There are more than 11 million minority-owned businesses in the United States, and the figure rapidly grows each year. Yet, regardless of the entrepreneurial boom for minority groups, women, and veterans, one major factor hindering the growth of minority-owned businesses is access to capital. Minority business owners have a hard time securing the capital, and when they do, they often receive less than requested.
Fortunately, the recently introduced bipartisan legislation aims to close the financial gap between women and minority business owners. Today, there are small business loans and grants designed exclusively for minorities.
This post highlights the challenges minority business owners face, how to qualify for a minority business loan and the funding options for minority business loans.
Challenges Minority Business Owners Face
One of the significant challenges facing minority business owners is getting access to capital to finance their business operations. This is primarily because of institutional barriers, such as unconscious bias from lenders, limited banking options, and little to no credit history.
Minorities comprise 40% of the U.S. population, but only 18.7% (1.1 million) of U.S. employer businesses were minority-owned, according to census.gov. Minority business owners are less likely to receive the full loan amount they request and are more likely discouraged from applying for business credit.
The discrimination in financing among minority groups resulted in minority business loans. In this day and age, there are a wide variety of business loans that minority entrepreneurs can tap into whenever they’re in need of capital to finance their business operations.
What are Minority Business Loans?
A minority business loan is a financing solution for underserved small businesses operated by minorities. For a business to be considered minority-owned, it should be controlled and operated by at least 51% African American (Black), Native American, Hispanic, Asian, or Alaskan Native.
There’s no specific small business financing designed exclusively for minority business owners. However, these businesses can access funding through multiple providers, including SBA lenders, microlenders, and online lenders.
What Can You Use a Minority Business Loan For?
Depending on the loan size and the type you’re looking to get, you can use a minority business loan for working capital, real estate purchases, business acquisitions, and equipment financing. Some minority loans, though, can only be used for specific purposes, such as real estate purchases or rural development. Loans for minorities are available for both startups and established small businesses.
How to Qualify for Minority Business Loans
To qualify for a minority business loan program, you must certify that your business is minority-owned through the SBA. In addition, the SBA requires 51% of the business to be owned and operated by socially and economically disadvantaged individuals.
Before you apply for a minority business loan, make sure you gather your paperwork beforehand. This will help speed up the application and approval process. You may be asked to provide your tax returns, profit and loss statements, annual revenue, and other documentation.
Funding Options for Minority Business Loans
There are several financing options for minority business loans. Whether you’re a startup or an established small business in underserved communities, here’s where you can get a minority loan.
Government Programs
The federal government provides various small business loan programs that may be helpful for minority business owners depending on the intended use and industry of operation. Some of these programs include:
- SBA 7(a) Loans: The program isn’t exclusively meant for minorities, but minority business owners can access these loans. SBA 7(a) loans can be borrowed up to $5 million, and you can use them for various purposes, including working capital, equipment financing, real estate purchase, and more.
- SBA 8(a) Business Development Program: The SBA 8(a) program doesn’t offer loans. Instead, it gives small business owners, including minorities, the opportunity to win government contract bids. To qualify for the program, your business must be 51% owned by socially and economically disadvantaged people.
- Business Consortium Fund Loan: Certified by the U.S. Department of the Treasury as a CDFI, the BCF offers minority-owned businesses access to funds from $75,000 to $500,000 through their direct lending program.
- USDA Business Loans: While USDA business loans aren’t meant for designated minority business loans, minority-owned businesses in rural areas might benefit from the program. You can borrow up to $10 million, and terms differ depending on the purpose of funds.
SBA Lenders
The U.S. Small Business Administration guarantees several types of SBA loans issued by banks and select lenders. One of the most popular SBA loan programs for minority business owners is the SBA Community Advantage loans.
This loan program works to meet the financing needs of businesses in underserved markets. It encourages mission-based lenders to make loans of up to $250,000 to women entrepreneurs and other minority entrepreneurs.
By backing up most of the loan amount, the SBA tries to help small business owners who might otherwise not qualify for traditional financing, making it the best option for minority business owners.
Online Lenders
Online lenders have more flexible lending requirements compared to traditional lenders. Plus, they offer a wide variety of business financing options, including working capital, term loans, and commercial real estate.
Nonprofit Lenders and Grants
Several nonprofit lenders offer loans to small business owners, usually focusing on minority groups, women, and veterans. For instance, Accion Opportunity Fund, an international lending organization, has a loan program designed for minority business owners who might have difficulties accessing funds using traditional routes. While the program isn’t designed exclusively for minorities, you can get anywhere from $5,000 to $100,000.
There are also many small business grants that target minority-owned businesses. Unlike loans, federal grants are free money you get to finance your business operations. Before sending in your grant application, make sure you apply for a minority business enterprise (MBE) certification. To qualify for an MBE, you must prove that 51% of your business is controlled and owned by a minority group.
Community Development Financial Institutions
CDFIs are financial institutions that work with underserved businesses in rural communities. They offer financial services to entrepreneurs often underrepresented by traditional financial institutions. These institutions include banks, credit unions, loan funds, and venture capital funds.
One popular CDFI program is the Native Initiative, which offers Native Americans, Alaskan Natives, and Hawaiian communities a chance to access working capital, credit, and other financial services.
The Business Centre for Native Americans is another great example of a CDFI program. It provides various loans to minority businesses and immigrants looking for startup capital. The program is also certified by the U.S. Department of the Treasury as a CDFI.
Banks and Credit Unions
Traditionally, minorities have had difficulties getting approved for a loan through banks and credit unions. However, some financial institutions have loan programs targeted at disadvantaged entrepreneurs. For example, Union Bank and Native American Bank have such programs.
Union Bank, for example, has a minority business loan program that helps businesses that are 51% owned by minority groups, women, and veterans. The diversity lending program offers flexible financing options, including fixed-rate, secured and unsecured term loans, with repayment periods of up to seven years.
