Denied: Lack of Capital Stymies, or Ends Main Street Entrepreneurs’ Dreams

Underserved Business Owners Often Encounter Roadblocks in Securing Funding
Kimberly N. Alleyne
Reporting on Disparities

This is part one is a series about capital access challenges among underserved entrepreneurs.

Lasenta Lewis-Ellis decided to study architecture so she could build a house for her mother. With that dream in heart and a plan for the future in hand, Lewis-Ellis pursued an education to help her realize that dream.

The Columbia, South Carolina, resident went on to earn bachelors and masters degrees and is now working on her doctorate degree. Today she is a licensed general contractor and although she did not build a house for her mother, at least not yet, she has built a thriving construction and facilities management business — but that was not the plan.

LLE Construction Group, LLC was born in 2011 out of deep intimacy with adversity and a desperate need for a Plan B.

“I had been employed with a company for six years where I oversaw the construction division. I was the only licensed contractor in the company,” Lewis-Ellis said. In January 2011 when she was downsized from her near six-figure job, it left more than a financial blow.

“When you lose your job,” Lewis-Ellis said, “it’s hard. You question your abilities. It took me a minute to re-group and get my mind together. I had to encourage myself. It is difficult to go from earning more than $1,600 each week to receiving $270 each week in unemployment benefits. My job loss impacted our home very hard. We were a two-income household, and I earned more than my husband.”

Along with her husband, Lewis-Ellis tried to support their family of eight, but soon realized she could not. And she wanted more; so she cashed out her retirement fund and used $1,500 to start LLE Construction Group, LLC, and never second-guessed herself.

 

Open for Business

LLE Construction Group, LLC is a microbusiness, which is an enterprise five or fewer employees including the owner. The company grossed $303,000 in 2011, of which LLE was open only five months. The second year brought a gross of $689,000, and then $1.1 million in 2013 — a 263 percent increase since starting.

Despite the company’s success, when Lewis-Ellis recently applied for two working capital loans she was declined — by two different banks. Each loan would have been less than $25,000; she was counting on those loans to hire summer help, which is her company’s busiest season.

Unfortunately this is not a unique story.

“In the land of the great American Dream, 8,000 daily business loan denials are symptomatic of a massive market failure. Each time business owners like Lasenta are denied requests for capital, it hinders their ability to start, grow, hire, or even stay open” according to Connie Evans, president and CEO of the Association for Enterprise Opportunity (AEO).

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AEO’s Micro Capital Task Force (MCTF) presented to Congress recommendations for improving access for entrepreneurs who seek capital in amounts of up to $250,000. The MCTF’s analysis shows the Main Street capital gap is an estimated $44 billion to $52 billion.

While the nation’s protracted unemployment crisis shows signs of resuscitation, thousands of jobless individuals’ long-term benefits are dead. Consequently, more folks – the long-term unemployed and those who want to exit an erratic job market – are turning to self-employment, to microbusiness in particular.

When the Playing Field Is Not Level

In 2011, 92 percent of U.S. businesses were microbusinesses, and generated approximately $4.87 trillion annually to the U.S. economy. Clearly these are small but powerful enterprises. And an AEO report, “Bigger than You Think: The Economic Impact of Microbusiness in the United States,” says the field is level, as low barriers to entry make microbusiness ownership a strong option regardless of one’s background such as education.

For an example, individuals without a college degree constitute 52 percent of microbusiness owners, yet Bigger report findings show no substantial difference in the median annual sales and receipts of entrepreneurs with a college degree and entrepreneurs without one.

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However, when it comes to accessing capital, the field is much less equitable.

Each business day in America, according to Treasury Secretary Jacob Lew, 8,000 requests for business capital are denied. Those denials cause an enhanced ripple effect among underserved and low-wealth entrepreneurs. They, more often than their counterparts, meet significant challenges when attempting to acquire business capital to hire, or launch, or expand their enterprises.

 

Disparities in business lending are more common among historically underserved groups such as women, African-Americans, Hispanics, veterans, and residents of rural and urban areas. According to 2013 Kauffman Foundation research, not only are minority business owners more likely to be declined for loans, but they also are less likely to apply to begin with for fear of being denied.

In the Land of Varying Opportunity

A May 2014 Journal of Consumer Research highlights a study where African-American, Hispanic and Caucasian entrepreneurs in an unnamed U.S. metropolitan city were outfitted in matching attire (blue polo shirt and khaki pants), and directed to approach banks about small business loans.

As part of the study, entrepreneurs were instructed to request business loan information. Even though all of the business owners had similar profiles, the African-American and Hispanic entrepreneurs received less information, were questioned more about their financial backgrounds, and were not encouraged to apply for loans.

The study findings were published in the paper, “Rejected, Shackled and Alone: The Impact of Systemic Restricted Consumer Choice on Minority Consumers Construction of Self.” The paper’s co-authors are professors Jerome Williams, Sterling Bone and Glenn Christensen.

Of the study findings, Professor Williams said, “What this work did is take that to the level of small businesses and entrepreneurs who are like consumers but the assumption is that because they’re a business they’re treated the same as big businesses. What we did show was that the same type of discrimination we’ve seen evident in the marketplace in retail stores, restaurants and other places is also evident in situations where entrepreneurs and small business owners go into banks and apply for loans.” Williams holds the Prudential Chair in Business at Rutgers Business School and is also the research director of the Center of Urban Entrepreneurship and Economic Development at the RBS. “It is appropriate to continue asking the question, ‘Is the glass half empty, or is the glass half full?’ in terms of progress being made in eradicating discrimination in the marketplace.”

Even if a member of an underserved group is approved for capital, the capital is often more costly.  In 2012, the Federal Reserve released data showing minority entrepreneurs paid interest rates 32 percent higher than what Caucasians paid for loans.

Roadblocks to capital access aside, some say Main Street remains fertile with potential.

“Main Street is a solution to many things that ail America. After a few decades of consumers going for bigger, bigger and bigger, things are changing, and tastes and preferences are returning to Main Street — people realize that bigger is not better,” said Mitch Jacobs, co-chair of AEO’s Micro Capital Task Force.

“The return to Main Street is an opportunity to create more jobs. There is no lock-out on Main Street.  We simply need a better financial system for Main Street.”

 

 

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