The Definitive Guide to Minority-Owned Business Loans

There are enough obstacles involved in the launching of a small business without the entrepreneur’s ethnicity factoring into the equation.

While a business owner’s ethnic background should never be an impediment to financial success, the reality is that, in some cases, minorities who start their own company sometimes do have to deal with roadblocks that might be more pronounced than they would be for white entrepreneurs.

Without even considering the unfortunate possibility of bias, some minority business owners might have a more limited banking history or insufficient credit established, and those two things alone could make qualifying for financing more difficult.

There are, however, solutions to this conundrum that can make small business funding more easily attainable for entrepreneurs who are minorities, or any business owner who might come from a less privileged background.

A business that is at least 51% owned and operated by people of specific ethnicities is considered a minority-owned company. The classification may vary slightly from state to state. In New York, Black, Hispanic, Asian-Pacific, Asian-Indian Subcontinent, Native American, or Alaskan Native entrepreneurs are considered to be minorities.

The unfortunate truth is that some banks do not have the same approval rates for minority business owners as they do for white applicants, however, according to a 2019 study by the Federal Reserve, online lenders approved loan requests from minorities at a similar rate as they did for white applicants.

What are some favorable funding options for minorities who own a small business?

Business Lines of Credit

When a lender provides pre-approved funding with a maximum credit limit, that is known as a business line of credit. If the borrower–in this case, the minority business owner–is approved for this line of credit, funds can be accessed whenever they are needed until the established credit limit has been reached.

Because the borrower is only paying interest on the loan amounts that he or she withdraws, a business line of credit can be an advantage for business owners who are uncertain of the amount of funding they actually will require, or when they might need it.

The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other types of loans. How costly that might actually turn out to be is heavily dependent on the amount of funds the entrepreneur ends up using.

If a minority entrepreneur needs to establish a favorable credit history, a business line of credit could help him or her do that.

Small Business Administration (SBA) Loans

A government agency that provides support for entrepreneurs, the United States Small Business Administration (SBA) backs minority business loans issued through their lending partners to help lower financing rates for business owners. The SBA also can help minority entrepreneurs to qualify for loans.

Financing a startup through the SBA usually means a larger selection of loan sizes, repayment terms that are lengthier, and interest rates that are not exorbitant. Other means of short-term funding usually don’t offer annual percentage rates as low as SBA loans.

Approval also will depend heavily on the applicant’s business history and credit score. But if you are willing to deal with all the red tape that goes with applying for an SBA loan, the upside is markedly lower financing rates and generous lengths of time to repay the loan than is the case with other loan options the minority business owner might be exploring.

According to 2016 data from the Small Business Association, SBA loans are most frequently approved for the following types of businesses:

Restaurants (full and limited service)
Medical offices
Beauty salons
Gas stations (with convenience stores)
General contractors
Landscaping services
Trucking/logistics

Term Loans

When a bank or online lender approves a borrower for an up-front single payment with the understanding that the borrower will repay the total amount of the loan, along with interest and other fees, via monthly installments, that is what is known as a term loan. The amount of the loan is repaid over a period of time that is established at the time of the finance agreement.

Banks and online lenders both are able to provide loan options for business financing, but term loans can be a challenge to secure. They may involve a lengthy, arduous application process without a high rate of approval. Applying for a term loan in the online marketplace rather than in person at a bank is another option the minority business owner might consider.

Like SBA loans, term loans are also desirable products. You’ll want to come in with a strong personal and business credit history to improve your chances for approval and a lower interest rate on any term loan. A term loan requires collateral and a demanding approval process to reduce the risk to the lender that the borrower may default on the loan or fail to make payments. Term loans usually do not carry any penalties provided they are paid off ahead of schedule.

Short-Term Loans

Another type of term loan that small business owners who are minorities may wish to consider is a short-term loan. This type of financing entails a shorter borrowing period, with a repayment term that is a year-and-a-half or sometimes even less. Payments on short-term loans are required frequently–sometimes once a week, or, in some cases, every day.

Although the credit requirements are not as strict for short-term loans as they are for regular term loans, the frequent payment schedule may be burdensome for someone in a new business without a lot of cash flow at that moment. But an owner’s business needs may call for a loan in a hurry, and in that case, he still might opt for a short-term loan because it may be easier to secure than other forms of financing.

Choosing to apply for a short-term loan comes with the expectation that you might have to repay it over just a couple of weeks. If you have an installment loan, you have up to six months to pay it off. A short-term loan application is completed online and normally takes a matter of minutes to be approved.

Rapid processing is one of the main attractions of a short-term online loan. Sometimes approval could even come the same day the application is placed. In addition to fast approval, other advantages of short-term online loans for working capital include paying less interest, the chance to improve a bad credit rating, and flexibility.

Online Loans

Non-traditional online lenders might have requirements that are less stringent for financing approval than traditional brick-and-mortar banks, and this can be a good fit for some minority business owners. Their focus could tend to be more on a business’ cash flow than the credit of the company’s owner. According to the Federal Reserve, minority applicants have a higher likelihood of getting approved for a loan from an online source, although the loan might cost more.

Microloans

Small loans that come from individual lenders, not from a bank or a credit union, microloans can be issued by a single individual, or they can be assembled from several lenders each contributing a given amount until the necessary funding total is achieved.

With a microloan, the lender gets interest on the loan and repayment of principal after the loan has reached its full term. Microloans come with interest rates that are above market, so some investors may be attracted by that aspect of them.

Peer-to-Peer Loans (P2P)

A loan that must be repaid with interest in a period of one to five years, a peer-to-peer loan is an option if your credit is good enough to command better rates than you’d get with a short-term loan online but is not quite good enough to qualify for an SBA loan.

Peer-to-peer (p2p) personal loans are offered directly to individuals without the intermediation of a bank or traditional financial institution. Online lending platforms fund borrowers via institutional lending partners. Also referred to as marketplace lending, peer-to-peer lending is an increasingly popular alternative to traditional lending. Borrowers and lenders can both benefit from this more-direct lending system.

In p2p lending, one party lends money to a business, with the promise of receiving a sizable return for doing so. When a business seeks a p2p loan, it accesses a website, requests a loan, and then investors are permitted to fund the loan and also share in the interest payments.

Specific financing options for minority-owned businesses

There are loans that specifically cater to minority business owners who are concerned about their eligibility for financing. These include Black-Business Loan Fund (BBLF), SBA Community Advantage Loans, Minority-Owned Business Loans, the Business Diversity Lending Program, the National African American Micro Business Loan Fund, the Business and Industry Guarantee Loan Program, Hispanic Small Business Loans, the ATNI Loan Fund, and Latino Economic Centre Loans.

In order to qualify for a BBLF loan, the applicant needs to have a minimum of 51 percent of the total value of the business, and the business should have been operational in the last two years. Collateral is not required for a BBLF loan. There are two types of loans offered by the Black Business Loan Fund; direct loans up to a maximum of $100,000, and loan guarantees that also go up to $100,000.

With an SBA Community Advantage Loan, the SBA guarantees the lender up to 85 percent of the total money borrowed. Businesses owned by minorities are eligible to apply for this type of loan.

Minority-owned Business Loans are offered by an organization called Accion that is not affiliated with the government. There are no restrictions on the kind of minority businesses than can apply to Accion for financing. These loans also come with the benefit of online workshops meant to provide business guidance.

The Business Diversity Lending Program offered by Union Bank is available to minority entrepreneurs who have a business that has been active for the last two years, who run at least 51 percent of the business, and who borrow less than $2.5 million.

The Hispanic Small Business Loans from Balboa Capital require some standard paperwork and other documents. Hispanic entrepreneurs must apply online and answer a few basic questions in a process that minimizes the number of complications and red tape for most applicants.

The SBA has come up with another solution for business owners who may be saddled with disadvantages that are not of their own doing so that it may be easier for them to get ahead with fewer obstacles in their path.

According to the U.S. Small Business Administration, the government limits competition for certain contracts to companies participating in the 8(a) Business Development program.

The 8(a) Business Development Program is an initiative designed to facilitate the ability of small business owners who are socially and economically disadvantaged to qualify for financing and to compete in the business world. Qualifying businesses can vie for contracts that are set aside specifically for members of the program. These businesses may also receive assistance from SBA experts on submitting government contract bids, connect with mentors and gain access to additional beneficial resources.

“Congress realized that small, disadvantaged businesses that were socially and economically disadvantaged were unable to compete in the open market,” said Nancy Byerly, a strategic business advisor in her series of YouTube videos on the 8(a) program. “In order to help these businesses, they created the 8(a) B.D. Program. … As long as a small business remains eligible for the program, they can stay in the program for a full nine years.”

What are the benefits of the 8(a) program?

The ability to bid on contracts set aside for minority entrepreneurs is one perk of the 8(a) Business Development Program. Access to sole-source federal government contracts (a contract in which only one vendor is available to provide an item or service) can be very lucrative, and 8(a) participants bidding for larger contracts can pool their resources to take part in collaborative bids. This can be done by making contact with bigger companies so they can combine to bid on contracts that have been set aside for small contractors. Only small businesses that have never received a government contract are permitted to participate in this program.

Qualifying for an 8(a) program

What are the qualifications for a small business to participate in the SBA’s 8(a) program?

Must be a small business
Must not have previously participated in the 8(a) program
Must be at least 51 percent owned and controlled by U.S. citizens who are socially and economically disadvantaged
Must have a personal net worth of $750K or less, adjusted gross income of $350K, or less and $6 million or less in assets

Must show good character and potential to perform on contracts