Report: Minority-Owned Suppliers Lack Access to Capital, Education Around Financing Options

supplier diversity

Minority-owned businesses often lack access to the capital needed to compete and grow in their market, a new study released by the National Minority Supplier Development Council shows. Many minority business enterprise (MBE) suppliers have little or no knowledge of the opportunities available for obtaining capital, making education key for survival.

According to NMSDC President Joset Wright-Lacy, some MBE suppliers don’t see the importance of establishing a relationship with a finance or investment professional, say a banker, who can help them through the stages of business development. This is one of the main factors for this barrier to capital for MBEs, Wright-Lacy said.

“If you don’t have that relationship, you are already a step behind,” she said.

Wright-Lacy said NMSDC works with MBEs to help them understand the need for having the proper corporate structure in the organization, which includes having someone who is watching the finances and exploring means of financing.

Spend Matters’ Founder and Head of Strategy Jason Busch said another issue when it comes to growth capital for small and diverse businesses in general is that short-term maturity, non-bank receivables and payables financing options have not yet crossed the adoption chasm in North America.

“The opportunity for larger corporates and public sector organizations to adopt payables-led invoice discounting programs that provide access to early payment for suppliers at reasonable rates of interest — with or without impact to their balance sheets — is very significant,” Busch said.

Accelerating payments to MBEs represents a true “win-win” initiative, Busch added. The only challenge is technology adoption that can provide transparency and efficiency throughout the PO, invoicing and approvals process. When this becomes ubiquitous, the days of small business owners maxing their personal credit facilities or taking onerous merchant cash advances to fund growth will become a memory for more and more entrepreneurs, he said.

Additional Report Insights

NMSDC’s survey of 456 MBE suppliers showed the majority of the organizations had little to no knowledge about the types of financing available, such as private equity, angel investors and mezzanine financing. However, few respondents had positive perceptions of these financing options, with just 10% saying they had positive impression of mezzanine financing, for instance. Conversely, 88% had an extremely negative to neutral opinion of the financing option.

MBEs cited credit cards and earnings of the business as the top ways they were financing for capital needs. Forty percent of respondents said they had used credit cards for capital needs within the last two years, and 40% cited using business earnings for capital needs. A third used a revolving line of credit from a bank and 22% used a private loan from a friends of family members. Just 14% said they used a bank loan. The survey also showed 30% used no financing within the last one to two years.

Wright-Lacy, who has been working in the space for more than 25 years, said the survey findings were not surprising. Rather, the responses confirmed everything she has seen over the years that make it difficult for MBEs to compete and survive. A lack of access to capital, she said, has been the “No. 1 barrier to growth for MBEs for 40-plus years.”

Survey participants agree a lack of capital hinders growth potential. Sixty-four percent of MBEs said without capital availability they are unable to grow and expand operations and 38% said they were unable to hire new or additional employees.

Additional findings of the survey include:

  • 71% of MBEs said they had no investors in the business.
  • 88% said zero percent of the business was owned by outside investors. One percent said 50% or more was owned by outside investors.
  • 50% of MBEs are currently seeking financing for the business, while the other 50% are not.
  • Certification remains a top concern for MBEs, however, with 54% saying they thought losing their minority business certification would jeopardize their ability to retain customers.

Maintaining certification is a concern for MBEs, but there are ways still to keep a certification while growing capital, Wright-Lacy said. The NMSDC offers a “Growth Initiative” certification where the actual minority ownership stake in the company can sink to 30%, but a minority must maintain 51% of the organization’s day-to-day operations. Typically, a MBE certification calls for a minority to keep a 51% stake in the business’ ownership. The growth initiative allows for investors to come in to provide capital for an MBE and still allow the MBE to maintain its minority certification, Wright-Lacy said. She also expects more companies to take advantage of this certification in 2016.

Busch applauded NMSDC’s efforts in producing this study.

“The more attention we can call to accelerating cash in the financial supply chain for MBEs, the better off we will all be in terms of economic growth, supplier innovation and jobs creation,” he said. “Yet the opportunity is not just one of access to equity or longer-maturity debt financing for small businesses. Short-term facilities can play a critical role in funding survival and growth for firms. And all too often, people forget that.”

First Voice

  1. Laura Johnson:

    From our viewpoint, it would be interesting to understand why such a large fraction MBE suppliers had negative to neutral opinion about mezzanine financing.

    Is it because of lack of understanding of this type of financing source or is there any specific reason or perception?

    Our mission is to help business leader learn and access mezzanine financing. Our website includes a directory of mezzanine funds that is accessible free of charge. We’d be happy to get more feedback from other readers and especially those that represent MBE suppliers.

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