“What makes an entrepreneur?” is a recent study from
Dartmouth College and the London School of Economics. The study
concludes that having access to capital is the most critical factor
in creating an entrepreneur. The ability to access capital is vastly
more important than other components researched in the study, even
more important than entrepreneurial psychology. So much for the
theory that entrepreneurs are born instead of made.
This study should raise concern within America’s economic
circles – because it dovetails perfectly into other studies
showing that minorities consistently lag far behind their white
counterparts in accessing capital and credit. The U.S. Small Business
Administration states that: 1) African Americans accounted for
just 3.6 percent of all businesses, although they made up over
12 percent of the U.S. population at that time of the study; 2)
that only 15 percent of African American-owned small businesses
used banks as a source of credit, compared with 37 percent of all
U.S. small firms; 3) and that, after controlling for differences
in creditworthiness and other factors, African American-owned firms
were about twice as likely to be denied credit.
Another recent study finds that those African-American businesspeople
that secure loans pay higher interest rates. While business risk
is generally color blind, the category of credit risk clearly appears
to play more heavily against minorities. Minorities are falling
victim to the fifth “C” of financial transaction analysis
- Character.
The Five C’s are the roadmap analysts use to score risk in
financial transactions. Capacity, Capital, Collateral and
Conditions are hard scores driven by mathematics and rules of observation.
But the fifth C - Character - is soft. It’s the analyst’s
subjective impression of you, professionally and personally, and
how likely you are to repay a loan or deliver value on a venture
capitalist’s (VC) investment. Because it’s soft, your
Character score may say as much about the analyst’s false
preconceptions as it does about you. Sadly, this means that minorities
still have to be a bit better than whites to get the same loan.
I believe that nearly all financial executives are sincere when they say they
say, “The only color we see is green.” They’ve made great progress
over the last two decades and deserve credit for their strides. But progress
stops here unless we admit that bias remains a part of our capital markets. Once
overt and sharp edged, most racial bias has now reduced and softened into negative
preconceptions that cloud first impressions.
Even the best-intentioned humans (this author included) are trapped within their
preconceptions that have been taught and reinforced from birth.
Perfecting the Approach
Overcoming negative stereotypes is a long-term battle, fought by providing incentives
and increasing exposure of successful minority leaders. But you need help now
if you’re a minority businessperson. There is a significant advantage to
be gained by simply taking the necessary steps to cut the risks of running
a cash-starved company, steps that will help in opening the doors of your dream
business because of increased access to capital. Both steps focus on the fifth
C. First, you can perfect your approach to banks and VCs.
Cutting Risk
Second, you can embrace a simple risk management process
that makes your business more attractive to lenders. Without a proactive plan to
prevent trouble, companies are stuck with the unfortunate reality of
fighting fires, instead of
focusing on their core moneymaking activities. There is no profit or
growth in firefighting. Lenders understand that your risk becomes their
risk if they give
you a loan. They are quick to spot and avoid risky operators; conversely,
they are attracted to stable and professional companies. Practicing proactive
risk
management shows that you are more professional (and less risky) than
the average loan applicant. It gives you an important competitive advantage.
Proactive risk management lets your business grow a bigger
and more predictable bottom line. Common sense tells
you that companies
make
more money when
things don’t blow up, but the economic rewards of risk management might far surpass
expectations. The University of Southern California spent 20 years studying crises
preparedness within the Fortune 500. Companies that proactively prepared for
trouble enjoyed up to 100 percent higher return on assets (ROA) and suffered
nearly 60 percent fewer crises than companies that ignored or poorly managed
danger. You can emulate the school’s findings. These stunning numbers are
impossible to ignore if your company is suffering from tight cash flow – a
common issue among minority-owned businesses.
And, risk management isn’t just for the Fortune 500 anymore. New business
models make risk management practical for almost any employer. Risk management
doesn’t need to be expensive, time consuming or complex. It starts with
the CEO asking, “What worries keep me up at night?” Then the CEO
finds a risk management model designed for small businesses, like my PreActTM
model in Bulletproof Your Business. A good model recognizes that the CEO has
no time to become the company’s risk manager and shows him or her
how to select a trusted employee or partner, typically an administrative
VP or controller,
and delegate risk management responsibilities.
Every company has its own unique risks, but most risks are universal because
they are linked to people – clients, suppliers, employees and financial
stakeholders (i.e., banks or VCs). These people are highly responsive to risk
management strategy and tactics. Most risks can be managed with paper, usually
in the form of contracts and simple, documented work processes. To begin this
work, the risk manager obtains model contracts and processes and edits them to
fit the company’s unique needs. It should cost little to have an
attorney review the edited contracts and add the finishing touches.
Once a year the risk manager verifies that the contracts
and processes are working as expected, and adjusting
as needed
to keep them effective.
The consistent
use
of standardized contracts and work processes is the
very heart of a low cost, easy-to-implement and effective
risk
management
process for
small businesses.
Reaping the Rewards
Beyond bankers and VCs, clients, insurance companies
and smart employees will reward your risk management
efforts,
too. Making
your business
less risky directly
lowers their risk in working with you. A proactive
risk management program certainly gives you a competitive
advantage
over your “reactive” counterparts.
As your business and financial stability grows, you’ll have more peace
of mind, be able to better focus on your core objectives and find more time to
spend with family – likely the reasons you worry about capital
in the first place. Your true Character will show, as you become an example
of another successful
minority business leader.
Boilerplate
Bulletproof Your Business is a plain-English guide that
shows companies how to simply and cost-effectively
conduct risk management
on a
do-it-yourself basis.
The book is available online at
www.bradforsythe.com and retails for $59.95.
Brad Forsythe holds a certificate from the Harvard Business
School in small business strategic finance and is a
1975 honors graduate
from Augsburg
College
in Minneapolis,
completing his bachelor’s degree in communications. Forsythe began his
career as an incentive travel manager and later moved to group sales manager
within the hospitality division of American Airlines. In 1981, he co-founded
Frequency Marketing, Inc. and served as its executive vice president overseeing
legal, human resources and risk management. In 2003, Forsythe founded Best Practice
Advisors, LLC., and teaches the professional practice of risk management for
companies with less than 500 employees. He released his debut book, Bulletproof
Your Business – Cutting Risk for Small Business Owners and Managers,
in 2004. More information can be accessed at www.bradforsythe.com, and
the book
is available for purchase via the website.
Editors Note
Brad Forsythe is available for interview
Photos and graphics are available
