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Small Business Lending 101: What Every Entrepreneur Should Know

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.

Small business lending 101
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Before you sit down at a bank — or in front of a keyboard — to apply for a business loan, there are a few questions you should ask yourself. How much money do you want to borrow? What is the loan for and why do you need it? Those might seem like obvious questions, but many business owners don’t have the answers when they apply for loans.

Navigating the loan process can be tough. Asking for as much money as you can get might put you on the hook for way more than you can afford to pay back. Asking for too little could cause problems if you underestimated your costs.

You must first figure out what you need to use the money for — business expansion, equipment purchase, debt payoff, inventory — and then determine how much you can realistically afford to repay, making sure you include all fees and interest. If you’re looking at a term loan, for example, you can use an online amortization schedule calculator to estimate your monthly loan payments.

Ideally, the only time a business owner should take out a business loan is to increase sales or increase profit margins, according to the Women’s Business Development Center in Chicago. That might not always be practical, but you should always proceed with caution when you need money quickly to cover immediate business expenses; that’s when you’re most likely to pay high interest rates and fees.

What’s your business profile?

There are three main factors that traditional lenders look at when they consider your business loan application:

  1. Your personal credit score
  2. Time in business
  3. Annual business revenue.

Personal credit score

Most lenders give more weight to your personal credit than your business credit score because they consider that a more accurate sign of how consistently you pay down debts. Most banks and credit unions want to see a score of at least 680, but possibly as high as 720. The higher your score, the better your chances of being approved — and getting a good interest rate.

Time in business

Traditional lenders often require two years in business and will request proof by looking at two years’ worth of business statements. That can make it tough for new businesses to get a loan from a traditional lender, but you’ll stand a better shot if you have good credit, strong business sales and collateral.

Annual revenue

Most traditional lenders want to lend to a business that’s bringing in at least $100,000 a year in revenue. The lender wants to be confident you have enough money coming in — and not too much going out — so you can successfully manage your new loan payment.

Types of lenders

To get approved for a loan from a bank, credit union or government partners like the U.S. Small Business Administration, the requirements are similar. And online lenders’ requirements are typically less stringent. As a rule of thumb, keep in mind that the faster and easier it is to get a loan, the more expensive it will be. Read on to find out more about different financial institutions’ requirements:

  • Banks. Most people think about traditional banks when considering a loan. Although big banks are household names — Chase, Bank of America, Citigroup, Wells Fargo — they approve only 25% of small business loans. Smaller institutions, sometimes called community banks, are often defined as those with $10 billion or less in assets. According to the Biz2Credit Small Business Lending Index, small banks approved 49.1% of small business loans in January 2018. Whether large or small, banks’ loan requirements are stricter than online lenders, but they generally offer the best interest rates.
  • Credit unions. Credit unions are nonprofit institutions that usually require membership to get a loan. Although they have roughly the same loan requirements as traditional banks, they offer additional benefits because they’re nonprofits. Credit unions often give profits back to their members in the form of lower loan rates, higher savings or checking account rates and reduced fees. Credit unions’ small business loan approval rate was 40.3% in January 2018.
  • Government partner institutions/organizations. The U.S. Small Business Administration is the largest provider of government-backed loans. The SBA doesn’t directly lend money to business owners. Instead, it guarantees a portion of the loan that a lender approves. SBA lenders are typically banks and credit unions, although a few alternative lenders offer SBA loans. SBA business loans are tough to get — you need approval from the SBA and the lender — but they have low interest rates, long terms and high borrowing limits.The U.S. Department of Agriculture offers similar loan terms to borrowers, but approves loans only for rural projects. To get approved, your project must be located in an area with fewer than 50,000 people.
  • Online lenders. Sometimes called alternative lenders, these are online-based lenders who specialize in approving loans very quickly — potentially just a day or two — and offer less-stringent approval requirements. These lenders typically require a credit score between 620 and 640 (in the fair range), $50,000 in annual revenue and six months to a year in business. They almost always, however, charge much higher interest rates. A traditional bank loan might have an interest rate range of 5% to 10%, but an online lender can likely charge 7% to 30%. Online lenders approved 56.6% of small business loans in January of 2018.

Types of small business lending

It’s important to consider two things when getting a loan: the type you need and where you get it. A good rule of thumb is to use short-term debt to finance short-term expenses (like equipment that you’ll need to replace in less than a year) and long-term debt for long-term expenses (like equipment that you’ll need to replace in 12 to 48 months).

Review these seven types of small business lending products:

Personal loans

Personal loan approvals depend on your personal credit score. A personal loan might be a good option if you haven’t been in business very long — it can be tough for newer businesses to get a business loan.

You can secure a personal loan with collateral, such as a car title or a mortgage, or get an unsecured loan. Loan approval can be quick — anywhere from a day to a week — and you won’t have to fill out as much paperwork as you would with a traditional business loan. Keep in mind, however, that if your business fails and you default on the loan, your personal credit will take a big hit and your personal assets could be at risk.

Term loans

Traditional bank term loans are pretty straightforward — you borrow a set amount at a fixed interest rate and repay it over a period of time. These loans have some of the lowest interest rates, but you’ll need to have been in business for at least two years, have good credit and put up collateral. The term loan approval process can be lengthy.

Lines of credit

A line of credit allows business owners to draw from a set amount of credit and pay interest only on the amount they borrow. Once you repay the amount you borrowed, it becomes available to you again. These loans are good for seasonal businesses or those that need money to cover a cash flow gap. Most business lines of credit don’t require collateral.

Government-backed loans

Small business loans like those from the U.S. Small Business Administration or the U.S. Department of Agriculture are great options for stable businesses. They offer reasonable interest rates and long terms — and lenders might be more willing to loan to riskier borrowers because the government guarantees a portion of the loan. That doesn’t mean you’re off the hook if you default, though. You typically sign a personal guarantee that you will repay the loan, and that guarantee means lenders can try to collect their losses through your personal assets. The application process can also be lengthy, so this isn’t a good option if you need a quick cash injection for your business.

Specialty financing

Specialty financing includes loans for very specific purchases, such as leasing or buying equipment. You usually pay equipment loans over the estimated lifespan of the equipment you’re financing, and the equipment serves as collateral. Specialty financing also includes commercial real estate loans, which are designed for buying income-producing property for business use. The main drawback of these types of loans is that sometimes the length of the loan can be longer than the lifespan of the equipment.

Invoice financing

Invoice financing works like this: You use unpaid invoices as collateral to secure a cash advance, which is usually equal to a percentage of the invoice, but not the entire amount. You repay the advance along with a monthly fee, which ranges from 2% to 4% of the invoice value.

Invoice factoring, a similar alternative, works like this: You sell your outstanding invoices to a factoring company. The factoring company then collects on the outstanding invoices and gives you the full value of the invoices —minus a factoring fee, which is usually 3% to 5% of the value of the invoices.

Cash advances

When you take out a merchant cash advance, you get a lump sum of money that you pay back through a percentage of your credit sales each day. Your interest rate is based on a factor rate, which depends on your personal application. Cash advance merchants are more interested in the amount of sales your company makes than your credit score.

Cash advances are quick and fairly easy to get, but they can be very expensive because you must pay them quickly. These types of advances can come with an APR as high as 200%. You might also be able to take out a cash advance from a business credit card, but that’s another expensive option. Think of MCAs as a last alternative when it comes to business loans.

Finding the right loan for your business

Before you apply for a loan, make sure you fully understand the process and are aware of all your borrowing options. Research different types of loans and their approval requirements so you have a good idea of what will work best for your business. Here are some key things to consider before you apply:

  • Eligibility requirements. If it’s highly unlikely that you’ll get approved for a traditional bank loan, it might not be worth it to apply for one because the financial institution will conduct a hard pull on your credit. At the minimum, the three things you should know are your credit score, annual revenue and time in business. If you have poor credit and are running a newer business, you’ll probably want to start your search with online lenders. You might, however, be able to balance out any weaknesses in your application by providing collateral.
  • Time to funding. A traditional lender is a good fit for you if you meet all the requirements and you can wait as long as two months to get funding. If you need funding right away, however, it’s best to consider online lenders who can sometimes approve a loan within 24 hours.
  • Total cost. Make sure you know how much the total loan will cost over its term. In addition to the interest rate, many loans come with origination fees (lenders charge this to process a loan), a maintenance fee (lenders typically charge this annually) and a draw fee for borrowing from a line of credit. Evaluate the pros and cons of the timing of your funds vs. the total cost you’ll pay for those funds. If you choose a merchant cash advance, for example, make sure you know how the factor rate will be converted into an APR.

Getting approved: documents you’ll need

If you get a loan from a traditional bank or credit union, you’ll need to provide a lot of documentation and sign a lot of paperwork. Keep in mind that online lenders usually require less documentation. Here are some of the common documents you’ll need:

  1. Business financial statements. These will include a current profit and loss statement from the last three fiscal years, a cash flow statement and your balance sheet, both of which should be from the last 60 to 90 days.
  2. Bank statements. Some lenders require the last three months of your business bank statements to verify that you have a business banking account and enough cash to make loan payments.
  3. Current loan documents or leases. If you currently have a small business loan or equipment lease, you’ll need to disclose those documents. You’ll probably also have to provide a business lease or mortgage if you own the property where you run your business.
  4. Income tax returns. You’ll need the last three years of signed personal and business income tax returns. Online lenders might not require this for new businesses.
  5. Ownership and affiliations. Be ready to disclose any other businesses in which you have a financial interest. If you have partners, they might need to sign some of the paperwork, too.
  6. A business plan. Although many lenders don’t require a detailed business plan, most traditional bank loan lenders do. The SBA requires you to submit an in-depth business to get approved for a loan. You can find tips for writing a business plan, here.

The bottom line

Doing your research before you apply for a loan can save you a lot of money and trouble in the long run. Make sure you know exactly how much a loan will cost — and that you can afford the payments. Also make sure you understand exactly what will happen if you miss a payment or default on the loan. Most important, before you take out a loan, make sure that the funding will help you accomplish something positive for your business and not just add more debt.

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.

Jennifer Thomas
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Jennifer Thomas is a writer at MagnifyMoney. You can email Jennifer here

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

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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]