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Updated: Jul 15, 2020
The number of minority-owned businesses has been on the rise, representing 50% of the 2 million new U.S. businesses launched in the decade leading up to 2019. Nonetheless, the average gross receipts generated by minority entrepreneurs trails non-minority businesses, according to the latest data available from the Minority Business Development Agency.
If more minority entrepreneurs gain access to financing to grow their business, such as through the Small Business Administration’s popular 7(a) loans – the pendulum could begin to swing in the other direction.
Of the 30 million small businesses in the United States, roughly 8 million are owned by minority entrepreneurs, as per the SBA in a 2018 report. The breakdown is as follows, according to the latest data available:
Despite the growing number of minority-owned businesses, there is a glaring disparity in the amount of financing directed toward this demographic through the conventional lending market. According to a study by the MBDA, minority-owned businesses are also in the minority when it comes to accessing financing. These stats are particularly true for those minority entrepreneurs whose gross receipts fall below $500,000 annually, the study revealed.
When they can get a loan, the amounts tend to be lower for minority business owners vs. those non-minority business owners. The numbers are $310,000 vs. $149,000, respectively, for businesses that generate more than $500,000 in annual gross revenue. Interest rates tend to be higher, too.
Don’t let this discourage you, minority entrepreneurs. The reality is that there are many options available to the minority business community if you know where to look.
The SBA is looking for borrowers with strong credit, good character, and a proven ability to repay the loan. The 7 (a) loan program is open to everyone, not just minorities. Still, the loans have caught on like wildfire within this demographic.
The SBA delivers a significant percentage of its 7(a) loans to women and minority-owned businesses compared to the traditional lending market. Almost 33% of SBA’s 7(a) loans are issued to minority business owners.
No doubt, these business owners are drawn to the flexibility in which borrowers can direct the capital. SBA loans for minorities are applicable to use for expansion, new construction, renovation, equipment, inventory, refinancings, and more.
Another benefit of SBA loans for minority-owned businesses is that while they’re not delivered directly through the SBA, they’re backed by the agency. The government-backing of these loans gives lenders more confidence to issue the loans in the event of a default. Not only that, but the 7(a) loan is the “borrower’s loan”. That means it is there for business owners who have been shut out of other financing options, as is often the case with minority-owned businesses.
Perhaps no other feature of the 7(a) loan is more attractive to borrowers than the below-market interest rate. The SBA caps the rate that lenders can charge borrowers to the Prime Rate plus a certain percentage. At Funding Circle, an approved 7(a) lender, the rate currently hovers at 6%. Low rates give minority business owners seeking SBA 7(a) loans more cash flow to invest into growing their business and less that they must direct toward chipping away at debt.
Business owners can borrow a maximum of $5 million under the program. In addition, the repayment details of SBA loans for minorities are generous. Loans boast repayment terms of up to 10 years for working capital needs and 25 years for real estate purchases or construction.
The SBA also offers what’s known as an Advantage Loans Program. Under this program, there are two types of loans: Small Loan Advantage and Community Advantage. As the name suggests, these loans are tailored for disadvantaged business owners operating in underserved areas. Both offer what the SBA describes as a “streamlined application process for SBA 7(a) loans up to $250,000,” which involves a two-page application process.
The Small Loan Advantage loans are meant to propel approved SBA lenders to issue loans with a lower dollar amount. These SBA loans for minorities can help business owners in these underserved areas. Community Advantage, meanwhile, is a program meant to bolster the number of SBA 7(a) lenders that were previously left out of the agency’s inner-circle to focus on underserved communities.
Business owners must still be deemed creditworthy, but they are less stringent than the traditional 7(a) loans. For instance, borrowers aren’t likely to be denied based on the size of their balance sheet or the type of collateral they can provide. And given the streamlined nature of the application process, borrowers can expect Community Advantage loans to be approved within five to 10 days.
Although the SBA’s 7(a) program and its offshoots may not have been explicitly designed for minority entrepreneurs, there is still help for those who seek it. The SBA 8(a) Business Development Program was created to give small disadvantaged businesses a chance to compete in the marketplace. Through 8(a), the government looks to award 5% or more federal contracting funds to program participants.
Business owners must meet an eligibility checklist to qualify. This checklist includes being majority-owned by economically and socially disadvantaged U.S. citizens with an average adjusted gross income of no more than $250,000 over the past three years.
But if approved for these SBA grants for minority businesses, you gain access to resources that you would otherwise not have. These resources include contracts and protege/mentor relationships as well as technical and management training. With more significant contracts and higher revenue, business owners have a better shot at qualifying for SBA 7(a) loans for minorities in the future.