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The Ultimate Guide to Secured Business Loans

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.

Opening or expanding a small business usually involves a significant financial investment, whether it’s paying for building renovations, computers or additional inventory. For new business owners with ambitious plans, this type of investment often requires more capital than they have on hand, and existing businesses may not have enough cash available to grow while continuing to pay regular operating expenses.

One common solution is a business loan, which can be secured from banks or other private lenders for more favorable terms and lower interest rates than unsecured loans.

In this guide, we’ll cover:

Part I: Understanding Secured Business Loans

USBL Table

Business loans typically are secured or unsecured, and the type of loan that you can qualify for will depend on market conditions, your credit score, your assets and your business’s profitability and outlook.

Secured business loans require collateral – as much as 80 percent or more of the loan’s value, which shows that the borrowers can repay the loan if the business fails or the loan goes into default. That means that business owners need to show the lender that they are willing to take on significant risk, including the possibility of losing their house or business assets, to secure financing for their business venture.

Unsecured loans do not require collateral and typically are easier to qualify for. For secured business loans, on the other hand, lenders look for applicants who are in a position to pay the loan back regardless of the business’s success and are willing to risk their own assets for the business. Applicants also need to have good credit and businesses that are feasible in the current market.

“That’s why [lenders] want people to have a proven track record of doing things responsibly,” says Roman Starns, a business consultant with the Louisiana Small Business Development Center. “[Borrowers are saying,] ‘look, I’m willing to put my home equity in, I’m willing to pledge some real estate, I’m willing to put 20 percent down in cash to make this business work.’

“That’s going to mean they are more likely to run that business well and do well at it. If someone puts nothing into it, they have nothing to lose but their credit.”

Lenders also will investigate whether the business is viable in the current market. An entrepreneur who wants to open, for example, a VHS repair shop could have a solid business plan and financial backing, but lenders likely will reject the application.

“They are going to look at the market conditions for this loan as well,” says Starns, who has 20 years’ experience as an entrepreneur and small business owner. “No one has VHS anymore. They want to see that this is a workable business and the financial projections on it show that, within reason, you’re going to be able to pay back everything and the business is going to make it. It’s not as easy as, ‘Oh, I have a great idea that’s going to work,’ and you go get a loan for the money.”

Part II: Types of Business Loans

Traditional lending institutions, such as banks, offer standard secure business loans through a simple application process. Borrowers can apply in person or online, and bank professionals will work with the borrower on the terms and amount of the loan. For applicants and businesses in good financial shape, this process can be quick and easy.

The type of business loan a borrower applies for will depend on their need for cash, financial situation and availability of collateral. Here are some options for business owners considering secured business loans.

Term loans

Term loans are best for business owners who have a specific, one-time need for cash, such as buying an expensive piece of equipment or financing a major building renovation. A term loan will provide the money up front in a lump sum, and the borrower pays it back over time. These loans typically are approved for established businesses that need extra cash to expand or enhance their services.

The length of the repayment period will depend on the purpose of the loan and the amount of collateral the borrower can offer. Until recently, term loans were offered between two and five years, but now they can be repaid in as little time as six months or as long as 25 years.

Deciding which type of term loan you need depends a lot on how soon are prepared to repay the loan.

Up to 2 years: Short-term loans

Short-term loans, which are best for paying for a pressing business need, must be paid back quickly. Terms might require daily or weekly payments, which allow the borrower to pay back the money quickly and minimize financing costs.

2 to 5 years: Medium-term loans

Medium-term loans are ideal for companies that are growing and are optimistic about their future. These loans, which usually are repaid in two to five years, allow business owners to put plans for expansion into action immediately rather than waiting to save enough money to buy equipment or other assets that will allow the business to grow. Medium-term loans can be unsecured or secured, and approval is based on the applicant’s credit score and collateral, if required.

10-25 years: Long-term loans

Long-term loans are designed for businesses that can project growth years. The amount of these loans, which have repayment terms ranging from 10 to 25 years, is dependent on the need, and they can range from several thousand dollars for a small equipment purchase up to $1 million for buying a building or property.

SBA-guaranteed loans

It is a common misconception that the Small Business Administration, a government agency that provides assistance to small businesses, loans money to businesses. Instead of making loans directly, the SBA creates guidelines for loans and then guarantees to its lending partners that their loans will be repaid.

The SBA works with several different kinds of institutions, including traditional lenders, microlending institutions and community development organizations. When a business applies for an SBA loan through one of these partners, the partner provides a loan that is structured according to SBA rules and is guaranteed by the SBA.

Because the SBA is a government organization, its rules and practices can change as government fiscal policies adapt to the current economy. It’s important to always check with the SBA for its most current policies and loan programs.

The SBA typically will not offer loans to businesses that can secure financing on their own, and it does not offer grants to new or expanding businesses. It does provide several programs to help borrowers finance different aspects of a business.

  • General small business loans: These loans, called 7(a), are the SBA’s most common loan program and can be approved for up to $5 million, although the SBA states that the average 7(a) loan for fiscal year 2015 was about $371,000. These loans are assigned low interest rates, and the SBA will guarantee as much as 85 percent of the loan up to $150,000. Seventy-five percent of loans over $150,000 are guaranteed. The loans are generally available to small businesses that do business in the United States and have already used alternative funding sources, such as personal savings.
  • Microloans: Available for startups and business expansions, SBA microloans are provided through intermediary nonprofit community organizations for up to $50,000. The average microloan is $13,000, according to the SBA, and interest rates are between 8% and 13%. Business owners usually are required to pledge collateral and a personal guarantee.
  • Real estate and equipment loans: The CDC/504 program offers loans for buying land, improving property, constructing and improving buildings, and purchasing equipment and machinery. Successful applicants will have a feasible business plan, no available funding from other sources, good character, and business projections that show an ability to pay back the loan. Loan amounts are based on how the business will use the money and how closely the business’s plan meets the program’s goals.
  • Disaster loans: When businesses suffer losses due to a declared disaster and are in a declared disaster area, SBA low-interest disaster loans are available to replace or repair real estate, personal property, inventory, business assets, and equipment and machinery damaged in the disaster. Owners of businesses of all sizes can apply online, at designated disaster recovery centers, or by mail, and the loan can be repaid in monthly payments or a lump sum. Loans can be approved for up to $2 million.

Business line of credit

A business line of credit works much like a business credit card, allowing the business to access funds as needed and make minimum monthly payments to repay the borrowed money. Through this type of lending, business owners can set their own borrowing and repayment schedules, depending on their cash flow.

Lines of credit are appealing to businesses because they are easier to obtain than standard secured loans, and the business owner does not pay interest until they withdraw money from the credit line. This type of borrowing is best for established businesses with optimistic outlooks, as struggling businesses in danger of failing may leave the owner personally responsible for unpaid debt.

Chris Kline, co-owner of a pillow manufacturing business in Bucks County, Pa., says his business recently took out a $50,000 line of credit to buy more manufacturing equipment to meet increasing demand for their products. Kline and artist Eric Fausnacht opened the business manufacturing pillows printed with Fausnacht’s artwork five years ago, and Kline helped move the business from arts and crafts shows into the wholesale market.

The application process for a line of credit included a meeting with a bank official, who visited the company on-site and talked at length with the business owners about their company and business projections.

Kline, 45, says that he prefers to borrow conservatively, and he and Fausnacht pledged business assets rather than personal assets to secure the line of credit. While unsecured lines of credit are available for maximums under $100,000, secured lines of credit typically have lower interest rates and higher credit lines.

“I’m not looking to borrow more than 10 or 15 percent of annual sales,” Kline says. “And I’m confident we will be able to pay that back if something unforeseen happens.”

The new equipment purchased with the line of credit already increased production and revenues enough that Eric & Christopher now has eight or nine full-time employees and additional part-time staff.

Equipment loans

Many businesses require expensive equipment, such as an X-ray machine or a tractor, to get started. Without revenues from the business, a business owner may not have the capital to pay for the equipment. An equipment loan, which several types of lenders offer, can help a business buy the equipment it needs to begin or expand operations.

Unlike many other types of business loans, the equipment can serve as collateral for the loan and makes the loan easier to obtain. If the borrower can’t make the payments, the lender will repossess the equipment and sell it to recoup some of its losses. Applicants for equipment loans should have good credit and cash available for as much as a 20 percent down payment.

Equipment loans typically come with low interest rates and manageable payments, making them good tools to help businesses afford expensive purchases. Business owners must pay off the entire loan, even if the loan repayment term is longer than the life of the equipment.

Invoice financing (factoring)

Invoice financing, also called invoice factoring, is an easier way for an established business owner to raise capital than with a standard secured loan. This process allows business owners to sell their outstanding invoices at a discount to a third party, which then collects on them to repay a single-payment loan issued to the business owner.

These types of loans are beneficial for business owners who need cash faster than the repayment deadline on the invoices. Invoice financing can cover cash flow gaps and payroll, for example, and it is low risk because the money comes from completed sales rather than sales projections. The downside is that invoice financing requires substantial fees.

Inventory financing

Businesses that depend on a steady flow of inventory can use inventory financing to keep their shelves stocked or to buy more inventory for seasonal sales increases. Inventory financing also can help small businesses with cash flow during periods of slow sales.

Inventory financing provides a revolving line of credit that business owners can draw on as needed. The business owner pledges existing inventory as collateral for the loan.

Part III: How to Secure Your Business Loan

There are several ways to secure a business loan. You can use hard assets for collateral, like a house or a boat; paper assets, like investments and savings accounts; or your own inventory and invoices. We’ll dig into types of ways to secure your business loan here.

Securing your business loan with collateral

If you or your business has significant assets, you likely are a good candidate for a secured business loan. Lenders will consider the amount of collateral you have when deciding on your loan application, as they want to reduce their risk in case you can’t repay your loan. If you default, lenders will take possession of collateral and sell it to regain at least some of the money they lent you.

This is where risk can come in. While your business may be secure when you apply for the loan, downturns in the market or other unexpected events may push a business into hard times. For example, if an unsavory business moves in next door, your customer traffic may slow significantly. If a machine breaks down or needs to be replaced, production could be slowed and orders unfulfilled. Theft and natural disasters that destroy your business’s property also can severely reduce revenues and lead to unexpected expenses.

If unforeseen circumstances result in a business owner being unable to make loan payments, the lender can seize collateral. As a result, a business owner can lose their house, their car or their savings. If the collateral is property belonging to the business, seizure can be just as devastating, and losing significant business assets can cause the business to close.

The payoff for a secured loan, though, will be more flexible loan terms and significant financial savings over time. Borrowers with secured loans will pay lower interest rates and fewer fees, and they may not be penalized for paying off the loan early.

Hard vs. paper assets

Lenders typically will accept personal and business assets, which a business owner can pledge as collateral if they want to protect their personal property. Either way, borrowers must promise the lender something valuable that can easily convert to cash in the case of default to recoup losses.

Borrowers can pledge two types of collateral: hard assets and paper assets. Hard assets include houses, vehicles, boats and land, while paper assets include stocks, savings, investments, insurance policies and bonds. Lenders also will happily accept cash accounts as collateral, but they will not consider retirement accounts, such as 401(k) plans.

Business assets that qualify as collateral include inventory, insurance policies, accounts receivable, machinery and equipment, and unpaid invoices.

Some lenders may attach a blanket lien to a loan as collateral, and borrowers should be aware of the sweeping consequences this can have if the loan goes into default. Blanket liens give lenders a legal claim to all of your assets, business or personal, if you stop making loan payments.

Securing your business with a personal guarantee

In many cases, borrowers will be asked to provide a personal guarantee for a secured business loan. This requires the signatures of all principal owners, ensuring that they have assets they can put up as collateral. While the signatures are on unsecured promises, a personal guarantee does allow the lender to take signers’ assets if the loan is not paid. If you don’t have enough assets to personally guarantee a loan, business consultant Starns recommends finding a business partner who does.

Personal guarantees are different from collateral in that they give lenders access to a wide range of assets, while collateral typically specifies assets the lender can seize in case of nonpayment.

It’s important to know what you’re signing when offering a personal guarantee. If you do default on the loan, the lender may release you from the personal guarantee if you ask, and you also could try to arrange with the lender to first sell business assets to satisfy the outstanding debt before they seize your personal assets.

Part IV: Shopping for a Secured Business Loan

Borrowers can apply for secured business loans at several types of financial institutions. Banks and credit unions offer standard application procedures that include filling out an application in person or over the phone, discussing terms and the loan amount with a loan officer, and working with a business specialist to access funds if the loan is approved.

Business owners can apply for SBA loan programs through partner lenders, which can include banks and community organizations that work within SBA guidelines. Borrowers will need to download and complete an SBA loan application and be prepared to submit documents such as personal background and financial statements, business financial statements, and income tax returns. A list of SBA lenders is available on the agency’s website.

Online lenders typically have faster application processes and can get money to borrowers quickly, but they often come with higher interest rates than traditional lenders. Some online lenders often charge origination and monthly maintenance fees as well.

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Before business owners begin shopping for a secured business loan, financial advisers recommend realistically assessing their business’s economic situation. Secured business loans come with great personal risk, as a failed business and inability to pay off a secured loan can cost a business owner significant personal or business assets. Online calculators can help borrowers estimate potential monthly payments and make good decisions about what amount of loan they can afford.

Bob Burton, a retired businessman who now volunteers as a mentor for the Charlotte, N.C., office of SCORE, a national organization that provides mentoring and education to small business owners, says he makes sure that clients understand the economics of their idea for a business.

“They have to make the call whether they want to put their money in it,” Burton says. “A lot of people don’t understand what’s involved in starting a business. It sometimes can look very simple, but it can be quite complex.”

Starns advises borrowers to think through how realistic their plan is, including whether they are truly committed to the endeavor and have enough experience to execute it, before taking on a secured loan.

“You’re risking a lot of things,” he says. “Owning your own business is rewarding, but it’s also risky and takes a special mentality to be able to do it.”

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.

Marty Minchin
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Marty Minchin is a writer at MagnifyMoney. You can email Marty 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]