Native American Entrepreneurship

First Nations Development Institite completed a survey on Native American entrepreneurship recently. Here are the major conclusions of the survey, which suggest to me that the problems and obstacles facing Native entrepreneurs are no different than those facing other minority businesses--only more severe in some cases.

First, it was concluded that access to financing and limited business expertise and experience are significant barriers for Native entrepreneurs. It is impossible to delink inadequate financing from inadequate business expertise. Prospective Native entrepreneurs often lack the necessary business knowledge and skills to successfully start businesses. There is an issue of “readiness” both in being able to access lending capital, as well as in understanding and building a successful business operation. Any successful funding model will combine both. The combination may be through separate organizations coordinating services or may be one organization offering both credit and training. Either way, the research indicates that non-financial support needs to be provided throughout the process — from the development of the business plan through its implementation — in order to improve the chance for the client’s success.

Second, the results of the survey show that providing non-financial services (training and technical assistance) are major programmatic expenses for these organizations, with 43 percent of total operating expenses spent on training and technical assistance. In addition, estimating the technical cost recovery indicates that the ability to recover these costs from income generated internally is limited. The program directors acknowledged that technical assistance is critical in building borrower readiness and should be provided throughout the process — from the development of the business plan through to the operation of the business. The median cost of training per training client was $1059, with the range varying from $125 to $5714. Existing comparison data available by the Aspen Institute (Aspen Institute, 2001) found that the median cost of training per client was $949. The percentage of total income generated internally is the proportion of total income reported by the organization that was generated from either the proceeds of the lending operations or the training activities. Across all organizations the proportion of earned income was 56 percent, but this percentage was significantly higher among those organizations that provided financial services only (95 percent) and negligible among those programs providing training only (1 percent). This finding is consistent with the fact that organizations engaged in lending are able to generate revenues, while those providing only nonfinancial
services are dependent on outside funding. The majority of the programs providing non-financial services only were approximately 80 percent dependent on federal funding sources for their operations. The findings of the research indicate that the costs of providing nonfinancial services to prospective entrepreneurs often exceed the revenues generated from lending. Some form of subsidization of these services is required.

Third, the results of the research indicate that the lending programs may experience inadequate cash flow. However, it is important to note that the problem of inadequate cash flow is more complex. The costs of operating a lending program can be broken down into lending capital, a loss reserve, and general administration and overhead. Before technical assistance is even considered, a lending program needs very cheap capital (at about 0 to 3 percent), a net balance percentage for equity for loss reserve and general staff salaries and administration. It is difficult to find investors that will capitalize the loan pool with low interest, long-term notes. Funders expect utilization rates that drive up the loan loss reserve levels required to mitigate risk. To fund general operations and loss reserves from cash flow requires a higher volume of lending than most reservations can absorb.

These conditions exist for even the most streamlined lending program. In most cases the income generated from lending operations cannot fund all of the above costs. Typically it has not even been sufficient to maintain the lending pool, and raising capital to re-lend has been a significant challenge for most programs. The inadequate cash flow that these programs experience, however, may only partially be due to the high costs of nonfinancial services. Instead it reflects the limited scale and scope of these operations. The research found that lending programs are often small with limited lending histories. Without a sufficient volume of loans, these programs cannot generate enough revenues to sustain their lending pool, and keep costs down. Community-based loan funds or micro-loan programs are vehicles through which funding has been provided. However, the research found that there is remarkable diversity in how these programs are structured. In addition, the recent establishment of some of these funds, with limited institutional histories, implies less that this model for financing may be unsatisfactory and more that there is a need to achieve organizational maturity.

Download the survey report here.