[co-author: Roke Iko]
Capital is the lifeblood of small businesses and fundamental to their formation and growth. However, obtaining capital can be difficult for minority-owned business enterprises (MBEs), as a lack of access to capital is one of the primary barriers for MBEs hoping to enter the government contracting world. Access to capital and access to contracts form a symbiotic relationship: MBEs need both simultaneously to survive. They seldom arrive at the same time, however. MBEs often lack access to capital both at startup and in subsequent years, making it difficult to compete for government contracts. According to a study by Stanford Institute for Economic Policy Research, the average MBE has $500 of outside equity at its foundation compared to $18,500 for non-MBEs.[1]
Challenges that MBEs face
- Lower personal wealth levels are a barrier to entry
- MBEs may receive lower loan amounts than non-MBES, are more likely to be denied loans, and are more likely not to apply for loans because of rejection fears.
The federal government has established a number of programs to attempt to redress this imbalance. Federal SBA-backed loans are three times more likely to go to MBEs than conventional loans.
SBA LOAN PROGRAMS
What type of funding is this?
| SBA 7(a) Standard Loan |
Primary program for providing financial assistance to small business.
Provided by private lenders (usually banks) & partially guaranteed by SBA |
| SBA Express Loans |
Similar to the 7(a) standard program but provides funding much faster |
| SBA 504 Loan |
Provides small businesses with long-term, fixed-rate financing
Loans are made through partnership with a non-profit certified development company (CDC) & a private lender
CDC provides 40% of total project costs (SBA guaranteed), lender covers up to 50%, and borrower contributes 10-20% |
| SBA Microloans |
Smaller loans made by non-profit community-based organizations |
| Community Advantage Loan |
Offers loans through mission-oriented lenders (usually nonprofit financial intermediaries)
Lenders are required to make at least 60% of loans in underserved markets |
What can this funding be used for?
| SBA 7(a) Standard Loan |
Wide range of purposes including new construction, expansion/renovation |
| SBA Express Loans |
Wide range of purposes including new construction, expansion/renovation |
| SBA 504 Loan |
Useful to acquire fixed assets for expansion or modernization and owner-occupied real estate |
| SBA Microloans |
Working capital, supplies, machinery, equipment |
| Community Advantage Loan |
Working capital, equipment, real estate |
Who qualifies for this funding
Business must (1) be a small business under SBA lending size standards (which differ from contract standards), (2) must be unable to get similar financing elsewhere, (3) must demonstrate it can repay the loan, (4) the owner must invest their own money in the business, (5) must have good credit. Often borrowers must contribute a down payment of up to 10%.
SBA lenders may have additional criteria as well including capital requirements & collateral.
How much funding is available to MBEs?
| SBA 7(a) Standard Loan |
Up to $5 million |
| SBA Express Loans |
Up to $350,000 available; temporarily raised to $1 million from CARES Act |
| SBA 504 Loan |
No cap on the loan, depends on the project size, but maximum SBA contribution is up to $5 million |
| SBA Microloans |
From $500 to $50,000 |
| Community Advantage Loan |
From $50,000 to $250,000 |
What are the repayment terms?
| SBA 7(a) Standard Loan |
Offers 10-year repayment period, with extensions for loans for equipment & real estate (25 years) |
| SBA Express Loans |
Offers 10-year repayment period, with extensions for loans for equipment & real estate (25 years) |
| SBA 504 Loan |
Loan repayment period is 10-25 years |
| SBA Microloans |
6 year repayment period, may require you to engage in additional training programs |
| Community Advantage Loan |
Maximum 10 years for working capital & up to 25 years/or life of the asset for fixed asset purchase |
What are the benefits of this funding?
| SBA 7(a) Standard Loan |
Moderate interest rates (5.5-11.25%), can be negotiated |
| SBA Express Loans |
Moderate interest rates (7.75% to 9.75%), can be negotiated
Fast turnaround for approval (24-48 hours)
SBA guarantee ensures a higher approval rate |
| SBA 504 Loan |
Lowest interest rates ~(2.2 to 2.3%), can be negotiated
Longer terms can help free up cash flow for small businesses |
| SBA Microloans |
Moderate interest rates, 7.75%-8.5%) can be negotiated
Easily accessible (MBEs received 48% of microloans in 2018), may not require collateral and are amenable to borrowers who are rebuilding their credit |
| Community Advantage Loan |
Moderate interest rates (7%-10%)
Offers management & technical assistance
Access to affordable credit |
What are the drawbacks?
| SBA 7(a) Standard Loan |
Longer approval process |
| SBA Express Loans |
SBA guarantees only up to 50% of Express Loans
More difficult to obtain than traditional SBA loans for early-stage companies, thus lower odds of approval |
| SBA 504 Loan |
More stringent requirements (credit & solid financials) than other SBA loans
Owners are required to guarantee at least 20 percent of loan
Cannot be used to buy inventory, consolidate debt |
| SBA Microloans |
Cannot be used for real estate or to repay debt
Longer approval process
Borrowers must sign a personal guarantee |
| Community Advantage Loan |
Lower amount of funding available |
How do I apply?
Additional info
| SBA 7(a) Standard Loan |
— |
| SBA Express Loans |
The amount available to MBEs is highly dependent on the lender |
| SBA 504 Loan |
CDCs are more likely to approve loans that help meet a public policy goal, including revitalizing a community, updating facilities to meet health & safety requirements, or increasing MBEs |
| SBA Microloans |
Microloans are designed to assist early-stage businesses, particularly owned by women, low-income, veteran, and MBEs; |
| Community Advantage Loan |
— |
Certification and verification of MBEs will also help firms compete in more state and local government procurement. Contact the National Minority Supplier Development Council for more information.
[1] https://siepr.stanford.edu/sites/default/files/publications/17-003.pdf pg. 8
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