Minority Business Loans
For minorities seeking business loans, the normal challenges of financing can be compounded by lending biases, language barriers, and under-served communities.
It’s not all bad news, though. There are a number of organizations that seek to even the playing field, either as a part of their mission or as one of their services. We’ll look at some of your options below.
Organizations that Can Help
Even if they don’t directly issue loans, there are some organizations that can help you find lenders and other financial resources:
Minority Business Development Agency
Before you can utilize a program, you’ll have to find one. A good first resource is the Minority Business Development Agency.
A division of the U.S. Department of Commerce, the MBDA seeks to help minorities find capital and contracts, as well as find markets for their products and services.
Online resources like the research library can help new businesses understand some of the challenges and opportunities for minority-owned business. The blog, updated several times a month, offers discussions of trending topics.
They also offer on-site services at their business centers in most major cities.
The Small Business Administration (SBA)
The SBA can also help you find lenders, but in a different way. When you qualify for one of the SBA’s lending programs, they will guarantee a percentage of your loan. If you default on your loan for any reason, the SBA will repay that percentage of your loan. SBA programs may also include training courses, business-plan writing assistance, and similar prerequisites.
Two programs that are worth a look:
- Microloans: The SBA Microloan Program offers up to $50,000 to businesses that qualify. The lending institutions in question are nonprofits, often those with community development charters in your area. Be aware, however, that SBA microloans can’t be used to purchase real estate.
- Community Advantage Loans: This program is designed to help businesses in underserved communities that may have trouble coming up with collateral or show a large balance sheet. You can borrow up to $250,000 through this program, but owners with very poor credit may still find that to be an obstacle.
Minority Depository Institutions (MDIs)
Banks with at least 51 percent minority ownership can qualify as MDIs, so long as they also primarily serve communities that are predominantly “Black American, Asian American, Hispanic American, or Native American.”
Working with one of these institutions–so long as your business is operating within a qualifying community–can help you circumvent some of the racial biases that plague lending. You can find them in most major and secondary cities.
Community Development Banks (CDBs) and Community Development Financial Institutions (CDFIs)
If you don’t live in an area served by an MDI, the next best option to look at will likely be a CDB or CDFI. To qualify as a CDFI, banks have to apply to the federal Community Development Financial Institutions Fund and prove that they’re primarily lending to under-served markets. CDB can have either a national or a state charter and serve low-to-middle income communities.
You can find some of these institutions through the Community Development Bankers Association.
State Programs and Non-Profits
Programs like New York’s Minority and Women Revolving Loan Trust Fund offer small, low-interest loans to resident business owners. These funds are offered without a profit motive, so they tend to have lower interest rates than comparable banks loans. On the other hand, programs of this sort generally don’t have deep pockets, making them less ideal for businesses seeking large amounts of money.
Alternative lenders don’t usually have a minority-oriented or community business focus, but their business models tend to be more predicated on finding reasons to lend to people rather than risk mitigation. With that in mind, I wouldn’t suggest them as your first choice, but they are worth considering if you’re running out of other options.
Another advantage alternative lenders offer is speed. Applications are often shorter and can be started online. If all goes well, you can receive your money in a matter of days, or even hours. Just be aware that alternative lending often comes with higher (sometimes much higher) rates.
Types of alternative financial products include:
- Short-term loans: These products tend to consider your business’s cash flow more than your credit. Unlike longer-term installment loans, these loans charge a flat fee and are paid daily or weekly through an automated clearing house debit from your business checking account.
- Merchant cash advances: While not technically a loan, an MCA serves a similar niche. Like a short-term lender, an MCA provider cares about your revenue more than your credit score, and they’ll be looking specifically at your credit and debit card sales. The funder will collect a percentage of your daily card sales until the advance is paid off. The warning we made about alternative lenders applies doubly for MCAs; advances aren’t governed by the same laws as loans in many states, allowing funders to charge extraordinarily high interest rates.
- Invoice factoring: This is another option for businesses that have good cash flow but bad credit. Invoice factoring allows you to sell uncashed invoices to a funder at a discount in exchange for an immediate lump sum. While it’s not always the best deal, it can be decidedly less risky than some of the other options.
What’s better than a loan?
Free money, of course.
Grants can have a more complex set of hoops to jump through, and many even take the form of contests, but if you qualify, you won’t have to worry about interest rates, term lengths, or any of the other stresses that come with loans. Better still, some grants are available specifically to minorities.
Even though starting and running a business as a minority offers some additional and unjust challenges, those issues don’t have to be roadblocks. Remember that there are sympathetic organizations and programs that can make the process a whole lot easier for you.
If you’re not sure where to get started with lenders more generally, be sure to check out some of our small business loan reviews.