Funding Options for Minority Small Business Owners

In this current economic climate, it can be tough for small business owners to find funding. Sadly, it’s even tougher for business owners who also happen to be minorities.

As of January 2016, there were 8 million firms owned by minorities, broken down into:

  • 6 million owned by black/African American
  • 273K owned by American Indian & Alaska native
  • 9 million owned by Asian
  • 3 million owned by Hispanic
  • 55K owned by Native Hawaiian & Pacific Islander

Despite the large number of minority-owned businesses, accessing working capital is more difficult than for non-minority business owners. In fact, while 8 percent of non-minority businesses received private business loans, only 5 percent of minority businesses did. And only 16 percent of non-minority business owners feel discouraged from seeking private loans compared to the 30 percent of minority business owners.

So, how can minority business owners get access to additional capital instead of relying on personal finances?

How to level the playing field for minority business funding

There are many valid reasons why minority-owned businesses need to be able to access funding. These include benefits for the business, for the surrounding community and for the economy.

  • Support minority communities

In many cases, the need for business funding is the greatest in the communities where it is the hardest to obtain. Overall, American small businesses offer almost half of all jobs for workers in the U.S. Thriving small businesses have the money to hire more people and help their neighborhood and city prosper. Minority business loans can help these small and startup companies grow.

  • Facilitate cash flow management

Most companies can’t realize a positive cash flow during their early stages of growth. Even later, a business owner might hope to make an investment in a company that will make it tougher to meet operating expenses. Access to minority loans can make sure that the company can keep their equipment in good condition or take advantage of an opportunity to buy inventory at a discount without worrying about meeting payroll.

  • Invest in the future

Many enlightened business owners hope to invest in their communities in the same way that they have invested their time and money into their business. Thriving companies usually make an effort to support local government, charities and other worthwhile causes. They do this to make their own communities better and also because they might generate goodwill with their potential and current customers. Businesses need adequate funding to manage operations, grow their companies and to help invest in their surrounding communities.

Sources of Minority Business Loans

Getting a loan approved might be challenging for a minority-owned business for multiple reasons. However, there are some sources of minority small business loans that won’t discriminate because of credit scores, owner stakes or even the neighborhood a business is located in.

It’s important for minority business owners to consider different sources of funding to figure out which ones are best for their own company and likely to approve an application. Of course, this depends upon the type of business and how long it has had its doors open.

Why minority business owners should consider all lending sources

It’s challenging for small and startup business owners to find the right sources of funding, but especially so for minority business owners. Fortunately, there are many minority business loan options and loan alternatives available when you need funds, including:

  • State and local agencies
  • Private organizations
  • Small Business Association (SBA) backed loans
  • Grants
  • …and more

Below, we’ll cover specific funding options for minority-owned businesses.

Federal funding

  • The Minority Business Development Agency (MBDA)

The Minority Business Development Agency is part of the US Department of Commerce and offers technical assistance and access to capital, contract opportunities and new markets with the purpose of fueling job growth.

On the MBDA website, there’s information about a variety of financing options for minorities including how to apply for a minority business loan, availability of grants and private equity and venture capital sourcing. The agency offers one-on-one financial counseling for minority business owners and can even help with getting documentation together for a loan application.

  • The Small Business Administration (SBA)

While the SBA doesn’t offer specific any specific minority business loan program, it’s one of the largest loan guarantors in the United States. This gives businesses the opportunity to apply to certified commercial lenders for loans backed by the government. The SBA does not offer any preferential status for any group, and as such doesn’t provide funding specific to a demographic. But, many certified lenders do have special programs to award loans to minority businesses. These loan programs include:

  • General small business loans

For general small business loans, the SBA has the 7(a) Loan Program which provides loans to businesses to assist in the acquisition, operation or expansion of an existing business. These loans have a maximum amount of $5 million.

  • Microloans

The SBA’s Microloan program loans up to $50,000 to help small businesses and some not-for-profit childcare centers expand or startup. The SBA works with designated intermediary lenders which are nonprofit community-based organizations with experience in lending, management, and technical assistance. These lenders each have their own lending and credit requirements, and some offer special programs for minority business owners.

However, SBA microloan proceeds cannot be used to pay off existing debt or to purchase real estate. The maximum payment term for an SBA microloan is six years, and the interest rates vary on the size of the microloan.

To apply for a microloan, you’ll need to work through one of the affiliated nonprofit, community-based organizations, and typically business training is one of the requirements of obtaining this type of funding.

  • SBA 8(a) Business Development Program

While not a loan program, the 8(a) program helps qualifying minority-owned businesses growth through one-to-one counseling, training workshops and management and technical guidance. The 8(a) program also gives minority businesses access to government contracting opportunities to enable them to compete in the federal marketplace.

Minority groups are presumed by the SBA to be socially and economically disadvantaged and can qualify for the 8(a) program. These groups include African Americans, Hispanic Americans, Native Americans, Asian Pacific Americans and Subcontinent Asian Americans.

Business owners who are not members for one or more of these groups can be considered for the 8(a) program if they can provide substantial evidence and documentation that shows they have been subjected to bias or discrimination and are economically disadvantaged.

Minority business owners who are interested in the 8(a) program should contact their local SBA district office.

State and local funding

It’s definitely a good idea to investigate state and local sources of funding when looking for a minority business loan. There are a variety of regionally-focused redevelopment agencies and other organizations that can help.

Operation Hope is one such organization that is helping people in low-wealth communities who want to grow businesses. Their Small Business Development program provides:

  • Business training
  • Assistance with loan packaging
  • Access to direct lenders
  • Access to SBA loan program financing
  • Access to lines of credit

Many states offer specific minority business loan programs. For example, the State of Ohio offers a Minority Direct Loan Program which provides fixed, low-interest rate loans to certified minority-owned businesses that are purchasing or improving fixed assets or creating or retaining jobs.

Eligibility for the program is determined by a number of factors including:

  • Number of jobs created or retained as a result of the state’s investment
  • Extent of participation by the business and a lender in the project
  • Demonstrated need for the funds.

The minimum amount for this loan program is $45,000 with a maximum amount being $450,000. However, the Director of the Ohio Development Services Agency may authorize a higher amount to address unique and demonstrated economic development needs.

Private lenders for minority business owners

Both community and national lending institutions offer minority business loans. These loans typically have competitive interest rates, more flexible underwriting and generally less restrictive lending options.

Traditional financers generally use the minority definitions set forth by the Equal Employment Opportunity Commission. And a minority must own and manage at least 51 percent of the business.

Most commercial banks with active small business portfolios or SBA lending programs have programs for minorities. For example, KeyBank runs a minority and women’s business enterprise program.

Other forms of funding for minorities

Minority business loans are definitely an option for minorities looking for working capital to fund their businesses. But, there are other options for acquiring cash including peer-to-peer microlending sites and non-traditional lenders of working capital.

Of course, many minorities obtain loans through friends and family and even angel investors who are willing to invest in a portion of a business in the infancy stage with the hope that they will be able to make a profit as the business grows.

Grants for Minority Business Loans

Another source of funding for small businesses is grants. These are typically more difficult to get, but there are programs just for minority business owners. It pays to do a little internet sleuthing and to check community organization websites to see what is available.

The Obama administration launched a grant program called the Small Business Innovation Research (SBIR) Small Business Technology Transfer Program (STTR) grant that is focused on providing money to businesses focused on early-stage research and development. This program has reached out to socially and economically disadvantaged firms.

Here are a few other grants to consider for your minority-owned business.

Federal grants

As part of their quest for funding, the first choice for minority business owners is to seek out grants. The belief that there are federal grants available for the startup and growth phases for small businesses is a myth. The federal government does not provide grants to businesses for startup, expansion, operational expenses or paying off debts.

However, there are federal grants available in the areas of research in the fields of medicine, scientific research, education, and technology development. Here are a few such grants.

  • Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR)

As we mentioned above, this grant is for the purpose of funding small business projects that are research related. Research areas include the U.S. Department of Health and Human Service (HHS), Centers for Disease Control and Prevention (CDC) and the Food and Drug Administration (FDA). See a full list of program descriptions and research topics allowed on their site.

  • The USDA Rural Business Enterprise Grant (RBEG) Program

The purpose of this grant is to finance the development of small and emerging businesses in rural areas. The amount of the award ranges from $10,000 to $500,000.

You can search for additional federal grants at grants.gov.

Corporate grants

  • FedEx small business grant contest

The FedEx Small Business Grant awards 10 different grants to small business owners in the following amounts: one grand prize grant of $25,000, one silver prize grant of $10,000, and eight bronze grants of $5,000. To enter, the applicants must share their business story including their motivation and plans for growth.

  • The National Association for the Self Employed (NASE) Growth Grant Program

This grant allows business owners to apply for financing for a particular business need. Each grant is worth up to $4,000. To apply, visit www.nase.org, create an account, become a member, and click on the link “apply today”. Grants are awarded on a quarterly basis.

  • Huggies MomInspired Grant Program

Grant proposals are accepted from businesses that nurture the relationship between mother and child either through a product or service. The amount of the award is $15,000 plus additional business resources for further development.

Application Tips

Applying for a grant is not a quick process. First, the application can be more than a few pages and it is normally a detailed application. Most grants have an opening date, which is the date when the grant became available for application. The deadline date is the final date you must submit your grant by. Keep in mind that the decision may take a few months.

Tips for getting a minority business loan

Whether you’ve struggled to get financing or are just thinking about getting a loan for the first time, there are some strategies that will help improve your chances of getting the funding you need.

  • Create a business plan

Writing a business plan is an important step. The business plan will act as the roadmap for your business. Be sure to provide specific information in the plan about your minority business and how it will improve the economy and your community.

  • Read through grant information thoroughly.

Once you have decided which grant you will apply for, make sure that you read through all of the information. This will ensure that you have all of your ducks in a row. Most grant synopsis’ are detailed and require a lot of specific information.

  • Keep track of the application deadline.

Obviously, it’s important that you do not miss the deadline. So be sure to apply for the grant before the deadline. A good idea would be to create a project checklist which includes dates and milestones. It’s a good idea to submit the grant before the deadline approaches.

  • Gather all of your documents.

Make sure you gather all of the documents required for the grant. Prepare a checklist, check, and double check. You do not want to have any missing documents that may cause the grant to be denied.

  • Find the right lender.

Your local SBA district office will be able to provide you with information on community and national banks. They also have a wealth of information on loan eligibility and application requirements.

  • Learn how to prepare a loan proposal.

When applying for a minority business loan, you should expect to prepare a loan proposal. This document includes personal and business financials that document your net worth, sales projects and general information about your business. Be prepared to provide:

  • Financial statements
  • Certifications and licenses
  • Loan application history
  • Income tax returns
  • Resumes
  • Business history
  • Leasing information
  • Personal background statements

The SBA offers free online courses on how to complete a loan proposal and other application requirements, as well as loan application checklists to help guide you through the process.

  • Be persistent.

Many business owners, whether they are minorities or not, are turned down for business loans. Don’t get discouraged. If you do get turned down, don’t let this be a deterrent. However, make sure you find out the specifics on why your application was denied. This can help you as you move forward with future applications.

  • Decide on a minority business loan.

Once you’ve decided that you’re ready to apply for a minority business loan or other types of financing for your business, it’s smart to determine exactly how much you’ll be needing and how you will allocate the funds. To preserve your credit and improve your chances to successfully grow your business, it makes good sense to borrow only as much as you need and to have a very clear strategy for how you will pay back what you have borrowed.

As well, you will want to completely understand the terms of the loan. This includes amortization (the monthly payments of principal and interest), whether or not there is a balloon payment or prepayment penalty, and any collateral that will be required to secure the loan. Being a savvy lender who knows the options and understands the terms is the best way to successfully borrow money.

As a minority business owner, you have a tremendous amount of lending options and resources to help you on your path to entrepreneurial success. Whether you choose a government program, a commercial bank, or other private lending sources, you can obtain the funds you need to achieve your goals. The first step is to ask for help and acquire information from a variety of sources to find out what is right for you and your business. With the facts in hand, you’ll be able to get the right loan and leverage the funds to the best of your ability.

If you’re in need of alternative funding, consider a small business loan from online lenders. Some online application processes can be completed in minutes, so you can quickly access the funds you need to grow.

Additional Resources

There are many resources including business membership alliances, networking groups and specific industry organizations that provide specific assistance for minorities business owners.

The National Minority Supplier Development Council (NMSDC) is one such organization that was created to provide increased procurement and business opportunities for minority businesses of all sizes. The Council advances business opportunities to minority-owned businesses and connects them with corporate members.

The NMSDC has regional councils across the country and 1,750 corporate members that include most of the largest top publicly-owned, privately-owned and foreign-owned companies, as well as hospitals, universities and other buying institutions. The Regional Councils have matched more than 12,000 minority-owned businesses with member corporations which want to purchase their products and services.

Other resources for advice include:

There are also professional organizations (for example, the Alliance of Business Leaders and Entrepreneurs in Chicago) that help connect black entrepreneurs with decision makers at corporations.

Despite the fact that there are an abundant number of minority-owned businesses (and many more growing), funding is often harder to attain for these businesses. Fortunately, grants, resources and online lending help bridge this gap for minority-owned businesses to grow and succeed.

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