Funding accessibility for minority entrepreneurs: an empirical analysis

Abstract

Purpose – The purpose of this paper is to examine what factors affect entrepreneurs with minority background to access public financial institutions’ funds in initiating and developing their new ventures. Following the signal theory, social capital theory and the liability of newness perspective, the effect of demographic characteristics of entrepreneurs were investigated and the differences between ethnic minority and non-minority entrepreneurs’ access to financial institutions’ funds were compared. Design/methodology/approach – This paper draws on the data of 2,119 high technology and non-high technology firms from the Kauffman foundation survey. The empirical analysis was focussed on the characteristics of entrepreneurs of these new ventures and the nature of the financial arrangements of these businesses to test the theoretical framework. Findings – This study provides empirical evidence that ethnic minority entrepreneurs are less likely to access loans from financial institutions than non-minority entrepreneurs. Moreover, the education level of ethnic minority entrepreneurs was identified as a key factor to help them to access financial institutions’ funds. Research limitations/implications – The main limitation is that the data did not allow us to explore the actual reasons for observed correlations between entrepreneurs’ ethnic background, demographic characteristics and their use of financial institutions’ funds. Practical implications – Since the constraints in the access to financial resources greatly impact the success of new ventures, this study indicates through what factors minority entrepreneurs can increase their credence to get more financial support. In addition, it is also helpful for the loan managers of financial institutions to make rational decisions when they assess the application of minority entrepreneurs. Originality/value – This study enriches the understanding of minority entrepreneurs in the entrepreneurship literature. First, it aggregates major minorities in the USA and strives to identify systematically different financing behaviors of these minority entrepreneurs; second, it provides empirical investigation on the correlation of ethnic minority background and access to funds from financial institutions and the moderating effect of a set of demographic factors.