The future economic wellbeing of Los Angeles County hinges on the success of the growing number of minority-owned businesses located here. Yet a new study shows that minority-owned businesses are still finding it extremely hard to get access to capital, hampering their growth and threatening the region’s long-term economic outlook.

The study, published by the Milken Institute in Santa Monica, shows that minority-owned businesses nationwide have been growing at a faster rate than white-owned ones, in terms of both their numbers and revenues.

Nevertheless, minority businesses are only getting a fraction of the total amount of money that is loaned to or invested in American businesses. Just 2 percent of all private equity investments in the U.S., for example, went to minority-owned businesses last year, according to the study.

If the inability of minority-owned businesses to finance their growth is a potential risk to the future economic strength of the U.S. in general, that risk is even higher in California and particularly in Los Angeles, where there is a larger number of minority-owned businesses than anywhere else in the country.

Although the study does not break out data for Los Angeles County, it shows that roughly one-third of all minority-owned businesses in the U.S. are based in California, far more than in any other state.

“For Los Angeles specifically, it is not hard to anticipate that the economic importance of minority-owned businesses to have access to capital is greater than elsewhere,” said Glenn Yago, director of capital studies at the Milken Institute and principal author of the study. “Minorities are now in the majority in Los Angeles and they face the same conditions and constraints as nationwide.”

Los Angeles County is home to no fewer than 230,025 minority-owned businesses, including self-employed entrepreneurs, according to the 1992 Economic Census (1997 data will not be available until November), with combined annual revenues of $27.9 billion. That represents more than half the minority-owned businesses in California and almost double the number found in the country’s No. 2 city for minority-owned businesses, New York.

Although the Milken study found there is a significant gap between minority and non-minority enterprises, when it comes to accessing capital, there are also some significant differences between the type of financing that these businesses are trying to obtain.

Venture capital vs. loans

“There are two types of capital that are important here,” said Dominic Ng, president of East West Bank in Monrovia. “In the first place, there are the small amounts of capital that are needed to start a business. This is part of the strength of the Los Angeles economy, that immigrant groups have been very self-sufficient in raising money through family and other networks. When it gets to the next stage, however, of raising large amounts of money through traditional sources of public capital, it has been much more difficult for immigrants here.”

The situation for minority entrepreneurs in L.A. County might be better than elsewhere in the U.S., according to Ng, in terms of acquiring loans from commercial banks. That’s because there are a fair number of small and mid-sized commercial banks, often with close ties to immigrant communities, that specialize in working with minority businesses.

However, when it comes to obtaining equity investments through private placements, minority-owned businesses in Los Angeles are worse off than in some other metropolitan areas because of the absence of investment banks locally.

Of 21 U.S. venture capital funds focusing on minority markets that were listed in the Milken study, only one, Bastion Capital Group, is based in Los Angeles. Two others are based in Northern California, and the rest are on the East Coast, in the Midwest or in Texas. The placement seems a bit odd considering that most minority-owned businesses are on the West Coast.

“There is a disconnect between supply and demand,” said Ng. “There is an infinite amount of capital floating around and it ends up in the same hands because investment banks don’t know what is out here. Investors tell me all the time, ‘If you can bring me a good deal, I’ve got the money.'”

Ng sees a growing opportunity for community-based commercial banks to act as a liaison between investment banks and local minority-owned businesses, providing much-needed access to capital for these companies.

Low risk tolerance

While gaining access to major investment funds is the issue for some immigrant entrepreneurs, for others, particularly those in the inner city, the problem comes down to qualifying for a small-business loan to stay afloat in the first place.

Even though major national banks have become more active in inner-city lending since passage of the Community Reinvestment Act, many fledgling minority businesses still find it hard to pass muster for loans under the standards of these institutions.

“The bottom line is that the money is there, but the problem remains that many of these businesses lack the two or three years of experience to qualify for a loan,” said Dominic Pilato, deputy director of the Minority Business Opportunity Committee, which is part of the Mayor’s Office of Economic Development. “We are working with the Federal Reserve and the large financial institutions to develop new and less risky loan products and help them to think outside the box.”

Pilato believes, however, that the large banks are slowly developing a taste for lending to minority businesses and that Los Angeles is ahead of other parts of the country in bringing the parties together.