EthnicMajority

There are always a few bad apples in any organization or program, and minority business programs are no exception. Take for example Wallace Construction in Rhode Island.

According to a story in the Providence Journal, Wallace was certified as a minority owned business and eligible to participate in federally-funded transportation projects that targeted contracting/subcontracting a portion of the business with minority owned businesses. Christina Rosciti, the daughter of a principal in a much larger construction firm, purchased a 49% interest in Wallace apparently for the sole purpose of using it as a front to keep more of the business in the family.

All was going swimmingly until the founder Wallace (an African American male) died, and the authorities began to question the firm’s minority status. In order to qualify for the federal minority owned business program (and most state and local programs), firms must be majority owned AND controlled by minorities. After the founder’s widow assumed the title of President, the firm had its minority status reinstated.

The reinstatement occurred in spite of several disturbing facts. Neither the founder’s widow nor Rosciti had any previous executive management experience. Rosciti had not paid taxes in years and clearly lacked the financial resources to buy her equity stake in Wallace, which was not a successful business until becoming the beneficiary of millions of dollars of business from Rosciti’s family businesses. There was also evidence that 15 employees were employed by both Wallace and Rosciti’s companies.

Minority business programs are intended to give legitimate companies opportunities to compete and grow. If a majority company acquires a significant interest in a minority owned company, brings in its own people, and funnels business to it, the minority owner becomes nothing more than a front for the majority owners. These fronts give both the program and the legitimate minority owned companies a bad name, and should be aggressively investigated and banned from the program.

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Small Business Administration (SBA) loans should be easier to get (theoretically) in the future. According to the Associated Press, the SBA has eliminated fees for its 7a and 504 small business loans. In addition, $15 billion in TARP money will be used to buy current SBA loans from the banks, thereby freeing up capital that can be used for new SBA loans.

The TARP program, which stands for Troubled Asset Relief Program, has gotten a nasty reputation as a bank bailout program funded by the taxpayers. Although there was the expectation that TARP funds would be used to loosen credit to make new loans, the reality is that most recipients have used the funding to shore up liquidity and protect against loan losses.

Perhaps new program changes increasing the amount of each loan the government will guarantee from 75-80% to 90% will help. If the lenders have less risk, they should be willing to make more loans.

For more details, see the Congressional Research Report.

Ethnicmajority Business page.