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The Ultimate Guide to Financial Assistance for Minority-Owned Businesses

Due to the poverty cycle, racial discrimination, and many other hurdles, minorities in the United States generally have a more difficult time than others in the economic arena. The opportunity to create a business can change not only an individual’s life, but their entire family’s life.

Therefore, it is important that our communities, large and small, are providing avenues to help individuals overcome economic disparities that minorities face, including barriers to business ownership. This guide will cover the existing financial resources that minorities in the United States may be able to utilize to get their business idea off the ground.

SBA Loans and Business Development Programs

The Small Business Administration (SBA) is a federal agency dedicated to providing information and financial resources to small businesses, as well as prospective small business owners. One of the major ways that the SBA endeavors to help minority business owners is through the SBA 8(a) Business Development program.

The program provides resources such as business development training and assistance, mentor-protégé opportunities with successful business owners in your field, and set-aside and sole-source contracts that could put the business on track to compete for a federal contract. This program is specifically for economically and/or socially disadvantaged small business owners.

In order to qualify for the program, your venture must meet the following requirements:

  • The business must qualify as a “small business.” According to Fundera:

“Depending on your industry, a small business could be defined as business with a maximum of 250 employees or a maximum of 1,500 employees. They’re privately owned corporations, partnerships, or sole proprietorships that have less revenue than larger businesses.”

  • The business must be at least 51% owned by economically or socially disadvantaged citizens.
  • The business must not have already participated in the program.
  • The owner’s personal net worth must not exceed $250,000.
  • The owner’s average adjusted gross income must not exceed $250,000 in the past three years.
  • The owner’s assets must not exceed $4 million.
  • The business should operate under good principles.
  • The owners should be highly involved in both day-to-day operations and long term strategy.
  • The business must demonstrate good prospects.

Minorities interested in starting a small business may also benefit from considering SBA Community Advantage Loans and SBA microloans. SBA Community Advantage Loans are provided by local or regional lenders and guaranteed by the SBA. This removes much of the risk for lenders, and therefore encourages them to accept loan agreements with less well-established businesses.

SBA microloans are similarly provided by private lenders and guaranteed by the SBA, however, they have a much lower cap of $250,000 and often require collateral. Businesses must demonstrate good credit and promising business prospects to acquire these loans.

SBA Microloan and Small Business Lenders

As stated, although the SBA guarantees some loans, private entities are the ones actually lending the money. Therefore, it is important to choose your lender carefully. The following is a non-exhaustive list of available lenders and loan programs for small businesses owned by minorities and socioeconomically disadvantaged individuals.

  • Opportunity Fund: This is a microloan provider that focuses on serving minorities, immigrants, women, and other socioeconomically disadvantaged business owners.
  • LiftFund: This is a nonprofit organization in the southern states that provides loans for economically disadvantaged business owners.
  • Accion: Accion is a global nonprofit that provides both loans and advisory services to socioeconomically disadvantaged business owners.

SBA Lenders by State

SBA lenders vary from state to state. When contacting an SBA lender, you may need the following documents and information prepared, although specific requirements vary by lender:

  • A borrower information form (SBA Form 1919);
  • A personal background and financial statement;
  • A business financial statement;
  • A business license;
  • Your loan application history;
  • Your income tax returns;
  • Resumes;
  • A business overview and history;
  • A business lease.

If you are purchasing an existing business, you may need additional documentation regarding the sale and the financial history of the business.

Community Development Financial Institutions Fund

Rather than an individual lender, the CDFI Fund is a network of lenders and financial advisors that collaborate to assist socioeconomically disadvantaged business owners. The CDFI Fund offers many different programs with different application criteria. You can use the CDFI locator to find an institution near you.

Business Grants

Unlike a loan, grants do not need to be repaid. There are many types of business grants available, and they may be privately or publicly sponsored.

Federal Grants

The following grants are offered by national institutions:

  • SBA Grants: The SBA acts as a middleman for federal organizations to provide grants to small businesses.
  • State Trade Expansion Program (STEP): State entities can apply for STEP grants, and then can distribute them to local small businesses. Interested businesses will need to contact a STEP awardee in their state.
  • Grants.gov: This is an exhaustive resource of federal grants.
  • SBIR/STTR: These grants are for small technology companies that work in the field of health and life sciences.
  • Rural Business Development Grants: This provides funding for small businesses in rural communities.

State Institutions

States offer small business grants through the U.S. Economic Development Administration. You can also find SBA centers in your state by entering your area information into their search tool.

Private Organizations

The following grants are offered by private organizations:

Business Financial Advice and Coaching

Funding alone isn’t very helpful if someone doesn’t know how to utilize it effectively. Therefore financial advice and coaching is incredibly valuable to prospective business owners. This is especially useful for groups such as women, LGBTQ+ individuals, and ethnic minorities who have historically been excluded from social networks of business professionals.

The following organizations provide coaching resources for small business owners:

In addition to the above resources, your bank, credit union, or workplace may also be able to offer financial advice. Further, local community colleges may be another great informational resource.

Minority-Owned Business Grants and Educational Resources

There are also business grants and educational resources that are exclusively available to minorities. A few organizations providing such services are:

Native Americans

Both state governments and tribal administrations offer grant funding for Native American-owned businesses. Therefore, it will benefit Native American business owners who are seeking such resources to carefully consider their options (including local options). The following are a few notable business development resources for Native American people:

African-American

African-American entrepreneurs may have luck finding educational resources about business development at universities, especially historically Black colleges. It’s to the benefit of African-American entrepreneurs to look into local resources, as well as the organizations listed below:

  • Black Founders: This organization provides educational, technical, and financial resources for Black entrepreneurs.
  • Black Enterprise: This group partners with the Minority Business Development Agency to provide technical and financial resources.
  • National Black MBA Association: This group offers information and training to African-American business professionals.
  • Black Business Association: This group offers access to financial resources for African-American business owners.
  • New Voices Foundation: This organization provides financial resources for entrepreneurs who are women of color.

Asian-American

The following organizations provide business resources for Asian-American entrepreneurs:

Hispanic

Some entrepreneurial resources specifically designed for Hispanic and Latino Americans include the following:

Additional Financing Options

In addition to the above resources, there are other options that minority entrepreneurs have for securing financing for their fledgling businesses. These may be used in addition to, or in lieu of the financing options that have already been discussed.

Business Lines of Credit

A business line of credit gives you open access to credit up to a certain limit for your business (as opposed to granting a lump sum all at once). Business credit cards operate similarly to personal credit cards, although there are some key differences, such as the fact that business credit cards tend to offer a higher credit limit, and you can use some business expenditures for tax deductions.

Furthermore, it is important to note that your business will have its own credit score, separate from your own. This may be especially helpful to note for Black business owners, as there is some evidence that suggests that business lines of credit may be underutilized by their businesses.

In order to apply for a business line of credit, a business owner will need the following materials and information:

  • Personal identification;
  • Personal tax returns;
  • Business tax returns;
  • Financial statements.

However, further materials may be necessary, depending on the lender. Business lines of credit are great for smaller, short-term expenses for businesses with a solid credit history. It is important to be wary of interest, as interest payments can stack up quickly for lines of credit. A line of credit should only be used when you actively need to spend money, as you may be charged for unused lines of credit.

Private Business Loans

A private business loan is a lump sum provided to the business by a private lender. In order to apply for a private business loan, you will usually need the following information and materials:

  • Personal identification;
  • Personal and business income tax returns;
  • Financial statements;
  • Business licenses;
  • Commercial licenses;
  • Resumes.

However, lenders will often have requirements unique to the institution as well, so it is important to do research. Private business loans are particularly useful for large, startup costs. Such loans can be difficult to acquire, and because they are paid out in a lump sum, you will need to apply for another loan if the original amount was insufficient.

Working Capital Loans

A working capital loan is a loan meant for the express purpose of covering small day-to-day operational expenses. In order to apply for a working capital loan, you will need the following information and materials:

  • Bank statements;
  • Balance sheet;
  • Your personal credit report;
  • Your personal tax returns;
  • Your business tax returns.

It is important to note however, that requirements may vary depending on the lender. For example, many lenders will also require proof of the age of your business. Working capital loans are often not available to businesses under two years of age.

Working capital loans are especially useful for businesses that do not have consistent business throughout the year, and therefore may need additional funds during short upswings. However, because these loans are meant to cover short-term expenses, they may have a short repayment period with high interest.

Accounts Receivable Factoring

Accounts receivable factoring allows the business to get an advance on unpaid invoices, so that they can essentially utilize guaranteed income before it would normally be available. This advance is acquired by selling your invoices to a financing company.

This is a good option for businesses that are having difficulty acquiring loans. The accounts receivable factoring option should not be too heavily relied upon, as you can ultimately lose quite a bit of money on fees and interest, and you are still on the hook for any invoices that don’t get paid.

Merchant Cash Advance

A merchant cash advance is an upfront cash payment on an electronic payment that is yet to go through. This can essentially give business owners access to their money a little bit faster. In order to secure a merchant cash advance, you must provide the relevant credit card receipts to the MCA provider. Merchant cash advances should be approached carefully, as they are very expensive and cannot be used to build credit. They should only be used to take care of very time-sensitive financial matters.

Peer-to-Peer Lending and Family Loans

Peer-to-peer lending is the practice of individual lenders connecting to prospective borrowers online. To borrow using this method, you just need to find a peer-to-peer lending website and fill out an application.

Meanwhile, family loans are a type of loan lent between family members. The only barrier for this type of loan, of course, is to convince your family member. It is important to note that this is distinct from a gift. Both peer-to-peer lending and family loans are typically very low risk for borrowers, and very high risk for lenders.

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