When you’re starting a small business, access to capital is crucial to fund growth. However, historically speaking, small business lending is more limited for minority-owned businesses. Part of the problem is that the U.S. Census reports that household net worth of minority families is lower overall than for Caucasians. If you are a minority business owner, how can you qualify for a minority business loan? Are there other options for small business lending that may boost your entrepreneurial efforts?Small Business Lending for Minority Firms
There is a disturbing disparity between the net worth and ability to seek entrepreneur help for minority-owned businesses. That’s where minority business loans can help. If you fall into the government demographic category called “minority,” there is entrepreneurial help available in the form of small business loans. For example:
- The Business Center for New Americans offers small business lending to refugees and immigrants starting a small business. There are numerous requirements including solid cash flow and business equity along with a track record of debt repayment.
- SBA 8(a) is a program for government contractors that identify as a disadvantaged business enterprise. The company must be 51 percent owned by U.S. citizens that meet the government definition of a disadvantaged group. This program provides contract opportunities for these groups as well as management and technical entrepreneurship tips.
- SBA 7(a) offers flexible funding to all kinds of businesses, including those that are minority owned. This type of small business lending has generous payment terms; however, the company must have an annual gross revenue of more than $120,000 as well as reliable credit. These loans are typically targeted for equipment purchases, as working capital, or to refinance debt.
- The SBA Microloan is for small companies that aren’t as established or successful yet. These six-year loans of up to $50,000 are open to everyone, regardless of their demographic ownership category. Their interest rates are similar to credit cards, at up to 13% or so.
What if you cannot qualify for these loans or would prefer to avoid debt accrual at this stage of your business? There are established alternatives available.
Alternatives to Small Business Lending
What if you need funding for your small business but don’t want to accrue debt? You can start your business cash-rich if you have retirement savings. Known in the industry as a Rollovers as Business Start-ups (ROBS) this is a small business funding solution that allows entrepreneurs with retirement savings to utilize those funds for a cash infusion without interest, a withdrawal fee, or tax penalty. These flexible funding methods aren’t loans; they are a way to access your retirement savings to purchase or recapitalize a business.
If you chose the ROBS funding approach, you won’t accrue debt and don’t need a good credit score or existing cash on hand to start the process. However, there are some complexities to this process that you should consider:
- A ROBS works best when you have and are looking to use $50,000 or more in a retirement account.
- You are using your retirement funds to invest in your business. Even though it is not a loan, with a ROBS arrangement your newly formed corporation has a retirement plan; in order to assure compliance with IRS and DOL regulations, it is advised to make contributions to the plan, either as profit sharing contributions or, if your plan has a 401(k) feature, by making deferrals on a regular basis.
If you have retirement savings and are looking to start or grow a small business, talk to our team about how you can leverage those funds now, so you'll have them when you need it most. Click here to download The Definitive Guide To 401(k)/ROBS Business Funding.