In 2020, 4.3 million new businesses opened in the United States, which was a 24.6% increase from the previous year in the number of new businesses started.1 However, minority-owned businesses were more likely to report that they experienced financial challenges in the second half of 2019 through the second half of 2020, and they may have trouble getting approved for bank loans.2
Data from the U.S. Census Bureau revealed nearly 70% of minority-owned businesses that applied for business financing in 2020 needed the money to cover the expenses required to run the business, compared to 53% of nonminority businesses that applied for business financing in 2020.
Key Takeaways
Organizations such as the National Supplier Development Council and the Minority Business Development Agency work to support and provide resources for minority-owned businesses.
Make sure you have a business plan, strong credit, and any necessary documents when applying for a loan.
If you can’t get a traditional loan, you may be able to get an alternative source of funding from a grant or online lender.
How To Apply for a Minority Small Business Loan
When looking for a loan, know your loan preferences and determine what will work well for your business. Determine how much money your business needs and whether you would prefer a short-term loan, which will garner less interest, or a long-term loan, which will allow you to take out larger amounts and pay over a longer period of time. Also understand the conditions of the loan and make sure your business can afford the monthly payments. To increase the likelihood that you qualify for a small business loan, you should:
Have a business plan
Build up your credit score (both personal and business credit)
Do research to find out which loans are the best fit for your business needs
Calculate your startup costs and come up with a break-even analysis
Have all relevant business documents
Make sure you understand loan terms
Get certified as a minority-owned business
Note
If you’re working to improve your credit for better interest rates, aim to lower your credit utilization, which is the amount of credit being used compared to your total available credit and that makes up 30% of your credit score. In general, aim to have a credit utilization of 30% or less, which means only using 30% or less of your available credit.
As you search for financing, you may find that some programs geared toward minorities are more generalized, while others are more specific. For example, the Native American Business Development Institute (NABDI) offers grants to help tribes and tribal organizations decide whether a business or economic opportunity is worth pursuing. The grant funds feasibility studies and business plans, which can help tribes get the financial backing they need from potential lenders and investors. There are many different programs that may be able to help you start or grow your business.
Best Types of Loans for Minority-Owned Businesses
There are some programs specifically for minorities, since minority entrepreneurs often have more difficulty obtaining loans.
National Minority Supplier Development Council and Business Consortium Fund
The National Minority Supplier Development Council (NMSDC) is an organization that works to help minority business enterprises (MBEs) grow. The organization provides certification for MBEs and provides connections to other businesses. NMSDC’s Business Consortium Fund provides loan programs and consulting services exclusively for certified MBEs.3v4
Minority Business Development Agency
The Minority Business Development Agency (MBDA) is operated by the U.S. Department of Commerce and aims to help minority-owned businesses throughout all industries. The MBDA offers a variety of resources and connects MBEs to private lenders, including investors, banks, and mutual funds.5
USDA’s Farm Service Agency
The Farm Service Agency, which is part of the U.S. Department of Agriculture (USDA), works to ensure that a portion of its loans go to those in underserved communities. This includes its microloans, youth loans, direct operating, direct farm ownership, and guaranteed loans.6
Programs From Large Banks
Many major banks have recently implemented programs for small businesses owned by minorities.
US Bank has started a pilot program that connects Black business owners with advisors who can help them access business development opportunities and connect them with resources they may need for their business.
Between 2022 and 2025, PNC plans to provide $26.5 billion in loans to small LMI, minority-, women-, and veteran-owned businesses.
Bank of America has launched a Small Business Down Payment Grant Program to help women and minority business owners purchase commercial real estate.
Other large banks have also recently made large contributions and partnered with minority depository institutions to help promote the growth of businesses in underserved communities.
Other Loans and Funding Opportunities for Minorities
MBE Connect and the U.S. Minority Chamber of Commerce are two other organizations that can connect minority small business owners with the resources they need.
There are also programs designed for specific minority groups. Those programs include:
National African-American Small Business Loan Fund
Accompany Capital loans, formerly known as Business Center for New Americans
Indian Loan Guaranty, Insurance, and Interest Subsidy Program
Asian Women Giving Circle
Latino Community Foundation
SBA Loans and Programs for Minorities Who Own Businesses
The U.S. Small Business Administration (SBA) backs several types of loans to assist small business owners. Borrowers must work with lenders because the SBA does not directly provide loans unless the business is recovering from a declared disaster. The SBA offers a lender match program to allow small businesses to connect with these lenders.
Note
The loan requirements are set by the SBA. Businesses must be for-profit, based in the U.S., and classify as a small business.
The SBA also provides contracting certifications and business development programs for minority-owned businesses through the 8(a) Business Development program, the HUBZone program, and the SBA Mentor-Protégé program.
7(a) Loans
The 7(a) loan program is guaranteed by the SBA and provides a maximum amount of $5 million. These loans can be used for working capital, refinancing business debt, business acquisition, real estate, and other purchases needed to run the business.
Microloans
The SBA microloan program provides loans of up to $50,000. These loans can be used to help expand or improve businesses. Some things businesses might use the proceeds for include inventory, equipment, and working capital. Microloans cannot be used for real estate or to pay off existing debts.
Community Advantage Program
The Community Advantage Program connects small businesses with lenders who are focused on lending to new businesses, businesses owned by veterans, and businesses in underserved communities, including low- to moderate-income communities.
Other Loan and Funding Options
Minority small business owners sometimes have trouble getting access to traditional bank loans. A 2021 report found that 71% of white-owned companies who applied for PPP loans through large banks received all the funding they requested, while only 41% of Black-owned companies received the full funding they requested.7
Grants
Small business owners can find a variety of grants through www.grants.gov, as well as through local initiatives. They may also find specific programs for their industry from various organizations. Some grants for minority business owners include Galaxy Grants from Galaxy of Stars, NAACP grants for Black-owned small businesses, and the Community Development Financial Institutions Fund’s Native Initiatives.
Alternative Lenders
If you can’t get a traditional loan from the SBA or a bank, consider alternative or online lenders. Alternative lenders provide loans that are similar to those of a traditional bank but generally are more lenient and are processed much faster. These loans may come with higher interest rates than a traditional loan would, since they typically are used by small businesses who haven’t been approved for a traditional loan.
The Bottom Line
You may want to get your business certified as a minority-owned business. While you can still apply for ordinary grants and loans, there are a variety of different programs and initiatives that work to help small business owners in underserved communities. Look into the available programs and see if any of them might be a good fit for your business.
Frequently Asked Questions (FAQs)
How do I register as a minority-owned business?
Your business can be formally recognized as a minority-owned business by getting an official certification. In order to be certified by the National Minority Supplier Development Council, the business must be 51% owned by minorities and the owners must be U.S. citizens. The owners will need to fill out an application, provide official documentation from the business, pay a fee, and schedule a site visit. You can also be certified as a minority-owned business by some states, cities, and the Small Business Administration.
What is the interest rate for a business loan?
Business loan interest rates can vary depending on many factors. The interest rate you’re offered can be affected by the Federal Reserve’s policies, your business credit score, your personal credit score, and the age of your business. In general, businesses deemed less risky will be given lower rates.