A common thread of capitalistic and conservative thought is to encourage people, particularly poor people to start business. Many organizations and careers are devoted to this effort, charitable groups give funds to support the effort, and it seems to be as American as apple pie. I have had first hand knowledge of this effort as a volunteer for SCORE and Justine Petersen, a micro lender that promotes business lending.
I have discovered that the great majority of people starting businesses don’t have a clue as to what to do. Many times they have outsized and romantic notions of business ownership. A common theme is they can be their own boss. The reality of the situation is as follows, particularly for African American businesses located in the central city:
1. The cost of borrowing is difficult and high. Many borrowers get loans at 10% or more and have to pledge personal assets against the loan. If someone has a checkered credit history it is almost impossible.
2. There is not a significant market in the central city. Crime is also a barrier.
3. The great majority of new businesses fail.
4. It is easy for the party to end up worse off than before.
Justine Petersen is an organization that gets tons of support from the lending community to make loans to people who are outside the banking system. They charge 10% annually for this service and many of these loans fail. The Coronavirus situation has of course made things worse. They are doing a disservice to these folks who run up huge interest charges and often fail in their businesses.
Written by Paul Dribin