Good news: There are now more than 8 million minority-owned businesses in America.
Bad news: Minorities are still having a much harder time accessing small business loans than their white counterparts. Even when approved, minority-owned firms are more likely to receive lower amounts and higher interest rates.
If you’re a black business owner, have you come across barriers to outside funding? According to the U.S. Department of Commerce Minority Business Development Agency, these discrepancies have made minority business owners more likely to not apply for small business loans, usually out of fear of rejection.
Fortunately, the business lending industry has evolved over the past decade or so, and small business loans are no longer just for white men with perfect credit. Explore the options below if you’re in the market for funds to use for working capital, debt refinance, equipment, or more.
Grants and Loans for African American Business Owners
Grants.gov helps business owners apply for federal funding opportunities. Not all grants are for minority business owners but you can use the search feature to narrow down your options. A business grant is a sum of money given to a business owner in order to help them further their business. It does not need to be paid back but there might be use of funds restrictions.
To apply for federal grants, you must obtain a DUNS number from Dun & Bradstreet for your business, register to do business with the U.S. government through its System Award Management website. and create a Grants.gov account. For information about the DUNS number and how to establish one, visit the SmartBiz Small Business Blog: Why Does Your Business Need a DUNS Number?
Minority Business Development Agency (MBDA)
MBDA is the only federal agency tasked with promoting the growth and competitiveness of minority-owned businesses. Every year, the MBDA organizes investors with the goal to support minority businesses with financing. Visit their website to learn about available grant and loan programs, as well as information on loan packaging, private equity, and venture capital sourcing.
The DOT Disadvantaged Business Enterprise (DBE)
The DOT program promotes nondiscrimination in the award and administration of DOT-assisted contracts in the Department’s highway, transit, airport, and highway safety financial assistance programs. In general, to be eligible for the DBE program, persons must own 51% or more of a small business, establish that they are disadvantaged within the meaning of DOT regulations, and prove they control their business.
National Minority Supplier Development Council
The NMSDC is a corporate member organization focused on increasing business opportunities for certified minority-owned businesses. It operates the Business Consortium Fund, a nonprofit business development program, which offers financing programs and business advisory services for its members.
Small Business Administration 7(a) loans
SBA loans are known as the “gold standard” in small business funding due to low rates, long terms, and very low monthly payments.
SBA 7(a) loans are not exclusively for minorities and any qualified business owner can apply. However, nearly one-third of SBA 7(a) loans go to minority applicants. SmartBiz Loans is proud of the fact that we facilitate 5.4% of our SBA 7(a) loans to businesses owned by Black or African-Americans, vs. the national average of 3% for SBA 7(a).
The most common misunderstanding about SBA loans is that the agency lends money directly to small businesses. However, the agency does not typically make direct loans. The SBA provides a guarantee on the loan, promising to reimburse the bank for a certain percentage of the loan if there is a default. This guarantee lowers the risks to lenders, encouraging them to offer these loans to more American small businesses.
An SBA 7(a) loan can be used for a variety of purposes:
- Working Capital – Purchase equipment, increase inventory, add marketing programs, use for operating expenses or to hire additional staff.
- Debt Consolidation Loans – Refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans or business credit cards.
- Commercial Real Estate – Refinance an existing commercial real estate mortgage, buy an office building or other owner-occupied commercial space.
For in-depth information about the popular SBA 7(a) loan program, visit the SmartBiz Small Business blog and review our comprehensive article: What is an SBA Loan?
SBA Community Advantage Loans
The Community Advantage Loan Program serves small businesses in underserved markets. This program encourages local, mission-based lenders such as nonprofit organizations to make loans of up to $250,000 to minorities, women, veterans, and other underserved business owners. Business owners must have good credit and the ability to pay back the loan. One barrier to funding is removed - collateral isn’t required. For more information about qualifications and how to apply, contact your local SBA district office.
SBA Microloan Program
The SBA microloan program is for small business owners in need of $50,000 or less. The program is open to any eligible small business owner, but can be a good place to start for minorities. Paying back an SBA microloan responsibly can help build credit so you’ll be in a stronger position to apply for more funding down the line. Microloans are made through third-party nonprofit lenders. For more information, contact your local SBA District Office.
SBA 8(a) Business Development Program
The SBA 8(a) Business Development Program doesn’t provide funding. It’s a certification program to help minority-owned businesses get access to federal contracts. To level the playing field for disadvantaged business owners, competition is limited for some contracts to businesses that participate in the 8(a) Business Development program.
In order to qualify for this program, your business must be 51% owned by someone from a socially and economically disadvantaged background. Minorities are presumed to be socially disadvantaged under federal law. On the economic side, the owner’s personal net worth and average gross income for the last three years must be $250,000 or less, and their assets must be $4 million or less. Business owners who qualify can get certified online and free business mentorship and training is available through the program.
Business Lines of Credit
A business line of credit allows you to borrow funds up to a limit based on your credit, typically smaller than a term loan. You only pay interest on the amount you use, and you can continue borrowing as necessary until you reach the set maximum. These loans are usually unsecured, meaning that you won’t have to provide collateral to qualify. For in-depth information, read this post from the SmartBiz Blog: Small Business Lines of Credit Pros and Cons.
Business credit cards are revolving lines of credit. The main distinction is that they don’t terminate once the predetermined limit is reached. They function like personal credit cards, with varying spending rewards and offers depending on the lender. Learn more here: 5 Business Credit Card Myths.
Merchant Cash Advances
A merchant cash advance (MCA) is most often used by small businesses that accept credit and debit card sales. You receive a specific sum in advance that is repaid either by a percent deduction from daily transactions or through daily or weekly payments.
Keep in mind that MCAs often lead to extremely high annual percentage rates. Even the minimum within the range can be several times larger than term loan annual percentage rates. Some APRs can reach up to well over 300%. For more info, read What You Need to Know About an MCA.
Bank Term Loans
Bank term loans have repayment plans typically extending beyond one year. These loans typically have fixed interest rates. SmartBiz currently offers term loans through banks in the SmartBiz network for working capital, debt refinance, and new equipment purchase. Additional details include:
- $30,000 to $200,000 loan amounts
- 2 - 5 year repayment terms
- Fixed interest rate*
- Monthly repayments
- No pre-payment penalties
*Interest rate depends on loan term and the applicant's credit and financial profile.
Visit SmartBiz University to read informative and educational articles about the ABCs of small business funding. You’ll learn about business and personal credit, how to calculate cash flow, the best ways to use loan proceeds, and more.