The state of small black business.

An anti-affirmative action firestorm is brewing in the small black business community. To stay competitive, these firms must build alliances, use technology and enxercise their voice.

THE 21ST CENTURY IS QUICKLY approaching, but will small black businesses be able to compete successfully in the new millennium when many traditional challenges still persist? That is the question many African American entrepreneurs are asking themselves and the government agencies that claim to support their enterprises.

"For a lot of firms, just trying to get a commercial line of credit from banks still remains a problem," says Donald J. Todd, owner of Don Todd Associates Inc., a construction management company in San Francisco.

Gaining access to capital is just one of many die-hard problems that small black businesses have faced over the last decade. To overcome this challenge, many have participated in augmented loan programs such as the Small Business Administration's 7(a) Guaranteed Business Loan Program. This program guarantees bank loans of up to $750,000 to creditworthy small enterprises that have had difficulty getting loans through normal lending channels. However, in fiscal year 1997, African American-owned firms received a mere 3% (about $237 million) of the more than $8 billion awarded. This is a decrease from fiscal year 1996, in which small black-owned companies received $259 million in 7(a) loans.

Some small black business owners say persistent loan discrimination is making fair access to capital difficult. However, Frank R. Gittens, a business financial consultant at Arizona's Bank One, the third largest lender to small businesses, insists banking institutions have become more small business-friendly. He says money is available, but many small black enterprises are ill-prepared to access it. "African American business owners call daily, but they really don't have a clue as to how much money they want to borrow," says Gittens. "They don't have a business plan or financial projections. They should because the days are gone when banks extend a loan just because you're a good, trustworthy person with an entrepreneurial idea. You have to ascertain how much you need to borrow in order to run your business successfully."

In addition to reduced access to loan dollars, African American entrepreneurs have also experienced a firestorm of anti-affirmative action policies. One of the hardest hit areas has been in federal procurement.

In 1995, the Supreme Court's ruling in the Adarand Construction v. Pena Case restricted the use of race as a consideration in awarding federal contracts. Now, in an attempt to comply with this decision, many of the nation's contracting programs that were originally designed to help minority businesses secure projects are eliminating the race factor.

In fact, California's Proposition 209, also known as California's Civil Rights Initiative (CCRI), prohibits consideration of race, gender or ethnicity in all areas of the state's system of public contracting, as well as employment and education.

In last November's election, voters voted in favor of the Initiative. The American Civil Liberties Union and other groups challenged the constitutionality of CCRI. But last April, the 9th Circuit Court of Appeals upheld the measure, enacting it into state law.

Now the Clinton Administration has announced proposals to revise the nation's largest contracting initiative, the SBA's hotly debated 8(a) program.

The proposed changes to the 8(a) program will, among other things, expand the definition of those who quality, opening up contract bidding to more white-owned companies (see "Is 8(a) Doing the Two-Step?" Newspoints, this issue). In fiscal year 1996, a total of 6,115 companies participated in 8(a). Of these firms, all but 27 were owned by racial or ethnic minorities.

"You still have to qualify as socially disadvantaged, and there is a strict test for that," explains SBA administrator Aida Alvarez of the proposed changes. "But there will be more flexibility and more participants, so we think that's a good thing," she says.

But good for whom? asks Deborah Proctor, president of Acorn Services Inc., a $10 million contract food services business in Florham Park, New Jersey. "Just getting to the table has been difficult enough," says Proctor, who has received four contracts through 8(a) worth a total of $4.5 million. "I've been in the 8(a) program for four years now, and it has allowed me to bid on contracts that I may not have been able to otherwise."

African American participants already lag behind the other businesses that participate in 8(a). In fact, Asian American-owned firms appear to be the program's front-runners. They have more than doubled their share of contracts from 10.5% in 1986 to 23.7% in 1996. Blacks, on the other hand, have lost one-quarter of their contract dollars, dropping from 50.5% in 1986 to 36.7% in 1996. Hispanic-owned firms have hovered around 30% for the 10-year span.

"So when they introduce white companies into 8(a)," contends Todd, "there is going to be even less for black-owned firms." Total federal contract actions for fiscal year 1996 totaled $198 billion. Those in the 8(a) program accounted for 3.2% (or $6 billion) of all federal contracts.

The slow erosion of minority set-aside programs has many small black entrepreneurs rethinking their strategies for doing business in the new millennium. But the changes have also challenged many small black-friendly agencies to step up their efforts to level the economic playing field.

Paul R. Webber IV, acting director of the Commerce Department's Minority Business Development Agency (MBDA), says the organization has become an active matchmaker for small black-owned companies and larger corporations. "By maintaining a database of minority firms and their capabilities, we've been brokering a lot of relationships between those companies and major Fortune 1,000 firms that have a need for their product or service," says Webber, who last July succeeded former director Joan Parrott Fonseca, the first woman to head the agency since its inception in 1969.

The MBDA operates minority business development centers nationwide and facilitates minority business opportunity committees to provide technical and financial assistance to small black business owners. The agency anticipates opening a nationwide Capital Formation Technical Assistance Center this year to increase access to capital among African American entrepreneurs. "The idea is that we will put minority businesses in touch with a bank of consultants who can come up with a creative, very tailored capital formation strategy that's going to include banks, but also private investors and private placements," explains Webber. "We want them to have a capital structure that's going to put their business in a position to grow long term."

Capital access and procurement aside, small black businesses may also face a new set of challenges moving forward. In what appears to be the year of the merger, African American companies are wrestling with competition created by megamergers among top Fortune 500 companies. Now these corporate behemoths are siphoning away larger profits from many industries, leaving smaller enterprises to scramble for pennies.

And in the wake of welfare reform, some small black business owners feel challenged to find skilled workers. "There is a pervasive belief in white and black businesses that because these people are coming off welfare, they will not make good workers," says Terrian Barnes, vice president of minority and women's affairs at the International Franchise Association in Washington, D.C. "But welfare reform does not necessarily make them inferior. In fact, I think their hunger and desire to be a part of change in their own lives might make them the best employees."

The Work Opportunity Tax Credit, created by the Small Business Job Protection Act in 1996, grants businesses as much as $2,100 per employee for each person hired off the welfare rolls. Barnes says welfare reform could be an opportunity for black businesses to contribute to job training and nurture the kinds of employees they would like to have.

It has been a rocky road for small black businesses over the past several years. And there appears to be little relief in sight. The proposed changes to 8(a), in particular, and the strong desire among both Republicans and Democrats to eliminate so-called "reverse discrimination," suggest that black-owned firms could be facing an unapologetic post-affirmative action era. But that's not to say they can't compete.

To stay successful, small black-owned firms must exercise their voice. They need to join trade associations, local black chambers of commerce, and other small business advocacy groups in order to effect positive change in the black business community. "We also need to support, financially and in in other ways, our politicians who are creating an agenda that will create a climate for our businesses to succeed," says Barnes. "We have good black leaders such as those in the Congressional Black Caucus, and we need to let them work for us."

Small black businesses must engage in peer-to-peer networking to access opportunities in and beyond the black business community. But to achieve true economic empowerment, they need to develop a new business ethic independent of governmental decrees and create competitive strategies that will position their companies for the long haul. This means forming partnerships or strategic alliances with black- and majority-owned firms to penetrate new markers and foster growth.

With the economic community quickly transforming into a paperless society, small black businesses must fully embrace technology and use the Internet to penetrate the marketplace

African American entrepreneurs will also need to position their businesses for the international arena. The late Commerce Secretary Ron Brown touted "commercial diplomacy," in which the department would create jobs for the American people, influence foreign policy and promote U.S. exports.

Brown said going into foreign markets would provide a competitive advantage for black-owned businesses, and he encouraged black entrepreneurs to participate to expand their global reach. Now, under the direction of William M. Daley, the Commerce Department is seeking to carry out Brown's vision through trade missions sponsored by the MBDA, in partnership with the International Trade Administration, to Latin America, the Caribbean, South Africa and West Africa.

The 21st century can prove to be a boon for small black-owned businesses. However, Barnes says, owners must place more responsibility on themselves. "The government has an important role in creating a business climate that fosters entrepreneurism in this country," she says. "But the government is not ultimately responsible for the success or failure of our black businesses. We are."

THE BAROMETER OF BLACK BUSINESS

In the last decade, the number of black-owned firms has jumped by 46% to about 621,000. According to a 1992 Economic Census survey of minority-owned businesses (the latest statistical information available), these firms generate over $32 billion in national sales in industries ranging from agricultural services and construction to transportation and finance.

Thomas Boston, Ph.D., a professor of economics at the Georgia Institute of Technology, says the growth of black businesses makes good economic sense for the country. In addition to pouring more dollars into the economy, they also address employment disparities in the black community. "In fact, a recent study indicates that only one-third of non-minority-owned firms located in African American communities employ at least 50% of their workforce from the African American labor market," says Boston. On the other hand, roughly 80% of the workers at black-owned firms, both large and small, are African American.

By the year 2010, the number of black businesses is expected to reach 2.2 million. Boston notes, however, that this increase will only occur if black businesses maintain their current growth rate at 7% annually. "And that depends largely upon whether the local, state and federal government will promote strategies designed to grow African American-owned businesses as, well as the willingness of this country to maintain a commitment to affirmative action policies," he says.

CHOOSING YOUR ALLIES: BUILDING STRATEGIC ALLIANCES

As black businesses battle with majority-owned firms for a larger piece of the economic pie, they must create a competitive and strategic plan. Part of this plan involves building strategic alliances.

By joining forces with other companies, small black businesses can share resources to penetrate new markets, expand their product line and increase their revenues and overall growth.

In fact, according to the latest Coopers & Lybrand Trendsetter Barometer, companies forming alliances with other firms are growing by 30% more than those that do not. Also, 50% of firms involved in alliances market their products/services internationally, versus only 30% of those that do not form alliances.

Roy Terry president and CEO of Terry Manufacturing Co., an apparel manufacturer (No. 62 on the BE INDUSTRIAL/SERVICE 100 list), encourages black businesses to choose allies. "I think that most of our businesses, even those on the BE 100s, are still very small compared to our competitors and the size of the marketplace, so by teaming together and sharing knowledge, access to markets and information, we can be much stronger," he says.

The Roanoke, Alabama-based company initiated a shared production agreement with the Defense Department and McDonald's Corp. in 1992 to produce military and fast food service uniforms. Terry Manufacturing had been a supplier to both since the 1980s. But when Terry saw the military making cutbacks in personnel in the early '90s, he decided to approach the Defense Department about creating a strategic alliance among all three parties. "I said why don't we take folks who make McDonald's uniforms every day and cross train them so that in case of war, they can join the military production line," says Terry. "The benefit to the military was that they didn't have to try to fill up their warehouse (with outside personnel), and the benefit to Terry was that we were in constant production." This alliance accounts for 60% of Terry's $34 million in revenues.

Creating an alliance is not easy, says Terry: "You have to look at the specific circumstances of your company to figure out what might work for you, but you also have to understand the circumstances of your potential allies."

When Terry inquired about producing licensed apparel for the 1996 Summer Olympic Games in Atlanta, he realized that he was a small company competing with some of the nation's largest corporations. But to gain leverage in his bidding, Terry capitalized on the needs of the Atlanta community. "We came up with a proposition that said if we got a direct Olympics license to put our name on garments carrying the Olympic logo, we would locate a permanent production facility in a minority neighborhood to bring permanent jobs to the city," he says.

Terry says this proposition gave his company the additional strength it needed to become the first minority-owned firm to receive a direct Olympic license for the Summer Games. The agreement also opened up opportunities for other licensing agreements, including a sublicense for woven apparel for Champion Products, which is owned by the Sara Lee Corporation.

Today, Terry's consumer-oriented licensed apparel accounts for 20% of his total revenue.

RIDE THE TECHNOLOGY WAVE

Savvy black-owned businesses realize that in order to do business in the 21st century they must ride the technology wave. "Capital alone isn't enough to operate a successful business," says Michael Fields, president of the Fields Group, a management consulting firm in Pleasanton, California. "You have to have great leadership and the appropriate market but, most importantly, in this decade and going into the future, you need to have technology."

When Fields started out in 1992, he developed an acquisition strategy in which he procured small corporations specializing in computer software. Of course, not every start-up can assume this type of strategy as a way to implement technology into its operation, but Fields says minority business owners can start by simply learning the dynamics of the World Wide Web.

A recent study by the National Federation of Independent Business, the nation's largest small business advocacy group representing over 600,000 small enterprises, indicates that while 77% of small businesses report having computers, only about 40% of those firms are online.

Utilizing technology successfully will allow black businesses to service customers more effectively, increase their research capabilities (e.g., access information about competitors) and provide immediate information specific to their industries. It can also expand their market and competitive reach, as well as improve their overall business process.

MBDA's Webber says corporate suppliers, in particular, must become computer savvy. "Because not only are federal sector purchasers moving everything into the electronic arena, but so are the private sector companies. So if you're going to be a supplier for Walt Disney, MCI or any of these other Fortune 1,000 corporations, you're going to have to be linked into their purchasing system so that you can communicate purchase orders and invoice them electronically," he says. "Using technology is not something people are going to have a choice about in the future."

TREADING FOREIGN TERRITORY: THE GLOBAL MARKETPLACE

The global marketplace is ripe with opportunities for small black businesses, but fear of the unknown is keeping some African American entrepreneurs at bay. "The misconception is that only the large Fortune 500 companies need to think about global issues," says Kathryn D. Leary, president and CEO of the Leary Group Inc. an international marketing and trade company in West New York, New Jersey. "But it's important that black entrepreneurs realize the possibilities that exist for us in the international arena," she says.

Leary assists large and small American companies in trying to market their products/services in foreign countries. She has helped ice cream giant Ben & Jerry's and cosmetic manufacturer Estee Lauder market their products in the Japanese marketplace.

Doing business globally can create a competitive edge for black businesses, particularly since minority firms have a unique advantage over majority-owned companies. "One of our greatest skills is coping with being outside of a larger culture, and it's a skill that serves us well when we go into foreign countries," says Leary. "We can quickly acclimate ourselves and develop strategies to fit in."

But how black businesses position themselves at the start can make or break fortunes. To successfully do business globally, black entrepreneurs must first know the product or service they wish to import or export. They must research and understand their chosen global market (e.g., be aware of the issues, legalities, taxes and other aspects unique to the country), be open to the culture and its challenges and exercise patience. (see "Ship It," May 1997.)

Leary says black businesses needn't be overwhelmed by the notion that the global marketplace is an expensive proposition. Exercising this strategy can begin by simply talking to those familiar with working overseas. "For example, if you're interested in going into the Japanese market, build your network with the movers and hakers in the Japan Society and make yourself familiar with what's going on," says Leary.

Leary suggests that small black businesses take part in trade missions to learn about the international arena and to gauge what opportunities exist overseas. The National Minority Business Council, a minority business advocacy group in New York, is planning a trade mission to South Africa, March 19-29, 1998. For more information, call the NMBC at 212 573-2385, ext. 3.

"The bottom line is that we can compete going into the 21st century," says Barnes. "But we must ask ourselves, do we see ourselves as being successful and are we willing to support other black-owned businesses? If so, the future can be bright. It's really up to us."