By Chad Otar
Running a successful business is a challenging endeavor for anyone. There are many reasons people start their own business, whether there’s a need they feel isn’t being filled in the market, they want to improve the system in place, or they feel that they can run their business better than what they experienced as employees at other businesses. While minority business enterprises (MBEs) have experienced significant growth within the past decade, it’s no secret that minority-owned businesses still face many obstacles, especially during the process of obtaining capital.
According to the U.S. Small Business Administration, approximately 28 million Americans have taken the plunge and become entrepreneurs, with nearly 30 percent being people of color. Within the past decade, the number of minority-owned businesses has nearly doubled. Companies owned by African-Americans grew by almost 45 percent, Asians by 24 percent, Hispanics by 31 percent and Hawaiian-Pacific Islanders by 49 percent. Despite this growth, minority business owners continue to be an untapped and underserved market. They face higher borrowing costs and rejection rates and tend to be approved for lower loan amounts. This is especially true for business owners operating in urban and lower-income neighborhoods.
As stated by entrepreneur and investor David Kiger, “The value of loans for minority-owned businesses is usually less than non-minority loans. For minority businesses with more than $500,000 in gross revenue, the average loan amount is $149,000. But non-minority business loans average $310,000, and … interest rates are often higher for minority business loans.” This leads to owners falling into the trap of using personal credit cards for business expenses, which can cause complications when filing taxes and seriously damage their personal credit score. Fortunately, focus is now shifting to this issue, and there are more funding options available to minority business owners.
Alternative lenders offer a variety of financing solutions for small businesses. Lenders usually only require a one-page application, four months of recent business bank statements and four months of recent credit card processing statements, if your business accepts credit cards. The following are some of the alternative financing solutions available to MBEs:
ACH Advance: A form of a merchant cash advance that is repaid on a daily basis by direct ACH debits rather than a merchant account. These are still a purchase of receivables, and the amount debited via ACH is determined by the amount of credit card processing sales that are batched out the previous day.
SBA Loan: The U.S. Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets at below market rates.
Business Lines of Credit: A rotating loan that gives business owners access to a fixed amount of money, which they can use day-to-day according to their need for cash. Interest is only paid on the amount of the advance actually used.
Asset Based Loans: A business loan secured by collateral.
Term Loans: A loan that is backed by a bank for an exact amount that has a specified repayment timetable and interest rate that are adjusted accordingly. Terms mature between one and 10 years.
Having diversity in cultures, genders, ethnicities and perspectives is beneficial in all aspects of life — business is no different. It promotes innovation and allows companies to adapt to the ever-changing business landscape. Limiting access severely impacts ability to expand, create new jobs and reinvest into the community they serve. As the business world slowly changes to become more inclusive, it’s good to know there are options available.
Chad Otar is the managing partner/funding specialist at Excel Capital Management. Otar has witnessed the merchant cash advance/alternative lending world blossom and prosper from a little-known facet of finance to a multibillion-dollar industry. He is active and well respected in the alternative lending industry due to his credibility, experience and knowledge.