The state of Black business.

Democrats and Republicans are pushing small business legislation. With affirmative action and fair access to capital caught in the political firestorm, how will black small business owners fare in 1996?

In 1995, small business got its first real taste of what it will be like to survive in the New World Order. Over the past few years, competition at home and abroad has produced a number of megamergers on Wall Street, but their impact on small business was debatable--until now.

The creation of lean, mean corporate machines has heightened the competitive stakes across all industries. With newly acquired stockpiles of resources--which in many cases allow them to produce their own supplies, as well as manufacture and distribute their own products--these corporate behemoths are hunkering down to wage war over the long haul. The clashes of these corporate titans threatens to siphon away profits in many industries, leaving behind a fallout that could be fatal to small business as we know it.

"The typical mind-set of the small business owner is survival," says Laverne Morrow, president of St. Louis-based Emprise Designs Inc., a firm that designs social and child welfare programs for federal government agencies. Morrow, who acted as national chairperson of the minority delegates caucus at the White House Conference on Small Business in June, says meeting payroll and paying bills on time have become major tasks for many small firms. While corporate cost-cutting, downsizing and economies of scale have allowed large firms to streamline operations and boost revenues, small businesses have shown declining profits even as sales have increased. Market forces appear to have gone terribly askew.

"We hear a great deal about how small business is driving the economy. Yet, we are penalized rather than rewarded for running our businesses because we have to constantly micromanage paperwork and pay excessive taxes," says Kathy Jordan, president of Jordan & Co., a media marketing and advertising firm in Huntsville, Ala. Jordan also explains that there are fewer government contracts for fewer dollars than in recent years. And there are other obstacles as well. "There are some people who don't believe others [minorities] should even be allowed to sit at the table," she laments.

The pressures on small business are mounting with little relief in sight. As the banking industry enjoys one of the most prosperous periods in its history, small business loans remain in limited supply. Regulations involving environmental and worker safety, health insurance and other paperwork continue to drive up costs--and blood pressures. In most states, taxes on businesses are increasing, not declining. And African American-owned businesses contemplate a future without minority set-aside programs to ease the burden of competing in a hostile business environment.

How will small businesses deal with these pressures? Geoffrey Kessler, president of the Kessler Exchange, a small business research firm in Northridge, Calif., notes that when large corporations were forced to make changes to survive at the start of the 1990s, these companies acquired some of the best characteristics of small businesses. Now, the market has turned in their favor and it's small business turn to adapt. "With big competitors becoming more flexible, creative and efficient, small businesses have to do more than just swim with the sharks--they have to outpace them," he says.

No doubt, they'll need some help to swim these rough waters. Both Democrats and Republicans have been falling over themselves trying to push small business legislation on Capitol Hill. With election year 1996 on the horizon, it's a good bet that relief is not far away--but only if small business owners mobilize to see it through.

SMALL BUSINESS BAROMETER

Signs that small businesses are ready to mobilize were evident at the White House Conference on Small Business. At this gathering, some 2,000 small business owners from across the country in all industries voted on federal policy recommendations.

The group adopted 60 recommendations, which were submitted to Congress and the president in September. The wish list includes proposals for a simpler tax system with lower rates, greater access to capital, fewer government regulations and a cap on product liability lawsuits.

Roughly 16 out of the 60 recommendations were issues that Morrow's group of 388 minority delegates had pushed for. They included the vigorous enforcement of the Community Reinvestment Act (CRA), a commitment to community development, the continuation of SBA 8(a) set-asides and assistance in securing trade opportunities overseas. Moreover, 10 of the 60 recommendations were mentioned in the Republican Contract With America.

With such a united front of discontent among all small business owners--black, white, Democrat and Republican--it's difficult to understand how Washington continues to spew out political rhetoric glorifying the way small business is driving the nation's economy. Political pundits declare that small firms create four times as many jobs as big business and produce twice as many innovations.

According to the 1994 State of Small Business: A Report of the President, small firms added more than 1 million jobs to the economy in 1993, while large firms reduced employment by more than 200,000. Last year, firms with four or fewer employees added 2.6 million new jobs. Small businesses employ 60% of the workforce, contribute to 54% of sales, account for roughly 40% of gross domestic product and are responsible for 50% of private sector output.

The fastest growing industries were health care, social services and construction. Retail and business services industries were the biggest employers. The report also notes that smaller firms outnumber their larger counterparts, 21.5 million to 14,000. Of the 21.5 million total businesses in the nation, 15.3 million were proprietorships, 4.6 million were corporations and 1.6 million were partnerships.

Despite the positive numbers, the overall picture for small business isn't as rosy as some people portray it. While small firms have been driving employment, only 5.8 million out of a total 21.5 million have any employees other than the owner. And though small firms also are showing sales increases, the costs of doing business have eroded their profits. The reality is that small business owners are working harder to squeeze profits from their sales.

The obstacles of "excessive paperwork, taxes and government regulations are making it harder for entrepreneurs to turn a profit and grow their business while providing economic support for their employees and communities," says Jack Faris, president and CEO of the National Federation of Independent Business, a trade association with over 600,000 members. He strongly believes that the government is too often the ultimate arbiter of small business success or failure.

THE CAPITAL BARRIER

The fate of small businesses will always be linked to their ability to raise capital, and capitalization remains the No. 1 barrier for small business owners. Even after 10 years in business and revenues of $3.5 million, Morrow still finds herself turning to private investors to expand her business.

She cites a government contract with the U.S. Department of Health and Human Services to provide training and technical assistance for two regions. But to fulfill the contract, she had to build two new offices, one in the Midwest and the other in the South. The cost of the expansion will be about $400,000.

Morrow was turned down by two commercial banks, including the one where her company did business. "When we first started in business, the banks told us we needed to get the contracts before they could help us," she says. "Then when we started getting contracts, they told us we needed a track record. Every time you go to them they add on a different requirement."

Morrow ended up borrowing the money from private investors who stipulated that she pay it back in three months with interest. Now with two years to go before Emprise Designs completes the contract, Morrow estimates she would have made about half a million dollars from this one deal.

Morrow's experience illustrates that now more than ever, African American business owners must sharpen their skills and make sure their businesses are up to par. Jordan and other minority business owners believe the new scrutiny of affirmative action could make it even harder for minority businesses to get access to capital. Commercial banks have been less than responsive when it comes to lending to minority business owners.

"We need to pay close attention to how we will be treated in the economic arena," cautions Jordan. "We can no longer afford to have people look at us and say we are in business merely because of affirmative action--because we've worked hard to get where we are."

Many minority groups are calling on greater enforcement of the CRA with special emphasis on ending redlining. CRA requires banks to meet the small business needs of the communities they serve.

Two years ago, Congressman Albert R. Wynn (D-Md.) introduced The Small Business Lending Disclosure Act (H.R. 918), which would require banks to disclose records of lending to minority-owned and start-up small businesses. The bill is currently lying dead in the hands of the Committee on Banking, Finance and Urban Affairs.

A tightfisted banking community continues to stifle minority business owners, many of whom bear the burden of providing employment opportunities in their communities. Small businesses are expected to play a major role in revitalizing America's economically depressed communities, both urban and rural. Some minority entrepreneurs are still hoping to build their businesses with help from state and local programs and empowerment zone, which have been designed to resuscitate distressed communities.

The Clinton administration has made attempts to make it easier for small business owners to get credit through the SBA. Last year, the agency introduced the Low-Documentation Program, which reduced the amount of paperwork for loan applications. (Forms for loans under $100,000 have gone from being an inch thick to a page long.) The total number of SBA loans has doubled since 1992.

Minorities and women have benefited slightly from Low-Doc loans. According to President Clinton, "We expanded loans to minorities and women dramatically without lowering the volume of loans to other businesses or without lowering the credit standards one single bit."

Minority business owners equally benefited from 100 micro-lenders that have been accredited and funded by the SBA since 1992. Local groups, small community banks or credit unions apply to the SBA asking to serve as intermediary lenders or micro-loan centers. In turn, the SBA funds these groups up to $750,000. Minority groups are now pushing for Congress to enhance the SBA's micro-loan program and to make it a permanent capital source.

PLAYING CATCH-UP

As African American entrepreneurs struggle to acquire capital, procurement opportunities are looming as a major concern. Washington purchases approximately $200 billion in goods and services from the private sector each year. Roughly 19.6% is awarded to small businesses and subcontractors under larger awards. Women- owned businesses typically receive only 1.3% of all federal procurement contracts and minority businesses win about 4. 1

These percentages hardly suggest that affirmative action measures have given minorities an overwhelming "advantage" against other firms. Rather, they show that set-aside programs provide goals intended to create a level playing field. The programs are not about preferences, but about balanced competitiveness, productivity and fairness (See "The Affirmative Action War In California," this issue.)

Minority business owners realize that it requires more than set-asides to make your firm competitive. You don't win contracts simply because your company is minority-owned, but by providing a needed product or service. That is why many African American business owners are frantically playing catch-up in the technology arena.

"Minority businesses have no choice but to keep up with the next phase of this millennium. Business will soon evolve to another level and minorities will be excluded if they don't understand, appreciate and accept new technologies," says Pedro Alfonso, president and CEO of Washington-based Dynamic Concepts Inc.

"Information is already being processed online by the government. Eventually everyone will be buying, selling and marketing over the airwaves and cyberspace," explains Alfonso, whose firm is ranked No. 95 on the BE 100 INDUSTRIAL SERVICE list.

Admittedly trailing their white counterparts, black entrepreneurs have detailed the actions necessary to lift the community up to a more competitive level.

First, they want Congress to ensure fair competition in the technological marketplace by offering a single, central government location that would provide free information on telecommunications products and services. Second, minority business owners want an online electronic clearinghouse service; it would be coordinated by the SBA and include the use of the Internet to access procurement contract information.

Savvy minority entrepreneurs also understand that they must fight to be included in the global arena. The Commerce Department is encouraging minority businesses to trade overseas. "The problem is they don't know about our existence or the resources we offer," says Lauri Fitz-Pegado, assistant secretary and director general of the U.S. and Foreign Commercial Service at the Department of Commerce. "We have not done a good job of marketing our services."

Last year, the Department of Commerce's International Trade Administration (ITA) created the Memorandum of Understanding Program with the Minority Business Development Agency. The pilot program offers import/export counseling, financing and matchmaking with more experienced firms. Trade missions sponsored by the ITA to Mexico, Brazil and South Africa have exposed nearly 100 minority business owners to these markets. It also has set up 15 export assistance centers.

No doubt, capital access, community development, international trade, technology and procurement will be key concerns of African American small business owners for the rest of 1995 and into next year. These issues are more than likely to surface somewhere on next year's Republican and Democratic political party platforms. There are bound to be some wins and some losses.

Meanwhile, the overall sentiment is that small business can no longer go about business as usual. What is it going to take for small business owners to survive in 1996? Says small business expert Geoffrey Kessler, "They need to constantly reassess every aspect of their: businesses and their industries to come up with products and services nobody else can offer, in ways that are increasingly efficient. They have to make their business indispensable."

And that will mean sizing up the new behemoths in individual industries and finding ways to partner with the big boys or finding niches that the big boys can't fill. After all, no one can do it all alone. This time, small businesses will have to learn from big business as the dynamics of our new economy continue to unfold.