Report: Inner city entrepreneurs are severely underfinanced

image courtesy flickr user pwbaker

We've often heard that entrepreneurship and the growth of small businesses are going to be the forces that drag us out of this recession. If that is to be the case, then nowhere is that entrepreneurial spirit more needed than in our inner cities, which are home to almost 20% of all U.S. poverty and more than 30% of all minority poverty.

Now, a new study from the Initiative for a Competitive Inner City, a nonprofit research and strategy organization, shows just how difficult it might be for inner city entrepreneurs to help revitalize their neighborhoods. According to ICIC's research:

1. The vast majority of inner city businesses -- some 71% -- are dramatically undercapitalized. On average, they have only a small fraction -- one quarter -- of the capital needed to compete in their industries.

2. A much smaller group of inner city companies -- 29% of the total -- are relatively well capitalized. They've managed to raise four times the amount of capital they would be expected to need, given their industries.

3. Businesses that are severely undercapitalized are 50% more likely to be headed by minority entrepreneurs than those that have more money to work with.

ICIC, in partnership with Bank of America, runs its own program, called Inner City Capital Connections, to introduce capital-ready inner-city entrepreneurs to financiers who can help them build stronger companies. So far, companies that have participated in ICCC have raised $406 million and created 2,790 jobs, according to ICCC. The most recent ICCC event was in New York last week, where more than 125 urban entrepreneurs met with more than 50 potential investors for their companies.

In its research, ICIC also evaluated the success of a number of government programs that are supposed to help provide financing to entrepreneurs who might not otherwise be able to raise money.

Praise for the Small Business Administration
The Small Business Administration seems to have a strong influence in encouraging lenders to work with inner city companies, according to the report. The SBA does not make loans itself, but instead provides loan guarantees to its partner banks. In 2006, about 3% of all small business loans came with an SBA guarantee, but 3.5% of inner city small business loans came with an SBA guarantee. Even in more recent years, the SBA has remained relatively more active in inner cities even as the proportion of loans backed by the SBA has fallen.

The New Markets Tax Credit program, which gives tax incentives to those who invest in lower-income areas, and Community Development Financial Institutions, which also provide investments in these areas, seem to have quite a bit less impact on inner city entrepreneurs.

Inner cities receive almost half of New Markets Tax Credits funding, but almost all of that goes to real estate development and redevelopment. Only nine percent of New Markets Tax Credits go to inner city small businesses that are not involved in real estate. And while Community Development Financial Institutions do a good job at reaching inner cities overall, they have a much bigger impact in some geographies than in others. Just ten inner cities account for 82% of all CDFI lending nationwide.

Should the government do more to help entrepreneurs raise money? Would that create more jobs?

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    Kimberly Weisul is the co-founder of One Thing New, the free email newsletter for smart, busy women. She was previously Senior Editor at BusinessWeek, responsible for all coverage of entrepreneurship and for launching BusinessWeek SmallBiz, a bimonthly magazine. She is also a freelance writer, editor and editorial consultant.