Is Minority Owned Business Certification Worth It? Probably.
This is the third and final post in our series on certification for diverse business owners. We began with LGBT certification, followed by certification for women-owned businesses, and are capping it off with minority owned business certification. While the hurdle of certification-related paperwork is high for both LGBT- and women-owned businesses, and the process requires a certain amount of hustle, it was pretty cut and dried. Minority owned business certification, however, means navigating a certification process specifically for government contracts more rigorous than that for either LGBT- or women-owned businesses. The good news is that getting a minority owned business certification for corporate contracts is no more burdensome than it is for LGBT- or women-owned businesses.
Given that state of affairs, let’s start with certification for corporate contracts and work our way up to the more complicated process for government contracts, after a quick look at the (more or less) current state of minority-owned businesses.
Minority-owned business in the US
Minority business owners, for the purposes of certification and census-taking, include African-Americans, Latino, Pacific Islander, Asian, and Native American owners as well. The most accurate and current data on minority-owned businesses comes from the US Census Bureau, which, while detailed, is unfortunately from 2012, the last year a study was conducted. Still, according to these statistics, it’s clear that the environment for minority-owned businesses has improved significantly, even in the last ten years.
The US Census estimates that in 2010, there were about 27.9 million small businesses in the country. According to a contemporaneous Pew Research study, of minority-owned businesses, “about 29 percent of firms were owned by blacks or Asians and about 12 percent were owned by Hispanics.” As of 2012, there were 8 million minority-owned businesses in the US. Going back just five years to 2007, that number was 5.8 million; that’s a 38.1 percent increase! Coupled with this big jump in the number of businesses is their increase in revenue. Over the same period, minority-owned business revenue grew from $1 trillion to $1.4 trillion, a 34.7 percent increase. That’s almost on a par with the growth in the number of businesses.
While it’s clear that minority-owned businesses are growing, there remain significant barriers to capital for minorities. In a recent report on CNBC, an economist at the SBA Office of Advocacy said, “There’s empirical evidence that [minorities] have been disproportionately denied access to capital when they apply for it.” That bias particularly affects Hispanics and African-Americans.
Minority owned business certification attempts to bridge this gap in access to capital, while also positioning minority business owners to be considered for government and corporate contracts earmarked for minority-owned businesses. Business can apply for both corporate and government certifications or just one.
Minority Business Enterprise Certification for corporate contracts
Many minority businesses opt for the nationally recognized Minority Business Enterprise (MBE) Certification, which is solely for private sector and corporate contracts.
One of the largest nationally-recognized providers of Minority Business Enterprise Certification is the National Minority Supplier Development Council (NMSDC). The NMSDC’s mission is to connect minority-owned businesses with corporate opportunities and to consistently work for the advancement of minority-owned businesses. Through MBE certification, the NMSDC has gathered over 12,000 minority businesses into their network and connected them with over 1,750 corporate members.
The NMSDC does charge for certification. For businesses with less than $1 million in revenue, it’s generally about $300, but cost varies by region. Still, the cost of certification is well worth it if your business is looking to provide corporate clients with goods or services. Additionally, certified businesses have access to a network of fellow MBEs. If this all sounds good to you, contact your NMSDC regional affiliate and get your application underway. Here’s what that process will look like:
Applying for MBE Certification
The general requirements for MBE certification are:
- Minorities must own and control at least 51.0 percent of the business
- Minority owner(s) must serve as President or CEO (if both positions exist)
- Minority owner(s) must be active in daily management
- Minority owner(s) must be a U.S. citizen or legal resident
- Minority owner(s) must have the ownership and officer position for at least 6 months
The benefits of MBE certification include access to corporate contracts through the NMSDC’s 1,750 partners, exclusive networking events, mentoring services, and business opportunity fairs. And, the NMSDC has 23 regional affiliates with whom local MBEs can work.
Government contracts: The challenge for minority businesses
What all diversity certifications, for LGBT-, women-, and minority-owned businesses, have in common is something called a “means-test” which basically requires applicants to prove they are indeed diverse. While women and LGBTQ business owners have overcome many of the barriers to certification through the creation of large national advocacy groups, minority-owned businesses have not fared as well with their national advocacy networks. Much of this has to do with the more-heterogenous definition of “minority” along ethnic and racial identity in comparison to gender or sexual identities, at least for the purposes of certification.
As a result, the Small Business Administration (SBA) process for minority owned business certification is a much more rigorous process for certification than that for either women-owned or LGBT-owned businesses. Minority business owners must prove their disadvantage, submit tax information, and in some cases even submit spousal financial records. It’s disappointing that the process for minority owned business certification is more difficult than certification for women and LGBT businesses; hopefully the process will be streamlined in the near future.
Minority Owned Business Certification for government
When it comes to minority owned business certification for government contracts, the means-test and other requirements are more stringent than for other socially disadvantaged business owners. However, with diligence and an incredible amount of patience with bureaucracy, certification can be yours.
Even the name of the Federal government’s certification is daunting: the 8(a) Business Development Program. The 8(a) Program is “a business assistance program for small disadvantaged businesses” that “offers a broad scope of assistance to firms that are owned and controlled at least 51 percent by socially and economically disadvantaged individuals.” According to the SBA, the 8(a) Program is “an essential instrument for helping socially and economically disadvantaged entrepreneurs gain access to the economic mainstream of American society.”
Certification through the 8(a) Program is a great opportunity for a minority-owned business; the benefits are robust and include a nine-year program, with four years of developmental support and five of transitional support. The standout benefits for the 8(a) program include:
- Participants can receive sole-source contracts, with a ceiling of $4 million for goods and services and $6.5 million for manufacturing.
- 8(a) firms are also able to form joint ventures and teams to bid on contracts. This enhances the ability of 8(a) firms to perform larger prime contracts and overcome the effects of contract bundling, the combining of two or more contracts together into one large contract.
- 8(a) firms also have access to the Mentor-Protégé Program which helps new 8(a) companies learn the ropes from other, more experienced businesses.
SBA 8(a) Certification Requirements
The following are the basic criteria you’ll want to be sure you and your business meet before beginning the application process:
- The business must be majority-owned (51 percent or more) by an individual(s).
- The individual(s) must be an American citizen, by birth or naturalization.
- The business must be majority-owned (51 percent or more) and controlled/managed by socially and economically disadvantaged individual(s).
- The individual(s) controlling and managing the firm on a full-time basis must meet the SBA requirement for disadvantage by proving both social disadvantage and economic disadvantage.
- The business must be a small business.
- The business must demonstrate potential for success.
- The principals must show good character.
- Separate eligibility requirements exist for a business that is owned by American Indians, Native Alaskans, Native Hawaiians or Certified Development Companies.
About that “good character” requirement: Applicants who have had legal entanglements seem to be at risk here. The SBA will “automatically decline” applicants who “lack business integrity,” which includes “any legal issues such as indictments, guilty pleas, convictions, judgments, settlements.”
The real difficulty will likely be the extra paperwork you have to produce in order to meet the “proof of both social disadvantage and economic disadvantage.” So, what constitutes social and economic disadvantage, according to the SBA?
Social Disadvantage and Economic Disadvantage
Proving social disadvantage is less burdensome than proving economic disadvantage. The SBA defines socially disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identification as members of groups without regard to their individual qualities.” In order to demonstrate this disadvantage, the 8(a) Program makes use of what it calls “presumed groups,” that is groups who belong to presumed socially-disadvantaged backgrounds, including:
- Black Americans
- Hispanic Americans
- Native Americans
- Asian Pacific Americans
- Subcontinent Asian American
If you are a member of any of these “presumed groups,” you automatically meet the social disadvantage criterion of the SBA 8(a) Program. If, however, you identify with a disadvantaged group not listed, you will have to provide evidence of social disadvantage, which the SBA spells out here.
Once interested minority-owned businesses have established that they meet the social disadvantage criterion, the next step is proving economic disadvantage. The SBA defines economically disadvantaged individuals as “socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities.” Applicants must submit the following proof:
- Narrative statement of economic disadvantage
- Personal financial information, including tax returns and certain SBA forms
- In every case, when married, the socially disadvantaged individual must submit separate financial information to SBA for his or her spouse (including tax returns and certain SBA forms).
Yes, you have to write an essay.
If you meet both the social and economic disadvantage requirements, you are ready to move on to the actual application(!). At least there’s no application fee for the 8(a).
The 8(a) program benefits may be so compelling that minority owned business certification will be worth the lengthy and complex application process. The SBA understands that the program criteria are rigorous and to facilitate applications and ensure that there is support for business owners at every stage, the SBA makes available dedicated staff at each of their local offices. If you’re confident about tackling the application process on your own, you can access the steps to applying, or, to take advantage of one-on-one counseling and other support from the SBA, you can contact your local SBA office.
The Future of Minority-Owned Business
While minority owned business certification is available to help redress social and economic disadvantages for minority businesses, there remains work to be done. Much of it will need to be a concerted and holistic approach to advocacy for minority-owned business.
In the meantime, there is the greater small business community as a whole to support small businesses owners, regardless of race, gender, orientation, or ethnicity.