A growing proportion of minority-owned companies now account for half of the 2 million new American companies established in the ten years before 2019. Nevertheless, the most recent statistics available by the Minority Business Development Agency show that the average gross revenues generated by minority entrepreneurs lag below those of non-minority enterprises.
How to Become a Minority-Owned Business
Getting certified as a minority-owned business, or MBE can be very beneficial to your company. You may qualify for company subsidies, government contracts, and financing options that are exclusive to MBEs.
Your company must be a for-profit venture based in the United States or its territories, and it must be at least 51% owned, run, and controlled by a member of a minority group who has US citizenship, according to the NMSDC, which is the leading national certifier of MBEs.
Which SBA loans are available to minorities?
SBA-backed loans are managed by approved lenders and supported by the SBA. Minority business owners are eligible for all SBA loans, provided they fulfill the necessary standards.
- Your company must run profitably,
- Be present in the US or its territories or plan to do so
- Have reasonable owner equity to invest
- Use other funding sources, such as personal assets,
- Before applying for a loan to meet the SBA’s loan eligibility standards.
- Be able to prove that you need the loan;
- Use the money for sensible business purposes
- Not have any outstanding debts to the US government.
Remember that collateral is not needed for business loans under $25,000 from SBA-certified lenders. However, you must offer security in the form of company assets or an individual guarantee for business loans greater than $25,000.
To obtain a loan, the SBA demands a personal guarantee if you control 20% or more of the company. If you sign a personal guarantee, you agree to pay back the loan balance if your company defaults. Personal belongings like your house and automobile are therefore in jeopardy.
The best SBA loans for minority business owners
The conventional 7(a) loan, the SBA microloan, the Express Loan, and the Community Advantage Loan are the greatest SBA loans available to minority-owned businesses. We’ll go over each choice in more depth below.
SBA 7(A) Loan
Term loans up to $5 million are available to qualified business owners under the normal SBA 7(a) loan program for the purchase of real estate, debt refinancing, and working capital purposes. A 7(a) loan may also be used for the construction of a new structure, the remodeling of an existing area, or the acquisition of supplies, machinery, equipment, furnishings, and fixtures.
Apart from their adaptability, SBA 7(a) loans are renowned for their advantageous financing conditions. Repayment terms vary from 10 to 25 years, and interest rates range from 5 to 11%, contingent on the purpose of the loan.
Your company must fit the SBA’s small business size requirements to be eligible for a 7(a) loan. Additionally, you want to have a high credit score; lenders typically look for scores of 640 or higher.
SBA Microloan
An SBA microloan is exactly what it sounds like—a small, short-term company loan. The SBA provides small business owners in need of a little cash infusion with microloans up to $50,000. The money might be used for operating capital, inventory, furnishings, equipment, supplies, and beginning costs.
The typical microloan amount is $13,000, with interest rates in the 8–13% range. A microloan’s maximum repayment duration is six years, though actual repayment terms will vary.
Your engagement with an SBA-approved intermediary lender will determine your eligibility for SBA microloans. The good thing is that you can apply for a microloan without having to have perfect credit. You might, however, be required to sign a personal guarantee and put down collateral of some kind.
SBA Express Loan
The SBA Express claims to respond to you in less than 36 hours if you require money on short notice, and it usually provides funds within a month. You can obtain a business line of credit or a term loan up to $500,000 with the SBA Express. Similar to a 7(a) loan, you may utilize Express funds for several things, such as working capital, debt refinancing, business expansion, and the acquisition of real estate and equipment.
Subject to the loan amount you receive, interest rates for Express loans are typically 4.5–6.5% higher than the prime rate at the moment. For instance, the prime rate reached a record high of 8% in March 2023, meaning that the interest rate on an Express loan would be almost 12.5%.
Term loan repayment terms range from 10 to 25 years, while credit line repayment terms are up to seven years. While qualifying standards for Express loans may differ according to the lender, they are comparable to those for 7(a) loans.
SBA Community Advantage Loan
The SBA Community Advantage loan program is intended to assist small businesses in underserved communities. It is a pilot program that will end on September 30, 2024. This can include, among others, startups, veteran-owned companies, and businesses held by minorities in low-income areas.
The loans are managed by mission-driven, locally-based lenders such as microloan intermediaries and certified development organizations (CDCs). You can enhance your business with a term loan or line of credit worth up to $350,000. This includes allocating the money for improvements, growth, initial costs, purchasing machinery and equipment, or working capital.
Repayment terms vary from 10 to 25 years, with interest rates ranging from 4.5 to 6.5% above the prime rate. You must fulfill both the specific standards set forth by your lender and the 7(a) loan small company requirements to be eligible. Normally, you’ll require documentation of solid company finances in addition to a credit score of no less than 600.
SBA Resources for Minority-Led Businesses
The SBA offers loans to minority-owned firms in addition to special resources.
SBA 8(a) Business Development Program
By providing technical, financial, and managerial support, the 8(a) Business Development Program fosters the expansion of firms owned by economically and socially excluded individuals. Participating in the program entitles you to leadership and company development training and assistance, as well as the opportunity to bid on and win federal set-aside and sole-source employment agreements.
The program has a nine-year lifespan, and to be eligible, you must:
- Be a small business that has not previously taken part in the 8(a) program,
- Be a minimum of 51% of which is owned or controlled by a US citizen or citizens who are economically and socially disadvantaged,
- Have assets totaling $6.5 million or less.
- An adjusted gross income of $400,000 or less, and an individual net worth of $850,000 or less;
Additionally, the business must have demonstrated good character for the last two years of operation.
View the SBA’s list of actions to apply for certification under the 8(a) program.
HUBZone program
The SBA HUBZone Program assists small firms in historically underused business zones, much like the 8(a) program does. A HUBZone-certified company is qualified to apply for and be awarded federal set-aside labor agreements.
To be eligible for the HUBZone program, your company must: meet SBA size guidelines for small businesses.
Possess and manage at least 51% of the company’s assets from US citizens.
- Community Development Corporations,
- agricultural cooperatives,
- Native Hawaiian organizations,
- Alaska Native corporations,
- or Indian tribes;
- Have your main office situated in a HUBZone;
- And have at least 35% of your staff members reside there.
Remember that on July 1, 2023, the HUBZone map had changed, so it’s crucial to check back for updates. Additional qualifying requirements are available here.
Other SBA counseling and contracting resources
For minority business owners looking to network with other business owners, obtain job contracts, meet mentors, and receive technical assistance, the SBA offers a plethora of programs and offices. Take a look at these resources:
- SBA Mentor-Protégé Program
- Contracting assistance programs
- T.H.R.I.V.E. Emerging Leaders Reimagined
- Small Business Development Centers
- SCORE business mentoring
Non-SBA financing options for minority-owned businesses
The following three flexible funding choices are things minority business owners should think about:
Business Line of Credit
One of the best ways to pay for recurring operating costs, temporary cash flow shortages, or emergencies is with a company line of credit. You can access a predetermined credit limit with a line of credit, which can be anywhere from a few thousand dollars upwards of $100,000.
Similar to a credit card, you have two options: pay off the balance on your credit card in full to avoid interest fees, or make the bare minimum payment every thirty days and incur interest. The typical interest rate varies greatly, from 8% to 80%, contingent upon the lender.
Online Term Loan
Compared to bank or SBA loans, business loans from Internet lenders typically offer quicker funding and more accommodating qualifying standards. It’s possible that you won’t require as many documents or perfect credit to apply. Lender to lender differs in terms of loan quantities, terms, and payback schedules, however, average interest rates fall between 11 to 44%.
Business Grants
Think about applying for a business grant intended for minority business owners if you want debt-free capital to spend in your enterprise. Grants are an excellent source of unconditional funding, but they can be demanding and difficult to come by. To find government grants you could be eligible for, start by visiting Grants.gov. Then, broaden your search by visiting professional associations and nonprofits.
Here are some other choices to think about:
- Coalition to Back Black Businesses
- National Black MBA Association Scale-Up Pitch Challenge
- Asian Women Giving Circle
- The National Association for the Self-Employed Growth Grants
- Business Consortium Fund
- Comcast Rise Investment Fund
- Fast Break for Small Business
Tips for Getting Financing As A Minority-Owned Business
These actions will help improve your likelihood of success if you’re seeking funding:
- Boost your credit score: Having a higher credit score makes it easier for you to get better loan terms and opens up more options for company funding. While it will take time to raise your credit score, you may start by keeping your credit usage ratio low, paying your bills and payments on time, and updating your financial data with the three major credit bureaus—Equifax, Experian, and Dun & Bradstreet. This implies that you should only use about 30% of your credit limit at a time and then pay it off.
- Your company plan’s market and financial portions should be tightened up: A thorough business plan demonstrates to lenders your understanding of the market, potential for growth, and financial requirements of your company. A break-even analysis, sales predictions, cash flow forecasts, and a detailed explanation of the amount of finance required, its intended use, and how it will benefit your company should all be included in your business plan.
- Make contact with other minority-owned companies: You can get insightful guidance on funding options and growth plans from other business owners. To locate people to network with, check out professional associations, industry associations, and local community groups.
- Compare your available financing alternatives: Take the time to thoroughly investigate the lenders and financing solutions that pique your interest. Make sure you comprehend the prerequisites, the funding timetable, the application process, the conditions, the annual percentage rate, and the expenses. Inquire with lenders about their frequency of working with minority-owned businesses and any special resources they may be able to provide you with. Swoop Finance Limited can assist you in conducting the necessary research and comparison shopping.
FAQs
What distinguishes a conventional business loan from a minority loan?
Loans intended only for minority-owned businesses are known as minority loans. The SBA, a few nonprofits, government agencies, and community development financial institutions (CDFIs) all offer minority loans.
Minority business entrepreneurs may, nevertheless, also submit an application for funding through conventional lenders and financial organizations.
Does owning a business owned by a minority have advantages?
Having a minority-owned business indeed has two main benefits. First off, government contracts and other financial options are available to you that are not available to non-minority business owners. Second, you can attract clients and communities who support or identify with minority company owners by showcasing your certification as a minority-owned enterprise.
Why are minorities having more difficulty obtaining business loans?
For a few important reasons, minority business owners may find it more difficult to obtain finance. Minority business owners may not have a substantial banking history or may have poor credit since they have consistently been turned down for financing. Minority business owners may also have fewer or less costly possessions to utilize as collateral when obtaining a loan due to the racial wealth gap. Lastly, unintentional racial and ethnic prejudice in lending may also be quite significant.