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Minorities: The force fueling small-business growth

After a decade of working 10-hour days as a manicurist, Patty Paredes decided to take a risk and pursue her dream: to become her own boss.

She wiped out her savings, and with the financial help of her mother, Paredes collected $95,000 to open her own nail salon, Nails & Spa 4U, which she inaugurated in March.

Today Paredes works more days and more hours per week than she did at her previous job—and has other things to worry about as a business owner, such as paying rent for her 900-square-foot nail salon. But for the 30-year-old, the extra work and sacrifice pays off, because for her, entrepreneurship is the only viable path for prosperity.

"I know this is a big risk, but it's an investment," said Paredes, who employs three manicurists at her salon in Brooklyn, NY. "All the work I put in is for myself."

Controlling her own destiny: Patty Paredes, owner of Nails & Spa 4U
Silvana Ordonez | CNBC
Controlling her own destiny: Patty Paredes, owner of Nails & Spa 4U

Like Paredes, millions of minorities take on entrepreneurship in search of financial independence and success. Minority businesses make up almost 15 percent of the 28 million small businesses and employ 5.9 million workers in the United States.

Minorities include people in any category other than non-Hispanic white, according to the U.S. Census Bureau.

Business ownership among minorities has been on the rise in recent years. Between 2002 and 2007, minority-owned businesses increased 46 percent, while nonminority-owned businesses grew 10 percent during that same period, according to Minority Business Development Agency.

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In 2007, Asians owned 1.6 million businesses, African-Americans owned 1.9 million, Hispanics owned 2.3 million, and Native American/Pacific Islander owned 0.3 million, according to the most recent data from the Small Business Administration.

And the growth trend is expected to grow.

"Minorities are going to become the majority in the next 5 to 10 years in terms of small businesses," Rohit Arora, CEO of Biz2Credit, an online site that connects small-business owners with financing. "They will keep contributing in starting, buying and growing businesses."

What's driving the growth?

There are several factors contributing to the increase in minority entrepreneurship, including minorities buying businesses from baby boomers seeking to retire as the economy improves—a trend Arora has noticed in the past year.

Other factors include growth of the minority labor force, overall population growth and increased immigration.

According to a study by Kauffman in 2013, immigrants were nearly twice as likely as native-born to start businesses each month.

"In a lot of cases, especially low-skilled, low-educated immigrants, entrepreneurship often provides a more economically viable path," explained Dane Stangler, vice president of Research & Policy at Kauffman.

Hispanics, the largest minority group in the nation, is also the fastest-growing group of business owners in the U.S. From 2002 to 2007, the number of Hispanic-owned businesses grew from 1.5 million to more than 2.2 million, according to a joint report by The United States Hispanic Chamber of Commerce, the country's largest Hispanic business organization; and Geoscape, an analytics and market intelligence company.

"Many times Hispanics find the need to create their own businesses because they might not have access to corporate network jobs that are out there," said César Melgoza, founder and CEO of Geoscape, explaining that this was especially true among immigrants. "The path to entrepreneurship is almost enforced upon them."

Minority businesses are a big boost to the small-business economy, Melgoza added.

In Chicago, for example, Hispanics, 29 percent of the city's population, own about 22,000 businesses, or almost 9 percent of all businesses, and employ 77,000 people, according to the city's data.

"I see up close the vital contributions immigrants make to our economy," wrote Rahm Emanuel, Chicago's mayor and former White House chief of staff, in a column. "In Chicago, one half of all new businesses every year are started by immigrants."

Between 2002 and 2007, the number of Hispanic-owned businesses in the state of Illinois grew 43 percent, compared to 16 percent of all others during the same period, according to a report by the Center for Hispanic Entrepreneurship and DePaul's College of Business.

And the number of Hispanic-owned businesses in the United States could rise even more if an immigration reform is passed and legal status is granted to the approximate 11 million undocumented immigrants in the country.

"It's going to result in an infusion of entrepreneurship and more business growth," said Melgoza.

Challenges

Although minority businesses are on the rise, they also face challenges—access to capital is one of them.

"There's empirical evidence that they have been disproportionately denied access to capital when they apply for it," said Christine Kymn, an economist at SBA Office of Advocacy, adding that Hispanics and African-Americans are the minorities most affected.

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Experts note that minorities, especially immigrants, don't have established relationships with banks and many times don't have the financial education on how to access and build credit and a credit score—crucial factors for banks when determining to lend money.

Access to capital is a problem for all small business in general, not just minorities, explained Mac Wilcox, president and CEO of Savoy Bank, a New York bank that specializes in small businesses.

He said that operating history—the length of time a business has been running—is often a reason small businesses are denied loans.

That was the case for black entrepreneur Psyche Terry, who was denied a bank loan when she wanted to launch Urban Intimates, a lingerie line for curvy women.

"We only had a concept and no orders—just a business name. … It just wasn't enough for a bank to partner with us," said the 32-year-old entrepreneur who lives in Dallas.

But for Terry the loan denial was not an impediment. She turned to her 401(k) and maxed seven credit cards to get the $150,000 she needed for her business.

Terry's risk is now paying off. Her lingerie line, two years young, is being sold at major retailers such as Macy's and jcpenney.com.

Other challenges that minority businesses face is profitability and survival rate. About 50 percent of all small businesses survive five years or more, and only one-third survive 10 years or more. And according to an SBA report, "Women and minority-owned firms tend to be smaller and less profitable … and they carry lower survival rates than their male or nonminority counterparts."

"Smaller loan sizes seem to be linked to higher failure rates. Access to credit is a big barrier," Lisa D. Cook, an associate professor of economics at Michigan State University and a former member of President Obama's Council of Economic Advisers. "Most of minority-owned businesses are located in their local communities, and if their local communities are poorer than other communities, they're going to have a lot less growth potential."

Another challenge that could hamper business growth among blacks and Hispanics is the lingering effect of the housing crisis, Cook said.

"A lot of their wealth for 2008 was tied up in housing," she explained. "It's not easy to get a mortgage anymore. ... Home-equity loans can't be counted on as they were before to finance start-ups."

A study found that minority homeowners were disproportionately affected by the foreclosure crisis.

Home ownership often serves as collateral for those who want to start their business and can also help decrease the probability of loan denials.

"Home equity can serve as a relatively low-cost financing alternative," the SBA says. "Absence of home ownership may also serve as a barrier to entry for prospective women and minority entrepreneurs."

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Another challenge Cook sees among blacks and Hispanics—whose businesses are mostly in the service and manufacturing industries—is their lack of representation in the innovative economy, or science and technology economy, which she says is the fastest growing economy.

Asians, however, fare well in the STEM (science, technology,engineering) industry holding 15 percent of all stem jobs, according to the Census.

Blacks held 6 percent of STEM jobs, while Hispanics held 7 percent.

The Obama administration hopes to alleviate some of the hurdles small-business owners face—in particular, among minority—with the appointment of the new SBA administrator, Maria Contreras-Sweet, who was born in Mexico.

Resources

Despite the challenges minority small-business owners face, there are various resources and organizations that serve as a support system to network and expand their businesses, such as:

National Black Chamber of Commerce

U.S. Pan Asian American Chamber of Commerce

U.S. Hispanic Chamber of Commerce

National Association of Women Business Owners

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"If you join these organizations and get involved and meet people, you'll find lots of mentors," said Carmen Rad, founder and president of CR&A Custom, a 20-year-old digital printer and outdoor advertising company in Los Angeles that employs 40 people, with annual revenue of $5.6 million. "That is crucial for your business."

Rad, of Puerto Rico, is an active member of the Los Angeles chapter of the National Association of Women Business Owners and the Los Angeles Latino Chamber of Commerce.

"These organizations are willing to help. They want to see you succeed," she said.

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