Small Business Loans for Black-Owned Businesses
You’ve done the hard work of starting and getting your business off the ground. Now learn how to secure funding for your black-owned business and grow to new heights.
In a 2014 study, researchers at Brigham Young University recruited nine “mystery shoppers” to seek loans. Three of them were Black, three were Hispanic, and three were White small-business owners. The entrepreneurs wore the same clothes, asked for identical $60,000 loans to expand identical businesses, and had near-identical backgrounds.
The mystery shoppers were told they were there to evaluate customer service. You can probably guess what happened next. The minority loan-seekers were given less information on loan repayment terms, were asked more questions about their personal finances, and were offered less application help by loan officers.
Today, eight years later, it’s still harder for Black and other minority-owned businesses to secure funding than their White counterparts. Fortunately, there’s now more awareness around this issue, and more organizations are stepping up to support Black-owned businesses and provide loans and financing options. Here’s what you need to know about securing small-business loans for Black-owned businesses.
What is a Black-owned business?
A “Black-owned” business describes any business where Black people own at least a majority of the shareholder equity, partnership interest, or other ownership interest in the business or its holding companies.
What are minority business loans?
Given the challenges faced by Black and minority entrepreneurs, a number of public and private organizations have stepped up to fill the gap that traditional banks and financial institutions have left. One way to do that is through minority business loans. These are loans offered by government entities like the U.S. Small Business Administration (SBA) and lenders like Accion Opportunity Fund. They’re specifically designed to provide funding support to minority groups like Native Americans, Asian Americans, or, in this case, African Americans.
Minority business loans are frequently smaller than traditional term loans. However, they tend to have less-stringent credit requirements and offer lower interest rates. Minority loan servicers also tend to be more considerate of their borrowers’ business needs.
SBA programs and loans for Black business owners
The U.S. Small Business Administration (SBA) offers small business loans, small business grants, and other kinds of funding specifically for Black business owners. Here are a few of the biggest programs.
8(a) Business Development Program
The SBA 8(a) Business Development Program is not a direct loan. However, it does offer a host of unique opportunities to help socially and economically disadvantaged small business owners grow their businesses.
This nine-year program includes mentoring, business counseling, training, and financial assistance, as well as access to specialists that can help participants navigate the extremely regulated process of getting federal contracts. The U.S. government is the biggest buyer of products and services around the world, with military and civilian installations making about $200 billion in purchases each year. That means that nabbing one of these contracts can be a great way to kickstart your business.
Fortunately, the federal government aims to award at least 5% of these contracting dollars to disadvantaged small businesses each year. Businesses participating in the SBA 8(a) program are given a preference for these contracts.
In addition to having a business that’s at least 51% owned and controlled by U.S. citizens who are socially and economically disadvantaged, you must meet these criteria to qualify:
- Have a personal net worth of $750,000 or less
- Have an adjusted growth income of $350,000 or less
- Have been in business for two years
- Have less than $6 million in total assets
SBA Community Advantage Loans
The SBA offers the Community Advantage Loan Program to meet the financial needs of small businesses in underserved communities. These include low- to moderate-income business owners, veteran-owned businesses, businesses where more than 50% of the full-time workforce is low-income, and businesses in rural areas.
Through this program, the SBA works with community-based and mission-focused lenders such as nonprofit organizations to offer loans of up to $350,000. The SBA will guarantee up to 85% of loans that are $150,000 or less, and 75% of loans above that amount.
SBA Microloan Program
SBA’s Microloan Program provides loans of up to $50,000 to help both startups and small businesses looking to expand their operations. In 2020, about 52% of these microloans were issued to minority-owned businesses, while women-owned businesses received about 47%. These microloans come through intermediary lenders, which are nonprofit, community-based organizations experienced in lending and in providing technical assistance to small businesses.
Each intermediary lender has its own lending and credit requirements. The average microloan is $13,000, and that amount can be used for any of the following purposes:
- Working capital
- Purchase of inventory or supplies
- Purchase or repair of furniture, fixtures, machinery, or equipment
The loans cannot, however, be used to pay existing debts or purchase real estate.
In addition to the SBA microloan program, there are also a number of small-dollar lending programs available to historically underfunded entrepreneurs, including Native entrepreneurs, people of color, and Black women. These small-dollar loans are typically short-term, low-interest loans that are especially useful for business owners with low credit. They’re available from community-based lenders like Accion Opportunity Fund.
SBA’s HUBZone program aims to fuel small business growth in historically underutilized business zones. It does this by awarding at least 3% of federal contract dollars to HUBZone-certified companies each year. These businesses are given preferential consideration for those contracts.
To qualify for the HUBZone program, a business’s main office must be located in a HUBZone, and at least 35% of its employees must live in a HUBZone, as well.
SBA Mentor-Protégé program
If you’d like business development help from an experienced government contractor, the SBA Mentor-Protégé Program could be a good fit. This program connects small-business owners with experienced mentor companies, which can provide instruction on how to win lucrative government contracts. Mentors can also share advice on international business management, international trade, and human resources questions.
Other SBA Loans
After the now-expired Paycheck Protection Program (PPP), SBA 7(a) is perhaps the best-known loan fund provided by the SBA. Though it’s not exclusive to minority-owned businesses, SBA 7(a) exists to provide financial help for small businesses with special requirements. This program saw $36.5 billion in loans approved in 2021 alone. The funds can be used for everything from working capital to purchasing furniture and supplies.
How to secure small business loans for Black-owned businesses
Keep these steps in mind when applying for a small-business loan for your company.
1. Identify small business loans for minorities
There are a number of small business loans offered at both city and state levels by nonprofits, community development financial institutions, and the SBA. To get started, reach out to a local business group or do an online search.
If you search online, just be sure to use “disadvantaged” rather than “minority” in your search phrase, because that’s how most of these loans tend to be classified. Also be sure to refer to the list of resources below to help you get started.
2. Check the eligibility requirements
Each minority-loan servicer has its own requirements. Some only cater to businesses in certain geographical regions (some loans will only be available to New York City residents, or to businesses founded in the state of California, for example).
Other lenders might only serve minority business owners who work in a specific industry. Even the small business loans available specifically for Black-owned businesses may have other qualifying criteria. For example, you may need to be certified as a minority business enterprise (MBE) or a disadvantaged business enterprise (DBE) to apply.
3. Gather your documents and apply
It’s always a good idea to have your documentation ready before you start the application process. In addition to your minority-owned business or disadvantaged business enterprise certification, you may need the following:
- An idea of the total loan amount you’ll need and what you intend to use it for
- Both your personal credit history and your business credit history, including other open business lines of credit, and your credit score
- A comprehensive business plan
Why equity-based lending matters
Black Americans represent 12% of the U.S. labor force but only 9.4% of business owners, according to U.S. Chamber of Commerce data. Largely because of lack of access to funding options, Black Americans are also less likely than White Americans to launch businesses, and have lower revenues and fewer employees when they do.
According to the Stanford Institute for Economic Policy Research, only 1% of Black business owners were able to obtain loans in their founding year, compared to 7% of White business owners. Even after the unprecedented influx of investment in Black-owned businesses and nonprofits in 2020, only about 3% of venture-capital deal volume went to Black-founded companies.
Venture capital investment access isn’t the only hurdle Black business owners face. They can also have a tougher time getting loans from traditional financial providers like banks. Unconscious bias, i.e., lenders making subconscious assumptions about borrowers based on stereotypes, means people of color are often asked to jump through more and bigger hoops for fewer dollars.
The real cost of funding inequity
This lack of support and funding comes at a high cost. According to a 2019 report by McKinsey, the Black/White wealth gap will cost the economy up to $1.5 trillion between 2019 and 2028. On the flip side, however, if Black businesses were able to get the resources they needed, especially in those early years of business, that would create an estimated 19 million jobs and revenue increases of $5.9 trillion. That’s the goal of community lenders like Accion Opportunity Fund: to help close that funding gap, and give Black and other minority entrepreneurs the tools they need to reach their full potential.
Other business resources for Black entrepreneurs
Need help on your business journey? Whether you’re looking for funding help or just some solid advice, here are a few resources that cater specifically to Black-owned businesses.
National Black Chamber of Commerce
The National Black Chamber of Commerce works to empower and sustain African American communities through entrepreneurship and business endeavors within the United States. It does this through its 140 affiliated chapters, both in the U.S. and abroad.
The NBCC currently reaches about 100,000 Black-owned businesses. It supports its members through an annual convention, travel and trade opportunities, and small business resource guides.
U.S. Black Chambers, Inc.
The U.S. Black Chambers, Inc. (USBC) calls itself the “National Voice of Black Businesses.” It lives up to that moniker by advocating for Black-owned businesses and start-ups, facilitating access to capital, and helping with contracting, training, and chamber development. Members also get access to monthly webinars, briefings, programs, and events.
Coalition to Back Black Businesses
This coalition is a partnership of several brands, including American Express, ADP, AIG, Dow, and Shopify. Their goal is to provide immediate financial assistance to Black-owned small businesses, especially in the aftermath of the pandemic. To this end, the Coalition is providing $14 million in grants, training, and resources between 2020 and 2023. Businesses can apply for $5,000 grants each fall. A few winners will receive an additional grant of $25,000 each year. (American Express, part of the coalition, also partners with Accion Opportunity Fund to provide loans and other business resources to underfunded small business owners including people of color, women, and immigrants.)
Black Owned Everything
Black Owned Everything is an e-commerce marketplace that showcases products created by Black-owned businesses. A Black-owned business directory of sorts, this organization takes an innovative approach by using Instagram to highlight its member businesses and products. If you’re running a retail business, partnering with Black Owned Everything can help you get additional visibility and sales.
National Urban League
The National Urban League (NUL) helps African Americans and other underserved urban residents secure economic self-reliance, power, and civil rights. It does this through a number of programs, as well as by funding public policy research and advocacy.
One of NUL’s programs is the Entrepreneurship Center program, which has counseled, mentored, and trained over 60,000 businesses since 2006. The program provides entrepreneurs with individualized counseling, management, training, and mentorship. NUL can also help coach business owners on small business financing and/or contracting.
Further resources for Black-owned businesses
While there are a number of great organizations that cater specifically to Black business owners, you may also want to check out resources more broadly aimed at minority entrepreneurs. The National Minority Supplier Development Council’s Business Consortium Fund and the Minority Business Development Agency (MBDA) are both good places to start.
Get funding for your minority-owned small business
While it remains difficult to find funding for Black and minority businesses through traditional financial institutions, other funding options have started to become available. This new generation of small business loans is making funding not only more equitable, but more accessible, for Black business owners. Knowing what they are and how to access them can mean the difference between getting funding and start-up costs for your business, or struggling to make ends meet.
Accion Opportunity Fund is committed to supporting small business owners who are often shut out from financing. Take a look at our available small business loans to see how we can help support your business.