By Carolyn Wright-Thomas, Certified Volunteer Mentor and Ambassador for Diversity, Equity & Inclusion with the Southeast Michigan Chapter of SCORE
Typically, new businesses don't qualify for business loans—minority or otherwise—unless they have collateral to secure the loan against (i.e., real estate or equipment) or can offer a personal guarantee, which means the business owner must have a credit score of 650 or higher. The usual qualification requires at least two years in business, with financial statements and tax returns, which startups (by their very nature) can often not produce.
This creates a challenge for business owners looking to find capital to invest in their operations or equipment or to have working capital to make the business run.
This can be even more challenging for minority business owners. Certain types of businesses will be scrutinized more than others in the loan process. Unfortunately, minority owned businesses are often dropped into the "high-risk" category before any real vetting is done. This is not always due to bias or discrimination. Historically, the failure rate of these businesses, along with the industries to which minorities tend to gravitate as entrepreneurs, makes it a hard sell to a loan officer.
Which is why I'm so glad to share with you the work of the Minority Business Development Agency (MBDA), the only federal agency solely dedicated to the growth and global competitiveness of minority business enterprises.
Celebrating Minority Enterprises
I encourage minority business owners (and aspiring entrepreneurs) to learn about and consider attending MBDA's annual National Minority Enterprise Development (MED) Week, a virtual conference coming up on September 19th through 25th. The conference celebrates the outstanding accomplishments of minority-owned companies and presents informational sessions and programming; offering interactive networking sessions to generate new connections and fresh perspectives. MED Week also features an awards ceremony where individuals and organizations are honored for exceptional commitments and contributions to minority business growth. Click here to learn more and register for what is sure to be an outstanding event.
Frequently Asked Questions
Below are some of the most common questions lenders will want to know when considering your business for a loan:
Is the business a for-profit or non-profit?
Most for-profit businesses don't qualify for grants unless the business (owner) falls into one of the "underserved" categories, such as minority-owned, woman-owned, veteran-owned or other socially, economically disadvantaged businesses. There are (MESBICS) Minority Enterprise Small Business Investment Companies in every state to serve these communities. MESBICS are government-chartered venture capital firms so, they're a good source for funding and other resource information. Google: "MESBIC" and the state you're seeking funding.
Also, Fortune 500 Corporations have started awarding grants to for-profits through programs such as Ernst & Young Entrepreneur of the Year and the American Express 100 for 100.
Non-profit businesses usually qualify for grants based on the mission of the organization. Foundations are the main sources of grant funds for non-profits. In southeast Michigan, Kresge Foundation (Education), Hudson- Webber (Community Development) Kellogg Foundation (Children & Families) come immediately to mind. Also, each of the "Detroit 3" automakers have charitable foundations. Google: "foundations" in your area.
How many years in business?
Startups don't usually qualify for traditional bank loans. A two-year benchmark usually applies in most cases. The only alternative might be a "micro loan" through an entity such as the Small Business Administration, a SCORE partner. Micro loans don't require an above average credit score. However, they do usually require collateral and a personal guarantee. Google: "504 Loans".
Is the business a product manufacturer, distributor or retailer?
This question will determine what type of funding to go after. An automotive tool & die shop owner has more funding options at his or her disposal than a clothing boutique owner. The tool & die shop may have access to "alternative financing" such as:
- Sale-Leaseback - Equipment and Real Estate
- Purchase Order (Factoring) - Selling a customer purchase order to a funder for 20% of its face value.
Google: "Alternative Financing"
Is the business old school or new school?
Sounds funny, but some of the "new school" businesses weren't around 20 years ago, and neither were the funders who focus on them. Think about those who do 100% of their business online or through an app. Funding for those types include:
- Peer-to-peer loans - these work for most industries, particularly online retailers.
- Crowd funding - same as above
- Online banks/lenders - same
Google: "Kabbage Lending," "Fundbox," and/or "Torro Lending"
But again, if you operate or own a minority-owned business, consider the vast resources and guidance available to you at the MBDA.
Want to Know More?
If you would like to know more about funding options for your business, be on the lookout for an upcoming workshop on funding and financing options. Or reach out to Carolyn for mentorship.