A critical component of starting a business is capital. While it’s hard enough for all new entrepreneurs to secure financing, women and business owners of color are often at a greater disadvantage. Minority-owned businesses are denied financing from traditional banks at higher rates than white-owned businesses, according to a Kauffman Foundation report. These low approval rates often discourage owners of these firms from applying for bank funding, putting them at risk of turning to predatory business lenders. When minority businesses do receive small business loans, owners may end up paying higher interest rates. Minority businesses typically receive smaller loan amounts as well.
Minority-owned businesses make up 29% of all firms in the U.S., according to data from the U.S. Census Bureau. If these businesses achieved economic parity, the Census Bureau estimates 13 million additional jobs would be realized by the U.S. economy.
The good news is there are already many loan programs specifically designated for entrepreneurs of color. Rates and fees mentioned below are accurate as of the date of publishing. Here’s a look at some available options.
10 minority business loans to consider
1. SBA Microloan Program
The U.S. Small Business Administration’s microloan program provides funding to minority-owned businesses, as well as women, low-income and veteran business owners, who may have trouble qualifying for traditional bank financing. Nonprofit lenders administer microloans in amounts of $50,000 or less. Microloans have a maximum term of six years and interest rates typically range from 6.5% to 9%. The average in fiscal year 2017 was 7.5%. SBA microloans can be used to purchase supplies, furniture, fixtures and equipment and to cover other working capital expenses.
2. SBA Community Advantage Loan Program
Another SBA program for underserved business owners is the Community Advantage loan program. Nonprofit lenders provide financing for small businesses in underserved areas. Qualifying business owners can receive up to $250,000 to cover any business expense. Community Advantage loans have a maximum term of 10 years for working capital loans and 25 years for fixed-asset or refinanced loans. The maximum interest rate on these loans is the current prime rate plus 6%. Underserved markets eligible for Community Advantage loans include businesses in low-to-moderate income communities, businesses where more than half of the full-time workforce is low-income and veteran-owned businesses, and those living in Opportunity Zones or areas defined as “mostly rural” or “completely rural” by the Census Bureau.
3. SBA 8(a) Business Development Program
Although not a loan program, the SBA 8(a) business development program also helps underserved business owners receive funding. The program ensures at least 5% of all federal contracting dollars are awarded to small, disadvantaged businesses each year. Economically or socially challenged business owners can be certified as an 8(a) small business if they own at least 51% of the company and have a personal net worth of $250,000 or less or an average income of $250,000 or less in the past three years. Qualifying businesses can compete for contracts and receive mentorship from an SBA-approved business owner.
4. Community Development Financial Institutions
The Community Development Financial Institutions Program combines federal resources and private funding to serve small businesses in underserved communities across the country. Community Development Financial Institutions are private banks, credit unions, loan or microloan funds or venture capital providers that help businesses in low-income communities access capital. There are more than 1,000 CDFIs operating throughout the U.S. Some CDFIs partner with major banks like Bank of America to provide larger loans, sometimes up to $1 million.
5. Business Center for New Americans
The Business Center for New Americans provides financial assistance for immigrant and refugee business owners in New York. The BCNA is a certified CDFI and is an SBA-backed microlender. Loans from the BCNA range from $500 to $50,000 with a maximum term of three years. Interest rates range from 8.25% to 10%, depending on the loan amount. There’s no minimum credit score required to qualify for a BCNA loan, but business owners must be able to show how they’ll repay the debt.
6. Valley Economic Development Center
The Valley Economic Development Center is another CDFI that works with business owners who may not qualify for traditional financing. VEDC offers three different loans ranging from $500 to $500,000 with terms from six to 60 months. Interest rates start as low as 7.75%. VEDC loans can be used to cover business expansions, working capital costs, new equipment purchases or to refinance existing debt. While VEDC works with all types of small businesses, the center focuses on women and minority business owners. VEDC has offices near Los Angeles, New York and Chicago.
7. Union Bank Minority Small Business Loans
Union Bank’s Business Diversity Lending program provides loans and lines of credit to qualifying small business owners who fall into the following ethnicity and race categories: Hispanic or Latino; American Indian or Alaskan Native; Asian; Black or African American; Native Hawaiian or other Pacific Islander. Secured and unsecured financing options are available at both fixed and variable rates. To qualify, businesses must have been in business for at least two years and have annual sales of $20 million or less. Business owners can borrow up to $2.5 million. Find your nearest Union Bank branch here.
8. The Affiliated Tribes of Northwest Indians Revolving Loan Fund
The Affiliated Tribes of Northwest Indians provides loans to Native American-owned businesses that have trouble qualifying for traditional financing. ATNI aims to grow businesses and bring jobs to distressed Native American communities. The Revolving Loan Fund supplies loans up to $125,000 with a 10-year term maximum. Loan interest rates are fixed but may be higher than bank rates. Business owners can use RLF loans to purchase equipment, inventory, new buildings or to cover any working capital expenses.
9. Latino Economic Development Center
For Latino business owners near Baltimore and Washington, D.C., the Latino Economic Development Center provides loans that can be used for working capital, equipment, inventory, advertising and marketing. The LEDC issues loans between $5,000 and $50,000. Terms range between one and five years and interest rates span 9% to 14%. When approving loan applications, the LEDC considers the strength of the business, available collateral, character references and credit score of the owner, although there is no minimum credit score required. Startups can also apply for these minority business loans.
10. Carolina Small Business African American Loan Fund
The African American Loan Fund from the Carolina Small Business Development Fund offers loans to African-American-owned businesses in North Carolina. Loan terms range from $25,000 to $250,000 and can be used to cover business acquisitions, equipment, commercial real estate purchases and debt refinance. Interest rates are typically lower than 10%. To qualify, business owners must have at least one year in business, one to 200 employees and an annual revenue of at least $75,000. Startups with fewer than 12 months in business may also apply, as long as the owner has established personal credit.
More resources for minority small business owners
Minority-owned businesses may need more than money. Many organizations offer research, mentorship and other support for minority small business owners.
Minority Business Development Agency: MBDA is part of the U.S. Department of Commerce and promotes the growth of minority-owned businesses throughout the country by utilizing public and private sector programs, policy and research. MBDA Business Centers are available to business owners looking for help in a range of areas, from securing capital to accessing new markets. Find your local MBDA Business Center here.
Minority Chamber of Commerce: The Minority Chamber of Commerce is a nonprofit organization providing business education, networking and advocacy. The organization hosts seminars and workshops related to a range of business topics, from management to finance. The Chamber has offices in New York, Washington, Atlanta, Miami and on Puerto Rico.
Minority business accelerator programs: Many cities have accelerator programs for minority-owned businesses, providing them with resources and mentorship over a set period of time. For example, the Cincinnati Chamber accelerator program boosts Hispanic and African-American-owned businesses through coaching and networking.
The bottom line
Starting a business can be challenging for all entrepreneurs, but minority-owned businesses often face additional hurdles. Historically, lack of capital has been one of the major obstacles standing in the way of entrepreneurs of color achieving their dreams.
Several national programs exist to help minority-owned firms secure financing to run their operations. Owners can apply for minority business loans that would best fit their needs and take advantage of community resources that are available for additional business support.