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The Best Small Business Loans for Minorities with Bad Credit

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As much as we may want to pretend otherwise, the business world isn’t an even playing field. No matter how good an idea or business plan you have, there can still often be a complex mix of social and financial barriers to getting a loan. And, of course, having bad credit never makes getting a loan easy.

There are, however, ways to circumnavigate racial lending biases and disparities, sometimes even when your credit is shot. We’ll explore some strategies and options below.

The Small Business Administration (SBA)

The federal SBA doesn’t lend directly, but its lending programs specialize in providing guarantees for businesses that might otherwise be turned away by traditional lending institutions—the SBA actually offers to pay back a percentage of the loan should you default. You’ll still need to meet the SBA’s own program criteria, however, which can sometimes include training, classes, and disclosing business plans.

There are a couple SBA programs that can be particularly useful for minority-owned businesses:

  • 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 Business Development Agency

Another government agency you can take advantage of is the Minority Business Development Agency. In addition to the online resources they offer, they maintain business centers in most major cities.

Among the services they offer is helping minority-owned businesses connect with lenders.

Minority Depository Institutions (MDIs) and Community Development Banks

MDI is a designation that can be claimed by institutions at which 51 percent of the stock is held by minorities and which primarily serve communities that are predominantly “Black American, Asian American, Hispanic American, or Native American.” Many of these institutions will be familiar with the challenges of starting businesses in their communities and be able to offer guidance about how best to proceed.

Your options will be a bit constrained by geography, but most major and secondary cities will have at least MDI.

Alternative Lenders

Since the tightening of traditional credit markets after the Great Recession, a large, primarily online, lending industry has stepped in to fill the void.

At a glance, alternative lenders run the gamut between conservative and high-risk. Overall, their loans are easier to qualify for. Many will lend to owners with poor credit; some won’t even do a hard pull on your credit score.

That being said, be extremely cautious dealing with alternative lenders. Many offer reasonable if somewhat unorthodox deals. Others charge usurious interest rates that can sink an unprepared business and compound your existing problems.

Here are a few options to consider if traditional loans are eluding you:

  • 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 loan, an MCA 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.

Final Thoughts

As large as the challenges facing minority business-owners can be, remember that there are a number of sympathetic agencies, organizations, and even lenders that exist to help correct lending disparities. Do your research before taking any loan offer, and be sure to also check out our more general resources on how to get your business off the ground when you have bad credit.

Chris Motola

Chris Motola

Finance Writer at Merchant Maverick
Chris Motola is a writer, programmer, game designer, and product of NY. These days he's mostly writing about financial products, but in a past life he wrote about health care and business. He's a graduate of the University of Central Florida.
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