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Why Blacks are not as Wealthy as Whites?

In Capitalist America, owning a business is the main ingredient in the recipe for creating wealth. Although the number of self-employed Black Americans doubled from 1984 to 2003, the Black American self-employment rate is less than half the national average and still lags behind Latino, Asian and White Americans.

According to the Small Business Administration, only 4.5 percent of blacks own their own business, compared with 7 percent of Latinos and 11 percent of white and Asian Americans. Black-owned businesses generate dramatically lower annual sales than firms owned by white and Asian Americans, and they are more likely to fail.

For years, University of California Santa Cruz (UC Santa Cruz) Economist Robert Fairlie, has analyzed data to understand these disparities and along with Alicia Robb of the Foundation for Sustainable Development, has uncovered the main factors that account for the lack of black owned businesses compared to other races:

• Insufficient amounts of startup capital

• Lack of self-employed work experience

• Lack of educational attainment

"Half of all Asian Americans in the labor market have a college education or higher," said Fairlie, emphasizing the importance of education.

"Business ownership is an alternative to unemployment and discrimination in the labor market, and political influence comes with success in small business," he said. "Historically in this country, we've seen rapid growth of business ownership among immigrants, including Chinese, Japanese, Jews, Italians, Greeks, and, most recently, Koreans."

Yet business ownership rates have been stagnant among Black Americans, said Fairlie, who presented his research during a conference titled "Race, Families, and Business Success: A Comparison of African American-, Asian- and White-Owned Businesses." His presentation was sponsored by the UCSC Equal Employment Opportunity/Affirmative Action Office as part of its diversity lecture series.

In his analysis, Black-owned businesses average annual sales of about $60,000, compared with $167,000 for Latino-owned businesses, $219,000 for white-owned businesses, and $245,000 for Asian-owned businesses.

Only 14 percent of black-owned businesses generated annual profits of $10,000 or more, compared with 30 percent of white-owned businesses. Business failure rates during the first four years are 27 percent for black-owned businesses compared with 22.5 percent for white-owned businesses.

Sufficient startup capital, prior work experience in a family-owned business, and education emerged as the biggest differences in the success and survival of black, white and Asian-owned businesses. Having sufficient start-up capital accounted for 43 percent, self-employed work experience - 11 percent, and educational level about 6 percent of the difference in business ownership success.

Businesses launched with $100,000 or more of startup capital were twice as likely to prosper, but only 1.7 percent of black-owned businesses start out with more than $100,000, compared with 4.9 percent of white-owned firms, said Fairlie. Furthermore, only 6.5 percent of black-owned businesses start a business with more than $25,000 in capital, compared with 11.1 percent of white-owned firms and 12 percent of business owned by Asian Americans.

Why the large differences in start-up capital? Not surprisingly: Wealth! The net worth of blacks and whites accounts for the disparity in startup capital, said Fairlie. Defined as total assets, including home equity, automobiles, and savings, net worth for average Black Americans is about $6,000; Latino net worth averages $7,000; and White and Asian Americans net worth is about $70,000.

"Wealth inequality leads to these low levels of capital, which is a huge factor in determining the outcome of a business," said Fairlie, adding that, "Economists tend to focus on wage and income inequality, but there really needs to be more attention paid to wealth inequality in this country."

The alternative source for start-up capital are Bank and Government (SBA) loans. Not surprisingly, Asian Americans have been the leaders in snagging SBA business loans. Over the past ten years, Asians obtained 12.2% of the $85 billion in loans guaranteed by the SBA, while Latinos received 5.6% and Blacks 2.8%.

The USA Today also reported earlier this year how self-employed Asian Americans assist each other in business with alternative financing:

"Many Asian immigrants finance start-ups through informal loan associations. How they work: Twelve established Asian U.S. business owners will contribute $1,000 each to a fund. That $12,000 is loaned to a new immigrant entrepreneur. Loans are often interest-free, and agreements are sealed with a handshake," says Greg Fairchild, a professor at the University of Virginia. "It's a new version of what people have negatively called the good old boys' network," he says."

These types of business associations are dated back to the early 20th century in the United States when Asians were the primary foreign immigrant group. Unfortunately, there are no direct equivalents in other minority communities. Harry Alford, president of the National Black Chamber of Commerce, hopes one day there will be. Asians don't form loan pools "because they love each other," he says. "They see it as a necessity for business growth. We African-Americans have a natural dependency on waiting for the government to do something."

After reflecting on their discoveries, Fairlie and Robb point out several issues for government review, including improving bank lending laws to further protect Black Americans from financial discrimination, addressing wealth inequality, and developing internships that would help narrow the gap for the lack of work experience in family-owned businesses available to Black Americans.

Create Wealth, Enjoy Life!


Written by James Bird Guess

President & Founder The Black Economy.com

James "Bird" Guess graduated college with dreams of climbing the corporate ladder and becoming a prominent financial executive. But after only working a year in "Corporate America", James grew bitter of the politics and bureaucracy associated and decided to venture out on his own to become a full-time entrepreneur.

With a repossession and other unpaid debts on his credit, James had a negative net worth. Starting with only $1,000 saved from college, he single-handedly built a quarter million dollar apparel business from the trunk of his car. Shortly thereafter, his business model would transition from retailer to wholesaler of apparel, which generated $750,000 dollars in revenue.

James could now take one step closer toward financial freedom. As an entrepreneur, he has bought and sold over $1.5 million of apparel. He now uses his financial acumen to help individuals, entrepreneurs, businesses and investors create wealth in their lives! James is now the President & Founder of BlacBird Investments LLC. http://www.BlacBirds.com & http://www.theblackeconomy.com, Create Wealth! & Enjoy Life!

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