The Definitive Guide to Business Loans for Immigrants
October 21, 2019 | Last Updated on: July 20, 2022
October 21, 2019 | Last Updated on: July 20, 2022
For many, the definition of the American Dream implies abundant opportunity for all. For immigrants, that may manifest itself in realizing the goal of launching their own business in a land where they have a greater likelihood of prospering.
But many immigrants wishing to start their own business in the United States do not have the financial means to build it up from scratch. Immigrant entrepreneurs seeking the answer to the question of how foreigners can get money to start a business can start with following a few simple guidelines.
According to Arnobio Morelix, an analyst at the Kauffman Foundation, which promotes entrepreneurship, immigrants are about twice as likely as native-born citizens to start new businesses. Indeed, 43 percent of the companies in the Fortune 500 were founded by first- or second-generation immigrants, according to a recent study by the Center for American Entrepreneurship. The Kauffman Foundation also reports that in 2016 nearly 30 percent of new companies in the U.S. were founded by first-generation immigrants. Just 20 years earlier, the figure was a mere 13 percent.
More than 25 percent of small business owners are immigrants, according to studies by the Kauffmann Foundation, which also reveal that:
Beyond having a vision of success or an exceptional entrepreneurial ambition, another factor in the high percentage of immigrant business owners also is attributable to the inability of some immigrants to land employment for which they would seem to be eminently qualified.
There are U.S. employers who might not be able to interpret the qualifications that a degree from a foreign university, or job experience in a different country, and how those may translate to their own business’ needs. That might lead employers to bypass the application of an immigrant for that of a native-born applicant, according to Associated Press report by Paul Wiseman.
Immigrants wishing to start their own enterprise who seek a business loan may be required to prove legal U.S. citizenship. In that event, they’ll need to share their Social Security number, a visa or an Individual Taxpayer Identification Number (ITIN), which is issued to anyone in need of an identification number to pay taxes, but who is ineligible to receive a Social Security Number. An immigrant without a Social Security number must request an ITIN number from the Internal Revenue Service.
When a lender provides pre-approved funding with a maximum credit limit, it is known as a business line of credit. If the borrower — in this case, the immigrant business owner — is approved for this line of credit, funds can be accessed whenever they are needed until the established credit limit has been reached.
Because the borrower is only paying interest on the amount that he or she withdraws, a business line of credit can be advantageous for business owners who are uncertain of the amount of funding they will actually require, or when they might need it.
The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other types of loans, such as traditional bank term loans. How costly that actually would be is heavily dependent on the amount of funds the entrepreneur ends up using.
If an immigrant business owner needs to establish a favorable credit history, a business line of credit could help him or her do that.
A government agency that provides support for entrepreneurs, the U.S. Small Business Administration (SBA) backs loans issued through their lending partners to help lower financing rates for business owners. The SBA also can help immigrant entrepreneurs to qualify for loans.
Naturalized citizens applying for a business loan will not be subject to restrictions or requirements for their application for an SBA loan provided that they note their naturalized status on their SBA Form 1919.
Financing through the SBA usually means a larger selection of loan sizes, repayment terms that are lengthier and interest rates that are not exorbitant. Other means of short-term funding usually don’t offer annual percentage rates as low as SBA loans.
Immigrants who are lawful permanent residents of the U.S. are eligible for SBA loans. People who have just recently arrived in the country and who are awaiting their green card — a process which can sometimes take a notoriously long amount of time — also can apply for an SBA loan with a valid immigrant visa and Customs and Border Protection stamp that verifies their legal residence.
Immigrants who are in the U.S. lawfully, but who are not permanent citizens can still get an SBA loan as long as they possess an appropriate work visa with a current date. Immigrants who have sought asylum and refugee status also retain SBA loans eligibility if they have status as a lawful permanent resident.
SBA loans for immigrants do require an inordinate amount of paperwork–lots of applications to fill out. Approval also will depend heavily on the applicant’s business history and credit score. But if you are willing to deal with all the red tape that goes with applying for an SBA loan, the upside is markedly lower financing rates and generous lengths of time to repay the loan than is the case with other loan options the immigrant business owner might be exploring.
“SBA loans typically range from 5–25 years,” writes Jared Hecht in Forbes.com. “Even though SBA-backed loans exist in order to give small business owners more access to financing —these loans are still competitive.
“Generally, your business must be able to adequately service the SBA loan and all other debt obligations from the cash flow of the business operations and borrowers will be evaluated on a case-by-case basis.”
According to 2016 data from the Small Business Association, BA loans are most frequently approved for the following types of businesses:
When a bank or online lender approves a borrower for an up-front single payment with the understanding that the borrower will repay the total amount of the loan, along with interest and other fees, via monthly installments, that is what is known as a term loan. The amount of the loan is repaid over a period of time that is established at the time of the finance agreement.
Banks and online lenders both are able to provide loan options, but term loans are not necessarily easy to secure. It’s a lengthy, arduous application process without a high rate of approval. It is possible that an immigrant, owing to possible language barriers, might have better success applying for a term loan in the online marketplace rather than in person at a bank.
Like SBA loans, term loans are also desirable products. You’ll want to come in with a strong personal and business credit history to improve your chances for approval and a lower interest rate on any term loan. A term loan often requires collateral and a demanding approval process to reduce the risk to the lender that the borrower may default on the loan or fail to make payments. Term loans usually do not carry any penalties provided they are paid off ahead of schedule.
Another type of term loan that immigrant entrepreneurs may wish to consider is a short-term loan. This type of financing entails a shorter borrowing period, with a repayment term that is a year-and-a-half or sometimes even less. Payments on short-term loans are required frequently — sometimes once a week, or, in some cases, every day.
Although the credit requirements are not as strict for short-term loans as they are for regular term loans, the frequent payment schedule may be burdensome for someone in a new business without a lot of cash flow at that moment. But an immigrant businessperson who needs a loan in a hurry still might opt for a short-term loan because it may be easier to secure than other forms of financing.
An immigrant whose business entails the use of a lot of machinery or implements of some kind might want to consider an equipment loan. Equipment financing enables the borrower to finance up to 100 percent of the cost of new or used equipment for his business, whether it is restaurant ovens, delivery trucks, washing machines, hair dryers for salons or what have you.
The collateral for an equipment loan is “baked in the cake” of the initial loan terms, meaning the borrower probably won’t be required to add anything else as a personal guarantee against the loan. Equipment loans do provide a level of convenience for immigrants in the initial stages of launching a business because the necessary collateral is the equipment itself. The borrower does not need to offer up personal assets as collateral.
Applying for an equipment loan will require submission of a quote, including the price of the equipment the entrepreneur plans to purchase, his credit history and other business documents.
Another way to facilitate access to money needed to finance one’s business expenses is a merchant cash advance. In this instance, a company grants the borrower access to cash. The borrower is then required to pay an agreed upon portion of her sales made with credit and debit cards and other business receipts, until the entire payback amount (which includes fees) has been repaid
A merchant cash advance does not require collateral or a minimum credit score. However, merchant cash advances to immigrant business owners involve higher costs than most other forms of financing.
A cash advance is not a business loan, but rather a purchase of future revenues that a company will make in the future at a discount.
In some foreign cultures, borrowing money that must be paid back with interest is considered an unacceptable practice. Some U.S. financial institutions may offer interest-free loans for business owners who follow strict religious or cultural rules regarding borrowing money.
Melissa Wylie of MagnifyMoney.com writes that, as an example, the Jewish Free Loan Association provides interest-free small business loans to residents of all faiths in the Los Angeles area. Eligible business owners could receive as much as $75,000 for business funding.
Another course of action for foreigners to get money to start a business is a microloan, which is suitable for business owners who need to borrow $500 to $50,000.
Non-profit lenders that may be good sources of microloans include Accion USA. The organization is a nonprofit community lender dedicated to helping entrepreneurs generate income, build assets, create jobs and achieve financial success through business ownership. Accion’s network serves small businesses in communities across the U.S. and is made up of three certified Community Development Financial Institutions (CDFIs).
According to immigrantbiz.org, the loan size, the lender and the entrepreneur’s credit history all will impact interest rates on a microloan. At Accion, they were 8.99% to 15.99% in March 2019; at Business Center for New Americans, they range from 8% to 10%. For some perspective, a bank loan for $25,000 or less that is backed by the SBA and which is due in seven years or less carried (as of March 2019) a maximum interest rate of 4.25 percent plus the prime rate, for a total of 9.75 percent.
A five-figure loan is not likely for a first-time borrower who seeks a microloan.
Accion USA Director Ana Hammock said, “Our average is a three-year, $6,000 to $7,000 loan. Normally people start small and then they graduate to bigger loans.”
Microlenders may require borrowers to take classes that assist them in operating their businesses more efficiently and profitably. An immigrant business owner who has yet to establish a credit history in the U.S. also can take part in credit-building programs offered by some microlenders. A business owner can borrow a small sum of money, pay in back over a short amount of time, and thus begin to build credit credibility. Once a borrower begins to establish that he or she is good for repayment of a loan, more lenders will show a willingness to make a microloan to the person.
Don’t expect microlenders to lend you $50,000 the first time you approach them. “Our average is a three-year, $6,000 to $7,000 loan,” says Ana Hammock. “Normally people start small and then they graduate to bigger loans.” Microloans generally are reported to credit bureaus, so if you do a good job of repaying your loan, it should boost your credit score.
One thing immigrant borrowers may not be aware of is the potential consequences of applying for multiple credit accounts simultaneously. Some financial experts have warned that every time someone applies for a new credit card or a loan, it can gradually damage one’s credit score. Every time a credit application is turned down, it negatively affects a credit score.
Another variable to keep in mind is that the immigrant entrepreneur’s ability to secure loans in the future will hinge on the consequence of his or her first loan.
A loan should be chosen that will enable the borrower to afford to make the payments. Doing so will enhance his credit score, and the higher a businessperson’s credit rating is, the greater the chance is that this entrepreneur will be approved for future loans — very likely at lower interest rates.
For this reason, taking out a loan really serves the same purpose as making an investment in your business’s future. Building one’s reputation and solidifying one’s credit score actually goes hand in hand with building a successful business.