Did you know that there are loans specifically targeting minority-owned businesses?
Minority-owned businesses are those with 50% or more ownership by an African American (or Black), Hispanic, Native-American, Asian, or another racial or ethnic group. Some important facts about minority small business owners when it comes to getting business funding:
- Minorities make up 40% of the US population but only 29% of small business owners (that’s 9.2 million out of the 30.7 million total small businesses in the U.S.)
- Minority-owned businesses are more likely than White-owned businesses to have been denied credit, less likely to receive the full amount requested, and more likely to be discouraged from applying for credit for their business needs.
- Asian-, Black-, and Hispanic-owned businesses were all more likely to be high credit risks than those owned by white business owners.
Clearly, there are some tremendous barriers facing minority small business owners. At the same time, they are starting and growing businesses despite those challenges. The number of Latino businesses has grown 34% over the past 10 years, faster than any other demographic.
And according to the State of Women-Owned Businesses Report by American Express, while the number of women-owned businesses grew 58% from 2007 to 2018, firms owned by women of color grew at nearly three times that rate (163%).
How to Qualify for a Minority Business Loan
The word “minority” is rarely used in conjunction with small business financing. Instead, organizations (such as the SBA) and financial institutions will use the phrase “disadvantaged” or specifically lay out certain minority groups that are eligible for preferential consideration when going through the lending process. While there may be some independent groups that offer funding for specific minorities, the bulk of what’s available is less specific.
Most federal programs define socially disadvantaged individuals as those who have “been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.” This disadvantage must have been outside their control.
Members of designated groups may also qualify. This presumes that the following people groups are socially disadvantaged: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. The SBA can, at its own discretion, designate other groups.
Some federal, state, and private programs have turned their focus to helping create a more level playing field for disadvantaged groups who want to start a business. Among those efforts is increased access to small business loans.
Minority Business Loans, Crowdfunding, and Grants
Here we’ll explain some financing sources and programs focused on assisting those from disadvantaged groups.
Community Development Financial Institutions (CDFIs)
One source of capital that is often under-utilized by minority entrepreneurs is funding from Community Development Financial Institutions (CDFIs). CDFIs are community-based organizations that expand economic opportunity— often in low-income or rural areas, as well as underserved communities— and provide financial products and services to individuals and businesses who are often underserved by traditional financial institutions. They may include banks, credit unions, loan funds, and venture capital funds.
A recent report published through the SBA Office of Advocacy pointed out that business owners may be overlooking this vital source of financing:
“Given the mission of many community development financial institutions (CDFIs) and credit unions, it is not a surprise that minority-owned businesses were more likely to apply to these sources than their non-minority counterparts. However, the relatively low rates of applications to these sources are surprising. For example, while they were two to three times more likely to apply to CDFIs than White-owned firms, only 11 percent of Black-owned firms and seven percent of Hispanic-owned firms applied to this kind of financial institution.”
As just one example of the programs funded through the Community Development Financial Institutions Fund, the Native Initiatives program increases opportunities for Native American, Alaska Native, and Native Hawaiian communities to access credit, capital, and financial services by creating or expanding CDFIs primarily serving those communities.
There are over 1100 certified CDFIs around the U.S. That means you may have to do some research to find the lender and program that’s right for your business.
Microloans are smaller loans, but they can still be quite powerful. CDFIs often offer microloans, and their programs may include loans for disadvantaged businesses, including minority-owned businesses. There is no specific cap on the loan amount for a microloan; they often range from a few thousand dollars to up to $250,000.
The SBA microloan program may also be an option. Open to anyone, regardless of ethnicity or race, successful applicants will have access to smaller loans of up to $50,000 with interest rates that rival the best business credit cards. Borrowers have up to six years to repay the loan, and the qualifications are a bit less rigorous than those for the larger term loans. There is also no need for collateral for the smallest loan amounts. Startups may qualify.
Applicants can use the money for buying equipment and supplies for their business, as well as use it for working capital. Proceeds may be used to refinance debt in some instances. However, these loans can’t be used for real estate, or to improve part of the business owners’ home—even if it’s being used for business purposes. Unlike some other types of funding, microloans may be obtained by “non-citizens lawfully in the U.S. with an appropriate work visa.”
SBA 7(a) Loans
The Small Business Administration has been a leader in the efforts to provide affordable and flexible funding to a variety of businesses, including those owned by minorities. The SBA generally guarantees loans made by approved lenders. (The only loans the SBA makes itself are Disaster Loans, including Economic Injury Disaster Loans.)
Its most notable loan program, the SBA 7(a) loan stands out from the rest as one that provides a significant amount of funding to qualified businesses with favorable repayment terms.
There are a number of requirements for an SBA 7(a) loan, but generally, these loans require acceptable credit and a demonstrated ability to pay back the loan.
Proceeds are often used as working capital loans but may also be used to purchase equipment or even to refinance debt in certain circumstances. The maximum loan amount is $5 million.
The SBA Express loan is similar but offers loans up to $350,000 and faster decisions. These are among the most sought-after funding options available through the SBA and are available to all qualified U.S. business owners—not just minorities.
It should be noted that the SBA is working hard to increase access to capital for minority business owners, but there is still room for improvement. Data from SBA 7(a) loans in 2020 shows that 23% of 7(a) loan proceeds went to Asian-owned businesses, 6% to Hispanic-owned businesses, and only 3% to Black-owned businesses, and 1% to American Indian-owned businesses. White-owned businesses received 47% of the loans and the other 21% were undetermined.
Lines of Credit
Another financing option to consider that isn’t limited to minority-owned businesses is a line of credit. Rather than receiving a lump sum of cash all up front, a line of credit approves you for a certain amount of money, which you can take out and pay back as you like.
And unlike small business loans, a line of credit can be active for years. As long as you pay back the funds, you can borrow them again and again.
There are many platforms that allow entrepreneurs to raise money via online crowdfunding, and not all types have to be paid back. Crowdfunding falls into four main categories:
- Rewards: Raise money by offering a physical reward (product sample, for example) to those who back the campaign. Kickstarter is a popular platform for this type of crowdfunding but there are many others.
- Loans: Borrow money and repay it. A notable example is Kiva, which offers 0% loans of up to $15,000 to businesses impacted by COVID-19. In a 2020 campaign, Kiva raised almost $500,000 dollars in loans to 60+ small business owners in just three days, and from those funds, 62% of the businesses supported were led by people of color and 23% were Black-owned businesses.
- Equity: Equity crowdfunding lets you secure investors in your business from anywhere, and they don’t have to be professional, accredited investors.
- Donations: The GoFundMe platform is the best-known of these platforms and has been instrumental in helping businesses raise money during the COVID-19 crisis.
The key to successful crowdfunding is to develop a compelling marketing message and ideally to find a way to reach fans and supporters, whether that is through an email list, social media platforms, etc.
Small Business Grants for Minorities
Small business grants do not have to be repaid. For that reason alone, many small business owners are eager to try to get one. Grants come from a variety of sources including federal, state, or local governments, as well as private grants.
For government grants, you can start your search at Grants.gov, where you can search federal grant opportunities for free. But there are two important things you must understand:
- Don’t expect to find free money to start a business. “The federal government does not offer grants or ‘free money’ to individuals to start a business or cover personal expenses, contrary to what you might see online or in the media.” That’s a quote from the US Government website USA.gov. However, it goes on to explain, “A grant is one of the ways the government funds ideas and projects to provide public services and stimulate the economy. Grants support critical recovery initiatives, innovative research, and many other programs.”
- Don’t expect to find federal government minority business grants specifically. Searching Grants.gov may help you identify opportunities for your business, though they may not be specifically for minority businesses. State and local government grants may be available as well, so be sure to connect with local resources for tips on searching (see more information below.)
Private grant programs are different. There may be organizations that specifically offer minority small business grants. However, if you do find one of these grants, you’ll generally see that it is very specific and offered for a limited period of time (and for a limited amount of money.) Read the eligibility requirements carefully and by all means, submit a grant application if you think you qualify. Generally, though you may find you need to cast your net wider and search a variety of private small business grants.
How to Find Minority Small Business Loans
Now let’s look at some resources and organizations that can help you prepare for applying for financing.
SBA Resource Partners
There are a number of SBA resource partners who can help you understand the financing landscape and who may be able to point you to local resources for financing including state or local grants. Connect with these organizations to get valuable assistance and insights for growing your business.
Small Business Development Centers
Small Business Development Centers (SBDCs) offer the most comprehensive small business assistance network in the United States and its territories. Small business owners and aspiring entrepreneurs can get free business consulting and at-cost training on a variety of topics.
SBDCs are hosted by leading universities, colleges, state economic development agencies, and private partners, and are funded in part by the United States Congress through a partnership with the U.S. Small Business Administration. There are nearly 1,000 local centers available to provide no-cost business consulting and low-cost training to new and existing businesses.
The nation’s largest business mentor network is SCORE. The free program matches entrepreneurs with experienced business mentors who can help with the specific struggles business owners face, from creating a business plan to finding funding. SCORE is open to all businesses, not specifically those in a minority group.
One perk of the business development program, however, is that the right match could help you learn about those opportunities that are relevant to minority business owners, including many networking options and financial advice that can lead to lending opportunities.
The Department of Commerce works with the Minority Business Development Agency (MBDA) to help minorities seek the funding they need. While they don’t give out grants directly, they do organize funding opportunities, such as grant competitions that are funded by outside investors. If you are in search of new opportunities, reaching out to them may be a good first step.
There is a whole host of resources available to tribal members found through the SBA’s Office of Native American Affairs (ONAA) and include information on the SBA 8(a) award program, loans, grants, and other empowerment programs designed to equip Native-owned businesses with the funds and support they are eligible to receive through various federal and state programs.
Local development offices will also have additional programs. Don’t discount reaching out to any local tribal business development centers for hyper-local funding info, as well.
SBA 8(a) program
While not a loan, the SBA 8(a) program works with those who identify as a disadvantaged business enterprise and pledges to award a certain number of contracts to these qualified businesses. Their goal is to award 5% of government contracts to these small companies. Qualifying businesses must be 51% owned and controlled by U.S. citizens who meet the definitions of being a disadvantaged group.
Certification is required before participation; only those who have less than $250,000 in personal net worth, an income of less than $250,000 per year, and asset value of under $4 million, and are a person of good character involved in the day-to-day operations of the business may qualify.
In addition to having access to that set-aside block of contracts, qualified SBA 8(a) businesses can receive help from a Business Opportunity Specialist who can assist with the federal contracting process. Access to the SBA’s mentoring program is also given, as well as ongoing management and technical assistance that can help develop the business. This might include training, marketing guidance, or leadership development.
Other certifications you may want to investigate, if applicable, include:
- Minority Business Enterprise (MBE)
- Disadvantaged Business Enterprise (DBE)
- Women-Owned Small Business
How to Apply for a Minority Business Loan
The first step, no matter the application, is to determine whether you qualify. Whether you’re applying for business loans for women or grants for African-American businesses, there will be a list of criteria for those who qualify.
Read through what’s required to apply, and gather your paperwork before you begin. You may be asked to provide tax returns or profit and loss statements. You’ll be asked for information about your business in the application process, including company name, industry, time in business, and revenues. You may also be asked to provide details about you and any other owners, including contact information and Social Security numbers.
What If You Have Bad Credit?
Government and economic organizations, such as the SBA, generally do not seek out applicants that are considered a high credit risk, and minority-owned businesses with a bad credit score may struggle to find business financing. It’s also much harder to find lenders willing to finance small businesses considered in the startup phase. Lenders want to see that you have a good track record and revenues to back up what will eventually be years of on-time loan payments.
If you have bad credit, there’s no question it will be more difficult to qualify for small business loan options. There’s no simple way around it, but the key is to take the steps needed to rebuild your credit as soon as possible. Here are a few steps to get started:
- Get your free personal credit reports at AnnualCreditReport.com and get free personal and business scores through Nav.
- Consider options like a secured credit card and/or a credit-builder account to help build personal credit.
- Get vendor accounts to build business credit. Many times these companies don’t check personal credit, which means you can build business credit even as you work on personal credit.
As you make on-time payments on these accounts, you can build or rebuild credit, making you a better candidate for more traditional business loans offered by lenders.
In the meantime, you may have to consider alternative means of funding, specifically those that are more credit-flexible. Credit cards, vendor financing, a cash advance, or merchant credit lines are all options that will have higher interest rates but may overlook lower credit scores. Use them to increase your business revenues while you work on your credit and you will help put your business on a more solid financial footing.
If you operate a minority-run business, finding the right financing is what can elevate your business to the next level.
This article was originally written on July 23, 2019 and updated on September 13, 2021.