This post was reviewed and updated on August 12, 2020
Minority-owned businesses are those with 50% or more ownership by an African- American (or Black), Hispanic, Native-American, Asian, or other racial or ethnic group. Some important facts about minority small business owners when it comes to getting financing:
- Minorities make up 40% of the US population but only 20% of small business owners.
- 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.
- Asian-, Black-, and Hispanic-owned businesses were all more likely to be financially constrained, compared with White-owned businesses
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 share of all new entrepreneurs who are Latino more than doubled between 1996 and 2019 according to research from the Kauffman Foundation. 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%).
Who is eligible for minority business loans?
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 are increased access to small business loans. 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 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.” Source: Minority-Owned Employer Businesses and their Credit Market Experiences in 2017.
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 (Native Communities) to access credit, capital, and financial services by creating or expanding CDFIs primarily serving those communities (Native CDFIs).
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. Here’s one example:
Business Center for New Americans
This organization started in 1998 with just three loans totaling $30,000. Today, it offers thousands of loans to refugees and qualified immigrants looking to start their own business. It is certified by the U.S. Department of the Treasury as a Community Development Financial Institution (CDFI) and by the Small Business Administration (SBA) as a SBA Microlender and Community Advantage lender.
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 (between 8 and 13%.) Borrowers have up to six years to repay the loan, and the qualifications are a bit less rigorous as 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.)
Their most notable loan program, the SBA 7(a) loan stands out from the rest as one that provides both 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 they 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 (with that limit raised to $1 million through the end of 2020) and faster decisions. These are among the most sought-after funding options available through the SBA and is 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. 2019 SBA loan data shows that 23% of 7(a) loan proceeds went to Asian-owned businesses, 7% to Hispanic-owned businesses, and only 3% to Black-owned businesses and 1% to American Indian-owned businesses. 49% went to White-owned businesses and the other 17% were undetermined.
There are many platforms that allow entrepreneurs to raise money via online platforms. They fall 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.org 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 3 days, and from those funds 62% businesses supported were led by people of color and 23% were Black-owned businesses.
- Equity: Secure investors in your business. The most time-consuming and expensive option, it can be used to raise large sums of money (currently up to $1.07 million).
- 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
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 and that may help you identify opportunities for your business. 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
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 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. These resources can best be 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. To qualify, the business must be 51 percent 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, asset value of under $4 million, and be a person of good character who is involved in the day-to-day operations of the business.
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
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 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 financing. 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 more solid financial footing.