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According to the Minority Business Development Agency, minority-owned businesses are less likely to receive the loan amounts they request and may end up paying higher interest rates on loans.
Bad credit doesn’t help the situation, but it also doesn’t mean you need to give up on your dream of owning a business.
Federal, state, and private lenders are working to create more fair systems and loan options for minority lending - including lending to those with bad credit.
- Historically, access to capital and business funding has been uneven based on race, and credit plays a role in the uneven distribution of funds
- SBA loans, microloans, and working capital can be solid options for minority-owned business owners with bad credit
- Free business mentorship programs can help minorities locate specific funding options as well
Bad credit is not permanent, and there are several ways to improve your score with time
Can a Minority Business Owner Get a Startup Loan with Bad Credit?
The startup business lending industry is wide, and there are many lenders who offer loans specifically to borrowers with less than perfect credit.
Others tend to focus on lending to minority-owned businesses and weigh several factors in addition to your credit.
Nevertheless, it’s possible for a minority business owner to get a startup loan with bad credit. You just need to narrow down the right lender, loan option and financing terms to meet your needs.
What Is Minority Lending?
Minority lending, also known as minority business loans, is a source of business funding that’s primarily offered to minority-owned businesses.
Certain SBA loans are a popular type of minority lending since they are backed by the federal government. In order to receive some SBA loans, your business must be Certified Minority-Owned Business.
Minority lending is also offered through nonprofits, microlenders, and community organizations.
What Qualifies As a Minority-Owned Business?
At least 51% of the business must be owned by one or more individuals that consider themselves part of a minority racial group. Minority groups include U.S. citizens who are:
- Black or African
- Asian Indian
- Hispanic or Latin American
- Native American
Women-owned businesses can also be considered a minority group. In addition to being minority-owned, the business must be for-profit and based in the United States.
You can register as a Certified Minority-Owned Business with your state through the National Minority Supplier Development Council (NMSDC).
What Are the Benefits of Being a Minority-Owned Business?
Being a Certified Minority-Owned Business can help you access more minority lending opportunities such as SBA loans as well as expanding your network.
Many federal, government, and private agencies set aside a budget to specifically work with minority-owned businesses so this could increase your contract opportunities.
You’ll also get access to government grants along with free training, workshops, and coaching opportunities through the NMSDC.
What’s Considered a Bad Credit Score?
Credit scores typically range from 300 to 850. According to Experian, a bad credit score is anything under 600. Some lenders even consider a credit score low if it’s under 670.
Each lender doesn’t weigh credit as such an important factor and some don’t even check credit.
Still, you may end up paying more in interest or higher fees on a startup business loan if you have bad credit.
Are Startup Loans Harder to Qualify for?
In general, it is harder to qualify for a startup loan since most business loans require you to be in business for at least two to three years.
Startup loans are used to help you get the money needed to begin operating your business.
Given that you may not have much profit to start with, startup loans can require collateral, extensive paperwork, or a more thorough business plan.
Qualifications for a Minority Startup Loan with Bad Credit
Qualifying for start up business loans for minorities with bad credit is not as complicated as you’d think. Each lender sets their own qualifications, but typically you’ll need to meet their guidelines for:
- Business type: Some lenders only lend to business startups in specific industries
- Time in business: Start up business loans for minorities may require that you’ve been in business for 6 months to a year while others may not have these requirements
- Revenue: Lenders like to see how much your business is making and may ask to see bank statements or tax returns.
- Business plan: A business plan explains various aspects of your business and can describe your plan for earning revenue if you haven’t started making money yet.
- Credit score: Even if the lender provides minority startup loans for borrowers with bad credit, they may still check your credit score and have certain guidelines on the scores they approve.
Where to Get a Minority Startup Loan with Bad Credit
There are many places to start your search when looking for a minority startup loan with bad credit.
The Small Business Administration, or SBA, has several loan programs available and some are geared toward minorities.
SBA 7(a) loans have high borrowing limits and low fees. These loans can be for working capital, purchasing equipment, paying existing debt, and expanding the business in other ways.
The SBA also offers micro loans for startups with bad credit, allowing you to borrow up to $50,000. These loans are easier to get with bad credit especially since you may have to put something down as collateral.
The SBA’s website helps you find lenders in your area by searching your state or city.
Online lenders are typically private companies and they all set their own rates and terms for borrowers.
As an alternative to a traditional bank, some lenders have lenient credit requirements which allows them to approve more borrowers for funding.
Even if the lender doesn’t cater to minorities only, they might still provide flexible loan options for a newer startup or applicant with bad credit.
Microlenders offer startup business loans in small amounts, usually less than $50,000.
Borrowers with low credit scores or very little profit can put something up for collateral to secure their loan.
Microlenders tend to focus more on your business plan, potential to grow, and social standing in your community over your credit score. This is why it helps to include strong professional references in your application.
Community Development Financial Institutions (CDFIs)
CDFI lenders offer business loans sponsored through the Department of Treasury.
These loans are intended to promote access to capital and economic growth in rural and urban low-income communities across the country.
Lenders are CDFI certified so you can apply for a business loan directly with the lender of your choice and not the Department of Treasury. These loans are usually microloans with lower fees and interest rates.
The Opportunity Finance Network database helps you find CDFI business lenders near you.
Banks and Credit Unions
Banks and credit unions have the strictest credit score requirements for business loans. However, you may be able to utilize options like a business line-of-credit to draw from regularly or even a business credit card.
If you are a member at your local credit union and have already established a relationship with the staff there, they may be able to offer you a business loan with reasonable terms.
Some banks and credit unions also have lending programs that cater to minority-owned businesses.
While it may not always work out, considering your existing bank for a startup business loan is worth exploring since they already have access to a lot of your financial information.
Peer-to-peer (P2P) lending helps people get loans directly from an investor and cuts out financial institutions as the middleman.
P2P lending platforms make it easy to apply for funding and get a business loan even with a lower credit score.
The investors act as the lender and are able to set their own terms and choose which borrowers they lend to. This means you have a good chance of getting approved for funding, even if this means paying a higher interest rate.
How to Get a Minority Business Startup Loans with Bad Credit
If you know you’ll need a business loan as a minority, don’t let your credit score discourage you.
The sooner you get started and complete these steps, the closer you’ll be to securing funding and growing your new venture.
- Choose the type of loan you want (and make sure you qualify): Narrow down your options by deciding whether you’d want to use an online lender, SBA lender, or microlender for your startup business loan. Also Consider the qualifications for the loan especially if you need to be a Certified Minority-Owned Business, or meet certain revenue requirements.
- Compare lender’s offers and rates: Compare different loan options to ensure you’re getting the best terms for your situation. With online lenders, you can often compare quotes and offers online. For other loans, compare their rates and fees along with borrowing limits and approved uses for the loan money.
- Apply for a business startup loan: Once you find a minority startup loan that meets your needs, submit an application. Sometimes you can do this partially or completely online.
- Submit supporting documentation: In order to process your loan application, lenders require additional documentation such as:
- Bank statements and tax returns
- Your business plan
- Business licenses and certifications
- Proof of collateral (if applicable)
- Letters of recommendation
At this time, lenders will also review your personal and business credit scores.
- Review and agree to loan terms: Once your application is done processing, the lender will give you their decision. If you’re approved, know that you may get a higher interest rate or be subject to more fees if you have a lower credit score.
Top Startup Business Loans for Minorities with Bad Credit
Having bad credit may leave you with fewer business loan opportunities, but you still have options.
In addition to microloans and SBA business loans, here are some additional startup loan options for minority business owners with bad credit.
Line of Credit
A business line of credit is similar to a loan but instead of receiving one lump sum payment, you can draw from a credit limit as business expenses come up.
Banks, credit unions, and online lenders typically offer a business line of credit.
There’s a repayment schedule for the money you borrow and interest rates tend to be higher with a line of credit. However, some lenders will accept a lower credit score of 680 to as low as 580.
Merchant Cash Advances
With a merchant cash advance, a company gives you money for your business upfront that you repay using a percentage of your debit card sales, plus a fee.
A merchant cash advance can help you cover immediate cash-flow needs, but the interest rate and fees can be high.
With this type of business lending, companies look at your personal credit score so it’s not a big deal if you don’t have a business credit score yet.
In order to get approved, you will have to be receiving a significant amount of credit card payments with your business already and lenders will consider the industry you’re in as well.
Working Capital/Invoice Financing
Invoice financing is another way to receive funding for your business upfront, but you must be a B2B business.
With invoice financing, you borrow an amount of money and pay it back to the lender with a percentage of your future or pending invoices.
For example, your invoice financing agreement may require you to pay 30% to 40% of your total invoice amount
Online lenders and fintech companies offer this type of financing. It focuses less on credit and more on your business financials along with how many invoices you’re sending each month.
Not Ideal For Minority Business Owners With Bad Credit
Loans that require lenders to heavily factor in your credit history are going to be harder to obtain.
Here are two types of business loans you may not want to start with if you’re a minority with bad credit.
- Long-term Loan: Long-term loans have an extended repayment period so you could be paying off your business loan for up to 10 years. These loans allow you to borrow large amounts of money (think $500,000 to $1 million) but often require a credit score of 700 or higher to qualify.
- Unsecured Loans: An unsecured business loan does not require you to put up collateral such as real estate or an asset. Instead, the lender uses your credit score to qualify you for the loan. This is where you can run into problems if you have bad credit. With no collateral to secure your loan, some lenders may not want to take a risk on a borrower with a low credit score.
How Minority Business Owners Can Find the Best Bad-Credit Startup Loan
Minority business owners should shop around to compare options for startup business loans with bad credit.
Use an online loan marketplace to do all the heavy lifting for you when it comes to gathering information from top lenders. An online loan marketplace will compare interest rates, credit score requirements, loan limits, and fees, from various lenders.
This helps you save time and avoid applying for multiple business loans that you may not qualify for.
If you’re considering an SBA loan, contact an SBA lender that services loans in your area to advise you on which loans to apply for.
A loan officer can tell you directly whether you’d qualify or what you can do to increase your chances of getting approved for the option you want.
Small business mentorship programs are equally as helpful. Knowing which lender another minority business owner used to secure funding will equip you with the knowledge to make your path easier.
Tips For Improving Your Credit Score as a Minority Business Owner
Bad credit isn’t permanent. There are several things you can do to build both your personal and business credit scores.
Track Your Credit Score
Start by tracking your credit score to see where you stand. Get your free credit score from sites like:
To check your business credit score, access a copy from Dun & Bradstreet, Experian, or Equifax.
Experian allows you to purchase a one-time copy of your credit report. Or, you can sign up for business credit monitoring and receive free unlimited access to your credit score.
Monitoring your credit will help you confirm that all your information is correct and determine areas you can improve in.
Obtain a Secured Credit Card
Secured credit cards help you build positive credit history and almost anyone can get approved.
Generally, applicants either have no credit or a low score. You open the account by making a deposit which serves as your credit limit.
Then, borrow against the credit limit whenever you use the card to make a purchase. Be sure to pay off your secured credit card bill in full each month to build positive credit history.
Apply for a Vendor Account
A vendor account works similar to a secured credit card in that you make regular payments that get reported to the credit bureaus. However, you typically make your purchase(s) from one vendor and pay your account off over time.
Lots of companies offer vendor accounts and this could be a more affordable way to pay for startup materials while building business credit.
Pay Bills On Time
Your credit score reflects your ability to pay bills on time so examine your monthly budget to make sure you’re planning for important payments well in advance.
Communicate with lenders if you are ever in a situation where you can’t make a monthly payment. You may be able to arrange a partial payment and avoid them reporting negative payment history on your credit.
Generate More Revenue
Generating more revenue can help your credit if it allows you to increase your credit limits so you can keep your credit utilization lower.
More revenue will also help you build up cash reserves for your business to help you pay bills and expenses even during the lower revenue months.
Additional Resources for Minority Business Owners with Bad Credit
All new startups need support, but minority owned-businesses are especially susceptible to disparities based on racial bias and a number of other factors.
Here are some additional resources that minority-owned businesses can utilize.
The SBA 8(a) Business Development Program
The SBA 8(a) Business Development Program provides training and business development resources for socially and economically disadvantaged small business owners.
To qualify for the program, your business needs to be at least two years old. You also need to have an interest in expanding your footprint in the federal marketplace since this program helps your business secure more federal contracts.
Small Business Grants
The SBA also offers a few small business grants and unlike loans, grants don’t need to be repaid. Some of these grants include:
- The Small Business Innovation Research
- Small Business Technology Transfer Programs
- Management and Technical Assistance Program
You can find business grants unique to your state by visiting your state’s government website. Private companies and organizations also offer lots of grants for minority-owned startup businesses despite credit.
For example, the Southern Restaurants for Racial Justice Heinz Lee Initiative grant provides $15,000 to $25,000 for black-owned food businesses (existing and startup).
Free Community Resources
Exploring free community resources that support minority business owners can help you grow your business, secure funding, and even improve your credit situation.
Check to see if your area has any small business development centers which offer free training and mentoring for minority business owners.
The Minority Business Development Agency (MBDA) is a federal agency with local branches that provides services to help minority businesses succeed and get funding.
SCORE is a nonprofit organization and the nation’s largest network of business mentor volunteers.
SCORE has local chapters and allows you to meet regularly with a mentor, learn from webinar presentations, and learn from an on-demand library of business resources.
While it may seem challenging to find start up business loans for minorities to get a startup business loan with bad credit, it’s not impossible. The benefits of securing funding for your business are also well worth the effort.
Consider getting a business mentor from one of the organizations mentioned and discuss your business plan and goals to see which type of business startup loan would be best for you.
Also, begin tracking your credit score and comparing loan options from minority lenders and business loans that are best for minorities with a lower credit score.