Aspiring entrepreneurs and small business owners can significantly boost the U.S. economy. However, many have to overcome challenges including inadequate access to capital among other barriers. Minorities, including Hispanics, are starting businesses at incredible rates. In fact, Hispanic-owned small businesses are the fastest-growing groups of entrepreneurs in the United States, and according to a study from Stanford University, they contributed approximately $500 billion to the U.S. economy in annual sales. Although Hispanic and other minority entrepreneurs are becoming an economic force, they are underrepresented in business.
Eliminating obstacles that hinder the progress, growth, and success of these small businesses is an imperative that can drive innovation, create jobs, and grow our nation’s economy.
Lack of access to capital is one of the major issues faced by Hispanic business owners, and it blocks business growth. Many do not get the funding they need. Most who were denied financing got turned down more than once, and they don’t even know why their applications got declined. As a result, Hispanic, Black, and women-owned businesses are either hesitant or not applying for loans altogether due to frustration and fear.
Most banks won’t lend to small businesses because they consider them risky as small businesses typically have fewer assets to provide as collateral. Additionally, transaction and underwriting costs are almost the same for small loans as larger ones. This causes banks to focus on loan amounts over $1 million.
Non-profit microlenders fill a niche for small businesses that might not otherwise qualify for a loan. However, these lenders usually focus on loans under $50,000. Thus, in the spectrum of small business lending, there exists what's called the "missing middle" gap, where the capital amount of $50K to $1MM that most business owners seek is too small for a big bank but too large for a nonprofit lender.
The good news is there are various funding options available, including
- business credit cards
- invoice factoring
- equipment leasing
- unsecured short-term business loans
- asset-based loans or lines of credit
- SBA guaranteed loans
The key to getting approved is understanding exactly what lenders are looking for and knowing what your financials are telling them. When you know your numbers and have your financials in order, you increase the likelihood of getting approved for funding.
Preparation is Key
There are countless stories of how unwavering persistence led to massive success. For instance, in order to get his coffee company Il Giornale off the ground in 1985, Howard Schultz had to raise more than $1.6 million. He spoke to 242 people, and 217 of them said no. It was disheartening, but he pressed on. Two years later, Il Giornale bought Starbucks and Howard Schultz became its CEO.
All businesses experience challenges so do not get discouraged or frustrated. Remember you do not have to do this alone. There are many organizations that can provide you with technical assistance on becoming fundable. Make sure to monitor and know the exact financial health of your business. Be upfront and do not lie to yourself or the lenders. The due diligence and underwriting process will reveal all details of your financials anyway. To improve your financial situation, you have to face the good, the bad, and the ugly head-on.
The reasons why businesses get rejected include
- Bad or no credit
- Weak cash flow
- Lack of collateral
- Lack of preparation
- An incomplete application
- Seeking small loans
- A Criminal record
- High risk or restricted industries.
By knowing these factors, you can work on improving your numbers ahead of time, filling in the gaps in the application, and getting technical assistance early.
Understanding the basic funding fundamentals is crucial to the success of your business and getting approved for funding. Make sure you set up a business bank account and separate your personal from business transactions. Get clear on what you want to accomplish, and before going to a lender, prepare the answers to the following questions:
- What are your annual gross revenues?
- How much capital do you need?
- What do you need the financing for?
- How will these funds affect your business and what is the return on this investment?
A common misconception among business owners is, “If I can just get the funding I need, my problems will go away.” That is far from the truth. In fact, when you get funded, there will be increased pressure because now you are responsible for paying the funds back. Whether you get funded or not, the bottom line is you can never stop focusing on getting more clients, generating more revenues, cutting costs, increasing profits, and improving your cash flow.
Entrepreneurship can be exhilarating and empowering. It can also be lonely and challenging. Leverage the experience, advice, and wisdom of mentors, coaches, and seasoned business owners who know first-hand what works and what doesn’t. It is vital to put yourself out there, show up, and join various circles of influence by giving value. Networking can lead to new leads, strategic partnerships, access to debt or equity financing, and other business opportunities.
Our population is becoming increasingly diverse and fostering business ownership among Hispanic and other minority entrepreneurs is critical to our economic growth and prosperity. When diverse businesses thrive, our neighborhoods and communities flourish.