Unlocking Growth: A Guide to Small Business Financing for Hispanics

Mon | June 2024

With nearly 5 million Latino-owned businesses generating over $800 billion in revenue, Hispanic companies are a driving force in the U.S. economy. Yet, many Hispanic entrepreneurs face challenges in securing the capital needed to grow their businesses. This guide is here to help bridge that gap.

We'll equip you with the knowledge and tools you need to navigate the world of business financing and grants for Hispanic-owned businesses. We'll cover traditional options like SBA loans, explore alternative financing solutions, and even show you programs tailored to your community's needs.

By understanding your financing options, you can unlock your business's full potential and achieve your entrepreneurial dreams.

Let's get started!

A team of young professionals collaborates around a table, illustrating the collaborative efforts funded by Hispanic business loans.

What Challenges Do Hispanic Businesses Face?

As a Hispanic entrepreneur, you have a wealth of opportunities to succeed. But before we explore specific business loan 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 funder 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.

A proud restaurant owner stands in his kitchen, highlighting the success of Hispanic business owners supported by dedicated loan programs.

Financing Your Hispanic-Owned Business: Exploring the Options

Hispanic entrepreneurs face common challenges when looking for business financing. Understanding these obstacles was the first step. Now, let's explore the available business financing that can help fuel the growth of your Hispanic-owned business.

1. SBA Loans: Financing Your Hispanic-Owned Business

The U.S. Small Business Administration (SBA) is a government agency committed to helping small businesses succeed, including those owned by Hispanic entrepreneurs. While the SBA doesn't directly hand out loans, it acts as a guarantor for a portion of loans issued by approved lenders like banks and credit unions.

What does an SBA loan guarantee mean? Think of it like this: an SBA guarantee reduces the risk for lenders if a borrower (the business owner) defaults on the loan (fails to repay). This encourages lenders to offer more favorable terms to borrowers because the SBA promises to cover a part of the loan in case of default.

Here are some of the most common SBA loan programs:

7(a) Loans: This is SBA's most popular program, offering loans up to $5 million for various business needs like working capital, equipment purchases, or real estate. To qualify, you'll need to be a for-profit US-based business, meet SBA size standards for your industry, have a viable business plan, and demonstrate a good credit history (ideally 600 or above).
504 Loans: This program helps finance fixed assets like real estate or machinery. It typically involves collaboration between a certified development company (CDC), a bank, and the SBA. Eligibility is similar to 7(a) Loans, emphasizing a sound business purpose for fixed asset financing. The maximum loan amount is also $5 million.
Micro loans: This program provides financing up to $50,000 for expenses such as working capital, inventory, machinery, and even real estate. Compared to other SBA loans, eligibility requirements are typically less strict, making it a good option for startups or businesses needing smaller amounts.

Considerations for SBA Loans:

While SBA loans offer great benefits, the application process can be lengthy and complex:

Underwriting: When you apply, the lender assesses the risk of lending you money. The SBA may consider your business plan and industry experience. They may also consider a strong personal guarantee from the owner. This is in addition to your credit score.
Interest Rates: SBA loans typically have interest rates of 6% to 8%, which may be slightly higher than some other financing options.

Next steps? The SBA application process can be complex. Consider these resources:

Financial Advisors: Consult with a financial advisor specializing in SBA loans. They can help you navigate the process and determine if an SBA loan fits your business needs.
SBA Website: The SBA website provides detailed information on all their SBA Loan Programs and Eligibility Requirements.

A happy seamstress works on a sewing machine in a bright studio, showing how Hispanic business loans can support creative ventures.

2. Revenue-Based Financing: Grow Your Hispanic Business Faster

Revenue-based financing (RBF) is an alternative funding option for businesses with strong sales growth potential but limited credit history.

Unlike traditional loans, which focus on credit score, RBF focuses on your company's future sales potential, making it a valuable tool for growing Hispanic-owned businesses.

How does RBF work for your growing business? Early signs of success, like steady sales, a growing customer base, and increasing revenue, demonstrate your business's potential. These signs of "early traction" often lead to growth needs, such as capital for marketing, inventory, equipment, or hiring. RBF can be a great solution to fuel these growth initiatives.

Here's how it works:

A funder provides a sum of cash upfront, typically between $5,000 and $250,000. The exact amount depends on your income and the funder's criteria.
In exchange for the capital advanced, you agree to pay the funder a percentage of your future gross income. This rate is usually between 5% and 15% of your bank's average daily balance. You continue these payments until you repay the financing amount in full.

Benefits of RBF for growing businesses:

Flexible Payments: Your payments are based on revenue, offering relief during slow sales.
Rapid Financing: The application process is typically faster than traditional business loans, and you can potentially obtain capital in less than a day.

What do you have to consider before applying for this type of financing? Revenue-based financing can be more expensive than traditional loans because they involve a riskier transaction for the funder. The cost of funds (factor rate) can range from 1.1 to 1.5 times the original financing amount. Make sure you understand the total cost of financing, including fees and interest, before agreeing to an RBF loan.

Now, how does the funder decide if you qualify? RBF funders consider several factors when evaluating your future sales potential. They will likely review your financial statements, including your sales history and company profitability. They may also consider your business plan and future growth projections. Maintaining a healthy bank account with consistent deposits can positively impact your RBF application.

Is RBF right for you? Consider your business goals and financial situation. RBF could be a good option if you are a growing Hispanic business owner and need capital to boost your sales potential. You can start by researching different companies online that offer RBF options. For example, at One Park Financial, you can prequalify for capital if your business generates at least $7,500 in revenue and has been open for three months. However, exploring various RBF options is essential to find the best fit for your business needs.

A smiling baker arranges pastries in a bakery, representing the growth potential with Hispanic business loans.

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.

A group of diverse friends happily posing for a selfie, symbolizing the community support and opportunities provided by grants and CDFIs for Hispanic entrepreneurs.

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.

A focused team of professionals working together in an office, representing the collaborative environment fostered by grants and CDFIs for Hispanic business growth.

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.