The #1 Reason Why Yakama Children Won’t Be Able to Start Businesses

The #1 Reason Why Yakama Children Won’t Be Able to Start Businesses
June 29, 2016 Darren Maxfield
Yakama Children

Many of us across America have heard about the American Dream.  A definition of this set of ideals (Democracy, Rights, Liberty, Opportunity, and Equality) includes the opportunity for prosperity and success, the ability to start businesses, and an upward social mobility for the family and children, achieved through hard work in a society with few barriers.

When talking about economic development in America most feel that this ideal is available for all. If you work hard enough there’s nothing standing in your way of economic success.

I don’t know how many times I’ve used that saying. In the past, I’ve even asked myself why can’t Native Americans “pull themselves up by their bootstraps” to get out of the poverty that many are often mired in.

But I’ve learned a few reasons why it isn’t so simple. Sometimes there are legitimate barriers that restrict an individual’s ability to succeed economically. The playing field is not truly level for Yakama children that might want to start a business as adults.

If I was going to start my own business and needed capital to be able to do that, one of the first places I could go to would be my home. Whether or not it is advisable to use home equity to finance a small business, the reality is that home equity loans are a significant source of capital for start-up businesses. It is estimated that about 25% of small business owners use home equity loans as a source of capital. See here.

But what if the Federal government owned the land your home was built on? Could you still do that?

Any bank that loans money will usually want some form of collateral to secure their loan. They do this so that if the loan is not repaid, the bank can foreclose on the collateral and the bank is able to get their money back. A bank is not able to foreclose on property owned by the Federal government.

This is the #1 reason why Yakama children won’t be able to start a business when they grow up: they do not have access to the funds to start a business.

Since the Allotment Act in 1887 and then modified with the Indian Reorganization Act in 1934, Reservation land is owned in trust by the Federal government. Any Reservation land not deeded and owned outright by a Native American is technically owned by the Federal government (with Native Americans as beneficial owner.)

As you can imagine, if a bank will not loan you money to take out a home equity loan, it is no wonder there are not more small businesses in Native America. In addition, when the Federal government owns the property in which you live, you don’t have the ability to sell that property either.

It’s no wonder that over half of respondents to a survey had received credit from alternative financial services at significantly higher interest rates than what can be obtained with a home equity loan (First Nations Development Institute (2015). Building Assets and Building Lives: Financial Capability in Native Communities. Longmont, CO: First Nations Development Institute.)

There are systemic issues that prevent many Native Americans from “pulling themselves up by their bootstraps.” This is a significant reason why Yakama children won’t have access to the funds to start a business.

Technology has significantly altered the landscape for certain economic activities. Technology has in many cases removed obstacles that Native Americans have faced previously. No longer are the Yakama Indians limited to selling products on their low population Reservation. The online marketplace available to all businesses today is truly providing opportunities not seen before. Sacred Road has the ability to start an online marketplace to help level this playing field and improve the financial situation of this community.

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Comments (7)

  1. Jason 12 months ago

    Darren,

    You raise some good points, but land held in trust is probably tangential to the problem than the root cause.

    First, land held in trust would also be exempt from state taxes. Goods delivered to trust land would be exempt from sales tax too. Giving two advantages to the trust arrangement.

    More to the point, Native American’s are not prohibited from purchasing fee non-trust lands, some of which is even available within the reservation.

    Further, I suspect that there are programs to aid low income/ minority populations in obtaining capital for a home purchase. And that if one had an alternate residence that was not subject to foreclosure, the true risk in leveraging the value of a second home would be greatly reduced.

    Combine those factors with the government contracting opportunities that exist for minority and disadvantaged businesses, and the reward side of the risk reward equation is further improved.

    I don’t disagree that there are impediments to Native American’s starting small business, but the fact their land is in trust does not seem like the root cause of the problem that you present it as.

    • Author
      Darren Maxfield 12 months ago

      Hi Jason,

      The key issue addressed in the post is access to capital. One of the reasons for this reduced ability to access capital is limited ability to use home equity loans. There are many other factors as well.

      A higher percentage of Native American people use alternative financial services and do not have access to quality, safe, and affordable credit products. The Northwest Area Foundation and First Nations Development Institute have reported the following statistics regarding financial literacy and lack of access to capital (Building Assets and Building Lives: Financial Capability Programs in Native Communities, ©2014):
      • Nearly 60% of Native Americans who live outside of metropolitan areas live in high poverty counties.
      • Nearly 87% of Native American high school seniors in their study received a “failing” score in financial literacy (compared to 62% of all students.)
      • Over half of respondents to a survey had received credit from alternative financial services and almost 40% had taken out a payday loan.
      • Only 14% of Indian Lands located in the lower 48 states had a financial institution in the community.

      If a Native American has the beneficial use of a house on trust lands, to be forced to purchase a second home to build capital seems an extra burden. In addition, while the Yakama Nation does have large portions of deeded, non-trust held lands, many Reservations do not have large portions of non-trust held lands that would be available to purchase.

      The tax exemption issue is related to the Tribes’ status as sovereign nations rather than how the land is held in trust.

      There are government contracting opportunities for minority owned businesses. But again, capital is often needed to start those businesses.

      There are many issues that hinder small business development on Reservations. One of the major reasons is access to capital and a major reason for limited access to capital is a reduced ability to obtain home equity loans.

      • Sue Kicha 12 months ago

        Hi Darren,
        Thanks for helping to open up this conversation. I’m wondering if you could set up a program whereby private citizens could donate capital to Native Americans who qualify to receive a “loan.” Then they agree to pay back the loan in a specified time period.
        There are such programs for instance in Africa. Just a thought.

        • Author
          Darren Maxfield 12 months ago

          There are various micro-lending organizations that operate in the states. From what I know about them there is a fair amount of structure you need to have in place in the community to provide peer-to-peer accountability which helps for higher pay back rates. In addition, the loan amounts are usually higher in the states than in developing countries.

          Another idea is something called an Individual Development Account or IDAs. The participant saves money into an account and if they use those funds for a qualifying purchase (e.g., equipment, college education, purchase a home) then their funds would be matched and not treated as a loan. Those matching funds would be raised from interested invdiduals. I plan to do a blog post in the future about IDAs.

  2. Jason 12 months ago

    All those are great points, but they don’t point to lack of capital as the number one reason Native American children won’t be able to start a business.

    Lack of capital due to land being held in trust by the federal government may be a component that presents challenges to a typical business model used by non-native Americans.

    Where there are viable business opportunities, American business is pretty good at getting capital resources where it is warranted. This is evidenced by the fairly new tribally owned gas station on the Yakima reservation. Financing for casino’s has historically not been a problem even in locations where they have not proved profitable.

    On a smaller scale, it might not surprise me if a high percentage of the native population does engage in small business enterprises. Given the number of small fireworks stands and the number of independent fisherman, some measure or source of capital seems available.

    • Author
      Darren Maxfield 12 months ago

      I feel a bit like we are quibbling about the title to the blog post.

      I’m not addressing tribal level economic development projects like casino’s or gas stations. Tribes as an entity would be able to obtain financing from banks and other more traditional lending sources. I just spoke last week to the banker that provided the Yakama casino with their first loan to get the project started. Even that was difficult because the bank hadn’t worked with tribal goverments before and were unsure about the structure of the loan. It was something they had to work through.

      There are many issues that lend to difficulty in starting small businesses on Reservations: from access to capital, to generational poverty effects that often leads to minimal work ethic, to the modern welfare state to many other issues. But none of that reduces the fact that it is difficult for many Native Americans to obtain home equity loans due to the way their property is titled.

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