Access to funding is often the difference between growing a successful business and closing up shop. And while there are a lot of funding options out there for entrepreneurs in general, minorities often need to go the extra mile to acquire that capital.
A study by the Department of Commerce’s Minority Business Development Agency looked at decades of data and found that “limited financial, human, and social capital, as well as racial discrimination, were primarily responsible for the disparities between non-minority and minority businesses.” The same agency found that minority-owned businesses were three times more likely to be denied for a loan than non-minority owned companies.
In addition, when loans are approved, minorities get less money than non-minority business owners. MBDA found that for businesses with more than $500,000 in gross revenue, minorities were getting an average loan amount of $149,000. Their non-minority counterparts were receiving an average loan amount of $310,000. The same report found that minorities were stuck with higher interest rates, too.
Despite those challenges, there are still a lot of options for minority entrepreneurs. But knowing where to look is a major piece of the puzzle. Whether you need money to get your franchise started or additional capital to buy more inventory, this guide can help you navigate through the challenges and secure the financing your business needs.
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Small business loan options
There are several government lending programs and non-governmental organizations you should look into if you want a business loan option that prizes the work of minority entrepreneurs.
SBA 7(a) and 8(a) Development Program
A 7(a) loan through the Small Business Administration, a federal entity created to foster small business growth, is not exclusively for minority-owned organizations. That being said, minority business owners have a better chance of qualifying for these loans if they participate in SBA’s 8(a) Business Development program.
The 8(a) program helps “socially and economically disadvantaged entrepreneurs gain access to the economic mainstream of American society.” The 8(a) program can also help minority business owners gain access to the capital they need in case they don’t qualify for SBA’s 7(a) loan. Once accepted into the program, organizations hold membership for nine years. Check here for eligibility requirements.
SBA Community Advantage Loans
Also run by the SBA, The Community Advantage program offers financial assistance for businesses based in underserved markets and communities. The program is a good option for small business owners who are looking for a large amount of capital but do not qualify for traditional financing. Loans are offered up to $250,000. Take a look at your local SBA district office for more information on the program.
SBA Microloan Program
For minority-owned businesses that have smaller capital needs, the SBA Microloan program offers federal loans of $50,000 or less. These microloans are made by third-party lenders—usually nonprofit community-based organizations that also offer professional assistance to business owners. Check out your local SBA district office to find microloan options.
Accion U.S. Network
While these loans aren’t created specifically for minority business owners, they do target low- to moderate-income businesses that don’t usually qualify for traditional lending. This makes Accion a great option for minority business owners and new entrepreneurs. The nonprofit-lending network has organizations in 50 states offering loans from $200 up to $300,000.
Union Bank
For business owners with large capital needs, Union Bank offers financing for up to $2.5 million. The program is under the Equal Credit Opportunity Act, and is “designed to empower woman-, minority- and veteran-owned businesses,” according to its website. The business loans and lines of credit are exclusively for minority-owned businesses and owners must meet the bank’s designation of “minority,” which is the same as the EEOC’s.
Community Development Financial Institutions (CDFI)
CDFIs offer financial assistance to minority and economically distressed communities. Below are a few programs to consider:
- Native Initiatives is a CDFI that grants access to credit, capital and financial services to help Native Communities thrive and grow.
- The Business Center for New Americans is a CDFI that offers loans from $5,000 to $50,000 specifically to immigrants, refugees, women and other minority entrepreneurs. The organization is also focused on business owners who were turned down by a bank for a number of reasons that include the borrower’s credit score being too low or that the requested amount is too small. The best part: there is no minimum credit score required to qualify for a loan.
There are 950 CDFIs nationwide that are certified by the CDFI Fund, which is a part of the U.S. Department of the Treasury. Take a look at the CDFI Fund’s database to search for businesses in your area that have received awards.
Related: Top Small Business Grants for Women and Minorities
Consider starting at the local level
Because many of the programs that provide funding to minority-owned businesses operate on the state or local level, getting to know the agencies in your community is a smart first step.
How else would you learn that the program WESST helps political refugees in New Mexico start businesses? You would also never know that the National African-American Small Business Loan Fund offers loans ranging from $35,000 to $250,000 to African American-owned small businesses in New York City, Chicago and Los Angeles.
Starting at the local level also helps you get to know the terrain better, and find people who can help you. Those people include mentors, advisors, lawyers and accountants. These working relationships can help you find lenders who provide loans to minorities in your industry. Get in touch with your local Chamber of Commerce or talk to a mentor to learn what local opportunities are available.
Don’t rule out business grants
Few things beat free, especially free money. Most small business grants are difficult to obtain due to the competition, but the following resources are worth exploring due to the fact that they are, well, free.
- Grants.gov provides information to more than 1,000 programs across 26 federal agencies that can help minority business owners tailor their search.
- The USDA Rural Business Enterprise Grant Program offers free money ranging from $10,000 to $500,000 for rural businesses. The money can be used for a number of purposes, including purchasing equipment, and acquisition and development of real estate. To qualify, the business must employ no more than 50 employees and have less than $1 million in annual gross revenue. The business must also operate in an eligible rural area. Check out the USDA’s Rural Development state offices for more information on eligibility and the application.
- Partnerships for Opportunity, Workforce and Economic Revitalization Initiative (POWER) was started by President Obama to help businesses in communities that were hurt by changes in the power and coal industries. The initiative is congressionally funded and has awarded $94 million in 114 investments since its start. Take a look here for more information.
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Increase your chances of securing funding
Once you find a funding option that suits you, increase your chances of securing a loan or grant by having a business plan and demonstrating that you have a strong management team. Many of the programs mentioned above offers assistance in these areas along with financing. The MBDA recommends that minority business owners show their competitive advantage in the industry to potential lenders by having the following ready:
- A record of profitable performance
- A history of financial statements
- Proof of positive net worth
The guide above can help you get started, but it’s not an exhaustive list. There are other options like finding an investor who believes in minority-owned businesses. But you won’t know this until you are active in your community. Get to know other entrepreneurs and small business owners in your city and state. Become a familiar face in the local government centers. Go to local networking events and professional development trainings. That way, you’ll be the first to know of new opportunities.
The above list isn’t exhaustive, but these options are the best place to start. All that’s left is for you to go out and get the capital you need to start or grow your business.
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Eric Goldschein, Khareem Sudlow
