Small Business Loans for Minority Entrepreneurs
A minority-owned business is a business whose owner is Asian, Black, Hispanic, or Native American. According to the U.S. Census, the number of minority-owned small businesses in the U.S. is growing rapidly. In fact, the number of minority-owned SMBs grew to 11.1 million in 2017 – a 79 percent increase between 2007 and 2017.
However, despite the fast pace at which minority-owned businesses are increasing, minority business owners do not yet get equal access and opportunities, particularly when it comes to securing financing.
A 2016 survey conducted by Biz2Credit on more than 1,500 minority business owners revealed that 36.3% admitted that lack of adequate funding was their biggest challenge. In 2016, the U.S. Department of Commerce commissioned the study Barriers and Factors Affecting Minority Business Enterprises: A Review of Existing Disparity Studies to expose the disparity and impact discrimination has on MBEs. The study reveals that MBEs typically do not obtain contracts that are as high in number and dollar value.
Historically, minority business owners have lower credit scores compared to non-minority business owners, and this has been a barrier for many when applying for financing. Fortunately, because the U.S. is becoming increasingly more diverse and inclusive, so are the opportunities for minority entrepreneurs to gain access to adequate funding for their businesses.
In this guide, we will look at funding options for minority business owners such as Small Business Administration (SBA) loans, minority business loans, and grants.
Small Business Administration (SBA) Loans for Minorities
The SBA investigated why women- and minority-owned businesses have limited access to external funds. The SBA report titled “Access to Capital among Young Firms, Minority-owned Firms, Women-owned Firms, and High-tech Firms” states that when it comes to traditional bank loans, “the minority group made up of Black and Hispanic business owners was significantly less likely to have their loan applications approved, compared with their White counterparts.”
Fortunately, the SBA has several lending programs ideal for small businesses particularly those that are minority-owned:
SBA 7(a) loans: As of March 2017, 26% of all SBA 7a loans have been awarded to minorities for the 2017 fiscal year. Loans amounts are between $30,000 and $5,000,000. The business’s annual gross revenue requirement is a minimum of $120,000. Another requirement is a minimum credit score of 680.
SBA 8(a) Business Development program: Each year, the SBA 8(a) Business Development program’s goal is to award at least 5% of federal contracting dollars to small disadvantaged businesses. One of the eligibility requirements is that the business must be at least 51% owned and controlled by U.S. citizens who are “socially and economically disadvantaged” such as those who face cultural biases.
SBA Micro loan program: The SBA offers micro loans of up to $50,000. Interest rates are between 8 and 13%; maximum repayment term allowed is six years.
SBA Community Advantage loans: This SBA’s Community Advantage program is for businesses located in underserved communities that need $250,000 or less.Community Advantage loans come with the same 7(a) loan guarantee of 85% for loans up to $150,000 and 75% for loans $150,000 and up.
Lending Programs for Minority Business Owners
Business Center for New Americans: The BCNA works with immigrants, women, and other minority business owners specifically. They provide small business loans and micro loans to business owners who are unable to obtain loans from traditional lenders due to a lack of business history or bad credit. Loans range from $500 to $50,000 with repayment periods of 6 months to 3 years. Interest rates are 8.25% fixed for loans of $500 - $9,999 and 10% fixed for loans of $10,000 - $50,000.
Minority and Women Revolving Loan Trust Fund Program: The Empire State Development’s program was created to offer low-cost financial assistance to minority and owned businesses who aren’t able to access to traditional financial services. The program provides fixed asset loans of up to $50,000 and working capital loans up to $35,000 for businesses located in New York.
Union Bank’s Business Diversity Lending Program: Union Bank offers minority small business loans to minority business owners whose business have annual sales that do not exceed $20 million whose borrowing needs are $2.5 million or less.
Business Consortium Fund loan: The BCF loan program is available to minority-owned businesses certified by the National Minority Supplier Development Council (NMSDC). The NMSDC’s BCF Direct Loan Program gives lines of credit, term loans, and working capital loans. Qualified applicants can borrow $75,000 - $500,000.
Resources and Grants for Minority Small Businesses
Minority Business Development Agency (MBDA): The MBDA is part of the Department of Commerce that aims to help minority business owners or minorities who wish to become entrepreneurs. The agency itself doesn’t give grants, but it does have many grant funding programs designed to help minority businesses by supporting the creation of jobs and helping them obtain contracts and capital. Each year, the MBDA organizes grant competitions funded by angel investors.
Operation HOPE Small Business Development Program: HOPE’s Small Business Development Program aims to empower aspiring entrepreneurs with training. The knowledge and skills they acquire will help them navigate their way to small business ownership and help them understand what they can do to overcome funding challenges.
First Nations Development Institute Grant: First Nations has a grant-making program for Native American, Alaska Native, and Native Hawaiian communities which provides financial and technical resources. The program is dedicated to the development of projects and businesses for these communities.
National Minority Business Council: The NMBC provides business assistance to minority- and women-owned business enterprises (MWBE).
To apply for a minority small business grant, you need to get certified as a minority-owned business by the Minority Business Enterprise (MBE). The minimum eligibility criteria for MBE are as follows as stated by the MBE:
A for-profit business located in the United States;
51% owned, operated, capitalized and controlled by a member(s) of a presumed group identified below, who is the top executive officer responsible for managing daily operations with a technical expertise (experience) in the firm’s primary business expertise;
Legal residents (green cards) are accepted by most MBE programs administered by a city, county and state; however, the NMSDC require U.S. Citizenship (no exceptions).
Member(s) of a presumed group includes:
Black American: any Black racial group originating in Africa;
Hispanic: origins in Mexico, Puerto Rico, Cuba, Central and South American, or other Spanish or Portuguese cultures;
Native American: a Native of Alaska or Hawaii, or certified member of a federal or state recognized Indian Tribe;
Asian Pacific: origins in the Pacific Islands, China, Taiwan, Korea, Japan, Thailand, Burma, Cambodia, Vietnam, Malaysia, Indonesia, Singapore or Philippines;
Subcontinent Asian: origins in India, Pakistan, Bangladesh, Bhutan, the Maldives Islands, Nepal or Sri Lanka.
Why Consider Alternative Lenders
While there are loans and grants specifically for minority businesses, many business owners don’t have time to wait for these options. Many of these programs and loans require lengthy applications and paperwork, as well as requiring a high FICO score or collateral. In some cases, you’d only be eligible for financing if you have a business history of at least two years.
There are other, faster, financing options out there, though. Alternative lenders such as Fundbox take a different approach.
With Fundbox, you can be eligible for up to a credit line between $1,000 to $100,000. There is no paperwork to get started. You don’t need to pledge collateral just in case you are unable to pay back your business line of credit loan. There are no minimum credit score requirements or monthly income requirements. As long as your business has been operating for at least three months, and you have a business bank account, you can be considered for credit.
At Fundbox, we assess business information to give small businesses access to credit by reviewing their accounting or bank transaction data. We use AI and machine learning, alongside traditional credit metrics, to make more nuanced credit decisions. We believe that, in many cases, this helps remove bias from the system, giving underserved groups more equitable access to the funding they need and deserve.
Increasingly, modern fin tech firms are using AI to make the lending process faster and potentially, fairer. We're proud to be part of that new wave, using technology to improve the industry for everyone.