In a recently reprinted MBDA study  “Disparities in Capital Access between Minority and Non-Minority-Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs,”

Robert Fairlie, Ph.D. and Alicia Robb, Ph.D. looked at both national and regional studies over several decades.  They discovered that limited financial, human, and social capital, as well as racial discrimination, were the major reasons for the disparities between non-minority and minority businesses.  Despite the fact that this study is 10 years old, many of the truths remain today. 

When It Comes to Minority Business Loans, Bad Credit May Haunt You

Forbes states that the major challenges faced by minority business owners in getting business funding include:  

Lower Net Worth

For example, the level of wealth for Latino and African Americans is 11 to 16 times lower than for whites. Caucasian business owners usually have more working capital when they start a business.

Lack of Collateral

As a general rule, banks are less likely to approve loans to applicants with lower valued collateral to use against a loan. Less net worth means less home ownership and fewer high-value assets to sell if a loan defaults. Less security and net worth mean banks are likely to issue smaller loans that need to be paid back quickly.  This slows growth over the long term.

Poor Location

Businesses owned by minorities in locations that have not supported new business in the past are not as likely to get funding.

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Little to No Credit History

Credit is a huge factor for banks when considering loan applications. This is why minority business loans bad credit are so scarce.  Since minority business owners tend to have lower credit scores, for all the reasons already listed, it is harder to get the best rates and terms.

That last one is what causes huge issues.  Minority business loans, bad credit or not, are not easy to find.  More often than not, the key is to look for loans with less strict credit requirements while simultaneously working to build fundability. 

Minority business Loans Bad Credit: First Things First 

Before we focus on how to find minority business loans bad credit, we need to talk about fundability as a whole. The first step is strong personal credit.  However, you can work on other aspects of fundability at the same time. When you do this, you increase your chances of getting any type of business funding you may ever need.  How do you build fundability?  

Set Your Business Up to Be Fundable

When you set up your business, you need it to have a foundation that will help build fundability and separate it from you as the owner.  Even if you are already in operation, you can take the steps necessary to do this.  However, the sooner the better, for a number of reasons. What does it take to build a foundation of fundability? 

• Separate contact information

Your business needs its own phone number and address. 

• An EIN

This is free on the IRS website. 

• All necessary and appropriate licenses

If you are not properly licensed to do what you do, lenders will not take you seriously.  This step is necessary to being a legitimate business. 

• Incorporation

There are many reasons for this.  However, for business credit building, the main thing is it separates your business from you as the owner even further. 

• A D-U-N-S Number

This is free to get on the Dun & Bradstreet website.  You must have one to have a business credit profile with D&B. 

• Separate Business Bank Account

There are many reasons to do this.  The main one for building credit building however, is that it further solidifies your business as a separate entity. 

• Professional website

This surprises a lot of people.  These days, if you don’t have an online presence, you might as well not even exist.  Still, a poorly put together online presence is just as bad. Pay for professional design and hosting.  It’s worth it.

Work on Building Business Credit

When we talk about minority business loans bad credit, we are talking about bad personal credit. However, there is such a thing as business credit. 

Even though most lenders will still take personal credit into account, separate business credit allows them to judge your business on its own merits.  If they can see that, despite some personal credit issues, you have strong business credit, it may sway them if they are wavering on approval. 

In addition, business credit opens up new funding doors that are not available to individuals, which in turn can only help you run and grow your business. 

Minority Business Loans Bad Credit: You Need Accounts Reporting to Your Business Credit Report

What you want to do is make minority business loans bad credit a non-issue.  In reality, you just need bad credit to be a non-issue. The key to this, when it comes to business credit, is to get accounts in your business’s name that do not really take your personal credit into account.  It may feel like it is impossible, but it isn’t.  There are a few ways to do it. 

First, vendors you already have a relationship with may be willing to extend credit without a credit check.  The worst that can happen is they say no.  If they say yes, ask them to report the payments to the business credit agencies. 

Utilities might also report accounts.  You already pay utilities, rent, and internet each month.  Ask those providers to report your payments to the business credit reporting agencies.  Be certain your accounts are set up in your business name with your business contact information.  Worst case scenario is that they say no.  It never hurts to ask.

Work with Starter Vendors

This is the secret that many business owners are unaware of. We call them starter vendors. They are part of the vendor credit tier.  Certain companies that will extend Net terms in your business name without a credit check.  After you pay, they will report those payments to the business credit reporting agencies (CRAs). 

Since they do not check your credit score, it doesn’t matter that you don’t have one.  Of course, they do have other ways of reducing risk.  These vary by vendor.  They may include a minimum time in business, average balance in a business banking account, or even a minimum annual revenue. 

Minority Business Loans Bad Credit: What Next? 

After you have enough of these types of accounts reporting payments to your business credit report, you probably have a strong enough score to move on to the next tier. We call this the retail credit tier.  They offer more traditional credit.  These are credit cards for use at specific stores such as Office Depot or Lowes.  It is also sometimes referred to as store credit. 

After you have several of these store credit accounts reporting, you can apply for cards in the fleet credit tier.  These include gas cards with companies such as Shell and Fuelman.  They can be used for fuel and auto repair and maintenance only. 

Lastly, with accounts reporting from all previous tiers, you should have a score strong enough to apply for cards from what we call the cash credit tier.  Of course, that is only if you have been making payments consistently on time. 

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These include traditional credit cards that are not connected to a certain store or type of purchase.  They can be used for anything and everything.  In addition, they often have better interest rates and nice rewards programs. 

Fix Your Personal Credit

Making sure your business has strong business credit is important to fundability, but personal credit still matters.  There are many business loans that will still require a personal credit check. Take the time to go through your personal credit report and look for mistakes. If you find any, get them corrected.  At the same time, make payments on time, consistently. If you find yourself with any extra cash, throw it on higher rate balances first. Then, when that balance is gone, use the entire payment amount on the next highest rate balance.   It’s called the snowball technique, and you’ll be surprised how quickly you’ll pay off balances and see credit score improvement. 

Minority Business Loans Bad Credit: In the Meantime

Of course, you likely need funds right now if you are reading this.  Since you can’t build or fix credit overnight, here are some options to help you in the meantime. 

Accion U.S. Network

Accion offers loans in all states.  Funds are available to: 

• minorities 
• veterans
• women
• those with disabilities
• and low to medium income business owners 

Typically, loan amounts start at $200,000 and go up to $300,000. Also, Accion can put owners in contact with others to help build a network of support.

Comparatively, the minimum credit score for these loans is 575.  In addition, you cannot be 30 days late on paying any accounts.  Lastly, you will not qualify if you have late rent or mortgage payments over the past 12 months.

Union Bank Business Diversity Lending Program

This program from Union Bank offers business loans for minorities. In fact, this one is specifically for minorities. Indeed, you must be Hispanic, American Indian, Latino, Asian, Alaskan Native, African American, Native Hawaiian, or other Pacific Islander to even qualify.    

Furthermore, a business that makes up to $20 million could qualify for a loan of $2.5 million.  However, you must be in business for at least 2 years.  Likewise, the business must be at least 51% minority owned.

The National African American Small Business Loan Fund

This is a partnership between JP Morgan Chase and the Valley Economic Development Centers.  It serves small businesses with minority owners that are in low income or medium income communities.  However, only those in New York, Los Angeles, and Chicago are eligible.  

Business Center for New Americans

Right now, The Business Center for New Americans offers minority business loans of $5,000 to $50,000.  They work with immigrants, refugees, women, and other minority entrepreneurs.  The goal is to help minority business owners who have not been able to get traditional financing.  

Camino Financial 

Camino Financial is an online lender.  Microloans range from $5,000 to $50,000.  Additionally, they offer small business loans between $10,000 to $400,000. 

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Minority Business Loans Bad Credit: The SBA?

Whether or not this option will work for you depends on how bad your credit actually is.  If it is above 640, then you may be able to get some help from the SBA.

The Small Business Administration focuses on helping all small businesses, not just those that are minority owned. They offer a number of products and resources through their programs.  For the most part, the SBA does not lend money directly. They work through partner financial institutions to guarantee loans. As a result, they are able to outsource the administration of the loans and disbursement of funds to those who do it on a regular basis. That is, lenders and non-profits that are in the communities where the businesses operate. 

SBA 7(a) Loans & 8(a) Business Development Program

These loans are open to all small business owners.  However, if a minority business owner participates in the SBA Business Development program, they increase their chance of getting this type of loan.  

Honestly, about 80% of SBA loan applications from Hispanic and African Americans are for $150,000 or less.  This is according to the SBA itself.  Surprisingly, these smaller loans seem to be harder to get.  Honestly, this is probably because lenders don’t make as much money from them.

SBA Community Advantage Loans

These are to meet the needs of small businesses in neglected markets. That includes minorities. The goal is to get local lenders to increase loans up to $250,000.  This is done by backing up to 85% of the loan amount. The hope is that this helps small business owners who might not be able to get traditional financing. 

SBA Microloan Program

First, loans through this program go up to $50,000.  Secondly, funds come from a third-party lender.  Usually, this consists of nonprofit organizations in the community. Often, they also offer other types of assistance to business owners along with the loan. 

Minority Business Loans Bad Credit: Bad Credit Doesn’t Have to Stop You

It may detour you for a bit, but if you work hard you can fix that.  In the meantime, there are options that can help you get through. Check these out, and work on building overall fundability to ensure you can access all the funding you could ever need to run and grow your business. When it comes to minority business loans, bad credit doesn’t have to be the end of the story.

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