FILLING THE HUMAN CAPITAL GAP IN ECONOMIC DEVELOPMENT

Based in Oconomowoc, Wisconsin, Qubain specializes in raising capital for small business development. Prior to joining Allied Capital, Qubain was affiliated with a Mellon Bank investment advisory firm. She has also worked on community development efforts in New York City, Washington, D.C., and the Middle East. She is a graduate of Bryn Mawr College, where she earned a bachelor’s degree in political science. In this column, Qubain discusses her belief that small business financing should be an integral part of national redevelopment efforts. [Unless otherwise stated, “small business” will refer to businesses located in economically disadvantaged areas.]

Small business can drive the economic development process by creating wealth and jobs, and therefore produce an income flow to economically disadvantaged areas. Consequently, national redevelopment efforts should focus on stimulating small businesses. Small business development, however, requires the expertise of individuals from sectors not traditionally active in the redevelopment process —the nonbank financial sector and corporate America.

SMALL BUSINESS DEVELOPMENT MODEL

In terms of obtaining equity and debt capital, small businesses located in the suburbs or owned by higher-income individuals have two major advantages over their inner-city counterparts. First, they are often part of an informal mentoring network that includes experienced professionals who can provide guidance— particularly during the start-up phase. Second, they have easier access to capital from friends and family, and from the equity in their homes. Equity is critical in lowering perceived default risk, thus enabling start-ups to obtain traditional bank financing.

Conversely, businesses located in the inner city, many of which are minority- or women-owned, typically have difficulty securing capital. Residents of economically distressed areas often do not have friends and family who can raise substantial amounts of equity. At the same time, their home values do not generally appreciate enough to obtain necessary start-up capital from home equity loans. Filling the capital gap requires the active involvement of corporate America, venture capitalists, and not-for-profit organizations.

Corporate America can support small businesses in two ways: by purchasing products and services from targeted firms; and by mentoring start-up companies, which will pro- vide a methodology for successfully running a business. From a lender’s perspective, corporate mentoring can reduce the perceived risk of financing small businesses because the mentor offers contracts and expertise in the same way a franchiser provides a systematic, successful formula for running a franchise.

Mentoring increases a small firm’s ability to meet lenders’ underwriting criteria, thus attracting the participation of venture capitalists, who can supply market-rate equity and quasi-equity capital so desperately needed by small businesses.

Not-for-profit organizations can also support small businesses by managing their human resources needs. These organizations understand neighborhood residents, their skill levels, and their training needs. Not-for-profits can provide manpower and train neighborhood residents to prepare them for work.

FACILITATING THE MODEL

If we are to facilitate a small business development model and the necessary partnerships, we must:

Close the cultural gap between the private sector and government and not-for-profit agencies;
Educate economic development advocates on the positive impact that financiers and corporations can have on neighborhoods;
Secure the long-term involvement of corporations, lenders, and institu- tional investors by structuring development efforts to benefit all parties. Transactions must be engineered to provide investors with market rate, fiducially acceptable returns; and corporations with solid, profitable business opportunities;
Identify mid-level managers in corporations who are interested in leading the community development effort within their institution. Unfortunately, there is no systematic way of finding these people, as they do not have a particular title or belong to a certain department; rather, they must have the personal desire and creative vision to become active in their community.

In conclusion, if we are to serve the needs of small business, we must fill the capital gaps—both monetary and human. By identifying and partnering with the right people and institutions, we will stimulate the creation of financial products for small business and stir the financial sector to become more active in small business financing.

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