Unlocking Growth: A Guide to Small Business Financing for Hispanics
Mon | June 2024
Hispanic businesses, nearly 5 million strong, contribute over $800 billion to the U.S. economy a 2023 report says. However, many Hispanic entrepreneurs struggle to find growth capital for their small businesses. This guide aims to bridge that gap.
We will provide the knowledge and tools needed to secure funding and grants. First, we'll cover traditional options like SBA loans. Then, we'll explore alternative financing and community-specific programs.
Understanding these options can unlock your business's potential and help you achieve your dreams.
Let's begin!
What Challenges Do Hispanic Businesses Face?
As a Hispanic entrepreneur, you have a wealth of opportunities to succeed. But before we explore specific loans and grant options, let's talk about some of the challenges you might face:
1. Limited Access to Traditional Business Loans
Obtaining traditional loans can be difficult due to limited credit history or a lack of a personal guarantee. Even with good credit scores, Hispanic businesses are less likely to receive financing than their non-Hispanic counterparts.
A 2023 study by The Small Business Credit Survey (SBCS) found that only 19% of Hispanic-owned businesses receive all the financing they seek, compared to 35% of non-Hispanic businesses. This is because traditional lenders typically have stricter eligibility requirements, which include:
High Credit Score: Depending on the lender and the type of loan you want to apply for, your credit score may need to be between 680 and 720 (or even higher).
Personal Guarantee: You may be required to provide a personal guarantee. This means you may need to use your financial assets, such as a car or home, as collateral for the loan.
2. Language Barriers Slow the Process
Many lenders do not offer support in Spanish, making it challenging to understand loan terms, such as interest rates and payment conditions. Understanding these terms is crucial because they determine the total cost of the loan and the repayment schedule. Clear comprehension prevents getting a loan that is too expensive or hard to manage, ultimately protecting your business from financial strain.
3. Limited Awareness of Available Resources
Many Hispanic business owners might not know about all the ways to get funding for their business. This could be because it's hard to find information, or maybe they just don't know there are programs specifically for Latino businesses.
Here's the good news: A whole bunch of financing and grant programs are made just for you! These programs often have:
Easier Requirements: Qualifying for these programs is usually simpler than traditional loans, making them a better option for Hispanic businesses.
Faster Applications: Getting approved is quicker and easier than with regular loans. You might even get the money you need in as little as a day!
Extra Help: Some programs offer valuable advice or mentorship to help your business grow even more.
You've taken a big step by being here! Next, we'll look at loans and grants for Hispanic-owned businesses. We'll cover their basic requirements and how to apply.
Financing Your Hispanic-Owned Business: Exploring the Options
Hispanic entrepreneurs face common challenges when seeking financing for their businesses. Understanding these obstacles was the first step. Now, let's explore the business financing available to you to fuel the growth of your Hispanic-owned business.
1. SBA Loans for Hispanic Businesses
The U.S. Small Business Administration (SBA) is a government agency committed to helping small businesses succeed.
While the SBA does not provide loans directly, it does guarantee a portion of loans issued by approved lenders, such as banks and credit unions. Standard SBA loan programs include:
7(a) Loans: The SBA's most popular program offers loans of up to $5 million for various needs such as real estate and building purchases. To qualify, you must be a U.S.-based, for-profit business, meet SBA size standards in your industry, and demonstrate a good credit history (ideally 600 or higher).
504 Loans: The CDC/504 Loan Program provides long-term, fixed-rate financing of up to $5 million. You can use this loan to purchase fixed assets that promote the growth of your business and job creation. One of its main requirements is that your company generates less than $5 million in net income from the previous two years.
Microloans: This program provides small loans of up to $50,000. Compared to other SBA loans, eligibility requirements are usually less strict, making them a good option for new businesses.
SBA loans offer exclusive benefits, such as competitive rates and educational resources. However, the application process can be long and complex due to their high demand. Here are resources that you can consult for more information about their requirements:
The SBA offers free or low-cost counseling and training in your area. You can check the local SBA local assistance locator.
The SBA website provides detailed information about its SBA loan programs and eligibility requirements.
2. Revenue-Based Financing: Grow Your Hispanic Business Faster
Revenue-based financing offers a flexible way for your business to access the capital it needs without taking on traditional debt. Here's how it works:
Access to Capital: With RBF, you can receive between $5,000 and $500,000 upfront, based on your projected future sales, and it's typically not tied to any type of collateral or your personal credit. This gives you the capital to grow your business, whether expanding your operations, investing in marketing, or purchasing new inventory.
Flexible Repayment: Because this isn't a loan, there's no "annual interest rate." Instead, you agree to pay back a percentage of your revenue through daily or weekly micropayments. This means your payments can adjust to your business's performance: if you have a slow month, your payment can be lower; if you have a great month, you can pay more and pay off your balance faster.
Total Repayment Amount: The total amount you repay is determined by a factor, usually between 1.2 and 1.49 times the funded amount. This factor is agreed upon and depends on the funder's underwriting principles, so you know exactly how much you'll repay.
Sounds new to you? Here's an example of how it will work for your business:
Let's say you receive a $25,000 investment with a factor of 1.3. This means you'll repay (25,000 x 1.3) = $32,500. When the funder puts in the offer, you'll be given a specific daily or weekly repayment amount based on your average daily business bank account balances.
Each day or week, you'll repay the advance amount with a percentage of your earnings until you pay the full amount of the capital received. The total repayment amount remains fixed, giving you peace of mind and predictability. You also benefit from being able to pay the total repayment amount sooner, saving you money on the cost of capital.
Before applying for revenue-based financing (RBF), keep the following in mind:
Cost Considerations: Revenue-based financing is often pricier than standard loans due to its higher risk for funders. The cost, or factor rate, usually ranges from 1.2 to 1.5 times the loan amount. So, be sure to understand all costs, including fees, before taking an RBF loan.
Business Evaluation: RBF lenders assess various aspects of your business. They review financial statements, sales history, and profitability. Moreover, having a healthy bank account with regular deposits can boost your RBF application.
RBF might suit you if you're a Hispanic business owner looking to boost sales. First, search online for options. For instance, with One Park Financial, you can pre-qualify online if your business makes over $7,500 and has been running for three months. Yet, it's crucial to explore different RBF options to find the best match for your needs.
3. CDFI Loans: Financing Built for Your Community
Did you know particular lenders support businesses in underserved communities? These lenders are called Community Development Financial Institutions (CDFIs). CDFIs can be banks, credit unions, loan funds, or venture capital funds, and they can be an excellent fit for many Hispanic-owned companies.
Why Choose a CDFI Loan?
Competitive Terms: CDFIs may offer better loan terms in rural or low-income areas than traditional lenders.
Low-Cost Financing: The U.S. Department of the Treasury supports CDFIs, allowing them to offer affordable financing options.
How to find a CDFI lender?
Search Online: Use the CDFI Fund Locator to find CDFIs in your area. Also, here's a CDFI list by state.
Treasury Department website: Visit the Treasury Department website for the latest information.
CDFIs care about your business's impact on the community. Having a solid business plan that shows job creation or economic growth is important. The application process for CDFIs might involve more documentation about your community involvement. However, this shows the CDFI's commitment to supporting businesses that give back.
4. Government Grant Opportunities for Hispanic Businesses
Government grants can be a valuable source of funding for Hispanic entrepreneurs, particularly for businesses focused on specific initiatives or in underserved areas. Underserved areas often have limited access to traditional financial resources like loans and banks. They may face fewer economic opportunities than other parts of the country.
Unlike loans, grants provide free money you don't need to repay. This makes them a desirable funding option. However, securing a grant is often competitive. You must submit a strong application proposal highlighting your business's value to succeed. Be prepared to present a compelling case that convinces the grantors why your business deserves their support.
There are many grant programs available to support Hispanic-owned businesses. Here are some resources you can use to start your search:
Grants.gov: Search and apply for federal grants on the official U.S. government website.
Minority Business Development Agency (MBDA) Grant Resources: Explore grant programs designed explicitly for minority-owned businesses.
Candid: This popular non-federal grant finder helps you find corporate, private, and community-sponsored grants.
Look beyond national resources. Your local government and nonprofit groups might offer specialized grants for businesses in your area. Start by searching online. Use keywords like "your industry + grant opportunities" or "your Location + small business grants." For instance, a Miami bakery owner could search for "bakery grants Miami" or "Florida small business bakery grants."
Use these resources. Also, do a targeted web search to increase your chances of finding the ideal grant to help your business thrive.
Growing Your Hispanic-Owned Business
Building a successful business takes time, dedication, and often an investment in growth. The financing options explored in this guide offer Hispanic entrepreneurs a roadmap to secure funding and achieve their expansion goals.
Explore online resources like One Park Financial or connect with the support organizations mentioned here. With careful planning, the right financing, and their support, your Hispanic-owned business can flourish and reach its full potential. Buena suerte!
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.