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Research and Analysis

Understanding the urban economic ecosystem

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Capital Availability in Inner Cities: What Role for Federal Policy?

A key driver of business success is access to financial capital. Businesses often have capital needs that are not met, especially businesses in inner cities. What role does federal policy have in ensuring access to capital for inner city businesses? Are current federal policies effective?  ICIC issued a research report exploring these questions. 

Download the full report:
Capital Availability in Inner Cities: What Role for Federal Policy?

To help readers digest the findings and how they can be used to strategize future capital policy, the report has been broken down into five Inner City Insights.  The five insights and their key takeaways are listed below. 

Framing Capital Policy for Inner Cities

  • Resolving the debate of if a capital gap still exists is critical for designing appropriate public and private sector responses to the anemic economic performance in inner cities
  • Inner city businesses are dramatically split between the “haves” and “have nots”
  • For inner city economies to thrive, they need stable, sustainable economic development institutions including capital providers

Measuring the Capital Gap

  • 29% of inner city companies are well-capitalized, having raised an average of four times the capital needed to compete in their industries
  • The other 71% of inner city companies are dramatically undercapitalized, operating with only one quarter of the capital compared to their industry peers
  • The undercapitalized firms are 50% more likely to be headed by a minority business owner

The Impact of Small Business Administration (SBA) Loan Programs in the Inner City

  • Inner cities receive dramatically more SBA loans than would be predicted based on the number of firms located there
  • In 2006, about 3.0% of all small business loans were SBA-backed, but 3.5% of inner city small business loans came with an SBA guarantee
  • Community banks, given their more modest resources compared to large banks, do more than their share of SBA lending
  • Due to fixed interest rate caps and fees —SBA-backed loans tend to be more expensive for entrepreneurs than conventional loans
  • A higher proportion of SBA-backed loans in a given area could point to signs of weakness and inefficiencies in the local capital markets

The Impact of the New Market Tax Credits (NMTC) in the Inner City

  • Inner cities receive a large share (nearly half from 2004-2008) of NMTC funding
  • Most NMTC money deployed in the inner city is used for real-estate transactions
  • Only 9% of NMTC dollars are used to finance inner city businesses
  • ICIC supports a number of proposed recommendations to increase the use of NMTC for business purposes

The Impact of Community Development Financial Institutions in the Inner City

  • The CDFI program is more successful in reaching inner cities than other targeted areas across the country
  • CDFI lending is highly concentrated--just 10 inner cities account for 82% of all CDFI lending to inner cities nationwide
  • CDFIs are effective at bringing funding to inner cities, but because of the program’s small size in terms of dollar amounts—CDFIs have only a modest impact on inner city entrepreneurs
for our monthly Inner City Insights.

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