But, despite leading a significant portion of the nation's
businesses, minority-owned firms are still having a much harder time accessing
small business loans than their white counterparts. Minority-owned firms are
much less likely to be approved for small business loans than white-owned
firms. And, even if they do get approved, minority-owned firms are more likely
to receive lower amounts and higher interest rates. According to findings from
the U.S. Department of Commerce Minority Business Development Agency, these
discrepancies have made minority business owners more likely to not apply for
small business loans, usually out of fear of rejection.
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Here are a few reasons why it’s particularly
difficult for minority business owners to obtain small business funding:
1. Lower Net Worth
It seems that the most common reason minority-owned firms are
rejected for small business loans is a lower net worth and/or lack of assets.
Wealth levels for Latinos and African-Americans are reportedly 11 to 16 times lower
than for whites. Data recorded in 2016 found that white business owners start
their businesses with an average of $106,720 in working capital compared to
African-American-owned businesses, which are started with an average of just
$35,205. Banks are traditionally biased against applicants with less money
to spare, partially because such applicants probably cannot offer collateral.
The lower net worth of minority business owners suggests that they are less
likely to own homes or other expensive assets the bank can sell if the
applicant cannot pay off the debt. A lack of collateral or higher net worth
often makes the bank so worried about being paid back that it is only willing
to distribute small business loans that must be paid back as quickly as
possible and are therefore insufficient for fostering significant growth.
2. Not The Most Optimal Location
Another major factor in the approval rating of small business
loans for minorities is the location of the business in question. A great deal
of minority-owned businesses are located in poorer, urbanized, communities.
Research from the Small Business Administration suggests that the location of a
business plays a bigger role in the approval of a loan than the ethnicity of
the business owner. Poorer communities need small businesses to bolster their
economies, but big banks do not typically craft their business funding programs
with long-term goals in mind.
3. Poor Or Little Credit History
The average minority small business owner has a credit score of
about 707 -- 15 points lower than the average small business owner in the U.S.
A nearly perfect credit score is basically mandatory for the most advantageous
bank loans, even though there are numerous plausible explanations as to why an
otherwise responsible and dedicated business owner would have poor or very
little credit history. Still, credit score is arguably just as important as the
business’s performance record when it comes to securing a bank loan.
Thankfully in times like this, private funding companies have
gained traction by mining data and looking not only at credit but also looking
at time in business, industry, location, cash flow, both daily and monthly
ending bank balances in the business accounts, number of staff, time left on
lease, etc. By looking at more than just credit, these models have allowed
minority business owners to access capital.
Exploring Other Options
It’s clear that banks might not be the best option for
minority-owned businesses looking for substantial funding. Fortunately, the
business lending industry has evolved dramatically over the past decade or so,
and small business loans are no longer strictly limited to wealthy white men
with flawless credit.
Several alternative business financing companies, for example, do
not discriminate based on credit history, net worth or the business’s size.
Most of their loans are 100% unsecured, meaning they do not require collateral
or a personal guarantee. They lend to virtually every industry, including those
that are stereotyped as risky, like retail or hospitality or smaller businesses
like Laundromats or convenience stores.
Some alternative lenders even offer programs that are tailored for
businesses with less cash on hand and lack the stringent, non-negotiable
guidelines of traditional bank loans. These funding companies have allowed
business owners to build up their track record and help to fix their perceived
problems so that they may one day qualify for the traditional financing they
desire.
While almost all alternative business lenders can boast speedy
approvals and loose qualifications, only a few can offer what is arguably the
biggest advantage of working with these companies: small business loans that
put the borrower, not the lender, first.
Bank loans appear to have been designed with the intent to draw a
profit, whereas certain alternative business lenders are more focused on
creating loans that are easy to pay off and capable of covering crucial
investments. They are aware that their success depends on the success of their
clients, so they focus on providing the tools to help them grow over time.
Minority business owners would be wise to explore this option if they’ve been
rejected by banks and don’t feel like endangering the health of their
businesses with loans that might do more harm than good.
POST WRITTEN BY
Jared
Weitz
Founder & CEO of United Capital Source LLC
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