Minority-ran businesses are an increasingly growing sector for the U.S. economy. However, according to a Recent Small Business Administration (SBA) study, traditional bank small business loans for minorities are the lowest sector of business owners to receive such a loan. Even though over 8 million minority-owned businesses provide over 7 million jobs and generate almost $1.4 trillion in annual revenue, the current lending climate for minority business owners has forced them to operate with significantly less working capital compared to their competitors. If you fall into the minority category, here is the important information that you should know before about small business loans for minorities with bad credit.
Business Financing Options for Minorities
Best Types of Lenders Providing Small Business Loans for Minorities with Bad Credit
Traditional Lenders & Alternative Lenders
Traditional lenders such as a bank, have been the norm for hundreds of years in the business community. Most every business owner already knows that interest rates from banks are competitive and usually lower than alternative funding sources minorities included. When making the decision to apply to a traditional banking financial institution keep in mind that the process for applying is lengthy and strict. Other than a good credit score of 650 or above, minorities may be required to produce up to a year’s worth of business related documents. Speed is also another factor to consider when choosing the right lender. If you need money right away bank issues business loan may not be a good option since the entire process can take several weeks or even months.
If you have past bad credit history or simply do not have the time to go through the traditional lending process, we suggest using an alternative lender. Most alternative lenders don’t care about a bad credit score or past poor credit history. In many instances, the don’t even require you to declare what you will be using the money for as long as the business owner agrees to use the financing for business related purposes. Instead, alternative lenders choose to look through your monthly cash flow and annual revenue to determine whether or not they will approve small business loans for minorities with bad credit. If you choose to work with an alternative lender, many minority business owners find the process can often be much easier and quicker than from a bank. Most reputable, established B2B lenders are able to give you an approval within a few hours and can deposit the approved business loan amount within a few business days.
Family and Friends
When starting a new business or seeking an expansion of an existing business, you may feel that as a minority getting a small business loan is a scary and lengthy process. If that is the case, consider taking on a business partner or asking for a small business loan from one of your friends or family members. Friends and family likely know if you are a responsible business owner and if will keep your promise to pay them back. In addition, asking friends or family for money to help fund your business may be a lot easier than having to fill out a lot of paper work and waiting many weeks or months to get a business loan from traditional financial institutions.
However, before you ask a friend or family member consider that this could damage your relationship if you fail to repay them within the agreed upon terms. Mixing business finances with loved ones often leads to conflict. Especially if they expect to be part of business decision making as a result of their loan. If you consider taking a loan from friends or family, create a written agreement outlining terms and a repayment schedule. There are many website’s that offer free lending agreement templates that will help both you and your loved one feel secure about such a transaction.
Peer-To-Peer Lending (P2P)
Peer-To-Peer Lending has become an increasing popular source for small business loans for minorities with bad credit in recent years. Although financial experts dispute the precise reasoning, most agree that minority business owners started turning to peer-to-peer companies because banks refused to expand their loan portfolios following the financial crisis of late 2000-s. Online P2P lending platforms help connect business borrowers to investors with more favorable interest rates than they would otherwise have gotten from a bank. P2P loans give borrowers access to financing that they may not have gotten approval for from traditional financial institutions.
Although the Peer-To-Peer Lending has many benefits to lure in minority-owned business owner, they also face the some of the same disadvantages of traditional lending including bad credit score cutoffs. A minority with below average credit history can expect to pay interest rates of 25 to 35%. In many cases this interest rate can be equal or higher than the borrowing on a credit card. Just because these business loans are unsecured that they don’t need to be paid so borrowers also need to be aware that there can be serious consequences if a P2P loan is not paid off following the terms of the lending agreement. Even one missed payment will effect your credit score just as badly as any other types of business loans.
Small Business Loan Types for Minorities with Bad Credit
There are a plethora of different traditional and alternative business loan programs available from a multitude of different B2B lenders for minorities with bad credit. Most alternative lenders have quick and easy applications online which will speed the process up even further. Below you will find a list of the top 4 most popular programs so that you understand which might be best for your business. Keep in mind that most business funding companies also have trained specialist who can advise you on the best program for you and your business.
Small business loans typically fall into four categories:
1) Installment Business Loan (Traditional Bank)
A traditional bank business loan, commonly known as an Installment Loan, is when a business owner borrows money and repays a fixed amount every month, plus interest. Installment loans are generally provided by traditional lenders (banks) and the average loan interest rate can be lower versus alternative lenders. The Small Business Administration SBA7 loan program is one such type of installment loan and requirements, interest rates, annual charges and other fees can be found here.
2) Merchant Cash Advance (MCA) Program
If you have been in business for at least six months. you have a merchant account and are already generating steady monthly revenue a merchant cash advance is a great option. Generally, you can be approved very quickly and with little paper work which is great if you need money for an emergency repair, to full-fill a large new order, or even make payroll. A merchant cash advance is similar to a business line of credit almost like a credit card. The amount of the credit line can range anywhere from $5,000 to 500,000 depending on your business loan needs, qualification, and lender you use. Merchant Cash Advance (MCA) and other Revenue Based Financing programs usually do not require the borrower to put up collateral to assure repayment. In additional, non-traditional lenders usually will provide higher risk funding to business owners who may have had poor credit history in their past. Rates on a merchant cash advance can be higher than a traditional business loan depending on the lender, and many business related factors. In general, when a private lender decides to finance your company without requiring collateral, and accepts bad credit history, this is an additional risk that the lender is taking and thus they will mitigate that risk by charging higher rates than a traditional bank loan.
[icon name=”thumbs-up”] Merchant Cash Advance is one of the fastest ways to receive small business loans for minorities with bad credit.
3) Revenue Based Financing (RBF) Program
If you are a minority looking to receive a small business loan, banking only programs are ideal for businesses that are in financial good standing. Don’t let the term “Bank Only” fool you. You don’t need to apply with a bank to get bank only funding. This type of program simply requires you to have a business banking account and monthly sales revenue to qualify. Lenders that offer this program will usually determine their interest rates and payment terms by your business “cash flow. If you’re in financial good standing you may be able to obtain a better rate with bank only programs. If you do not have a credit card merchant account, this option is one of the best.
4) Business Line of Credit
Business Line of Credit financing is another one of the available types of small business loans for minorities with bad credit. Business line of credit is where your lender grants you an amount of credit, much like a credit card. You may draw funds against your credit amount and pay back at least a minimum amount every month. Whatever credit that you haven’t used remains open and active until you take more. The interest rate of this type of funding is usually much lower than if you borrowed using a business credit card. Business lines of credits are ideal for unexpected business expenses. There are many issues that can arise during the year that you won’t be able to plan for. If such a problem occurs, a business line of credit can be accessed quickly and without a lot of questions and paperwork. This type of funding can mean help with everything from a natural disaster to an emergency repair. Whatever the case may be, having extra money available to you when you need it can be the factor that decides whether your business succeeds or fails.
Know Your Credit Score
Your credit score is a highly important approval factor for which traditional lenders will consider when reviewing small business loans for minorities with bad credit. In fact, it is the number one reason businesses loans for minorities are turned down. Start by creating an account on a credit checking website to see where you stand before you apply. Careful monitoring of your credit score can help you better negotiate your small business loan borrowing opportunities. If your credit score falls anywhere between a 300-629, your likely hood of getting a business loan without collateral is much lower with a traditional lender such as a bank. If this is the case we suggest using an alternative lender because most will accept and approve financing for minority business owners with bad credit as long as the health and sales of the business are strong.
No matter what type of lender or lending program that you choose to help your minority owned small business make sure that you clearly understand the repayment terms of the borrower. Keep in mind that most all lenders including banks will negotiate rates and terms to stay competitive. If you feel uncomfortable about the loan agreement presented to you don’t hesitate to contact other lenders to compare offers.