Joe Debro on racism in construction, Part 19

A study of the manpower implications of small business financing

by Joseph Debro

A 1968 book-length report, titled “A Study of the Manpower Implications of Small Business Financing: A Survey of 149 Minority and 202 Anglo-Owned Small Businesses in Oakland, California,” was sent to the Bay View by its author, Joseph Debro, prior to his death in November 2013, and his family has kindly permitted the Bay View to publish it. The survey it’s based on was conducted by the Oakland Small Business Development Center, which Debro headed, “in cooperation with the small businessmen of Oakland, supported in part by a grant, No. 91-05-67-29, from the U.S. Department of Labor, Manpower Administration, Office of Manpower, Policy, Evaluation and Research.” Project co-directors were Jack Brown and Joseph Debro, and survey coordinator was Agustin Jimenez. The Bay View is publishing the report as a series. A prolog appeared in the December 2013 Bay View, Part 1 in January 2014, Part 2 in February 2014, Part 3 in April 2014, Part 4 in May 2014, Part 5 in June 2014, Part 6 in August 2014, Part 7 in October 2014, Part 8 in November 2014, Part 9 in January 2015, Part 10 in March 2015, Part 11 in May 2015, Part 12 in October 2015, Part 13 in December 2015, Part 14 in May 2016, Part 15 in February 2017, Part 16 in March 2017, Part 17 in November 2017, Part 18 in May 2018, and this is Part 19 of the report.

Chapter IV: Operation Business Breakthrough: A study of 351 small businesses in Oakland

Slim-Jenkins-club-on-7th-St-West-Oakland, Joe Debro on racism in construction, Part 19, Local News & Views
Black musicians weren’t allowed to play in downtown Oakland, so they made their home on Seventh Street, the heart of Black West Oakland, when Oakland was a chocolate city. A historian writes: “(T)he place to be was Slim Jenkin’s, the most renowned club on the West Coast. It attracted a mixed clientele and the hottest names in jazz and blues like Nat King Cole, B.B. King, Charles Brown, The Ink Spots, Aretha Franklin, Duke Ellington and Sarah Vaughan. Lines would bend around the corner, while taxis zipped in and out filled with people waiting to listen to Jenkin’s next big act.”

“The Negro economy is essentially an isolated economy. It may be likened to a small economic area set off within the interior of the general economic system of the nation, surrounded by towering walls of racial segregation and discrimination. Inward through the small portals in this wall, which form the openings to and from the outer world, pass long lines of imports – merchandise, equipment, supplies and even a little capital – but outward moves a slender line of exports, chiefly wage labor and a large share of the profits of Negro business.

“Such a concept of an isolated Negro economy, of course, is at variance with the fundamental economics of the human race, the long trend of which has been in the direction of co-operation with, not isolation from, the racial groups. This imprisoned economy, confined within the artificial barriers of race, uses unorthodox methods and ideas to counter the limitations with which it is confronted. One of these is the practice, deliberate or otherwise, of catering principally to members of one race.

“Restricted patronage does not permit the enterprises owned and operated by Negroes to capitalize on the recognized advantages of normal commercial expansion. It tends to stifle business ingenuity and imagination because it limits the variety of needs and demands to those of one racial group – a race that is kept in a lower bracket of purchasing power largely because of these limitations.”

This lengthy quotation from Pierce (1947:31) is equally applicable to Mexican American entrepreneurs throughout the Southwest, and finds no exception in Oakland. Pierce pointed out that in 1939 the Negro consumer spent an average of only two dollars per person per year for food from Negro-run groceries and markets (1947:32).

Today the Negro grocer, faced with severe competition from supermarkets, is not much better off. The plight of the Negro or Mexican American restauranteur, cleaner, barber or shoe repair man is the same as that of the grocer. These lines of business, along with others currently identified with Negroes, such as second hand stores, used clothing and furniture stores, filling stations, beauty parlors and taverns, all have survival problems related to management and financing.

Management difficulties have been discussed at some length in a number of publications, including Pierce (1947), the excellent SBA-sponsored study, “The First Two Years” (1961), and the Peralta Junior College District’s “Small Business Survey” (1965). The difficulties of financing minority businesses have received less attention, but Pierce’s and Foley’s contributions, among others, merit discussion.

Management problems frequently emerge for many small businessmen because they usually are independent, self-confident and tough-minded regardless of their knowledge or ignorance of the general principles of business. As a consequence, they are skeptical of outside assistance, and are generally unwilling to accept counsel from anyone in an academic position.

The Peralta Junior College Study noted that many Oakland small businessmen were unable to recognize their major problems, preferring to blame lack of success on factors outside the operations of the firm, such as severe competition, unfair taxes or general economic conditions, rather than owning up to some shortcoming of the business itself. There is all too often a lack of long-range planning for the business, and of necessity decisions are made only under conditions of crisis.

Record keeping is indispensable to survival for any business; nonetheless, Pierce and the Peralta Junior College study found that very few small scale entrepreneurs kept adequate records and that they were unaware of the advantages of a good accounting system. Oakland’s small businessmen made little effort to recruit and train competent employees, and many proprietors complained that their employees were not dependable, lacked industriousness, were not loyal and were unwilling to accept responsibility – all excuses for lack of success.

Management problems frequently emerge for many small businessmen because they usually are independent, self-confident and tough-minded regardless of their knowledge or ignorance of the general principles of business.

Owners tended to hire poorly qualified employees at low wages with the (mistaken) desire to keep expenses to a minimum. Highly competent employees were viewed as potential competitors. Some managers attempted to keep training and income levels of their employees to a bare minimum with the mistaken belief that such personnel would not leave and would be eternally loyal to the company. In reality, low wages and little training undoubtedly result in high personnel turnover and inefficiency.

The Peralta study of minority businessmen uncovered additional difficulties. The authors noted that a lack of knowledge of business English was a handicap for Latin businessmen. They noted that the typical minority-owned and operated business is a neighborhood enterprise, started with little cash and only a small amount of equipment and merchandise. It employs fewer than six persons and is engaged in retail trade or services.

Minority businessmen usually lack training and experience. They do not have ready access to sources of business information and financial counseling. Among Negroes, parents tend to discourage their children from pursuing business careers, preferring instead to aim for the professions or the civil services (Peralta Junior College District, 1965:48). The Peralta report continues (1965: 48-9):

“There exists among some minority businessmen a sort of ‘ghetto psychology.’ This means that for many reasons it is easier and safer to remain within certain racial and economic confines. Due to past experience, the fear of competing against Caucasian-operated businesses has imposed a certain paralyzing effect which is characterized by an unwillingness to take risks. In addition, ghetto business offers an opportunity for intra-racial exploitation. Some businessmen who cater exclusively to minority customers offer low quality products at high prices coupled with poor service. They rely on the theory that customers will return either because they do not know any better or because of racial loyalty.

“Those minority businessmen who rely on racial loyalty to retain their customers while failing to compete on the basis of prices, quality and service are facing a dwindling market. As economic and social barriers continue to crumble, more and more minority shoppers are flocking to those firms which offer a wide selection of quality products at competitive prices. Moreover, an increasing number of large Caucasian owned and operated firms are actively seeking minority business.”

Minority businessmen usually lack training and experience. They do not have ready access to sources of business information and financial counseling.

In addition to problems of management, minority entrepreneurs are faced with a severe impediment – that of acquiring adequate capital to begin or to continue in business. Pierce, in a study of 3,866 Negro businesses in 12 Eastern and Southern cities concluded that Negroes usually started businesses on money saved from earnings, thus accounting for the fact that they generally engaged in very small endeavors.

In his survey, 86.3 percent started businesses out of earnings, the median amount being $500. Some 4.8 percent of Pierce’s sample acquired initial capital from relatives, the median being $586. Only 3.3 percent were able to obtain funds from banks, the median loan amount being $500; 4.4 percent of the Negro businesses acquired their initial capital through the sale of stock, the median amounting to $1,000 (1947: 38-9) .

Opening-day-of-1st-Everett-Jones-Bar-B-Q-92nd-St-Oakland-1973-web-300x236, Joe Debro on racism in construction, Part 19, Local News & Views
This is opening day of the first Everett & Jones’ Bar-B-Q in Oakland in 1973. It was on 92nd Street. A favorite gathering place where the food is always delicious, Everett & Jones has survived and thrived for 45 years in Oakland, an enviable record not often achieved by a Black business.

A frequent explanation given for Negroes not acquiring more business funds from banks is that of racial discrimination by bankers. Foley (1966:109-10) summarizes this situation by quoting from a typical Philadelphia Negro businessman:

“Local bankers have not treated Negro businessmen fairly. Most of the time they are willing to lend money only after you have been able to obtain money from some other source. Most of the time they disregard a good credit experience they have had with you prior to the attempt to obtain a significant loan to promote or improve your business.”

Foley also pointed out that prejudice was not the only reason for which Negroes were denied access to capital from banks. Banks practice another, more subtle form of discrimination in lending money. Consumer loans are, on the whole, readily available to Negroes, whereas commercial loans are difficult to obtain.

The banker knows that consumer loans are one of the most profitable endeavors in the banking industry. When the banker extends credit, the conditions appear extremely favorable to the consumer, who is beguiled by the low monthly payments.

In actuality, he will be paying severalfold for the commodity, depending upon the interest rate and the time period. The bank seldom risks loss of its investment, for it can repossess the merchandise if payments are not made. (A further elaboration of consumer financing is to be found in Hillel Black’s “Buy Now, Pay Later.”)

The Negro consumer is further disadvantaged because of his unstable economic situation. Faced with the problem of being overburdened with payments and of having insufficient money during slack seasons of the year, he is forced to seek additional financial assistance in order to keep the merchandise he is buying on time.

In addition to problems of management, minority entrepreneurs are faced with a severe impediment – that of acquiring adequate capital to begin or to continue in business.

Thus, for example, a man may find that he has, in addition to subsistence costs, $200 to $300 in monthly payments for his car and appliances. He asks the bank or finance company to “consolidate” these debts, to make the monthly payments lower.

What he does not perceive is that both an increase in the interest rate and an extension of payments over a longer period of time increase the total outlay of money for the commodities. The net effect of all this over-extension by buying on credit, if the consumer is also a Negro small businessman, is that he has ruined his possibilities of obtaining financing for his business.

The bank sees this businessman as a poor credit risk, unable to meet his financial obligations. The banker’s initial considerations in granting commercial loans involve the borrower’s record of adequate management of consumer loans – his honesty and ability to repay, his assets and amount of indebtedness, the source, amount, permanency and adequacy of his income. Another criterion adds to the Negro businessman’s difficulties in obtaining a commercial loan.

Commercial loans depend upon the management ability of the borrower (Foley’s italics) as well. Management ability is difficult to assess, but is most generally determined by analysis of a firm’s financial records. Since many Negroes and Mexican Americans do not keep adequate records because of lack of training in bookkeeping or accounting, there is little probability that they can obtain commercial loans. Inadequate bookkeeping is not unique to Negroes, for fully 60 percent of all businesses in Philadelphia, regardless of race, had no borrowing facility from a bank or finance company (Foley, 1966:112).

Since Negroes (and by extension Mexican Americans and other disadvantaged minority groups) have had little access to the conventional channels for upgrading basic business skills through course work, through holding responsible positions in Anglo-controlled firms, or through working with successful parents or other forebearers, there is little likelihood that commercial loans will become available as long as the prevailing attitudes continue.

Foley did not point out, however, that many Negroes are still the object of banking discrimination, even when adequate bookkeeping and accounting records were kept. One case from Texas will suffice to elucidate.

Mr. W. S. Willis, reporting on the Texas Knights of Pythias in 1924, told of a Negro college needing $20,000 to finish a dormitory. The college had property valued at $150,000, but local banks would not lend the money needed for improvements.

“Though there was a great religious denomination behind this institution, though it owned property valued at $150,000, was splendidly located, there was not a single banking institution in the state that would advance them the $20,000 needed. At the same time the various fraternal organizations of Texas had nearly a million dollars on deposit in these banks, drawing about 4 percent interest per annum in the average daily balances and was being loaned to white customers in due process of business. The Knights of Pythias at that time had about $100,000 cash surplus on hand. We were approached for the loan, which we readily made at 8 percent interest per annum, the legal rate in Texas, taking a first mortgage lien on the entire plant in the institution.” (National Negro Business League, 1924:40).

The Philadelphia and Texas picture of Negro commercial financing is typical of the nation as a whole. Data from Oakland reveals that minority businesses in this city are almost entirely restricted to the Flatlands neighborhoods and to a principally limited minority, poverty-stricken clientele.

Given the milieu of political and economic instability, as well as cultural deterioration, it is no wonder that ghetto businesses in Oakland have little survival potential. Because the incidence of crime is higher in the ghettoes, insurance rates against burglary, vandalism and damage are higher. Because ghetto residents are more transient than those in middle class communities, employees stay less time with any given concern, and because their educational and training background is more irregular, their skills as employees are lower.

Given the milieu of political and economic instability, as well as cultural deterioration, it is no wonder that ghetto businesses in Oakland have little survival potential.

Minority entrepreneurs dwelling within the ghettoes tend to reflect the neighborhood from which they come. As a result, they tend to be less experienced than their middle class counterparts. They are certainly, as a group, less educated, less able to manage their businesses in terms of profitability and longevity. And perhaps most important, minority businessmen have not become diversified to meet the new needs of a rapidly changing society.

Most ghetto businesses require only small amounts of capital to be initiated; entrepreneurs have been conditioned to ask little outside help; merchants specialize in personal services or products which are demanded by residents of the slums, i.e., groceries, liquor, inexpensive restaurants, filling stations, used car lots, automotive repair shops, minor appliance stores, second hand furniture and clothing stores, variety stores, barber and beauty shops, cleaning establishments, other small retail stores, local real estate agencies, pawnbrokers and loan companies.

For the most part, all of the aforementioned business lines are owned and operated by ghetto dwellers with the exception of pawnbrokers, loan companies and liquor stores, which are most frequently established by Anglos, who provide the substitute for banks as merchants of consumer and small business capital. These types of businesses inherently require fewer employees than those which are opening up as a result of more sophisticated demands placed upon our society – the data processing concerns, the supermarkets, the light manufacturing firms with highly trained administrative staffs, the consulting firms, the small electronics firms and so on. The Target Areas are conspicuous by their absence of these latter categories.

Those members of the minority community who manage to acquire advanced educational degrees or other types of specialized training soon filter out of the ghettoes, leaving as a residue those able to pursue traditional enterprises only. Like the prevailing situation in underdeveloped countries, this defection of talent constitutes a brain drain. This process has been an ever-increasing phenomenon since big industry and government have mushroomed in their search for technical and managerial personnel during the last 20 years.

Joseph Debro, born Nov. 27, 1928, in Jackson, Miss., and a pillar of Oakland until his death on Nov. 5, 2013, was president of Bay Area Black Builders and of Transbay Builders, a general engineering contractor, former director of the Oakland Small Business Development Center and the California Office of Small Business, co-founder of the National Association of Minority Contractors and a bio-chemical engineer.