Business Loans for Minorities: Everything You Need to Know
Tue | November 2023
Minority-owned businesses succeed in the diverse American economy. In 2020, minorities owned 1 in 5 US companies. This means they made up 20% of all businesses, showing the resourcefulness and drive of minority entrepreneurs. These businesses are also important because they provide jobs for almost 10 million people and generate over $357 billion in revenue annually.
Despite making immense contributions, minority-owned companies often struggle to access business funding. Their struggle holds them back, making it harder to achieve their entrepreneurial goals and grow. However, plenty of loans and financing options are available to support minority-owned businesses like yours.
If you own a business and are a minority entrepreneur, this guide is for you. It explains the different funding options in detail. Remember, you are not alone on this journey. There are many organizations and resources available to help you succeed financially. They can help you understand your options and choose the best one for your needs.
Let's get your journey started!
Understanding Minority-Owned Businesses
According to the National Minority Supplier Development Council (NMSDC), a minority-owned business is any company at least 51% owned by a U.S. citizen who is Asian-Indian, Asian-Pacific, Black, Hispanic, or Native American.
The reason why this matters is that there are several benefits to being a minority-owned company. For example, you'll likely have access to targeted grants and funding options and could receive preferential treatment for government contracts. There are even special workshops and training programs for minority-owned companies.
Just note that you typically need a certification to qualify for these benefits. You can review our article covering how to get certified as a minority-owned business to learn how the certification process works.
Types of Business Loans for Minority-Owned Businesses
Business owners, regardless of whether they are a minority or not, have multiple funding options. Each option has advantages and disadvantages, so it's crucial to carefully consider which one best suits your business needs before moving forward.
Here's a quick look at some of the different types of business financing you may qualify for:
Traditional bank loans: These tend to have strict eligibility criteria and lengthy application processes but may offer a low cost of capital to established companies and could let you borrow more money than the alternatives.
SBA loans: SBA loans are backed by the federal government, which means they often give you favorable terms compared to fully private loans. However, eligibility criteria are strict, and you may have to wait long to get approval.
Lines of credit: Business lines of credit give you flexible funding you can pull from when needed. But they often have variable costs of capital (which can go up on you unexpectedly), and you may need extensive credit history to qualify.
Revenue-based financing lets you secure a loan and make payments based on your company's revenue. This flexibility can benefit a small business, but depending on your chosen company, you may pay a higher cost to borrow funds.
Grants: Grants are a valuable funding source for minority-owned businesses, as they do not need to be repaid. Several grant programs are available, both from the government and private organizations.
Best Business Loan Options for Minority-Owned Businesses
In the following sections, we will compare some of the best financing options available to minority-owned businesses. We will also provide information on other financing options and resources you may be eligible for, including grants and certifications.
SBA Micro Loans
SBA microloans can provide up to $50,000 in federally-backed funds. These short-term loans have a maximum repayment term of six years and are offered through intermediary institutions, which set their eligibility requirements.
You may need to provide collateral or personally guarantee the loan if you choose this option. However, you might qualify for better borrowing fees than a traditional bank loan since the government backs SBA microloans.
You can view the SBA's list of microlenders to find an institution in your state that offers this type of funding. Each funder has its application process and range of borrowing fees. Some may even have special programs or resources available to minority entrepreneurs.
Micro loans can be an excellent option for minority business owners who need funding to achieve a specific business goal in a pre-determined amount of time. For example, they can be helpful for upfront expansion costs.
Choose this loan if you need short-term funding of $50,000 or less and can qualify for a traditional loan with or without collateral.
Don't choose this loan if you want a payment plan that lasts more than six years, needs more than $50,000, or can't qualify for a traditional loan.
Community Development Financial Institutions (CDFIs)
The U.S. Department of the Treasury gives money to private institutions to help underserved communities. They do this through their Community Development Financial Institution Fund. You can get a loan from this fund through a bank or financial institution. These institutions are called CDFIs.
The CDFI Fund has programs to support minority entrepreneurs and help them get capital. They include:
Native Initiatives program for CDFIs serving Native American populations.
Small Dollar Loan Program for CDFIs offering alternatives to high-cost small-dollar loans.
The New Markets Tax Credit Program helps low-income communities with economic and community development.
The cost of borrowing from an institution in the CDFI program is very competitive. Plus, your approval odds may be higher for this type of funding than for a traditional bank loan. However, the requirements, fees, and application process can differ between CDFIs.
Choose this loan if You think you qualify for funding through a CDFI initiative and want to pay less to borrow the money you need.
Don't choose this loan if Your business doesn't operate in a way that makes you eligible for CDFI funding.
Business Consortium Fund loan
The following organization is the Business Consortium Fund. It is a nonprofit that helps business owners of color with loans and consulting. To qualify for business financing, you'll need to meet the following criteria:
Two years of business operations
A business relationship with at least one corporation
Positive future business prospects
The capacity to repay the loan
Earnings and cash flow history
Earnings and cash flow forecast
Management experience
Available collateral
If you think you're eligible, you can apply for a loan online to see if you get approved. The organization provides small loans starting at $5,000 and larger business loans up to $1 million or more.
Choose this loan if you're interested in receiving business consulting alongside a loan and believe you meet the eligibility criteria.
Don't choose this loan if you don't meet the eligibility criteria or believe another opportunity on our list better fits your needs.
Minority Business Development Agency (MBDA)
Minority entrepreneurs can also look for funding through the MBDA. This branch of the U.S. Department of Commerce is dedicated solely to the growth of businesses owned by minorities.
MBDA Centers across the U.S. can be found in communities with large minority populations. These centers offer various services to business owners, including grants and business funding.
The specific grant process and eligibility criteria vary based on the center you go to and its mission. For example, there's an MBDA Center called Accelerating Northwest Native Business Innovation that provides explicit services for Native populations. Other MBDAs focus on formerly incarcerated individuals and other population groups.
Choose this loan if there's an MBDA in your area with a mission that aligns with your business.
Don't choose this loan if there's no MBDA in your area or it doesn't serve your company's target population.
Lines of credit
Lines of credit are a useful way for minority-owned businesses to get capital. It's like having a credit card but for businesses. You can use the money whenever you need it, up to the limit the bank gives you. You might need an excellent personal credit score to get a line of credit. The bank may also request proof of your monthly business income or something valuable as collateral.
One credit option for small businesses is the Fundbox line of credit. You can get up to $150,000 and need a credit score of at least 600. Fundbox makes it easy to get the money you need. They have a simple application process; you can often get the money within a day. If you're not careful, lines of credit can lead to a lot of debt. This can make it hard for a business to manage its money and make it harder to grow or invest in new opportunities.
Choose this if you want ongoing access to capital you can use and pay off however you choose.
Don't choose this if you need a single lump sum payment instead of ongoing funding.
One Park Financial
One Park Financial supports minority business owners in obtaining the necessary funding. Our process for obtaining business funding is fast and straightforward. You can determine your eligibility in minutes and consult with our knowledgeable advisors.
You will receive the working capital you need more quickly than if you were to apply for a traditional bank loan. Our revenue-based financing program enables you to qualify for funding, even with a low credit score and no collateral.
We assess funding requests based on your business's revenue. This means you can secure the funds you need, even if you previously could not obtain approval from other sources.
To qualify, you'll need to meet just two eligibility criteria:
Your business must be open for at least three months.
You should have a sales of $7,500 or more.
You must have a business banking account.
You must not be in an active bankruptcy.
Choose this loan if you want faster funding and a more straightforward pre-qualification process or are struggling to qualify for other business loans.
Don't choose this loan if you don't meet our eligibility criteria.
Tips to secure business financing for minority-owned businesses
Choosing a business loan type is the first step in reaching your financing goals. The next one is ensuring you get approved for your business funding. Here are some tips that can help with that process:
Write a strong business plan: Some funders will ask for your business plan. Make sure yours clearly articulates how the loan funds would be used to drive growth. Even non-traditional funders prefer a solid business plan that outlines how the funds will drive growth.
Prepare accurate financial statements: You'll also need to provide financial statements. These should include profit and loss figures, balance sheets, cash flow statements, and other relevant documentation. At the least, ensure you don't have negative days in your business banking account and keep a solid average daily balance (ADBs).
Maintain a strong credit history: You don't always need good credit to get a business loan, but your odds of approval tend to be higher if you have it, and it may help you avoid needing to supply collateral.
Build relationships: Funders are more likely to loan you capital when they know and trust you. Building solid relationships with potential funders in your area now can pay dividends down the road. The best way to do so is by starting with any of the products the funders are willing to start you with so you can show them that you are a business that is worth investing in.
Leverage community resources: Many communities have local organizations and support networks for minority business owners. Tap into these to see what forms of support are available in your area.
Additional Resources and Support
Many people and institutions want minority-owned businesses to succeed and offer support to those working on that goal. Here is a list of organizations with links to their websites that can help you find support as you work toward your funding goals:
The Bottom Line on Business Loans for Minority Entrepreneurs
Entrepreneurship can be difficult. But you're not the only person who cares if your business succeeds.
As we've shown throughout this article, there are a variety of governmental organizations, businesses, and nonprofits that are dedicated to helping minority business owners succeed with funding programs, consulting services, and other forms of support.
One Park Financial is one of these. We're committed to helping business owners of all backgrounds succeed with flexible funding options that provide fast working capital for people with all types of credit.
As long as you've been in business for at least three months and have a minimum of $7,500 of monthly revenue, we may be able to help you secure the funding you need to achieve your goals.
So why wait? Fill out our pre-qualification form online today to find out if you can qualify for a loan in just a few minutes.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.