Weekly C-POW: Bad News for the Minority-Owned Business Community

Sometimes the Weekly “Controversial Proposal of the Week” feature here on the Prosperity Blog earns its name because I say something controversial (like when I said we might have too many economic development organizations in the region). Sometimes, it’s because I’m just referring to something that’s – in itself – controversial. Like a ripped from the headlines story like the big scandal in the news this week about the Seattle Public School and its Regional Small Business Development Program.

We don’t know what the ultimate consequences for the school district will be. But what we can know for certain is that this is going to be bad news for the minority owned business community.

Prosperity Partnership has focused on minority-owned business development over the past few years through the Regional Economic Strategy’s “new and small business development” foundation initiative. That is, we recognized that the creation of successful new and small businesses is vital to the economy, particularly because that’s where a majority of the jobs in our country are created. They’re also the sources of significant innovation, and can provide services often cheaper and more flexibly than larger companies. Now, it’s hard for all small businesses to be successful, and particularly in Washington state where we’re among the top states in the country for number of business “failures” per capita. But the data shows that it’s even harder for minority-owned small businesses. To quote some work we did back in 2007:

According to the US Census, 3.5% of the state population is Black, but Black-owned businesses account for only 1.5% of the total number of businesses in the state. Similarly, Hispanics make up 8.8% of the population, but only 2.2% of businesses state-wide are owned by Hispanics. Nationally, 17.8% of all businesses are owned by racial minorities, compared to just 10.9% of businesses in Washington State.

In May of 2007, the University of Washington published its first annual Washington Minority Business Survey. Minority business owners (MBOs) identified several challenges to their growth: 1) 17% of Washington State minority business owners reported that their financing needs were not met, compared to just 5% of small businesses nationwide, and 2) competition from larger businesses was ranked fifth among concerns of small business owners nationwide, whereas among minority business owners in Washington, it was ranked as the principal concern.

Similarly, according to a recent Seattle University Minority Business Survey comparing Washington State MBOs to Washington State non-minority small business owners, Washington State MBOs report unmet credit needs and business development concerns at a significantly higher rate than Washington State non-minority small business owners.

Again, this is not an issue of social justice or some charitable desire to help a certain kind of small business. Rather, as Washington state continues to become more diverse and minority-owned businesses become a growing portion of small business in Washington state, success among minority-owned businesses translates to increased jobs, increased wealth and long-term prosperity for all of our region’s residents. And so doing more to ensure that these entrepreneurs have the tools, resources and access they need to be successful becomes an important regional economic development priority.

To that end, we identified a number of issues that disproportionately impact minority-owned businesses – access to credit and access to contracting opportunities – and developed our Performance First program, which helps large corporations in our region institute supplier diversity best practices. And while our work has gone very well – graduating five companies from the first year of the program – there’s clearly a lot more than needs to be done to ensure a competitive businesses climate and full access to opportunities for minority-owned businesses.

In fact, the best way to think about the needs of minority-owned businesses is supply and demand. There needs to be a “demand” for the services of these companies by large government and private-sector organizations (hence the focus on improving supplier diversity programs). But there also needs to be a “supply” – qualified minority-owned businesses with the skill and capacity to meet the needs of these clients. Of course, there already are many such qualified minority-owned businesses, but the data shows that a higher percentage of minority-owned businesses have issues in this regard than the overall small business population…so if you can address the issue with boosting minority-owned businesses, it’s a big return on investment.

There are plenty of great programs that do the work to help minority-owned businesses gain the necessary skills and capacity. Most are nonprofits. But interestingly enough, there are plenty of examples of large organizations that help minority-owned businesses gain capacity, and then do business with those minority-owned businesses. This explains why the Seattle Public Schools was engaged in its Regional Small Business Development program. There are plenty of examples in the corporate world as well. Microsoft will actually co-sign the loans of minority owned businesses that they want to do business with, so that these small businesses can get access to the credit they will need to do the work for Microsoft; they’ll also help bring together two minority-owned businesses to partner so that combined they have the capacity to do the work.

So, while you can fault SPS for its accountability, you can’t fault them for what they were trying to do. Which is of course what many people will do. They’ll see the problem as “focusing on helping minority-owned businesses inevitably leads to corruption or at least bias toward doing business with a certain set of companies that may not be the best choice.” It’s likely going to be tough for minority-owned businesses over the next several years, as major public and private entities react to this school district scandal by pulling back their support for these types of activities – even though, again, most programs are doing great work. And I don’t blame them for wanting to be extra cautious to avoid taint and scandal. But, it’s also a shame, and not only for those businesses that won’t get the extra support they need to be successful. It’s also bad news for the regional economy. Like I said earlier, if minority-owned small businesses are less successful, we all lose.

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