Robin Newberger, Senior Business Economist, Community Development and Policy Studies, Federal Reserve Bank of Chicago, US at the OECD Conference on SMEs and the Urban Fabric, 15-16 April 2019, OECD Trento Centre, Italy. Full event info: https://oe.cd/SMEs-Cities

1. Support for Small Businesses:
Identifying the Needs of
Minority-Owned Firms
Policy, Governance and Regulations
SMEs and the Urban Fabric
April 15-16 2019
Robin Newberger
Community Development and Policy Studies
Federal Reserve Bank of Chicago
This presentation represents the views of the author and not necessarily those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

2. Trends in Self-Employment
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
2000-01-01
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2006-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2011-01-01
2012-01-01
2013-01-01
2014-01-01
2015-01-01
2016-01-01
2017-01-01
2018-01-01
Incorportated
Unincorporated
Incorporated and Unincorporated Self Employment (000s)
Self-Employed Unincorporated Self Employed Incorporated
Source: US Census, Current Population Survey
Source: Katz and Krueger, 2016
https://krueger.princeton.edu/sites/default/files/akrueger/files/katz_krueger_cws_-
_march_29_20165.pdf

3. Trends in Business Starts
Source: Kauffman Indicators of Entrepreneurship
https://indicators.kauffman.org/ Source: Economic Innovation Group based on Census Business
Dynamics Statistics (share of businesses)

4. Differential Impacts by Geography
Source: Economic Innovation Group based on Census Business Dynamics Statistics

5. Sales and Earnings Trends (NFIB)
Source: National Federal Independent Business Owners Small Business Economic Trends, 2019

6. Less Lending to Small Businesses
Source: Economic Innovation Group, Dynamism in Retreat (2017)
329,221,721
179,638,754
242,459,574
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Small Business Loans Issued Per Year
Under $1 Million USD ($ 000)
Source: FFIEC, CRA Small Business Lending

7. What Do Business Owners Say They Want?
Source: Pepperdine Private Capital Market Report, 2018 Source: National Federal Independent Business Owners, 2019

8. What do Business Owners Say They Want?
Source: Kauffman Foundation, 2018 State of Entrepreneurship Survey

9. Possible Interventions:
• Increase population (immigration)
• Develop new tools and definitions in antitrust enforcement
• Increase public investment in basic R&D
• Increase broadband access
• Reduce volume of regulations
• Address consolidation of banking sector

10. Reduce Volume of Regulations
Source: World Bank, Doing Business 2019 http://www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf

11. Trends in Business Starts: Minority-Owned Businesses
Share of New Entrepreneurs
Source: Kauffman Foundation, National Report on Early Stage Entrepreneurship.
https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf

12. Younger Firms
Source: Annual Survey of Entrepreneurs, 2016 (Note: Firms with Paid Employees)
All White Black Asian Hispanic Minority
Less than 2 years old 0.08 0.07 0.20 0.13 0.15 0.14
2 to 3 years in business 0.12 0.12 0.16 0.17 0.2 0.18
4 to 5 years in business 0.09 0.09 0.12 0.14 0.13 0.13
6 to 10 years in business 0.18 0.18 0.20 0.23 0.22 0.22
11 to 15 years in business 0.13 0.14 0.09 0.13 0.13 0.13
16 or more years in business 0.39 0.40 0.24 0.19 0.17 0.19
All Firms 0.80 0.02 0.09 0.06
Share of employer firms by age within
race/ethnic group

13. (Lower) Profitability
64.6
62.1
59
50
0
10
20
30
40
50
60
70
White Asian Hispanic Black
Business had profits Business had losses Business broke even
Annual Survey of Entrepreneurs, 2016
United States
Chicago Metro
Source: Next Street 2019, using Survey of Business Owners (2012)

14. Source: Next Street 2019, using Survey of Business Owners (2012)
Lower-Margin Industry Concentration (Chicago,2012)

15. Lower Revenues by Place
Table 6. Small Business Revenue by LMI and ethnic/minority plurality of the neighborhoods
No Employees 1 to 4 employees 5 to 19 employees
more than 20
employees
nonLMI median
revenue
61,000 130,000 340,000 717,809
LMI median revenue 59,000 130,000 320,000 690,000
non LMI average
growth rate
0.29 1.31 2.93 9.31
LMI average growth
rate
0.08 0.56 0.13 0.66
Asian 64,000 140,000 290,000 673,867
Black, non-Hispanic 57,057 120,000 290,000 676,035
Hispanic/Latino 59,000 130,000 331,510 680,000
Non-Hispanic White 62,000 130,000 345,716 730,000
Source: Toussaint-Comeau and Newberger, 2019 (forthcoming)
Five Cities:
Atlanta, Baltimore
Chicago, Houston
and Los Angeles

16. Less Business Vibrancy by Place
Distance to Purchases (Chicago)
Source: JP Morgan Chase Institute, 2016Source: Economic Innovation Group Distressed Communities Index, 2018

17. Need for Owner/Personal Funding…
Source: Federal Reserve Board, 2017
Source: Alicia Robb and Arnobio Morelix, 2016 (The Kauffman Foundation,
Start-Up Financing Trends by Race)

18. …Yet Lower Wealth among African American Families
Median Value of Net Worth for Families with Holdings (2016)
Source: Survey of Consumer Finance, 2016 Lisa J. Dettling, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, and
Jeffrey P. Thompson with assistance from Elizabeth Llanes, 2017

19. Higher Bank Loan Denial Rates for Minorities
Source: Federal Reserve Board, 2017 Source: Alicia Robb, 2018

20. What Do Business Owners Say They Want?
Source: Next Street, 2019

21. Recommendations
Regulatory (National)
• Strengthen Community
Reinvestment Act
• (Continue to) Offer government-
guaranteed loans
Regulatory (Regional/Local)
• Promote neighborhood-based
corridor strategies
Private / Public / Nonprofit Sectors
• Improve BSO service delivery
• Target industry strategies
• “Ecosystem” coordination
• Diagnose financial health
• Address financing needs
• Increase social capital
• Invest in neighborhood strategies
• Support supplier diversity

22. Improve BSO Service Delivery:
Diagnose Financial Health
Knowledge of financial products:
knowledge of accounts receivable,
commercial banking, contract,
equipment lease, inventory
management, nonbank and trade
credit financing.
Obtaining financing: receipt of credit
through business credit cards, bank
loans, personal credit cards, vendors,
equipment leases, and trade credit.
Financial planning and oversight:
number of employees, management
experience, amount of available credit
on a credit card, existence of a
separate bank account for payroll,
regular review of profitability, and use
of a budget
Federal Reserve Bank of Chicago, Pepperdine, et al Center for Financial Services Innovation

23. Improve BSO Service Delivery:
Develop Local Business Ecosystem
• Dedicated organization whose
sole focus is aggregating and
coordinating resources
• Local multi-funder collaborative
to provide steady flow of
resources
• Impact measurement efforts
included
• City government at the
“business ecosystem” table
Next Street, 2019

24. Address Financing Needs //
Offer New Resources
• Blackstone Inclusive Entrepreneurship
Challenge (3-year, $3 million program as
of 2017)
• Chicago Entrepreneurs of Color Fund ($4
million JP Morgan; $2.5 million Fifth Third
= $6.5 million)
• New Voices Fund ($100 million from
family-run conglomerate)
• Chicago Community Loan Fund ($10
million long-term low-cost loan by JP
Morgan)
Source: Robb et al, 2018

25. Train Front-Line Personnel // Focus on Social Capital
Source: Robb et al, 2018Source: Robb et al, 2018

26. Strengthen Neighborhood Assets
Source: Toussaint-Comeau and Newberger, 2019 (forthcoming)
Five Cities:
Atlanta
Baltimore
Chicago
Houston
Los Angeles
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25
non-employer businesses
20 + employees
5 to 19 employees
1 to 4 employees
LMI
Hispanic plurality
neighborhoods
Black plurality
neighborhoods
Asian plurality
neighborhoods
Unemployment
Labor force participation
Population
Figure 10. Correlation estimates of the relationship
between selected characteristics and having businesses
in high LQ industries for the neighborhoods and the city
neighborhood city
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
Labor Force
Unemployment
LMI
Black plurality
neighborhoods
Asian plurality
neighborhoods
Hispanic plurality
neighborhoods
Atlanta
Baltimore
Chicago
Houston
Los Angeles
Population
Figure 8. Correlation estimates of the relationship
between selected characteristics with business density
and business revenue
business density revenue

27. The Best Ways to Support and Sustain
Minority-Owned Businesses?
• Train for business “financial health”
• Make improvements to ecosystem of small business service providers
• Supplement with niche sources of capital
• Support networks of minority financial service providers and financial
professionals
• Address regional and neighborhood issues by strengthening
neighborhood assets and household wealth-building