Guide to business loans for minority-owned businesses

The U.S. is a multiracial nation. Although its population is predominantly White, the 2020 U.S. census data shows the country is becoming more racially and ethnically diverse. According to the figures, Whites make up 57.8% of the U.S. population, while minorities (people of color identifying as Latino/Hispanic, Asian American, Black American, Native American, or mixed race) account for nearly 40%. These figures show a significant rise in the minority population from 36.3% in 2010.

An increase in cultural and social diversity is always a good thing because it fosters national equity, where each citizen gets fair and equal opportunities and rights regardless of their identity. Without delving into social-political dynamics, the minority business community could really use this equity, particularly when it comes to financial support.

Discrimination against minority-owned businesses

As of 2019, according to the 2020 Annual Business Survey (ABS), there were about 1.1 million businesses owned by minorities, making up approximately 18.7% of U.S. employer businesses (businesses with payroll employees).

Another report puts the total number of minority-owned businesses at 8 million, including non-employers (businesses with no payroll employees). It also points out that nearly all (99.9%) minority-owned businesses are small. Yet these companies manage to employ a total of 8.7 million workers and clock in an average of $1.2 million in annual sales each. These figures would probably be much higher were it not for the challenges that minorities face when running a business in the U.S.

Minority-owned SMBs contend with several obstacles, chief among which is discrimination. Businesses run by people of color are discriminated against in the marketplace, supply chains, business networks, and, most notably, in financing.

A survey conducted by all 12 Federal Reserve Banks found that businesses owned by minorities were more likely to report poor or suboptimal financial performance than White-owned businesses. Moreover, minority-owned businesses had less chance of receiving financing than their White-owned counterparts, even in cases where eligibility was not an issue. A 2021 Report on employer businesses paints the same picture of minority-owned businesses being more susceptible to financial hurdles and less likely to secure much-needed external funding.

Funding for minority-owned businesses

Minority entrepreneurs have a steeper hill to climb when seeking business financing. However, as a minority business owner, you can still get solid funding if you look in the right places. Here are three essential financial channels for minority-owned businesses:

SBA initiatives for minority-owned businesses

The Small Business Administration (SBA) was established to back all US-based small businesses, including those owned by minorities. It has various financial support solutions designed to provide minority entrepreneurs with the capital they need to launch and grow their ventures. These solutions include:

The 8(a) program is not a loan but a nine-year business development program that levels the playing field for underprivileged businesses competing for government contracts. Through this initiative, the government sets aside at least 5% of federal contracting dollars for small, socially and economically disadvantaged entrepreneurs.

8(a) aims to help eligible businesses, which include minority companies, win coveted government contracts with little to no competition. Beneficiaries can also take advantage of the SBA Mentor-Protégé program, where experienced entrepreneurs and trade experts guide them through government contracting processes and business growth.

While this may not provide hard cash, scoring government contracts can put your business in a better bargaining position for funding. For instance, you can use a government contract to quickly secure loans and other forms of financing.

This is a pilot loan program housed under the SBA 7(a) loan offering. Being a pilot program, it will only be available for a limited time — until September 30, 2024. The Community Advantage loan program was created to provide affordable and accessible financial assistance to underserved markets — start-ups, businesses operating in risky industries or communities, and businesses owned by minorities, women, or veterans.

Eligible businesses can get up to $350,000 at a 7% to 9% interest rate, with a 75% to 90% SBA guarantee, and collateral is only required for loans above $25,000. The repayment term can stretch as far as 25 years, depending on the loan type.

The Office of Native American Affairs was established to assist small businesses owned by American Indians, Alaska Natives, and Native Hawaiians in the U.S. It provides technical and financial support through entrepreneur empowerment workshops, lending and procurement programs, and business consultancy.

Minority-dedicated business funding programs

Besides the SBA, numerous government agencies, non-profit organizations, and business welfare groups offer loans, grants, and other funding solutions to underserved or disadvantaged businesses. These include:

Alternative funding for minorities

Negative bias aside, minority businesses often struggle to get financing due to their size. Small businesses, in general, have a hard time securing conventional loans via big banks and institutional lenders. Most SMBs, and by extension most minority-owned businesses, have a low net worth, light cash flow, and poor business credit, all of which undermine their eligibility for bank or institutional financing.

But the good news is that you don't need a bank to fund a minority-owned business or, indeed, any small business or start-up. Alternative lenders are quickly taking over the world of small business financing by providing funding resources that appeal to borrowers who'd otherwise be branded "non-creditworthy."

“Alternative lender” is a general term for non-bank lenders such as peer-to-peer lenders, investors, and online lenders. The beauty of alternative lenders is that they don't discriminate against businesses based on their backgrounds and rarely dwell on traditional lending requirements (credit score, business age, turnover, collateral, etc.). Plus, alternative financing allows for a lot of flexibility and variety when it comes to lending options. There’s essentially an ideal product for any financial scenario or business model.

Popular alternative loans for minority-owned businesses include:

  • Terms loans (long-term and short-term)
  • Microloans
  • Asset financing
  • Lines of credit
  • Invoice financing
  • Business credit cards
  • Merchant cash advances
  • Consolidation loans
  • Commercial real estate loans
  • Working capital loans

Where to find alternative business financing

Alternative financing is the easiest way to fund a minority-owned business or any SMB, for that matter. While grants and dedicated minority funding programs might seem attractive, qualification is never guaranteed, some are seasonal, and their processes can be lengthy and demanding.

The question is: where do you find alternative lenders? Well, that's actually the easy part. All you need is a powerful online lending service like Lendzero, which happens to be Black-owned, to engage alternative lenders and review the available funding options. Lendzero also negotiates with lenders on your behalf to ensure you get the best possible deals. Register today and start enjoying the easy, fast, zero-cost, and haggle-free way to hunt for SMB and minority-friendly funding offers.

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