Training supports entrepreneurship in underserved communities

Posted by: John Tozzi on September 12, 2008

Today we bring you excerpts of my conversation about race and entrepreneurship with Robert Fairlie, one of the leading experts on the subject. Fairlie answered my questions about his new book as well as questions submitted by readers. He has graciously agreed to answer some follow-ups from readers, as you guys continue to submit good questions in the comments. So fire away and we’ll post some follow-up answers next week. (Also take a look at some of the numbers on race and entrepreneurship from the book.)

By chance the Senate held a hearing on start-up hurdles in underserved communities Thursday. I glanced through the testimony and wanted to highlight something from Margaret Henningsen, founder and VP of Legacy Bank in Milwaukee. Here’s the PDF of her testimony. She and two other women founded Legacy in 1999 because they “recognized the need for greater access, and pent up demand for commercial capital for minority and women owned businesses in our target market.” In addition to expanding access to capital, Henningsen discusses another critical way her bank helps entrepreneurs:

Data demonstrates the fact that many minorities, who become or want to become small business owners, are often first generation entrepreneurs. These enterprising owners do not have the benefit of family members handing down a business or providing them with the necessary training and coaching that is so crucial for business success. At Legacy, we have found that when financial training and business coaching are provided businesses will succeed. The process of working with owners to strengthen their business is part of our banking model. Many major financial institutions provide the same type of assistance to their “less risky” customers.

The gap in “human capital” — like the experience, knowledge, and skills you get working in a family business — contributes to the difference in outcomes between minority- and white-owned businesses. (It’s the same gap that the Met School’s entrepreneurship program is filling for high school students in Providence.) By addressing that disparity and providing access to startup capital (another critical factor) Legacy is helping entrepreneurs in Milwaukee succeed.

In the 12 months ending in June 2008, Legacy made 392 business loans worth nearly $35 million. More than half were for startup or growth capital, Henningsen says. Legacy says the bank’s small business borrowers have created or sustained 2,500 jobs. The bank continues to profit even as the financial sector is in freefall from the mortgage fallout.

A couple of points here:

  • Legacy’s investment in training entrepreneurs helps the bank’s bottom line as well. (More successful businesses = more bank customers.)
  • Legacy Bank is profiting off deals that many other banks find too risky or too small to be worth making.
  • The number of banks willing to make these loans and offer this kind of training has almost certainly declined in the past 15 years because of bank consolidation and the increased reliance on automated credit scoring (instead of relationship lending).

The bank is starting a foundation for training Milwaukee entrepreneurs, and Henningsen calls on Congress to support similar efforts. Legacy looks like a small scale model for supporting successful entrepreneurship in underserved communities. So here’s my question: How does that model scale?

Reader Comments

Carol Eblen

September 12, 2008 6:03 PM

I am in favor of encouraging small INDEPENDENT business entrepreneurs in any way possible. Howeever, the banks must know that, in the event of a franchise purchase, it is not the franchisee borrower who is the entrepreneur but rather the FRANCHISOR, whether big and mature, or brand new.

It is the franchisee, however, who posts collateral for the loan and who signs personal guarantees on both the franchise and the lease agreements to build the physical units that wear the brand names.

I think the banks must recognize that in franchising, it is the franchisor who is the entrepreneur and the franchisee is just a resource of the entrepreneur on which the franchisor proves his/her concept in the marketplace.

Actually, the SBA subsidizes BIG Business when banks/lenders loan money to franchisees to buy a franchise in a big franchise network like Subway or Burger King or any of the big US Franchise Brands.

Most of the small businesses in the Malls that I frequent are franchises. I think this is true throughout the United States.

The Big Franchisors like Subway support entrepreneurship in underserved communities. I read recently in the Franchise Times where an Army LTC, an AfroAmerican, in the Reserve or National Guard? who worked in and owned two Subways in underserved communities lost both of his Subways after he was deployed to Afghanistan and his rent payments were late. He had been working 100 hours or more a week in his Subway stores before he was deployed and, of course, when he wasn't there to provide the free and cheap labor, the stores evidently couldn't produce enough revenue to take care of the rent. amd. in default for late payments, he lost both of his businesses to Subway who still profits from his orginal investment in the stores.

So often, the efforts to enlist the help of Congress is an effort to win subsidies for big business that are represented as a subsidy of the small business person, who is represented as the savior of the US ecomomy since so many US jobs have been lost to the Global Economy.

Banks are not generally altruistic and I'm sure they will want colateral and/or government guarantees for any loans they may make as protection for stockholders.

Barker

September 19, 2008 6:17 PM

Another way to help small business owners become less of a risk is not only through training from banks and lendors such as Legacy, but also through education and school training in business administration, accounting, etc. For already working adults who do not have this experience, there are now numerous options for online schooling. One school that I have found successful and informative is Iowa Central College. They provide online degree programs that have already been proven on their ground campus, the classes are just reformatted to accommodate unconventional students. Taking classes could help lendors see these students as less risky investments.

check it out at www.iowacentralonline.com

Carol Eblen

September 30, 2008 5:21 PM

Yes, I agree, Barker, that through education and school training in business administration and accounting, independent entrepreneurs who are looking for loans become more attractive to banks and lenders. But, of course, in today's climate, excellent collateral will be the name of the game.

Of course, franchisors, who are actually the entrepreneurs, do run their own training programs for franchisees which are generally paid for by the prospective franchisees ---who generally never flunk out of the programs.

Franchisees are really not entrepreneurs in the true sense of the word and are really a resource of the franchisor, who is the entrepreneur who uses the capital and cheaper labor of the franchisee owner of the franchised unit to prove his concept in the economy.

Banks and lenders and the SBA have always been more friendly to prospective franchisees, especially those prospective franchisees who are buying into franchise networks that are visible in the economy.

This is why franchising seems to increase during recessions and during hard economic times when easy credit is no longer the name of the game. The SBA seems more willing to guarantee loans for the big franchisors.

The credit Bailout, if passed by the Congress, will help the big brand franchisors, Big Business, but I'm not sure it will rescue the newer franchisors who are trying to grow their chain units if the newer chains and new concepts don't have a record of unit success stories to show the banks.

I'm not convinced that the Federal Bailout will help the small independent business man at all.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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