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Merchant Cash Advance: What You Need to Know Before Applying

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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When you need cash personally, you probably try to steer clear of payday loans. These short-term loans are risky, providing small amounts of money at a high cost. The speed at which you could receive funds may be tempting, but the risk involved in taking out a payday loan should make you think twice before doing so.

On the business side, cash advance funds or merchant cash advances, present the same dilemma. Merchant cash advance companies hand over a set amount of money in exchange for a portion of your business’ future receivables, such as credit card sales. A cash advance gives you cash on hand almost immediately, but it can have long-term effects on your finances.

Although merchant cash advances represent less than 1 percent of the financing products available to small businesses, here’s how to feel prepared to make an informed decision when you consider taking this option.

What is a merchant cash advance?

Unlike an actual loan, a merchant cash advance typically doesn’t require collateral, a personal guarantee or liens. Cash advances also do not have a fixed payment schedule, whereas traditional loans do.

When you take on a merchant cash advance, the advance provider purchases a portion of your credit card sales or other receivables in exchange for a lump sum of money. Going forward, the cash advance provider receives a percentage of your daily sales until you pay off the debt. Because the repayment schedule is based on a percentage rather than a fixed amount, the cash advance provider receives a larger payment on days when your sales are high.

Business owners tend to use merchant cash advances to cover working capital needs, such as new equipment purchases, seasonal inventory, expansions or remodels, debt payoff or emergency expenses.

Cash advance providers may include a performance guarantee when you sign a contract. Generally, there is no obligation to repay a cash advance. That’s different from loans, which require various guarantees and have a promissory note of repayment to ensure borrowers pay back the funds. Companies use performance guarantees to give a cash advance the appearance of a loan and borrowers an added push to repay the debt. A performance guarantee would require you to agree not to take any action that would undermine your business performance, such as selling the business or filing for bankruptcy.

Repayment depends on the business continuing to receive credit card payments or other receivables, which means the obligation to repay the advance is conditional, exempting merchant cash advances from state usury laws. These laws regulate traditional loans that are unconditionally repayable and the laws usually put a cap on the rates that lenders can charge. Usury laws do not apply to merchant cash advances.

How a merchant cash advance works

After applying for a merchant cash advance, you could see funds in your bank account in a matter of hours or days after approval. Repayment starts automatically and could begin as early as the next day.

While some merchant cash advance companies specifically purchase your future credit card receivables, other companies may accept a range of receivables, Catherine Brennan, partner at Maryland-based law firm Hudson Cook, told MagnifyMoney. Instead of taking a portion of your daily credit card sales, a cash advance company may make a daily withdrawal from an account that holds your receivables. This type of funding is similar to revenue-based financing, in which a company purchases a percentage of your total revenue rather than just your receivables.

Several companies use the Automated Clearing House Network (ACH) to set up direct electronic transactions between bank accounts. Companies that use a fixed ACH program collect a set amount of money from your business checking account each day. Some merchant cash advance contracts allow you to adjust the company’s daily withdrawal if business temporarily slows down, Brennan said.

“One of the key benefits of this [feature] is it’s supposed to be based on what you generate,” Brennan said.

If the merchant cash advance provider wants to collect part of your credit card receivables, the company may require you to switch to a credit card processing system of their choice to collect money.

Because repayment is based on your daily credit card sales in this situation, the more card transactions your business does, the faster you pay off the advance. However, if sales are slow, you still have to fork over a portion of your daily transactions.

Cash advance companies use factor rates to determine the cost of the advance instead of annual percentage rate, or APR, which is used to calculate interest on traditional loans. A factor rate is written as a decimal figure rather than a percentage and is multiplied by your funding amount. For example, a $10,000 merchant cash advance with a factor rate of 1.25 would cost $2,500, and you would owe the company $12,500 in total. When shopping for a cash advance, look for the lowest factor rate, Brennan said.

The pros and cons of cash advance funding

Pros

  • Fast cash. The underwriting process for merchant cash advances is less involved than the process for traditional bank loans, which contributes to the speed at which you receive funds, Brennan said.
  • Lenient eligibility requirements. Cash advance companies often target business owners with poor credit who may not qualify for other types of funding. However, a reputable merchant cash advance provider will have criteria that customers must meet, Brennan said. Watch out for companies that don’t have any eligibility requirements.
  • No obligation to repay. A merchant cash advance contract obligates you to keep your business running so the company can continue collecting receivables, Brennan said. If the business fails despite your best efforts, you’re not on the hook for a cash advance.

Cons

  • High cost. Because the underwriting process is so quick, the cost of merchant cash advances is high, Brennan said. Underwriting typically puts your credit history under a microscope to reduce the risk for the lender. Without going through that process, cash advance companies don’t reduce any risk, which leads to higher prices.
  • Your debt could build. Because cash advances are expensive, some business owners end up taking out more than one advance to cover the costs of their current advances, which is known as “stacking.” Cash advance companies may include contractual provisions that prevent business owners from stacking, Brennan said.
  • Fluctuating payments. It could be difficult to forecast how much will be taken out of your sales each day, and it may be difficult to plan around the payments.
  • Deceptive marketing. Some cash advance companies are deceptive when advertising their products. It’s important to look for fees or penalties that are not disclosed up front, which could make the cash advance more expensive.

Merchant cash advance FAQs

When you sign a contract for a merchant cash advance, you agree to continue operating your business to the best of your ability to ensure the cash advance company will receive a portion of sales.

Many merchant cash advance companies approve businesses for funding within a few hours and funding is delivered the next day.

A merchant cash advance company may collect a fixed percentage of daily credit card transactions or make a pre-scheduled withdrawal from your business account for a bank-to-bank transfer.

You could typically use your merchant cash advance to cover any business expense.

Where to get a merchant cash advance

Merchant cash advance companies operate online, and both the application and underwriting processes are completed digitally.

Some companies are direct lenders, which means they directly supply the capital to your business. When working with a direct lender, the name of the capital provider on the application should be the same as the name on the contract for the cash advance. If you work with a company that is not a direct lender, the company may send the information from your application to several different funding companies, which may all pull your credit. When a potential lender checks your credit, it’s considered a hard credit pull. Multiple hard credit pulls in a short amount of time could bring down your credit score. A direct lender only pulls your credit once, making minimal impact on your score.

Merchant cash advances are also available from independent sales organizations, or ISOs, that act as brokers for cash advance providers, Brennan said. They may work with a variety of companies and be able to provide you with information on a range of products. However, ISOs generally rely on commission and may push you toward a product that isn’t suited for you and your business.

“As a merchant, buyer beware is a good frame of mind,” Brennan said.

Alternatives to merchant cash advances

If you’re uncomfortable with the premise of a merchant cash advance but need capital quickly, online business lenders can offer fast short-term funding that traditional banks are hesitant to provide, Brennan said. Here are a few alternatives to merchant cash advances:

Working capital loans

Working capital loans are short-term products used to cover day-to-day business expenses. They typically must be paid off quickly and often come with high interest rates. You may need collateral to secure the loan, but the application process is less demanding than other loans and you could receive funds within a week.

Business line of credit

Instead of borrowing a lump sum of money, a business line of credit allows you to draw from a set amount of funds as you need it. You only pay interest on the amount you borrow. A business line of credit may require a personal guarantee and collateral, and your personal credit may be a determining factor. But you could use a business line of credit to boost cash flow and cover daily costs, building up your business credit at the same time.

Equipment financing

If you need to purchase specific materials for your business, equipment financing could help you cover those expenses. These loans tend to have low rates, as the piece of equipment acts as collateral. Credit history may be a deciding factor and you could be required to contribute a down payment, but payments on equipment loans are generally manageable.

The bottom line

Established business owners who have a good understanding of their operating expenses and can afford to turn over a portion of their daily receivables would be well-suited for a cash advance, Brennan said. This type of financing would be best for short-term expenses like a new air conditioning system, new signage or other equipment, she said.

If you’re interested in obtaining a merchant cash advance, you should understand exactly what you’re getting into, Brennan said. Take your time shopping around to find a company that offers the funding you need and terms you’re comfortable with.

The key piece of information when it comes to cash advances is factor rates, and you should find a company with the lowest ones, Brennan said. Many cash advance providers have become more transparent in disclosing factor rates upfront, Brennan said. Otherwise, you may not find out the rate until after you’ve gone through the application process.

Before selecting a merchant cash advance, you should pay close attention to the total amount that the company expects you to repay, because that will tell you the true cost of the advance. The percentage of your daily sales that the company will take is also important to note, but it won’t show the full cost of the advance.

Merchant cash advances are a relatively new financing product, which creates an opportunity for customer confusion, as well as deceptive practices, Brennan said. Because lending laws do not apply to merchant cash advances, business owners don’t have much legal standing if they want to get out of a bad agreement, she said.

However, if you’ve read the fine print and feel comfortable with the level of risk involved, a merchant cash advance may be a workable option to cover your immediate business needs.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

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How You Could Win an SBA Small Business Week Award

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Each year in May, the U.S. Small Business Administration hosts National Small Business Week, and the federal agency honors outstanding small business owners across the country as part of the event. Past winners of SBA Small Business Week Awards include the owners of Ben and Jerry’s, Chobani, Callaway Golf, Dogfish Head and Tom’s of Maine.

Mubarakah Ibrahim was named the 2019 Connecticut Home-Based Business of the Year. Ibrahim is the owner of Mmm Pies and Gourmet Dessert in New Haven, Connecticut where she sells homemade bean pies to local retailers, including a nearby Whole Foods. A bean pie is a traditional African-American dessert made from mashed navy beans, with a texture similar to sweet potato pie, Ibrahim said.

While the contest doesn’t come with a cash prize, it does mean major bragging rights for businesses that win in their state or at the national level. Continue reading to craft your winning nomination for your own SBA Small Business Week Award.

Ibrahim, a longtime health fitness trainer, started the business in 2016 shortly after making her first bean pie. One afternoon, Ibrahim had a craving for the treat she used to enjoy as a child in Brooklyn, New York, but realized there were no businesses in New Haven that sold bean pies. Ibrahim tweaked recipes she found online until satisfying her craving, sharing her bean pie journey with her social media followers.

“I found there was a demand for it,” she said.

Ibrahim now bakes pies in a rented commercial kitchen, but the business is officially based at her home address. She was nominated for the award by the Women’s Business Development Council in Connecticut; “it made me feel my efforts are paying off,” she said about her win.

What is National Small Business Week?

The SBA has recognized the efforts of entrepreneurs and small business owners for more than 50 years.

During National Small Business Week, the SBA hosts a free two-day virtual conference consisting of online workshops and networking. Business owners can participate in all webinars or choose topics that are of interest.

“National Small Business Week is not only an opportunity for us to recognize small business owners and those who champion the cause, but it’s also a learning opportunity,” SBA Georgia District Director Terri Denison said.

The SBA also hosts a hackathon in partnership with Visa. The event encourages entrepreneurs to spend a weekend brainstorming to solve business challenges. The theme of 2019’s hackathon was disaster relief.

To add a social media component, the SBA facilitates a Twitter chat about starting and growing small businesses. Anyone can join the conversation using the hashtag #SmallBusinessWeek.

National awards are given out at a ceremony in Washington, D.C., while SBA District Offices in each state host their own events to recognize local winners.

Next, we’ll discuss the various awards available to small business owners.

How to win an SBA Small Business Week Award

A number of national honors are awarded to business owners and supporters each year. These include:

  • Small Business Person of the Year
  • Small Business Exporter of the Year
  • Phoenix Award for Small Business Disaster Recovery
  • Phoenix Award for Outstanding Contributions to Disaster Recovery – Public Official
  • Phoenix Award for Outstanding Contributions to Disaster Recovery – Volunteer
  • Federal Procurement Award – Small Business Prime Contractor of the Year Award
  • Federal Procurement Award – Small Business Subcontractor of the Year Award
  • Federal Procurement Award – Dwight D. Eisenhower Award for Excellence
  • 8(a) Business Development Program Graduate of the Year Award
  • Small Business Development Center Excellence and Innovation Award
  • Veterans Business Outreach Center Excellence in Service Award
  • Women’s Business Center of the Year Excellence Award
  • Jody C. Raskind Lender of the Year
  • Small Business Investment Company of the Year

Each award has its own nomination form and requirements. For example, the 8(a) Business Development Program award is given to a business that has participated in the program designed for disadvantaged businesses. You can find the downloadable forms here.

The awards vary slightly at the state level, and some states may have more or fewer categories than others. In Connecticut, where Ibrahim won Home-Based Business of the Year, the available awards are:

  • Small Business Person of the Year
  • Minority-Owned Business of the Year
  • Women-Owned Business of the Year
  • Exporter of the Year
  • Jeffrey Butland Family Owned Business
  • Manufacturer of the Year
  • Veteran Owned Business
  • Microenterprise
  • Home Based Business
  • Women’s Business Center of the Year

In Georgia, the awards are similar, with the addition of awards like Rural-Owned Small Business of the Year, Young Entrepreneur of the Year and Second-Chance Hiring Champion. There are even some given to small business supporters, like Small Business Media Advocate and Women in Business Champion.

“That’s to recognize individuals who may or may not be business owners who support and advocate on behalf of small businesses,” Denison said.

Nominations typically open during late summer or fall, Denison said, although nomination forms for the 2020 awards are not yet available. Eligibility is not limited to businesses that have received financing or other support from the SBA — any business owner could be nominated.

Winners are selected based on the nomination packet that’s submitted, Denison said. In Georgia, a three-person committee reviews each nomination and chooses who best meets the criteria for each award, she said. Small business owners may nominate themselves, but most are nominated by others. A consulting firm, chamber of commerce member, lender or Small Business Development Center that the business owner has worked with are typical nominators, she said.

The Women’s Business Development Council in Connecticut was familiar with Ibrahim’s business because she previously attended WBDC workshops and sought help managing her operation.

“I needed help with the financials more than anything,” Ibrahim said. “I got a lot of benefit from consulting with them.”

Making an impression when working with business consultants, as Ibrahim did, could boost your chances of being nominated for an SBA award, Denison said. Your community impact or personal experience could also increase your odds of winning.

“If the owners have gone through difficulties on their entrepreneurial journey and have managed to overcome them and managed to be successful, that always makes for an interesting story,” Denison said.

Whether you’re nominating yourself or another business owner, the SBA provides these tips for submitting a winning nomination form:

1. Aim to win an award that best suits your business. Rather than going for Business Person of the Year, the SBA’s signature award, you could try your luck in more niche categories, like exporting or disaster recovery.
2. Make sure the entire nomination package is complete. All packages must include a completed background form for the nominee; the nomination form, including information about the business, like address and financial history; and a photo of the nominee. Certain awards may require additional information.
3. Brag about the business. The nomination package should highlight reasons why you’re among the best in your industry and how you plan to further your success.
4. Describe contributions to the community. Explain how you give back to your community, whether it’s through monetary donations or volunteered time.

Ibrahim was aware the WBDC nominated her for an SBA award because they asked her to provide some information for the nomination form, she said. After her local SBA District Office notified her that she won, representatives visited her commercial kitchen to see the business in person, Ibrahim said.

Each SBA District Office hosts its own awards ceremony. The Connecticut SBA District Office recognized Ibrahim and the other award winners during a luncheon in May, while in Georgia, the local SBA office also organizes an annual luncheon to honor award winners, Denison said.

Other national contests

You may want to consider entering your business into additional national contests or award programs, some of which offer prize money. Here are a few to check out:

  • U.S. Chamber of Commerce Dream Big Awards: For community-focused businesses with fewer than 250 employees and less than $20 million in gross revenue; $25,000 prize available. The Chamber will name 2019 winners in October.
  • FedEx Small Business Grant Contest: Eligible small business must have fewer than 99 employees and at least six months in operation; a grand prize of $50,000 plus $7,500 in FedEx services is available. FedEx will begin accepting applications in early 2020.
  • EY Entrepreneur of the Year: Regional programs recognize top local entrepreneurs; national honorees are also named. Nominations for the 2020 Ernst & Young contest open in December.
  • Grant programs: Federal and private grant programs offer no-strings-attached funding to qualifying businesses.

Benefits of winning an SBA award

Receiving a National Small Business Week Award from the SBA could increase your company’s visibility. For example, the Georgia SBA District Office sends out a press release each year announcing the winners, which could lead to additional media opportunities, according to Denison.

Attending the awards ceremony could also be a valuable networking opportunity, noted Denison. You could connect with other award winners, as well as members of your local business community. A number of SBA lenders usually attend the luncheon in Georgia, she added.

Ibrahim made useful connections through the SBA committee that selected her for the award. During the visit to her bakery, Ibrahim told the committee about her plans to ship bean pies to customers outside New Haven. However, she couldn’t find a shipping solution that made financial sense for her and for customers.

“They would literally have to pay for $500 worth of pie to make it affordable,” she said. “That’s my biggest dilemma now.”

The SBA committee referred Ibrahim to a company that could ship smaller orders of pies for a less expensive price, Ibrahim said, which wouldn’t have happened if not for the SBA award; she currently ships throughout the state of Connecticut.

“It did connect me with resources and put me on other people’s radar,” she said.

The Home-Based Business of the Year award didn’t come with a monetary prize, but Ibrahim said she felt validated receiving the honor. Although her business has many fans in her community, it’s often challenging to get her bean pies in stores.

“It can be very disappointing when you call and ask someone to carry your product and the answer is ‘no.’ Because the answer hasn’t always been ‘yes,’” she said. “Getting the award gave me the encouragement to keep going.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]

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Small Business

What You Need to Know to Start a Business as An Immigrant

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Immigrant entrepreneurs make a significant impact in America, often overcoming obstacles and setbacks to build businesses that contribute trillions of dollars to the national economy each year.

About 3.2 million immigrants ran their own businesses in the U.S. in 2017, according to the most recent data from bipartisan research organization New American Economy. Immigrants represent one in five entrepreneurs in America, generating $1.3 trillion in total sales and employing 8 million people in 2017. The New American Economy found that 45% of this year’s Fortune 500 companies were founded by immigrants or their children.

Yet immigrants, who comprise nearly 14% of the U.S. population, often face hurdles other business owners don’t: Language barriers, long waits for a green card or visa and difficulties finding financing at acceptable terms.

Among those business owners is Hilda Torres, executive director of My Little Best Friends Early Learning Center in Malden, Mass., a child care facility she founded with her cousin Gerardo Loza in 2012. Torres immigrated to the Boston area from Mexico in 1992 with her husband and two children, working as a beautician and volunteering at her children’s daycare.

“It was really hard for me to communicate with anybody there. I didn’t speak any English,” Torres said. “I got really attached to these kids and the director noticed I was really good at what I was doing.”

The director sent Torres to community college to learn English and Torres continued her education to become an instructor at the child care center. She eventually wanted to open her own facility to help working parents find affordable care for their children.

Her cousin had also immigrated from Mexico and offered to invest in My Little Best Friends with Torres. The business now has 33 full-time employees and 115 children from 2 months to 5 years old enrolled, Torres said, but growing the business wasn’t easy.

“It was difficult in the beginning because my English wasn’t very good, and we didn’t know anything about business,” she said. “Little by little, we started just learning on our own. But we struggled a lot.”

A lack of business knowledge is not entirely uncommon among immigrant entrepreneurs, said Edwidge Lafleur, director of the eastern Massachusetts branch of the Center for Women and Enterprise. Many immigrants who come to the center don’t understand how to write a business plan or manage their finances, or don’t understand why these elements are an important part of owning a business.

“They do have a sense of how to run a business, but don’t have any real training,” Lafleur said. “They definitely need to be able to understand the business concepts.”

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Potential hurdles for immigrant entrepreneurs

Anyone who starts a small business typically faces challenges, but immigrants usually have an additional set of hardships, said Rashed Amine, employment and training coordinator at the Arab Community Center for Economic and Social Services (ACCESS) in Dearborn, Mich. Finding child care, transportation and employment are the main concerns for immigrants who are new to America. Amine said these are obstacles that often stand in the way of starting a business.

Immigrant entrepreneurs may encounter these additional challenges:

Language barriers

If you’re unable to converse in your native language, you would need to rely on someone to translate all written and verbal communication for you, Amine said. ACCESS offers free English as a second language courses and staff members work with entrepreneurs to translate business plans and financial statements back and forth between Arabic and English, Amine said.

“We need them to understand and communicate that back to us,” Amine said. “They need to be able to have a legitimate conversation about their business.”

Immigration status

Common immigration classifications in the U.S. include:

  • Naturalized U.S. citizen: A foreign-born person granted U.S. citizenship.
  • Green card, or permanent resident: Permitted to live and work permanently in the U.S.
  • Employment Authorization Document, or EAD: Permitted to work in the U.S. for a specified period of time.
  • B-1 Visitor for Business Visa: Allows temporary status in the U.S. for business purposes.
  • Student visa: Grants entry to the U.S. for educational purposes. Some student visa holders are eligible to work.
  • Undocumented immigrant: A foreign-born person who is unauthorized to live or work in the U.S.

There’s nothing in the U.S. tax code that says you have to be a U.S. citizen or even hold a green card to start a business, but your immigration status could make the process more difficult.

Depending on your immigration status, you may not have a government-issued identification number. This could affect your ability to open a business bank account or hire employees, said Lafleur of the Center for Women and Enterprise in Massachusetts. However, there are alternative identification options, which we’ll discuss in a later section.

Although the U.S. does not provide any type of “startup visa” to bring immigrant entrepreneurs to America, there are a couple of visa classifications that could be useful in starting a business. The EB-5 visa classification grants entry to investors in commercial businesses, and the O-1 visa allows temporary status for those who demonstrate an “extraordinary ability” in business, education, athletics or the sciences. These are just a few of the many types of visas.

Business financing

When Torres opened My Little Best Friends, her cousin’s investment wasn’t enough to get started. They were approved for a loan backed by the U.S. Small Business Administration, but it took a while to find the right bank.

“Getting a loan for a startup was really difficult. We went to seven banks and nobody wanted to believe in us,” Torres said. “We felt discriminated against.”

Many entrepreneurs don’t have enough seed money to get started, Lafleur said. She’s seen immigrant entrepreneurs struggle producing the necessary financial documents when applying for financing, often because they don’t have the time or the knowledge to gather the information.

Lafleur’s experience is borne out by the research: Latino business owners, for example, struggle to find financing available at acceptable terms and tend to rely on informal financing from friends and family, according to the Stanford Latino Entrepreneurship Initiative (SLEI). Venture capital funding is also more difficult to obtain for minority and women founders.

“They need to be able to express what they think their revenues will be, what their expenses will be and what their profit margins will be,” Lafleur said. “The financial piece of it is extremely important.”

How to start a business as an immigrant

Starting a business as an immigrant entrepreneur requires a few extra considerations. Here are some steps to follow to begin.

Understand laws and regulations.

Although immigrant entrepreneurs may have had successful businesses in other countries, they may not be aware of all that’s required of business owners in the U.S., Amine said.

“They need to know the laws that are established in this country and how things work,” Amine said.

Several masonry workers who attended a recent ACCESS workshop had already begun operating a business but hadn’t registered the company and were working under their own names, Amine said. He explained that if an accident occurred and the business ended up in a legal matter, all the owners would be responsible without any protection from personal liability.

Registering your business is not always required, but would separate you from the company, depending on the structure you choose. A business structure or entity, such as a limited liability company or corporation, would protect you and other owners from being personally liable for the business. A sole proprietorship or partnership would not offer protection and would be better suited for low-risk businesses.

Typically, corporations, partnerships and LLCs need to be registered in the state where you conduct business. Sole proprietorships do not need to be registered, which could be appealing to entrepreneurs concerned about their privacy or immigration status, Lafleur said.

Apply for a Social Security or Individual Taxpayer Identification Number.

As mentioned earlier, a government-issued ID is required for several aspects of running a business. Any immigrant who is lawfully residing in the U.S. can request a Social Security card, either at the same time that they apply for a visa or after receiving it.

If you do not have a Social Security number, you could apply for an Individual Taxpayer Identification Number from the IRS, which would be an acceptable form of ID to open a checking or savings account. Nonresidents can apply for an ITIN, regardless of immigration status.

You could also use an ITIN to apply for an Employer Identification Number, or EIN. An EIN would be necessary if you plan to hire employees, as you would use the number to report employment taxes to the IRS.

Open a business bank account.

Entrepreneurs should open a business bank account to keep personal and business finances separate. Having a business account would help you track your revenue and business costs independent of your personal income and expenses.

You may be able to open an account at a local bank or credit union that caters to immigrant business owners, such as Cooperativa Latino Credit Union in North Carolina. Those financial institutions may provide materials in multiple languages or employ bilingual staff members. They may also be a good place to turn to for financing, which we’ll discuss more in a later section.

Write a business plan.

A business plan is a road map for your company and should detail each aspect of the operation, from customer research to marketing plans. When applying for financing, expect to turn over your business plan to lenders, who will use it to gauge the potential success of your business.

Oftentimes, immigrant entrepreneurs don’t have time to spend writing a business plan, Lafleur said. However, the document is crucial when starting a business.

“There’s a lot of resistance to writing a business plan,” Lafleur said. “But that’s what the banks want to see.”

A basic business plan should include the following information:

  • Summary of product or service and company mission statement
  • Market analysis and industry outlook
  • Description of your management team
  • Marketing and sales strategy
  • Financial projections
  • Additional documents like resumes, business permits or credit histories

Presenting a business plan when you apply for financing would help you look professional as a business owner and could speed up the approval process, Torres said.

Financing options for immigrant entrepreneurs

Once you have your ID number and business plan in place, you could start your search for financing. It could be difficult to get approved for startup financing, as lenders typically prefer borrowers who have been in business for two to three years, Lafleur said. However, the financing options below may be well-suited for immigrant entrepreneurs who need funding.

Interest-free loans

A number of financial institutions offer interest-free loans for business owners with cultural restrictions on borrowing, Amine said. In the Islamic community, for instance, it is frowned upon to take out a loan that must be paid back with interest, he said.

“There’s a number of institutions that offer interest-free loans for one reason or another,” Amine said.

For example, the Jewish Free Loan Association offers interest-free small business loans to Los Angeles residents of all faiths. Eligible business owners could receive up to $75,000 to fund their venture.

Microloans

The SBA microloan program provides small amounts of capital to underserved small business owners. Borrowers could receive up to $50,000 to start or expand a business. The program targets women, low-income, veteran and minority business owners. SBA-backed loans typically have competitive interest rates and favorable repayment terms. SBA microloans are not available to undocumented immigrants. The SBA requires nonresident applicants to submit a Social Security number, a permanent resident card or green card, or other documentation of legal status from the United States Citizenship and Immigration Services.

Local organizations may also offer microloans to immigrant-owned businesses in the community. For instance, New York-based Business Center for New Americans offers microloans from $500 to $50,000 with 3-year repayment terms.

Crowdfunding

Online crowdfunding platforms allow business owners to accept financial contributions from friends, family and members of the general public. Whether you have to repay funds or offer something in return would depend on the platform. GoFundMe lets you accept donations without providing anything in return. Others, such as Kickstarter and Indiegogo, may require you to offer a product or stake in your company in exchange for funding.

Resources for foreign-born small business owners

Like the Center for Women and Enterprise in eastern Massachusetts and ACCESS in Michigan, there are organizations across the U.S. that provide resources for immigrant entrepreneurs at the startup stage and throughout the life of the business.

“Being able to educate that population, getting them to realize what the laws are, it takes a little bit longer than several weeks,” Amine said. “That’s OK. It’s not a rush to the finish line.”

Check out these few organizations and professionals you could turn to for business assistance.

Small Business Development Centers

Through a partnership with the SBA, Small Business Development Centers provide consultation and training to entrepreneurs in cities throughout the country. There are nearly 1,000 centers that are typically hosted by colleges and universities or state economic development agencies. The SBA also supports development centers for certain demographics, such as women and veteran business owners. Find your local center here.

Legal groups

Law firms or legal groups in your area may provide pro bono services to help immigrant-owned businesses for free. For example, Volunteers of Legal Service in New York offers pro bono legal work to immigrants through its immigration and microenterprise projects. The Immigrant Legal Resource Center is a national nonprofit that also provides assistance and education to immigrants.

Local entrepreneurial community

Networking with other business owners in your community can prove beneficial, especially if you connect with fellow immigrant entrepreneurs, Lafleur said. Even when operating in different industries, entrepreneurs can often be resources for one another, she said. Some cities also have minority chambers of commerce.

Torres discusses her experience opening My Little Best Friends in Malden, Mass. at the Malden Chamber of Commerce, where she is second vice president, and periodically speaks to classes at the Immigrant Learning Center, which is also in Malden. She shares lessons she’s learned while running the business, hoping to help prospective immigrant business owners find their own path to success.

“One thing I always tell them is never give up,” Torres said. “If you have a dream that you feel like you can accomplish, fight for it.”

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Melissa Wylie
Melissa Wylie |

Melissa Wylie is a writer at MagnifyMoney. You can email Melissa at [email protected]