
Business Owners) data reported a 60.5 % increase in the total number of African
American businesses, higher than the 43.7 % increase for all minority-owned business
and substantially higher than the 17.9 % increase for all U.S. businesses.1 According to
the 2007 Survey of Business Owners (SBO) data, African-American owned firms
provided approximately 909,552 jobs, an increase of 20.6 % over the prior survey
(2002). As such, African American entrepreneurs are important for addressing the
adverse rates of African-American unemployment, which have averaged twice the
unemployment rates of whites through varied business cycles as far back as 1960
(U.S. Census Bureau, 2012). Absent these jobs provided by African-American owned
businesses, African American unemployment may have registered almost two-thirds
(62.8 %) higher, to as many as 2.3 million in the survey year of 2007 (Reuben, Wilson,
Wijewardena, Davis, and Clark 2011). Furthermore, analysis of 2007 SBO data finds
larger African-American owned firms paid average salaries across all employees of at
least $30,000.
This paper (1) examines the industry mix of African-American businesses, (2)
reviews evidence that African-American businesses suffer adversely from unequal
access to capital markets, and (3) discusses the resulting implications for the develop-
ment of African-American owned businesses in targeted industry sectors, especially
regarding prospects for providing employment and economic growth. Rather than the
conventional focus upon comparing certain activity performance measures with those

1
The 2007 Survey of Business Owners (SBO) data come from the U.S. Census Bureau and were collected as
part of the 2007 Economic Census. The SBO includes a sample of more than 2.3 million nonfarm businesses
filing 2007 tax forms as individual proprietorships, partnerships, or any type of corporation, and with receipts
of $1,000 or more. It provides estimates of business ownership by ethnicity, race, gender, and veteran status for
both the number of employer and non-employer firms, sales and receipts, annual payroll, and employment.
Data aggregates are available by 2007 North American Industry Classification System (NAICS) sectors
(https://www.census.gov/econ/sbo/getsof.html?07cosum).
Rev Black Polit Econ (2015) 42:355–378 357

of other ethnic businesses, this paper includes actionable assessments of African

American business by exploring the role of adverse capital constraints on the industry
mix profile of African-American owned businesses. Finally, the paper includes recom-
mendations regarding its analysis on industry mix in African-American businesses.

Industry mix of African-American owned businesses

Although not universally appreciated, African-Americans have a long history of

entrepreneurial achievements against the odds. From pre-Revolutionary War shipyard
owner James Forten of Philadelphia (PA), to Reconstruction-era Robert Smalls of
Charleston (SC) and America’s first female self-made millionaire, Madame C J
Walker through today’s executives of Black Enterprise magazine’s annual lists, evi-
dence abounds regarding the African-American interest in business ownership across a
diverse mix of industries. Due to blocked mobility with traditional employment
opportunities, limited employment growth options, and discriminatory workplace
practices, African Americans find self-employment a necessity to gain wealth, advance,
and sustain employment for themselves and their community which other entrepreneurs
neglect (Aldrich et al. 1985). Despite negative odds for success with African-American
entrepreneurship and disparities in financial resources, start-up capital, human capital,
and management experience, African-Americans find entrepreneurship alluring (Bates
1997). African Americans are more likely to start a business, but may face more
external constraints to succeed (Kolliger and Minniti 2006). In comparison to other
business owners by race and ethnicity, African-Americans are more optimistic about
entrepreneurship success and are motivated more by achievement of higher status,
financial security, and work autonomy to enter new business endeavors (Liu 2012).
Entrepreneurship is highly beneficial for minority communities. Entrepreneurship can
strengthen communities with focus on philanthropy, greater employment, and uplifted
economic conditions.
As shown in Table 1, entrepreneurship promotes advancement in income and
wealth. Firm owners or entrepreneurs traditionally have higher household wealth
(Haynes 2001). In 2007, even heading towards severe recession, families with self-
employed head of households retained net worth which is 60 % higher than the median
income of all families.
Consistent with the African-American legacy and continued interest in business
ownership, according to both of the last two SBO surveys (2002 and 2007), the number
of African-American owned businesses grew at rates of 45.4 % and 60.5 % which
exceeded those of other identified groups. With the tendency of minority business
owners to employ disadvantaged and underserved demographics, enhancing opportu-
nities for African-American entrepreneurship helps to promote wealth creation in areas
deplete of business development and employment.

Overview of African-American owned businesses The total number of African-

American owned businesses reported in the 2007 U.S. Census Bureau, Survey of
Business Owners (SBO 2007) is 1,921,864, a 60.5 % increase in number of businesses.
These businesses generated a total of $137.5 billion in revenues, an increase of 53.1 %
over receipts in 2002. In 2007, African-American owned businesses had substantial
increases in number of businesses and revenue as compared to all firms which had a
358 Rev Black Polit Econ (2015) 42:355–378

Table 1 Comparison of median wealth of U.S. families in 2007 thousands of dollars

Year All Families Head of Household Head of Household

Is an Employee Is Self Employed

Median Income Median Income Percent Increase Median Income Percent Increase
of All Firms of All Firms

1998 $42.6 $51.6 21.0 % $67.1 57.5 %

2001 $46.7 $55.3 18.4 % $74.1 58.7 %
2004 $47.5 $54.1 13.9 % $73.3 54.3 %
2007 $47.3 $56.6 19.7 % $75.7 60.0 %

Survey of Consumer Finances from the Federal Reserve Bulletin (Bucks et al. 2009). Median wealth
represents U.S. Family before-tax income in 2007 dollars
The Survey of Consumer Finances (SCF) is normally a triennial cross-sectional survey of U.S. families. The
survey data include information on families’ balance sheets, pensions, income, and demographic character-
istics. Participation in the study is strictly voluntary. A strong attempt is made to select families from all
economic strata. The study is sponsored by the Federal Reserve Board in cooperation with the Department of
the Treasury. For this table, the data are from BChanges in U.S. Family Finances from 2004 to 2007: Evidence
from the Survey of Consumer Finances^ by Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach and Kevin
B. Moore, Federal Reserve Bulletin, vol. 95 (February 2009), pp. A1-A55

17.9 % increase in number of businesses and a 32.9 % increase in revenues from 2002
to 2007 (Fig. 1).

Overview of African-American owned employer firms Notably, the number of employ-

er firms increased by 13 % to 106,566, from 2002 to 2007; these are the firms reporting
workers on the payroll, excluding sole proprietors and partnerships without employees.
These employer firms represent 5.5 % of the African-American owned firms with
approximately $97.1 billion in annual revenue, a 47.6 % increase from 2002 to 2007, as
compared to a 33.3 % increase for all firms and a 23.7 % increase for white owned

African-American Owned Employer Businesses

2002-2007
Source: 2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data
100%

80%

60%

40%

20%

0%
Revenue ($1,000) Businesses Employees
2007 $97,144,898 106,566 909,552
2002 $65,799,425 94,518 753,978
Fig. 1 Comparison of African-American owned employer businesses from 2002 to 2007
Rev Black Polit Econ (2015) 42:355–378 359

businesses. More than 14,300 African-American owned businesses had revenues in

excess of $1 million. Since the 2002 survey, these employer firms employed an average
of nine workers; and they generated approximately 910,000 jobs, an increase of
156,000 jobs from 2002 to 2007. Moreover, African-American owned businesses
employer firms had a 20.6 % increase in employees, as compared to all firms with a
5.9 % increase and white owned businesses with a 1.1 % increase from 2002 to 2007.
Those employer firms with revenues of one million dollars or more per year employed
an average of 42 workers in 2007.
Understandably, a major focus for business ownership growth and development in
the African-American community must be on the strategic expansion of the employer
firms. This paper contributes to this discussion with an assessment of the participation
and revenue performance of African-American employer firms by industry sectors.

Industry sector participation of African-American owned employer Firms As shown in

Table 2, more than half of the 106,566 African-American (AA) owned employer firms
(67,665 or 63.5 %) participate in only 5 of the 22 major North American Industry
Classification System (NAICS) sectors: (1) Health Care/Social Assistance, (2)
Professional/Scientific/Technical Services, (3) Retail Trade, (4) Administrative
Support/Waste Management, and (5) Construction. This leaves fewer than 40 %
(36.5 %) of these firms in the remaining 17 industry classifications. The Health
Care/Social Assistance sector accounts for the largest number of African-American
owned employer firms. Approximately 24,372, or almost a quarter (22.9 %), of
African-American owned employer firms are in the health care sector, nearly twice
as many firms as participate in any other industry sector. The second highest number of
employer firms, 12,916, is found in the Professional/Scientific/Technical Services
sector, which comprises 12.1 % of the total number of employer firms. The Retail
Trade sector includes 11,142 or 10.5 % of African-American owned employer firms.
The fourth and fifth most populated sectors, the Administrative Support/Waste
Management sector and the Construction sector, each accounts for about 9 % of these
African-American employer firms. We suggest that such a large majority (63.5 %) of
African-American owned employer firms are clustered in these 5 of 22 industry sectors
is due to relatively low barriers of entry and (with the exception of the Professional/

Table 2 Top 5 Industry sectors by participation for African-American owned employer firms

Industry Sector Numbers Percent

All AA Owned Employer Firms 106,566 100.0 %

Health Care/Social Assistance 24,372 22.9 %
Professional/Scientific/Technical Services 12,916 12.1 %
Retail Trade 11,142 10.5 %
Administrative Support/Waste Management 9,630 9.0 %
Construction 9,605 9.0 %
All AA Firms in Top 5 Industry Sectors 67,665 63.5 %

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

360 Rev Black Polit Econ (2015) 42:355–378

Scientific/Technical Services sector) relatively low capital demands for wages and cost
per employee.

Aggregate revenues of African-American owned employer firms by industry

sector Table 3 addresses the issue of revenue potential by sector and provides a review
of total aggregate revenues generated by all of the employer firms in each of the top 5
revenue generating industry sectors for African-American business owners. There is
noteworthy overlap, but not congruence, with the list of the top 5 sectors for numbers of
firm participation. The top 5 industry sectors for total African-American owned
employer firm revenues provide $62.5 billion, 64.3 % of employer firm revenues and
46.1 % of revenues from all African-American businesses (employer and non-employer
firms).
In 2007, the top 5 revenue generating industry sectors for African-American owned
employer firms are ranked as: (1) Retail Trade, (2) Wholesale Trade, (3) Health Care/
Social Assistance, (4) Construction, as well as (5) Professional/Scientific/Technology
Services. Although the percentage of revenues generated by the top 5 revenue sectors
(64.3 %) is similar to the percentage of firms in the top 5 sectors for firm participation
(63.5 %), there are at least two notable differences in these two lists. The Administrative
Support/Waste Management sector, where African-American business owners have the
fourth highest rate of participation, does not make the cut for the top revenue generating
industries. Also, the Wholesale Trade sector, which does not make the list of the top
industry sectors in which African-American employer firms participate, is the second
highest industry sector for revenues. As highlighted later in this paper, the Wholesale
Trade industry is the highest revenue generating industry for all firms which suggests
that greater participation in the Wholesale Trade sector for African-American owned
businesses may help increase firm revenue and employee wealth potential for African-
American owned businesses.
Firm revenues depend both upon the profitability of the sector and the rate of firm
participation in the sector. Although third in firm participation, the Retail Trade sector
ranked first in revenue generation for African-American businesses and generated
$17.5 billion or 18 % of aggregate employer firm revenues in 2007. The Wholesale
Trade sector generated $14.5 billion or 14.9 % of aggregate employer firm revenues.
The Health Care/Social Assistance sector, which yields the highest firm participation

Table 3 Top 5 Industry sectors by revenue for African-American owned employer firms

Industry Sector Revenues ($billions) Percent

All AA Owned Employer Firms $97.2 100.0 %

Retail Trade $17.5 18.0 %
Wholesale Trade $14.5 14.9 %
Health Care/Social Assistance $11.5 11.8 %
Construction $9.8 10.1 %
Professional/Scientific/Technical Services $9.2 9.5 %
All AA Firms in Top 5 Industry Sectors $62.5 64.3 %

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

Rev Black Polit Econ (2015) 42:355–378 361

rate (22.9 %), ranked third in aggregate industry revenues, with $11.5 billion and
11.8 % of employer firm revenues. The Construction industry ranked fourth with $9.8
billion or 10.1 % of aggregate revenues. The last of the top 5 industries by aggregate
revenues for African-American businesses was Professional/Scientific/Technology
Services which generated $9.2 billion or 9.5 % of African-American owned employer
firm revenues. The paper later shows that these industries are also high revenue
generating sectors for all firms which indicates that African-American business owners
are not clustered in all low revenue generating industries as widely asserted, but rather
suggests that lack of African-American participation (lower market share) is contribut-
ing to wealth disparities between African-American business owners and other groups.
Our review shows differences in industry sector rankings when firm participation
numbers and rates are compared with revenue generation measures. Analysis of
revenue generation by industry is a key focus because of its direct impact on survival
and growth of African-American owned businesses. It might be suggested that the
rankings by industry sector revenues would be preferred when targeting new business
development opportunities. However, firm-level profitability is also important. So,
Table 4 offers a review aimed at accessing the prospects for individual firm profitability
from ranking of industry sectors by average firm revenues.

Average revenues per employer firm by industry sector As shown in Table 4, this
ranking of average (mean) firm revenues by industry sectors is markedly different from
the ranking of firm participation by industry in Table 2 and aggregate firm revenues in
Table 3. Using 2007 data, the only industry sector in the top 5 ranking of African-
American businesses based upon average firm revenues by industry sector that also
appears in either one of the other two prior rankings (Table 2 and Table 3) is the
Wholesale Trade sector, which is not a top 5 sector for African-American business
participation. This highlights that African-American business owners have less partic-
ipation in capital-intensive industries which most often generate high revenues; this
observation we contend is related to barriers to capital rather than lack of interest,

Table 4 Comparison of top 7 industry sectors by average revenue per firm – ranked ordered by top African-
American owned firms’ average revenue per firm

Industry Sector Mean Revenue/Firm Mean Revenue/Firm Percent of Mean

of AA Owned Firms of All Firms of All Firms

All Employer Firms Rank Ordered by top $911,594 $5,066,430 17.99 %

AA owned firms’ average revenue
Wholesale Trade $6,303,220 $19,153,650 32.91 %
Manufacturing $3,506,550 $18,326,550 19.13 %
Utilities $2,640,220 $97,912,000 2.70 %
Management of Companies/Enterprises $1,790,660 $4,247,120 42.16 %
Information $1,761,150 $14,788,870 11.91 %
Retail Trade $1,569,370 $5,522,390 28.42 %
Construction $1,021,130 $2,159,720 47.28 %

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

362 Rev Black Polit Econ (2015) 42:355–378

know-how, or understanding of business potential. The hypothesis that the relative lack
of African-American firm participation in all the top 7 revenue generating industry
sectors (such as manufacturing and utilities) is a symptom of capital related barriers
will be addressed in an extension of this paper.
Well-documented discriminatory industry practices exclude minorities from lucra-
tive business segments. Many of the industry biases are long-standing practices and
structural policies which prohibit business entry in more profitable industry sectors.
These barriers include resource constraints from investors and consumers; gatekeeper
restrictions from unions, distributors, and wholesalers; and limited availability of
insurance and certification (Aldrich and Waldinger 1990; Sonfield 2001; Shelton
2010). Minorities tend to own businesses in heavily concentrated, labor-intensive and
more competitive industry segments which have greater business failure and turnover
(Robb 2002; Lowrey 2007).
Table 4 highlights this disparity in African-American owner participation by indus-
try and its direct wealth impact. Of the top African-American owned employer firms
ranked in order of highest average revenue per firm by industry, the top 3 industry
segments which yield the highest revenue per firm are capital intensive segments – (1)
wholesale trade, (2) manufacturing, and (3) utilities. Furthermore, none of these
industry segments represent the top 5 segments for African-American owner participa-
tion as shown in Table 2 meaning participation in these potentially high generating
revenue per firm industries is elusive for African-American entrepreneurs. Furthermore,
this wealth disparity is underscored by comparison of the average revenue per firm of
African-American owned firms to the average revenue per firm for all firms. Overall,
African-American owned firms have mean revenue per firm which is approximately
18 % of the average per firm for all firms with percentages by industry representing a
meager 3 % of revenue per firm in the utilities segment, 19 % in the manufacturing
segment, and 33 % in the wholesale trade sector. For the highest revenue generating
industries per firm, African-American owned business owners garner mean revenue per
firm which is less than 40 % of the mean revenue per firm for all firms; we contend that
impediments to capital access for African-American business owners may greatly
influence this circumstance. Therefore, the following sections discuss certain barriers
of capital faced by African-American owned businesses and provide some recommen-
dations to overcome these barriers by focusing on the intersection of high revenue
generating industries with high African-American business owner participation
industries.

Analysis of access to capital by industry

Access to capital is perennially the impediment most frequently cited by minority

entrepreneurs, especially African-American business owners (Fairlie and Robb 2010).
For decades, policy-makers have recognized the importance of providing financial and
other support mechanisms to bolster and benefit the small business sector. Yet, histor-
ical, anecdotal and analytical perspectives suggest that African-American owned busi-
nesses have long been impeded by adverse inequities that hamper entrepreneurial
growth and development. According to one survey of African-American business
owners, 84 % of respondents contend their business growth is impeded due to lack
Rev Black Polit Econ (2015) 42:355–378 363

of access to capital (Carlson 1992). Disparities to access to both debt and equity capital
is observed for African-American owned businesses with these business owners having
higher denial rates for loan applications and fewer investors willing to provide capital
as compared to white-owned businesses (Bates 1991; Bates and Bradford 1992). This
means that African-American owned businesses have not always had the full benefit of
government policy initiatives designed to assist the growth and development of small
businesses.

African-American suffer adverse, unequal access to capital

From an historical perspective, the Reconstruction Finance Corporation (RFC) was

created in 1932 as a federal lending program for all businesses, large and small. 2
However, recognizing and responding to the particular needs of smaller businesses, in
1942, Congress created the Smaller War Plants Corporation (SWPC), for promoting the
war-time contracting participation and the financial viability of the small business
sector. The SWPC was authorized (1) to engage in direct lending to private entrepre-
neurs, (2) to encourage small business lending by large financial institutions, and (3) to
advocate small business interests to federal agencies and to large corporations.3 When
the SWPC was dissolved after World War II, its primary financial assistance powers -
lending and contracting - were assumed by the RFC. Additionally, as a separate, but
related action, the Office of Small Business (OSB) in the Department of Commerce
was created and charged with certain educational and technical assistance for small
businesses.
However, it was not long until the small business sector was granted a stand-alone
federal agency, a separate federal agency with broad technical and financial assistance
authorities. In 1953, concomitant with the closing of the RFC, Congress passed the
Small Business Act which created the Small Business Administration (SBA) to Baid,
counsel, assist and protect … the interests of small business concerns.^ In addition to
providing management training and other technical assistance, the SBA was tasked
with ensuring that small businesses received a Bfair proportion^ of government con-
tracts and sales of surplus property. By 1954, with school segregation and Jim Crow
laws still firmly in place, SBA already was making direct business loans and bank loan
guarantees as well as working to get government procurement contracts for small
businesses and helping business owners with technical assistance and management
training.
In 1958, as a result of a Federal Reserve’s study which concluded that small
businesses could not get the credit they needed to keep pace with technological
advancements, the SBA was made a permanent, independent federal agency. In addi-
tion, the Investment Company Act of 1958 authorized the SBA to establish the Small
Business Investment Company (SBIC) Program for private venture capital investment
firms to help finance high-risk small businesses (Martin and Moore 1959). However,
there remains considerable controversy about the extent to which African-American
entrepreneurs have had historical or even recent access to these technical and financing

2
https://www.sba.gov/about-sba/what_we_do/history. Retrieved December 23, 2014.
3
https://www.sba.gov/about-sba/what_we_do/history. Retrieved December 23, 2014.
364 Rev Black Polit Econ (2015) 42:355–378

assistance programs that helped build and promote entrepreneurial success in the
history of the U.S. economy (Mandelbaum 2011).
Subsequently, socio-political events focused attention on African-American business
development. Initially, federal government attention to the importance of business
ownership participation by African-Americans emerged Bto raise minority incomes
and self-respect, [as a way of] easing the unrest that overwhelmed cities during the
1960s^ (Skrentny 1996; Kotlowski 1998). Certain historians have labeled Baffirmative
action and minority business enterprise as crisis management tools, that is, as policies to
promote minority economic development and thus allay urban unrest^ (Skrentny 1996;
Kotlowski 1998). In the wake of the 1967 riots, President Johnson led Congress to
pass^ anti-poverty amendments that boosted the Small Business Administration budget
to $2.65 billion and required the agency to funnel half its loans to blacks and whites in
ghetto areas^ (Kotlowski 1998).
The Small Business Administration (SBA) produces a Financial Assistance Guide
which describes its loan program, including eligibility requirements and its application
process. While the SBA has achieved notable success with developing and supporting
small business owners, patterns of discrimination for African-American entrepreneurs
exist. In 2003, a $50 million discrimination lawsuit was filed against the SBA’s Small
Business Investment Company (SBIC) program, citing credible testimony and reports
which showed

& that only 0.57 % (two persons) of the 350 licensed managers in the program were
African-American managers;
& that SBA’s own statistics show African-American owned firms received just 2.55 %
of SBA approved financing; and
& that 0.49 % of all SBA dollars were to African-American owned firms illustrating
that SBA’s policies for decades have had a disparate discriminatory impact on
African-Americans and minorities.

When the suit was originally filed, the SBA had not awarded any SBIC licenses to
African-American owned firms though the program had been in existence since 1958
(Caldwell, 2010). This means that from 1958 until the Bush administration
discontinued the important equity investment feature of the SBIC program, African-
American business owners were shunted to the riskier debt assistance programs, when
provided any assistance at all. In 2010, Federal District Court Judge Gladys Kessler
disallowed the SBA’s efforts to dismiss the 2003 discrimination lawsuit. Several
months after the judge allowed the lawsuit to proceed; the SBA negotiated a settlement
with the plaintiffs, including conditional access to an SBIC license and payment of
$1.625 million to cover plaintiff’s legal and licensing costs (Mandelbaum 2011).
Nevertheless, access to capital for entrepreneurs continues to be problematic for
minorities, especially African-American owned business. Prior research finds that
access to capital and capital levels at business start-up are a strong predictor of business
success (Fairlie and Robb 2008). According to Robb et al. (2009), BBlack-owned firms
experience higher loan denial probabilities and pay higher interest rates than white-
owned businesses even after controlling for differences in creditworthiness and other
factors.^ A recent study of access to capital for young, minority, and women-owned
technology firms finds that minorities, African-Americans and Latinos are apparently
Rev Black Polit Econ (2015) 42:355–378 365

consigned to use a different mix of debt and equity as compared to non-

minorities with these minority groups relying disproportionately on personal
equity. Furthermore, these initial disparities in capital access and use by busi-
ness owner’s race, ethnicity, and gender do not disappear in subsequent years
following startup (Fairlie and Robb 2010).
Some assistance is expected with the implementation of recent federal legislation. In
2010, as a measure of accelerating and expanding the economic recovery, President
Obama signed the Small Business JOBS (Jumpstart Our Business Start-ups) Act Bto
provide critical resources to help small businesses continue to drive economic recovery
and create jobs,^ and the SBA was given an important role in its implementation.4 This
legislation more than doubled the maximum loan size for the largest SBA programs.
The Small Business JOBS Act of 2010 permanently raised the maximum size for
SBA’s two largest loan programs: increasing the maximum 7(a) and 504 loans from $2
million to $5 million, and the maximum 504 manufacturing related loan from $4
million to $5.5 million. In addition, it temporarily increased the maximum loan size
for SBA Express loans from $350,000 to $1 million. In addition to greater loan limits,
the bill provides an increase in deductions for entrepreneurs’ start-up expenses from
$5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures), offering an
immediate incentive for someone with a new business idea to invest in starting up a
new small business today. Furthermore, this act enables greater funding for small
businesses via the Title III Crowdfunding Act, a provision which exempts small
businesses from expensive registration and expensive broker requirement costs when
selling stock directly to the public and soliciting funds from social media. The
expectation is the JOBS Act will improve access to capital for small businesses;
especially the Crowdfund Act which will open funding opportunities to small business
and underfunded entrepreneurs, but at a possible risk to unsophisticated investors
(Stemler 2013).
For the remainder of this study, we will focus on industry characteristics of those
intersecting sectors with higher revenue generating potential and higher firm participa-
tion of African-American business owners. These industry sectors are – wholesale
trade, retail trade, heath care/social assistance, construction, and professional/scien-
tific/technology services. This approach is taken to highlight impediments to business
entry and survival in industry segments with the largest African-American business
owner presence; thus, dispelling criticisms directed towards lack of business experience
or industry knowledge as causes of business failure. While these industries may be
highly competitive, product and service differentiation can be achieved when institu-
tional barriers and impediments are gone. Furthermore, all of these industries have high
revenue generating potential. Of the 22 major NAICS segments, these industries
represent the top 7 highest revenue generating industries from all firms. Therefore, if
African-American business owners can gain greater market share in these industries,
they would garner greater revenue and potentially greater wealth for themselves and
their employees.
Like most small business owners, African-American business owners utilize large
percentages of personal assets and debt financing to fund their business enterprises.

4
BSmall Business JOBS Act of 2010,^ Small Business Administration (SBA) Press Release, https://www.sba.
gov/about-sba/sba_initiatives/small_business_jobs_act_of_2010. Retrieved December 23, 2014.
366 Rev Black Polit Econ (2015) 42:355–378

However, as Table 5 captures, for African-American owned firms, most of these firms
as compared to all firms and non-minority firms utilize a greater percentage of personal
capital via savings and credit cards and a lower percentage of capital from
business loans or business investors. Noteworthy is that many of these 5
industries examined are not considered capital intensive industries, giving
further credence to adverse capital constraints or institutional barriers faced by
African-American owned businesses.
At first glance, Table 5 shows that all categories of entrepreneurs rely heavily on
personal capital with less reliance on bank loans and government support. In compar-
ison, minority firm owners rely more heavily on personal capital to start their business.
Of all the minority groups, Asian business owners obtain almost half of their start-up
capital from family and friends as compared to less than 1/3 for non-minority firm
owners (Bates 1989). Questions arise regarding the more problematic reliance on
personal capital for African-American owned firms. Access to capital for African-
American business owners is compounded because of discriminatory lending practices
(Scott 1983) and a significant wealth gap which limits availability of capital from
personal assets, family, and friends. Therefore, if the major source of funding has
limited resources, business owners are more constrained because little to no financial
resources are available. As Table 5 highlights, availability of start-up capital from bank
loans and ventured capitalists continues to plague minority firms, especially African-
American owned firms (Smith-Hunter and Nolan 2011). Despite evidence that African-
American entrepreneurs have similar education and risk potential as their white coun-
terparts, access to start-up capital is limited (Bates 1991). Therefore, for African-
American owned business owners to gain parity with their white counterparts, defi-
ciencies in personal assets must be offset by significant increases in guaranteed loans,
ventured capitalist investment, and grants.
Lack of venture capital (VC) funding and grants may be due to industry type.
Venture capitalists and angel investors generally provide financing to business enter-
prises with rapid growth and high returns. According to the Center for Venture
Research at the University of New Hampshire, venture capitalists gravitate to certain
types of businesses with the majority of funds invested in software, health care,
industrials or energy, retail, biotech and financial services sectors. For African-
American owned businesses, increases in VC funding are observed for the wholesale
trade and retail trade industries, but these increases are not adequate to off-set a long-
standing wealth gap between African-American versus white business owners due to
capital access inequalities.

Wealth gap of African Americans and impact on economy

While increases in African-American entrepreneurship are encouraging, disparities

between the wealth gap of minority and non-minority businesses are significant.
Historically, African-American business owners have lower wealth than their white
counterparts (Blau and Graham 1990) and this gap is widening. In a capitalist society,
why should economists be concerned about the misfortune or limited wealth prospects
of a specific demographic group of business owners? Capitalism is defined as an
unimpeded economic system in which individuals and corporations develop and
expand in proportion to profits gained in a free market.
Table 5 Capital sources for business start-up of top 5 industry sectors by revenue for African-American owned employer firms

Savings Assets Home Equity Credit Card Business Loan Guaranteed Loan Bank Loan Family/ Friend Venture Capitalist Grants Other

Percentage of Funding by Sources for Retail Trade Industry (%)

All Firms 64.70 9.16 7.78 14.42 0.96 1.10 13.17 3.90 0.26 0.09 2.00
White Firms 65.02 9.24 7.52 14.44 0.98 1.06 13.28 3.71 0.21 0.06 1.77
Minority Firms 67.04 8.22 9.15 15.47 1.00 1.05 9.40 4.74 0.22 0.17 2.60
AA Firms 65.68 6.61 N/A 16.61 0.79 1.03 5.53 2.45 0.24 0.29 2.90
Percentage of Funding by Sources for Health Care Industry (%)
All Firms 50.10 5.40 4.07 8.24 0.90 0.97 14.94 2.14 0.22 1.65 2.97
White Firms 52.89 5.67 4.05 8.71 0.87 1.01 15.76 2.22 0.19 0.39 1.84
Rev Black Polit Econ (2015) 42:355–378

Minority Firms 50.45 4.92 4.56 8.11 0.83 0.76 10.41 1.73 0.15 0.52 2.17
AA Firms 44.81 4.76 3.00 6.75 0.91 0.60 5.95 1.39 N/A 0.86 2.45
Percentage of Funding by Sources for Wholesale Trade Industry (%)
All Firms 63.83 8.00 7.18 10.60 0.65 0.85 12.17 3.83 0.83 0.09 3.31
White Firms 65.95 8.23 7.28 10.95 0.68 0.90 12.38 3.78 0.49 0.07 2.37
Minority Firms 68.48 8.06 8.84 13.15 0.69 0.57 8.84 4.46 0.71 0.08 2.29
AA Firms 64.73 6.13 6.16 15.33 N/A 0.86 6.56 3.59 1.14 N/A 2.64
Percentage of Funding by Sources for Construction Industry (%)
All Firms 62.76 8.72 5.90 11.88 0.34 0.29 8.42 2.20 0.19 0.06 1.63
White Firms 63.09 8.87 5.90 11.90 0.33 0.27 8.47 2.18 0.16 N/A 1.49
Minority Firms 62.14 6.70 5.21 12.38 N/A 0.28 4.14 2.04 0.20 0.11 1.68
AA Firms 61.73 6.28 4.80 9.92 0.64 0.51 3.99 1.30 N/A N/A 2.20
Percentage of Funding by Source type for Professional, Scientific, and Technology Industry (%)
All Firms 64.82 6.21 3.77 10.64 0.32 0.38 5.20 1.68 0.34 0.30 1.64
White Firms 65.13 6.23 3.71 10.52 0.31 0.37 5.35 1.66 0.24 0.18 1.38
Minority Firms 65.79 6.26 3.93 12.76 0.29 0.41 3.26 1.60 0.21 N/A 1.51
AA Firms 66.85 8.26 3.74 15.94 0.62 0.64 2.73 1.34 0.06 0.56 2.39

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

367
368 Rev Black Polit Econ (2015) 42:355–378

So, why is the plight of minority business owners a concern for economists?
According to U.S. labor forecasts (U.S. Bureau of Labor Statistics 2012), the 2025–
2050 outlook on the U.S. labor market is expected to grow slowly with the majority of
growth about 55 million by minorities and immigrants workers. Therefore, greater
pressures ensue to raise the rate of U.S. productivity growth. The success of minority
businesses to employ more workers and raise the productivity of workers is essential to
U.S. economic growth. As the past decade has shown, BThe success and failure of
minority-owned businesses will increasingly drive the success or failure of the overall
U.S. economy^ (Bernard and Slaughter 2004).
Yet, the ability of minority businesses to employ more minorities and increase
wealth of minority workers is doubtful when they are faced with documented adverse
disparities in accessing capital. As Table 6 highlights, of the industries which generate
higher revenues for African-American entrepreneurs, these African-American owned
firms have average revenue per firm which are staggeringly lower at approximately
18 % to 48 % of the average revenue of all firms in the same industry. For the
wholesale trade industry which is the highest revenue generating industry for all firms
and the second highest for African-American owned firms, the average revenue per
firm is $6.303 million for African-American owned firms, as compared to average
revenue of $19.154 million for all firms; the average revenue for African-American
firms is approximately 1/3 of the average revenue for all firms. While all the
top 5 industry sectors by revenue for African-American owned businesses are
also in the top 7 industry sectors by revenue for all firms, African-American
owned firms have average revenue per firm of approximately 33 % of all firms
in the Wholesale Trade industry, 30 % of all firms in the Retail Trade industry,
50 % of all firms in the Construction industry, 20 % of all firms in the Health
Care/Social Assistance industry, and 40 % of all firms in the Professional,
Scientific, and Technology Services industry. This is a significant revenue gap
which requires major, targeted efforts to reduce barriers to business entry, assist
minority entrepreneurs to penetrate high-growth and high-profit oriented indus-
tries, and to reduce the wealth gap between African-American owned entrepre-
neurs and their counterparts.
Similarly, this revenue disparity between African-American owned firms and all
firms is further highlighted in Table 7 which shows the aggregate revenue creation of
employees. For most industries, the average annual payroll per employee for African-
American owned firms is 20 % to 40 % less than all firms in the corresponding
industry, except the retail industry. For the retail industry which is traditionally low
paying, the average annual payroll is $24,969 per employee for African-American
owned firms as compared to $23,540 for all firms. For the African-American owned
firms, the average annual payroll per employee ranges from $20,836 to $46,119 which
is lower than the U.S. median household income. According to the 2007 U.S. Census
Bureau Income Data (U.S. Census Bureau 2007), the real annual median household
income of U.S. households was $50,233 with African-American households having, an
annual median household income of $33,916. A strong, robust U.S. economy needs
businesses to generate jobs and support a higher living standard for the projected
growing labor force of immigrant and minority workers. At present, the ability
for African-American business owners to generate wealth for their employees is
hampered, especially by financial market barriers.
Table 6 Comparison of average revenue by firm owner type of top 5 industry sectors by revenue for African-American owned employer businesses, 2007

Industry All AA Firms All Minority Firms All White Firms All Firms Percent for AA Firms Percent for Minority Firms Percent for White Firms
Rev Black Polit Econ (2015) 42:355–378

Wholesale Trade (ranked #1 in $6,303,224 $4,449,363 $8,135,003 $19,153,650 32.91 % 23.23 % 42.47 %
revenue for all firms)
Retail Trade (ranked #3 in $1,569,370 $1,482,500 $3,029,900 $5,522,400 28.42 % 26.84 % 54.87 %
revenue for all firms)
Construction (ranked #5 in $1,021,135 $1,182,451 $1,807,699 $2,159,724 47.28 % 54.75 % 83.70 %
revenue for all firms)
Health Care/Social Assistance $469,687 $668,511 $988,531 $2,513,051 18.69 % 26.60 % 39.34 %
(ranked # 6 in revenue for
all firms)
Professional, Scientific, and $706,819 $826,012 $861,247 $1,781,402 39.68 % 46.37 % 48.35 %
Technology Services (ranked
#7 in revenue for all firms)
369
370 Rev Black Polit Econ (2015) 42:355–378

Table 7 Comparison of average payroll per employee by firm owner type of top 5 industry sectors by
revenue for African-American owned employer businesses, 2007

Industry All AA All All All Percent for Percent for Percent for
Firms Minority White Firms AA Firms Minority White
Firms Firms Firms Firms

Wholesale Trade (ranked #1 $41,355 $39,637 $45,950 $53,847 76.80% 73.61 % 85.33 %
in revenue for all firms)
Retail Trade (ranked #3 $24,969 $20,923 $25,961 $23,540 106 % 88.88 % 110 %
in revenue for all firms)
Construction (ranked #5 $35,242 $36,858 $43,736 $45,406 77.62 % 81.17 % 96.32 %
in revenue for all firms)
Health Care/Social Assistance $21,957 $33,892 $36,326 $38,694 56.75 % 87.59 % 93.88 %
(ranked # 6 in revenue for
all firms)
Professional, Scientific, and $46,119 $55,060 $52,921 $64,124 71.92 % 85.86 % 82.53 %
Technology Services
(ranked #7 in revenue
for all firms)

Financial performance and capital structure by industry

Industry analysis of small business financial performance in relationship to capital

structure highlights potential impediments to success and survival for minority business
owners. Focusing on the top 5 revenue generating industries for African-
American owned businesses, Table 8 shows 5-year trends of liquidity, solvency,
and profitability ratios for small businesses. Financial performance of small
businesses typically differs from large firms. So, for this analysis, a comparison
of financial ratios for only small firms is more meaningful than comparisons to
widely reported market benchmarks. Each ratio type examines a different
dimension of the financial health of small businesses in the U.S. The
Financial Research Associates (FRA) which compiles these data defines small
business as businesses with total capitalization of under $2,000,000.
The current ratio is a liquidity ratio which measures the financial health of a
firm by assessing its ability to satisfy liabilities that become due within the next
12 months with the firm’s most liquid assets. Healthy firms are those which
have sufficient cash, cash equivalents, account receivables, and inventory which
exceed current liabilities. Liquidity ratios greater than one indicate short-term
funds are adequate to meet short-term obligations. Solvency ratios assess the
extent to which firms rely on debt as a source of financing. For this study, a
solvency ratio of short-term debt-to-total debt is examined. For some industries,
debt financing is typical; and for small businesses which do not have broader
assess to equity markets and equity investors, more financing with debt is
expected. However, for small business with limited financing options, too much
debt can lead to disruption in business services, bankruptcy, or business closure.
Profitability ratios measure a firm’s ability to generate income as compared to
its operating expenses and other relevant costs. For healthy firms, high
Rev Black Polit Econ (2015) 42:355–378 371

Table 8 Financial performance measures of U.S. small businesses by industry sectors

Financial Performance Measures 2002 2003 2004 2005 2006

Liquidity Ratios - Current Assets/Current Liabilities

Retail Industry – General Merchandise 2.9 2.6 3.1 3.9 3.0
Wholesale Industry – Electrical Supplies 1.8 1.9 1.9 2.8 2.9
Wholesale Industry – Auto Supplies 2.7 2.7 2.2 2.4 2.4
Healthcare Services Industry 1.2 1.7 1.3 1.3 1.1
Construction Industry – General Contractor 1.4 1.4 1.3 1.5 1.7
Professional Services Industry – Real Estate 1.0 1.4 1.8 1.5 1.3
Professional Services Industry – Insurance 1.2 1.2 1.2 1.1 1.2
Solvency Ratios - Short-term Debt/Total Debt % % % % %
Retail Industry – General Merchandise 58.5 59.6 65.7 94.2 79.5
Wholesale Industry – Electrical Supplies 81.5 92.7 79.0 89.7 100.0
Wholesale Industry – Auto Supplies 98.7 72.5 70.3 64.3 65.3
Healthcare Services Industry 58.5 59.6 65.7 94.2 79.5
Construction Industry – General Contractor 68.2 64.1 71.2 58.8 64.5
Professional Services Industry – Real Estate 30.6 35.0 33.9 28.7 36.5
Professional Services Industry – Insurance 30.6 35.0 33.9 28.7 36.5
Profitability Ratios - Profit/Net Worth % % % % %
Retail Industry – General Merchandise 4.5 4.7 3.3 3.0 3.6
Wholesale Industry – Electrical Supplies 1.5 6.5 16.9 16.4 10.1
Wholesale Industry – Auto Supplies 14.3 9.3 10.2 12.6 12.3
Healthcare Services Industry 15.2 15.2 51.1 40.0 35.0
Construction Industry – General Contractor 22.1 20.5 21.9 25.1 20.9
Professional Services Industry – Real Estate 14.0 13.1 14.7 20.4 20.8
Professional Services Industry – Insurance 30.6 41.5 32.8 62.5 53.9

2007 Financial Research Associates (FRA) Data on Small Businesses

Financial Research Associates (FRA) compiles data annually on small businesses. Data are selected from over
30,000 financial statements of small firms, contributed by over 1,500 independent CPA firms nationwide

profitability ratios that do not widely fluctuate from year-to-year are best. A
profitability ratio of profit/net worth is used. This ratio measures the return firm
owners are receiving on their investment. Higher values indicate firm resources
are better utilized to generate positive returns for firm owners.
As Table 8 highlights, the liquidity ratio for all industry sectors5 indicate that these
industries are very liquid with ratios ranging from 1.0 to 3.9; this is a noticeable
difference found between results for small businesses as compared to large firms
(FRA, 2007). While acceptable liquidity ratios differ by industry, a current ratio of 2
is a comfortable financial position for most businesses. Most large, industrial firms

5
Industry segments defined by Financial Research Associates (FRA) for small businesses are subcategories of
the NAICS sectors defined for the U.S. Census Bureau, Survey of Business Owners (SBO) data. Therefore,
the authors selected a sub-set of FRA industry segments which closely map to the broader NAICS sectors
examined.
372 Rev Black Polit Econ (2015) 42:355–378

target current ratios of 1.5. Current ratios much higher than 2 may indicate inefficient
use of cash that is the firm is holding cash versus investing its cash. Based upon typical
compositions of current assets for small businesses, the majority of their current
assets are cash or cash equivalents from personal resources and accounts
receivables from customers. For most of the industries examined, the current
ratio and quick ratio (not shown) have similar values which indicate that these
industries have little to no inventory comprising their current assets. This is
expected for service-related industries.
As the solvency ratio indicates, these small businesses largely rely on debt financing
with some industries (wholesale and health services) having short-term debt-to-total
debt ratios of greater than 80 % which indicates that almost all of these small
businesses’ debt obligations are due within 12 months. Furthermore, for most industries
the total debt-total asset ratios (not shown) are greater than 50 %. So, many of these
small businesses have debt obligations which are more than half of their total asset
value. These observations are particularly problematic for African-American business
owners who are less likely to obtain debt financing from banks or more likely to pay
higher interest rates on loans (Coleman 2008). Therefore, if a given industry relies
heavily on debt financing and a certain group of business owners are systematically
denied access to debt financing or will incur greater expense to obtain debt financing,
then these business owners will either lack the resources to start businesses in these
industries or will lack the resources to sustain operations.
Furthermore, as shown in Table 8, the average revenue for business owners differs
by industry with higher profit/net worth values of greater than 15 % for wholesale,
health services, and professional, scientific, and technology services industries. The
fluctuations observed in profitability ratios may be more attributed to the nature of
small business which is more susceptible to economic shocks than characteristics of a
given industry.
Analysis of Table 8 strengthens our argument that barriers to success for African-
American owned businesses may be linked to capital needs and capital structure of a
given industry rather than other arguments related to lack of entrepreneurial desire,
business experience, educational levels, or risk aversion. According to 2007 SBO data,
the top 5 industries with greater involvement of African-American business owners
based upon number of firms are industries also in the top 10 of the 22 major NAICS
highest revenue generating sectors for all firms. Therefore, these industries have the
potential to generate wealth for African-American business owners. Furthermore,
analysis of FRA small business data highlights that top industries by revenue and by
participation for African-American business owners have good profit margins. So, the
likelihood for African-American owned business owners to be successful and to sustain
operations is highly possible. As we contend, one likely impediment to success for all
small businesses, especially minority business owners is equitable availability of low
cost capital for business entry and expansion. For all business owners, access to equity
financing is limited with most business owners using personal wealth to fund business
endeavors. Therefore, debt financing is an essential funding source for small business
owners. However, as prior research confirms, African-American business owners as
compared to other groups are more often denied access to traditional financing sources.
Therefore, the ability of African-American business owners to keep pace with other
small business owners in similar industries is limited.
Rev Black Polit Econ (2015) 42:355–378 373

Ways to increase African-American business survival and success

We provide some approaches to obtain greater business growth and wealth creation for
African-American owned firms. As discussed above, business development and growth
of minority owned firms are paramount for U.S. economic expansion and sustainability
for the largest growing labor market demographics, immigrant and minority workers.
While some improvements to access to capital and greater penetration in high revenue
industries are observed, more local and regional efforts are needed to fortify minority
business throughout their lifecycle (Adebayo, Adekoya, and Ayadi 2001). Furthermore,
efforts to provide traditional debt financing at lower interest rates, more access to equity
financing, and state and federal support to spur business development with reductions
or delayed payment of business-related expenses are needed. Some suggestions
include:

a Greater access to capital from business loans and venture capitalists for business
start-up and expansion – Business failure for African-American owned firms is
attributed to differences in liquidity due to loan discrimination and less personal
wealth (Fairlie 1999; Blanchflower, Levine, and Zimmerman, 2003). One remedy is
to increase access to capital from matching 6 private institutional investors and
venture capitalists with African-American owned entrepreneurs to secure funding
sources throughout the firm’s lifecycle. For African-American owned firms to
survive and succeed, reliance on personal capital for business start-up and expan-
sion must decrease. With African-American entrepreneurs having less personal
wealth coupled with greater disproportionate use of personal capital for business
start-up and expansion, the wealth gap will continue to limit the success of African-
American owned businesses. Efforts to increase access to business investment from
venture capitalists, guaranteed federal loans, and funding grants will lessen depen-
dence on personal capital.
Federal, state, and local governments can provide essential resources to increase
minority business development and close wealth gaps between minority and non-
minority businesses with implementing some policy recommendations from The
Small Business Jobs Act of 2010 (U.S. Small Business Administration, Press
Release2010). Other federal provisions should include Loan Forgiveness Policy
(20 % per year loan forgiveness for full-time entrepreneurial establishment activities);
Social Security Deduction Policy; Investment Tax Credit Policy; Entrepreneurial
Savings Account with higher interest returns and bank fee waivers; and in cases
where personal assets are used, Home Equity Deduction Policy may be beneficial.
b Greater participation in high revenue generating industries – Efforts which con-
tinue to enable African-American business owners to penetrate high revenue
generating industries will enable African-American owned firms to be more prof-
itable, provided operating efficiencies ensue. As shown in Table 9, analysis of
number of firms by industry indicates minority firms represent approximately 8 %
to 17 % of total number of firms by industry. Yet, for black-owned firms, the
percentage of number of firms ranges from less than 1 % to 4 % which is

6
Efforts at Massachusetts Institute of Technology (MIT) and other schools are successful with matching
African-American entrepreneurs with venture capitalists – Black Enterprise Magazine, 24(11), 48.
374 Rev Black Polit Econ (2015) 42:355–378

Table 9 Comparison of share of number of firms by owner type of top industry sectors for African-American
owned employer firms

Industry All AA All All All Share Share of Share of

Firms Minority White Firms of AA Minority White
Firms Firms Firms Firms Firms

Wholesale Trade (ranked #1 2,300 46,919 262,784 333,798 0.69% 14.06 % 78.73 %
in revenue for all firms)
Retail Trade (ranked #3 in 11,142 117,905 575,024 711,859 1.57 % 16.56 % 80.78 %
revenue for all firms)
Construction (ranked #5 in 9,605 62,747 726,069 797,774 1.20 % 7.87 % 91.01 %
revenue for all firms)
Health Care/Social Assistance 24,372 104,295 421,649 609,135 4.00 % 17.12 % 69.22 %
(ranked # 6 in revenue for
all firms)
Professional, Scientific, and 12,916 78,385 665,337 775,614 1.67 % 10.11 % 85.78 %
Technology Services (ranked
#7 in revenue for all firms)

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

significantly lower than all minority firms and a fraction of white-owned firms
which range from 70 % to 90 % of all firms.
Wealth disparity reflected in market share by industry of African-American (AA)
owned firms compared to all firms are further highlighted in Table 10 which shows
the market share of revenue by industry sector. As this table highlights, the market
share of revenue for minority owned firms is minuscule as compared to white
owned firms, but for African-American owned firms, market share of revenue as

Table 10 Comparison of share of average annual revenue by owner type for the top 5 industry sectors by
revenue in millions of dollars for African-American owned employer firms

Industry All AA All All White All Firms Share Share of Share of
Firms Minority Firms of AA Minority White
Firms Firms (%) Firms (%) Firms (%)

Wholesale Trade (ranked #1 $14.5 $ 208.8 $2,138 $6,393 0.23 3.27 33.44
in revenue for
all firms)
Retail Trade (ranked #3 in $17.5 $ 174.8 $1,742 $3,931 0.45 4.45 44.32
revenue for all firms)
Construction (ranked #5 in $ 9.8 $ 74.2 $1,313 $1,723 0.57 4.30 76.20
revenue for all firms)
Health Care/Social $11.5 $ 69.7 $416.8 $1,531 0.75 4.55 27.23
Assistance (ranked # 6
in revenue for all firms)
Professional, Scientific, and $ 9.2 $ 64.7 $ 573 $1,382 0.67 4.69 41.47
Technology Services
(ranked #7 in revenue
for all firms)

2007 U.S. Census Bureau, Survey of Business Owners (SBO) Data

Rev Black Polit Econ (2015) 42:355–378 375

compared to all firms is less than 1 % for all industry sectors analyzed. Market-
share of annual revenue for African-American owned firms represent 0.23 % of the
average revenue for all firms in the wholesale trade industry, 0.45 % for the retail
industry, 0.57 % for the construction industry, the most capital intensive of the
industries analyzed, 0.75 % of the health care/social assistance industry, and
0.67 % of the professional, scientific and technology services industry. While these
are all industries with the greatest participation by African-American business
owners and industries with high revenue generating capacity, the average revenue
for African-American business owners as compared to all firms is startlingly
diminutive.
This paper points to efforts to increase market-share participation of African-
American owned firms in high revenue generating industries in order to generate
greater revenue potential for African American businesses. This may be accom-
plished by incentivizing ventured capitalists to support African-American entrepre-
neurs with Bknow-how^ and capital via investment tax credit when these ventured
capitalists invest in these high revenue generating industries.

Based upon the U.S. Bureau of Labor Statistics outlook for years 2012–2022,
opportunity to increase quantity of firms by industry is promising. Employment growth
is expected in the health care industry with increases in real output expected in
Construction (expected increase of 4.1 %), Professional, Scientific, and Technology
Services (expected increase of 3.9 %), Wholesale Trade (expected increase of 3.7 %),
Health Care/Social Assistance (expected increase of 3.6 %), and Retail Trade (expected
increase of 3.2 %) industries. These growth projections are encouraging for African-
American business owners who currently operate businesses in these industries.
However, the challenge is whether African-American owned entrepreneurs can capture
the potential growth outlook for these industries. This growth outlook should interest
potential investors who may consider broadening their portfolio with investments in
African-American businesses or new entrepreneurs seizing opportunities with govern-
ment economic development programs.

Summary and conclusion

This analysis indicates that the numbers of African-American owned businesses in

diverse industries are increasing; and these firms are providing greater contributions to
the socio-economic progress of African Americans and the larger society. The growth
in the total number of African-American owned firms has substantially outpaced other
minority groups and all U.S. businesses. Despite these increases in the number of
African-American owned firms, African-American entrepreneurs tend to participate in
industry sectors with less capital requirements for start-up and expansion. However,
some of these industries have lower revenue streams. Yet, when African-American
entrepreneurs operate in high-revenue generating industries, their average annual
revenue and average annual payroll per employee are significantly lower than their
white counterparts. Thus, revenue disparities, and concomitant wealth disparities, con-
tinue to adversely impact African-American business owners when compared to non-
minority business owners, as survival of African-American owned business is threatened.
376 Rev Black Polit Econ (2015) 42:355–378

Adverse disparities are further fueled by greater dependency on personal capital for
start-up and expansion for minority entrepreneurs. These minority entrepreneurs dis-
proportionately rely on more personal capital from personal savings, assets, credit
cards, and home equity than other groups. Furthermore, lending discrimination is a
major contributor to the plight of African-American entrepreneurs. Adverse capital
constraints for African-American owned businesses are barriers to business entry and
these initial disparities in capital access do not disappear in subsequent years of
business life. Although African-American entrepreneurs operate in traditionally more
labor-intensive versus capital-intensive industries, inequitable access to capital and low
capital levels hamper firm development and growth. As highlighted in this paper, for
many industry sectors, most small businesses rely heavily on personal assets and debt
financing to support day-to-day operations. For African-American business owners
who have limited personal assets and are routinely denied access to debt financing from
traditional funding sources, their ability to operate in less capital-intensive industries is
challenging.
While critics will contend that this revenue disparity between African-
American business owners and other groups is due significantly to the type
of industry in which most African-American business owners participate (lower
earning, labor-intensive sectors versus higher earning, capital-intensive sectors),
this analysis does not support that contention. Although African-American
business owners do not have high participation rates in manufacturing and
utilities sectors which are high yielding, capital-intensive industries, the highest
industry sector participation for African-American businesses include 5 of the
top 10 revenue generating industries for all firms. A significant proportion of
African-American owned businesses include retail trade (ranked #3 revenue
generating industry for all firms), construction (ranked #5 revenue generating
industry for all firms), health care/social assistance (ranked #6 revenue gener-
ating industry for all firms), professional, scientific, and technology services
(ranked #7 revenue generating industry for all firms), and administrative and
support/waste management services (ranked #9 revenue generating industry for
all firms). Many of these labor-intensive industries have high average firm
revenue and employee payroll potential as shown in Table 6 and Table 7.
African-American business owners have garnered little to no market share which we
attribute to capital constraints and institutional barriers rather than other explanations
offered by prior research. For those top industries by revenue in which most African-
American owned businesses operate, the data indicate market share of African-
American businesses based upon number of firms and revenue is merely fractions of
other groups. Future research may explore and highlight how African-American
business owners can garner more equitable access to capital and higher market share
in the industries in which they already participate.
The analysis presented suggests that with greater business development in more
lucrative revenue-generating industries, in which African-American business owners
current participate, the revenue potential of African-American entrepreneurs can im-
prove and the revenue gap lessened. Efforts to increase and sustain African-American
owned businesses can be addressed via government and/or private sector policies
which remove obstacles to access capital, improve access to equity capital, and lower
costs for debt financing. Much of the structural components for such programs already
Rev Black Polit Econ (2015) 42:355–378 377

exist. It is broader implementation and greater follow-through that is needed. The initial
contributions of this paper suggest several areas for further research and analysis,
especially with a focus on industry analysis of capital needs and capital structure of
minority business owners. Understanding and mitigating barriers to success and sus-
tainability for African-American business owners has direct economic impact to the
U.S. economy, especially in light of economic outlooks of employee demographics and
potential growth opportunities in industry sectors in which African-American business
owners currently operate.

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