Access to capital is the most significant factor limiting the growth of minority-owned businesses, yet over half of minority-owned businesses are likely to expand their business by investing more capital. These are just two key findings from The State of Small Business survey conducted for the third year in partnership between Sandy Spring Bank and the Business Journals. The survey, first conducted in 2019, provides important data to understand how small businesses are faring throughout Greater Washington and Baltimore.
Rhonda Pringle, market president and publisher for the Baltimore Business Journal; and Alex Orfinger, publisher of the Washington Business Journal, recently co-hosted a panel of local financial industry and banking executives and business owners to discuss challenges and opportunities for accessing funding for minority- and women-owned businesses. The discussion explored true-to-life experiences informed in part by data collected in the small business survey.
Participants included Jessica Butler, vice president and sales leader for business banking, Sandy Spring Bank; Randy Croxton, senior vice president and co-founder, Meridian Management Group; Josh Dew, CEO, Vagrant Coffee; and Obi Omile, co-founder and CEO, theCut. The discussion was sponsored by Sandy Spring Bank.
Following are excerpts from the discussion.
How did you access capital to start and grow your business?
Obi Omile: When we started off, we had money that we invested that lasted about a year. Then immediately we started to need more cash, which led us to pitch competitions (events where entrepreneurs present their business concepts to secure financial backing). We eventually did a crowdfunding campaign, and we offered equity to people who used our app and to people who just believed in our business. Most recently, we closed on what’s known as a mango seed round of funding. We raised $4.5 million in venture capital which is going to allow us to expand our engineering and business team to continue to grow over the next couple of years.
Josh Dew: My story started with self-financing. I put in $5,000 with the idea of convincing friends and family to contribute to the business. I pitched the business idea to some friends and I was very fortunate. One friend contributed, and then another, and then we were able to get the business off the ground. From there, it was about two years of early mornings and late nights of talking about the business, showing people our difference and how it can benefit them, and putting boots to the ground. That’s how we actually secured our first large investment. With that $500,000 investment, we focused a lot of effort on making sure that the brick-and-mortar store and our mobile operations were successful. That's not to say that it was easy. It wasn't.
What advice do you have for minority- and women-owned businesses seeking capital?
Randy Croxton: Trying to get people to recognize your potential is not easy to do, particularly when you're looking at equity-type funding. Most minority businesses, women-owned or otherwise, are funded initially by the entrepreneur. Most of them are first-generation owners or entrepreneurs and don't have the family wealth to enter into the financial system or to sustain rough periods as they learn the industry and get their business up and running.
We're able to provide financing to assist them to grow their business. We are able to structure the funding because of the variety of programs that we have under the Maryland Small Business Development Financing Authority. We can do contract financing, issue lines of credit, provide guarantees of loans similar to SBA 7(a) programs, and provide guarantees to the banks.
Jessica Butler: Women- and minority-owned businesses experience the same challenges. Access to capital is a roadblock. I want to express how critical it is to have a relationship with a banker, an accountant and an attorney. Those core people should be your business family. They should know what your situation is before you get started, understand what you need, and help you get to the next level. It’s also helpful to have a mentor who is familiar with your industry or with starting a business.
When you come to a bank for traditional financing, it’s important to have done your homework, understand your business plan, and have an initial investment in place. This will help build trust and demonstrate to the bank that you’re in this together as a team to elevate your business to that next level.
What barriers are in the way of access to capital?
Josh: A barrier for me was the coffee industry itself. A lot of people questioned how we could compete with large brands. I would recommend that entrepreneurs, especially women or minorities, who are starting out on this journey be prepared for more questions and more scrutiny. Do a lot of research and create a really compelling vision to be able to share with banking institutions or lenders. Do your homework and be prepared with an answer for anything.
Obi: There's a high level of scrutiny, especially being a founder of color. There are people who are always going to look at your business idea or you a little bit harder because they don't have the context or familiarity. Even with venture capital, investors want to feel a certain level of trust. Building relationships over time is a key way to getting them to that point where they're more willing to give you that check.
When it comes to bankers and other lenders, you have to have people in decision-making roles who have this additional level of context. It's finding people who understand not only what you're working on, but who understand what the business may be, who the customers may be, and what the dynamics are to lacking collateral.
Randy: The lender relationship is critical. People lend to people who they're comfortable with. The problem for most minorities and women is that they have not been a part of the financing platform until recently. Historically, there have been few minority or women bankers. That's where the ability to relate and build relationships was lacking for so long. There's been some improvement, but there's a lot of work that still needs to be done in bridging the gap.
Jessica: We need more women and minorities in leadership roles. When you're working with someone who looks like you or can relate to the business that you're starting and the industry that you're in, interactions are more comfortable. It's not only up to the banker or the lender to trust you, it's also up to you to trust them. It's a partnership and a relationship, and the trust
needs to go both ways. I've been in this industry for 25 years and I see change happening, but there's still a lot of work to be done.
What are some solutions to help minority businesses get better financing?
Obi: With regard to venture capital, the first suggestion I always give is to employ people who look like the demographic you're targeting. For lending or traditional banking, make sure that the decision makers have a better understanding of the people of the community in order to make more informed decisions. My suggestion for the financial community overall is to make alternative forms of financing like crowdsourcing, crowdfunding and microlending more visible and accessible.
Josh: I think it would make a big difference if financial institutions streamlined their electronic processes. We use Square at our retail locations and we’re very close to outgrowing it in how we operate, but what’s interesting about them is their simplified access to capital. There have been several times that I have reached out to our bank to see if they could offer us these same capital opportunities. The stack of paperwork and the back-and-forth process with the bank is time consuming, whereas Square makes capital available in a few clicks.
Jessica: A lot of banks are working to streamline the process. In the event that there is a lot of paperwork, especially with SBA programs, providing direction and helping clients pre-fill forms is very helpful. Also, be honest with expectations from the very beginning.
Randy: Be prepared. Have your information together and make sure you understand what you're presenting to a lender. Don't rely only on your financial statements prepared by accountants. It's important for you to understand what the numbers mean to your business.
Access is foundational to bridging the capital gap — not only for minority- and women-owned businesses throughout Greater Washington and Baltimore, but for entrepreneurs across the country. Capital opens doors for businesses to grow, creates generational wealth and fosters economic development. Investment pays off when minority- and women-owned businesses are given the opportunity to thrive.
To learn more about how Sandy Spring Bank is helping small businesses grow, click here.
Sandy Spring Bank has more than 50 locations across Maryland, Virginia and Washington, D.C.
Source: The Washington Business Journal’s third annual State of Small Business Survey, sponsored by Sandy Spring Bank.
The Washington Business Journal is not affiliated with Sandy Spring Bank.
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