For any business owner, sufficient access to funding can make the difference between surviving and thriving. In the U.S., minorities make up 32 percent of the population, but only 18 percent of business owners.
Minority business owners face their own set of unique obstacles when running their businesses. From access to education to equity, communication, and cultural factors, there are several systemic barriers that can create challenges for minority business owners.
A report developed by the Department of Commerce Minority Business Development Agency found that sufficient access to capital remains a key factor in limiting the establishment, expansion, and growth of minority-owned businesses. Findings from the same report showed that minority-owned businesses are less likely to receive funding and, if approved, receive smaller loans and higher interest rates than their non-minority counterparts.
Minority business owners are often faced with more institutional barriers to funding, such as limited banking options, insufficient credit history, and implicit bias. In addition, minority business owners are less likely to apply for funding due to fear of rejection. This can mean they miss out on equal funding opportunities or resources.
Understanding what financing options are available can help business owners during difficult times and times of growth. There are different programs and loans designed specifically for minority-owned businesses. These options can provide a vital source of funding to help traditionally underserved communities launch or grow an existing business.
Understanding Funding for Minority-Owned Businesses
Loans vs. grants
Loans refer to money borrowed with the expectation of paying it back (most often with interest) over a set and agreed-upon period of time. Loans are broadly available and offer flexibility in terms of eligibility requirements.
Grants offer funding with no expectation of repayment; however, they are less common than loans. Because they are few and far between, business owners can expect most grant programs to be highly competitive.
What are loans for minority-owned businesses?
These are loans that are specifically designated for businesses owned and operated by minorities, designed to increase funding access to traditionally underserved communities. There is no one-size-fits-all when it comes to minority-owned business loans. There are many options, and loans are available from a variety of different providers.
The goal of these loans is to level the playing field for minority-owned businesses and improve their chances of accessing the necessary capital to start, operate, or grow their businesses.
What you need to qualify for a minority-owned business loan
The business must be minority-owned. That usually means a business must be at least 51 percent owned or operated by a person belonging to Black, Hispanic, Native-American, Asian, or other racial or ethnic group(s).
Some federal loans and programs for minorities require your business to first apply for and obtain minority business enterprise certification from the National Minority Supplier Development Council (NMSDC).
Nonprofits and other entities that are not connected with the government also create and extend loans. Loan qualification requirements vary depending on the loan and the lender.
Many of these programs and loans require lengthy applications and paperwork, plus a high FICO (credit) score or collateral. In some cases, you’re only eligible for financing with a business history of at least two years.
Ten Minority-Owned Business Loans to Consider
If you Google ‘minority-owned business loans,’ you’ll find pages and pages of results. Seeking out the right loan for your business can be overwhelming. There are a variety of options available, but as with other types of financing, eligibility and terms vary. Some are more favorable than others. Here are some of the best minority loan options to consider:
Small Business Administration (SBA) Loans
The U.S. Small Business Administration is a federal entity created to foster small business growth.
SBA Community Advantage Loans
SBA Community Advantage (CA) loans help small businesses in underserved markets. Under this pilot program, minority-owned businesses can receive up to $250,000 with a maximum interest rate of prime plus six percent. The SBA guarantees 85 percent for loans up to $150,000, and 75 percent for loans larger than $150,000.
SBA CA loan terms vary depending on how you use the funds: Loan terms for equipment and working capital may extend up to 10 years, while those for real estate may extend up to 25 years. These loans are a decent option for new businesses, as well as those with below-average credit.
To apply for a CA loan you’ll need to contact an approved lender in your area. Approved lenders include community development corporations, SBA-authorized microloan providers, and community development financial institutions.
SBA microloans are open to all businesses, but are a good option for new minority small business owners or those seeking loans of $50,000 or less. The SBA microloan program offers up to $50,000 with seven-year maximum terms and interest rates typically ranging from 6 percent to 9 percent.
These microloans are made available through third-party lenders. To apply, you must work with an SBA-approved intermediary in your area. Approved intermediaries make all credit decisions on SBA microloans.
SBA 7(a) Loans
The 7(a) loan program is the SBA’s primary program for providing financial assistance to small businesses. The program is not designed specifically for minorities; however, a third of the 7(a) loans go to minority-owned businesses.
The interest rates on SBA 7(a) loans are some of the lowest you’ll find, allowing minority business owners to invest more profits in growth rather than paying off debt. You can qualify for up to $5 million with a repayment term of between 10 and 25 years. To apply for a 7(a) loan, you need to complete an application with an SBA lending partner, like a bank or credit union. The lender will submit your application to the SBA to receive a loan guarantee; this way, if you are unable to pay the loan, the SBA will repay the guaranteed amount to the lender.
SBA 8(a) Business Development Program
While not technically a loan, the SBA 8(a) Business Development Program helps minority-owned businesses gain access to federal contracts. Each year, the program’s goal is to award at least 5 percent of federal contracting dollars to small, underserved businesses.
This program is a valuable resource for minority small business owners who have been in business for at least two years and are interested in expanding their footprint in the federal marketplace. To qualify for this program, the business must be 51 percent owned by someone from a socially and economically underserved background.
Additionally, the applicant business owner’s personal net worth and average gross income for the last three years must be $250,000 or less, with assets valued at $4 million or less. Businesses interested in applying for 8(a) certification can take a preliminary assessment here to determine whether the 8(a) program is right for them.
While not always minority-specific, there are many nonprofit organizations that offer loans to small businesses.
The Business Consortium Fund (BCF)
The BCF is a nonprofit organization and community development financial institution (CDFI). The BCF provides financing exclusively for minority business owners.
Loans range from $100,000 to $750,000 with a maximum loan term of five years — interest rates depend on the risk analysis. To be eligible, you must certify your business as a minority business enterprise through the National Minority Supplier Development Council (NMSDC).
The Accion Opportunity Fund (AOF)
The AOF supports small businesses that advance racial, gender, and economic justice. This program offers loans from $5,000 to $100,000 and interest rates as low as 5.99 percent. AOF loans are targeted at low- to moderate-income business owners and 60 percent of AOF borrowers come from minority communities.
Kiva is a nonprofit organization and technology platform that enables crowdfunded loans for borrowers who are either financially excluded or creating social impact in their communities. Eligible business owners can qualify for up to $15,000 in no-interest financing.
Other Loan Options for Minority Small Businesses
Accompany Capital provides short-term loans up to $50,000 to minority business owners based in New York City. They offer low, fixed interest rates, but loans must be paid back within six months to three years. New businesses are eligible, and there is no minimum credit score required to qualify for these minority business loans.
The Union Bank Diversity Lending Program
This lending program offers up to $2.5 million in financing that is specifically designated for businesses that are at least 51 percent owned by women, veterans, and minority business owners. To qualify, businesses must be in operation for two years or more and annual sales cannot exceed $20 million. The program provides flexible loan types and terms; however, it’s limited to businesses operating in Arizona, California, Oregon, or Washington only.
United States Department of Agriculture business loans
The Department of Agriculture guarantees business loans for small businesses, companies, nonprofits, and other organizations located in rural communities. These loans are not tailored exclusively to minority-owned businesses, but can be a valuable option for those based in rural areas. The maximum loan amount is $10 million, and terms can differ based on how the funds are used. Interest rates are set by the lender but must fall within a maximum limit set by the USDA.
While there are loans specifically for minority businesses, many business owners do not have time to wait for these options. Many of these programs and loans require lengthy applications and paperwork, as well as a high FICO score or collateral.
If you’re interested in fast and flexible credit, explore Fundbox’s funding options, including business lines of credit and term loans. Apply today to see if you qualify.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.