CNBC Metro 20

An overlooked and diversified $1.4 trillion force in the US economy

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Minority-owned start-ups are on the rise in America, creating a powerful force in the evolving entrepreneurial landscape. Both native-born and immigrant entrepreneurs are creating thriving start-up ecosystems of their own in large metro areas across the country.

Start-up activity in America is climbing, according to a new and widely watched report from the Kauffman Foundation. Overall, new business activity rose in 2016, bolstered by women and minority-owned businesses. Women make up 40.6 percent of new entrepreneurs, while a second important stat showed a dramatic increase in Latino business owners, more than doubling since 1996, to 20.8 percent of all new entrepreneurs.

Separate data from the Minority Business Development Agency shows a similar trend. According to 2016 data, minority-owned firms contribute a stunning $1.4 trillion to the U.S economy. For 2012, the most recent data available, there were 8 million minority-owned businesses, representing a 38 percent increase since 2007.

New research from online lending marketplace Biz2Credit, done specifically for CNBC for its Metro 20: America's Best Places to Start a Business ranking, listed the locations with the highest levels of diversity among business owners across the country. The top five metros were Sacramento, California; Washington, D.C.; Philadelphia; San Jose, California; and Houston.

"Cities and municipalities with emerging entrepreneurial economies are those that have leadership that promote and embrace entrepreneurialism at the ground level." -Joann Hill, chief of the office of business development, MBDA

"Cities and municipalities with emerging entrepreneurial economies are those that have leadership that promote and embrace entrepreneurialism at the ground level," said MBDA's Joann Hill, chief of the office of business development. She added that the locations that were top ranked have this already in place.

Another factor that allows minority-owned businesses to flourish is a local community that supports these businesses regardless of whether they're retail storefronts or tech companies, according to MBDA national director Alejandra Castillo. Location in a community that is rich with diversity undoubtedly helps to make this a reality. "The population sees minorities start businesses and then become job creators within those communities," Castillo said.

The ability to bid for and win government contracts at local, state and federal levels helps minority-owned businesses develop new and better opportunities, according to the MBDA. This is something Cora Williams, president and CEO of Washington, D.C.-based Ideal Electrical Supply has seen firsthand. The company, launched in 1991, is a wholesale distributor of electrical and industrial products that employs 21 people.

"It's easy to get access to opportunities," Williams said of the D.C. area. "But it's hard to get the business — it's very competitive. We are competing with companies that have better buying power, stronger relationships and more money."

Williams adds that D.C.'s local government makes resources readily available for smaller companies to get off the ground, and the fact that both the Small Business Administration and the MBDA are located there also help.

Challenges for minority-owned businesses

While the number of minority-owned businesses in America continues to climb, one stubborn challenge remains: Access to capital is the top issue for these firms in launching. A separate report from Biz2Credit in April found nearly 40 percent of minority-owned businesses named getting adequate financing a top challenge for them in the year to come.

The major issues for minorities seeking credit is their relationships with banks and their credit histories. "Most minority-owned businesses do not have existing relationships with lenders, and they also have thin credit files," said Rohit Arora, co-founder and CEO of Biz2Credit. He noted that many are in Main Street businesses that banks shy away from, such as dry cleaners, Laundromats and gas stations.

The void has been filled in part by alternative lending, an emerging force in small-business lending. A recent report from Babson College, called the Global Entrepreneurship Monitor Special Report on Entrepreneurial Finance, found traditional forms of finance for entrepreneurs are increasingly being supplemented by alternate sources. This includes peer-to-peer lending, crowdfunding and microfinance.

"After the recession, banks reduced their overall lending exposure to small businesses," said Arora. "Alternate lending and peer-to-peer lending has helped them."

Many minority businesses self-fund with their own capital or even personal credit cards to get off the ground, the MDBA's Castillo points out — something the agency is working to improve. Williams admits that finding start-up capital when she launched in the 1990s was no easy task. In fact, she withdrew her own retirement funding in order to get started.

"I think it was more about me being a woman. No one was lending start-up businesses, especially women, money," she said. "But as we gained traction and the business grew, more banks became interested in us. We went with a community bank and have been with them for 18 years."