One of the ways that a small business can achieve greater growth is by obtaining government contracts. Though they can be catalysts for growth, too often navigating the procurement and contracting process– from tracking opportunities to submitting bids– can be laborious and difficult, creating barriers for many small business owners.
A recent report by the North Carolina Budget & Tax Center (BTC) looks at the Historically Underutilized Business (HUB) Office, and the economic potential for “underutilized” businesses– ie, businesses owned by those who have faced historical barriers, such as people of color and women. Becoming certified as a Historically Underutilized Business (HUB) can help in obtaining government contracts, as the program works to ensure that firms from these groups are not disproportionately excluded from opportunities. However, participation in the program is very low. Among eligible firms in the state, only 1.9 percent are certified as HUB businesses.
Minority-owned businesses already face barriers in accessing capital to start up and grow. A 2010 report by the Minority Business Development Agency showed that even as young minority-owned firms were comparable in terms of job creation, and had a higher growth rate, they still faced barriers accessing capital compared to non-minority firms. Minority firms were more likely to be denied loans, both among those with less than $500,000 in receipts and those with more than $500,00 in receipts. As we know, this leads to potential loan applicants becoming discouraged and not seeking credit, fearing rejection.
As the BTC report states, “undercapitalization encumbers business growth.” This is illustrated in the available data. According to the 2012 Survey of Business Owners, minority owned firms make up 12.2 percent of all employer firms, but only account for 5.4 percent of total receipts. A previous blog post showed that even in regions where the percentage of African-American firms was significant– for example 21 percent in the Sandhills region– these firms were not able to break above 3 percent of receipts in any region. These businesses lag behind when it comes to business performance, even in areas where their prevalence is relatively higher. Similar trends exist for women-owned businesses.
Despite these challenges, the number of underutilized firms in North Carolina continues to grow, from 61,551 in 1997 to 183,380 in 2012. While this is a significant increase in the number of firms, there has not been a corresponding increase in the revenue generated by them. In 2012, these firms still only accounted for 5.4 percent of total receipts, even though they represent 12.2 percent of firms.
But as BTC points out, underutilized firms are a significant and growing part of our economy. In total, minority owned firms in the US generated $1.38 trillion in revenue and contributed 7.2 million jobs to the economy.
While the HUB office provides assistance in becoming certified, marketing, and other technical assistance, it does not offer resources for expanding access to capital. These two components of small business development– capital and technical assistance– go hand-in-hand in ensuring the long term success of small businesses.
The BTC report points to CSBDF’s policy recommendations to improve access to capital:
- Establish a state fund for small business lending by making an appropriation to provide seed funding for a state revolving loan fund.
- Pilot a State Small Business Guaranteed Lending program to allow lenders to make loans to businesses they otherwise would not be able to.
- Establish a Business Development Corporation to pool investments from banks that CDFIs, community development corporations and other community lenders could use to make loans in underserved areas.
- Make direct investments in CDFIs, which are uniquely positioned to meet the needs of underserved small businesses.
The report also recommends that the HUB Office conduct a survey to understand the trend and needs among existing minority and women-owned businesses, to provide data to stimulate more participation in the HUB program. Secondly, BTC recommends that state and local bond referenda should be leveraged to increase contracting with minority owned businesses. Third, utilizing technology and other means of communication, could make finding out about contracting opportunities easier. As the report notes, one challenge is that many business owners simply do not know that these opportunities exist, and a proactive communication strategy could help to disseminate information. Finally, the BTC recommends that advocacy groups develop a strategy to work with the HUB Office to increase engagement with entrepreneurs.
With the right supports in place and a more level playing field, these firms can be poised to have an even greater impact on their communities and our economy as a whole. A combination of technical assistance and the right capital, along with the opportunity to bid on government contracts, can be a significant boost for minority-owned businesses in NC.