Thursday, 18 March 2010

Complex problems require window-dressing and handwaving

That's the message from David Cameron's article on black Britain. He lays out the problems impressively enough. (Hey, that's opposition for you.) It's when it comes to solutions that you're left wondering just when this masterly grasp of the issue slackened off. Here's the problem:

Research has shown that almost a third of black people in England want to start their own business, compared with just 9% of the white population. However, only 4% of black people do manage to launch a startup – a level lower than any other ethnic group.

Accessing finance and advice are the key challenges for would-be black entrepreneurs. According to one study, black entrepreneurs are four times more likely to be denied a bank loan outright than white entrepreneurs, while the UK Survey of Small and Medium Enterprises shows that as many as a quarter of black entrepreneurs report problems in accessing finance.

So, we need better access to finance right? Seems pretty clear. Here's the solution:

This will include funding for a national mentoring programme for black people who want to start a business. It will provide would-be black entrepreneurs with the targeted support, advice – and, crucially, role models – they need to access finance and work for themselves. We've selected successful black entrepreneurs – people like Sam Gyimah, Wilfred Emmanuel Jones and Helen Grant – as our candidates: not in Labour-held inner city seats, but in Surrey, Wiltshire and Kent. They'll help inspire a new generation of black people to take on the world.

This is how we solve a big problem? Black entrepreneurs are being denied access to funding on a massive scale, and the answer is to have a black MP in Surrey? That's going to open the floodgates of lending?

If black people are regularly being denied access to business loans then either there is degree of institutional racism in the lending industry or black entrepreneurs are disproportionately likely to be a bad risk. Dave seems to have ruled out the first option, or indeed any suggestion that lenders may want to critically examine their practices. Well and good - let's assume for the moment that he's got a good reason for doing so, even if he hasn't shared it with us.

This leaves us with the maybe slightly uncomfortable notion that black entrepreneurs struggle to borrow money because they're objectively a bad risk, or they at least present themselves as such. Now perhaps, for those entrepreneurs who have basically sound business plans that need a little refinement, some "targeted" advice might help them fix a couple of flaws in the business plan or present it in a more persuasive way. For some proportion of the others, as for all entrepreneurs, the best advice will be, "Stop kidding yourself". But is it really likely that the reason black entrepreneurs struggle to borrow is because they're that much worse than white people at writing business plans?

I'm going to stick my neck out and say that the reason black entrepreneurs don't see a lot of bank managers thrusting cheques into their hands is that they lack collateral. And what do you know, someone who actually looked at the issue agrees with me:

Lack of collateral/location in deprived areas - Due to lack of information relating to the borrower’s creditworthiness, lenders may require borrowers to post collateral on loans which can be liquidated in the event of default (see e.g., Bester, 1985). The report highlights collateral shortages (home ownership) amongst Caribbean and Bangladeshi entrepreneurs as a possible explanation for poorer access to finance amongst these ethnic groups. The collateral issue is closely related to the greater tendency of Caribbean and Bangladeshi businesses to be located in deprived inner city areas. Deprivation may create further obstacles for EMBs through skills shortages, higher levels of crime and poorer health/access to health care.

Banks don't lend fledgling businesses money because they think the business will make money - they lend because they think the business will make money, or the bank will get the founder's house. If you don't have a house, or your parents' house, or a few spare acres of land, you're going to struggle to get the bank to trust you. And what do you know - Saying, "but I was inspired by the new MP for Farnborough" won't really cut it.

So if this is a big problem (and it must be, because Dave wouldn't be getting the state involved otherwise) it might be worth a big solution. Maybe the government could set up its own venture capital fund, making unsecured loans to "inner-city" start ups. Maybe it could guarantee the loans under some sort of scheme for guaranteeing finance for enterprise. That would probably go some way to solving our big problem - access to finance. But sadly, it wouldn't address the much more fundamental problem - that when a young, thrusting black entrepreneur looks around for inspiration at a crucial time by flicking to BBC parliament, the member for Chippenham is lily-white. And with that, ambition dies.

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