Loans for Latino Business Owners
This guide will help any latino business owner looking for business loans. You may find that the type of loan, source of funding, or lender can be tailored to your specific small business in a way that will create long-term growth.
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Building new businesses is difficult for everyone, regardless of their background. But it can be particularly tough for hispanic and latino business owners to acquire the necessary amount of funding at the right interest rates. But while that's true overall, there are organizations, programs, and companies working to get funding
This guide will help any latino business owner looking for business loans. You may find that the type of loan, source of funding, or lender can be tailored to your specific small business in a way that will create long-term growth.
Unique challenges face Latino business owners.
Examining the statistics behind business lending to Latino business owners shows several risk factors for lenders. Biz2Credit's September, 2018 study of over 28,000 small- and medium-sized businesses revealed the following.
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Unique challenges face Latino business owners
Examining the statistics behind business lending to Latino business owners shows several risk factors for lenders. Biz2Credit's September, 2018 study of over 28,000 small- and medium-sized businesses revealed the following.
- The average annual revenue for Latino-owned businesses was over $25,000 lower than non-Latino owned companies.
- The average credit score for Latino-owned businesses was 594, 14 points lower than businesses owned by others.
It's difficult, if not outright impossible, to determine how much of those negative statistics is attributable to the fact that minority and women business owners are historically underserved by lenders. But the news wasn't all bad.
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Many Latino-owned businesses are succeeding
According to that same Biz2Credit study:
- The average annual revenue of Latino-owned businesses increased by 26.5%.
- Latino-owned businesses averaged 53 months in business, showing that these companies are, on average, viable long-term.
- The five-year average growth rate in the number of Latino-owned businesses has been at double or triple the national average rate for 15 years.
So what does this study suggest?
Looking at all of these facts together, we can deduce that Latino-owned businesses may start off with financial difficulties or hurdles, but they're clearly able to last a long while. They're growing, and more and more are being created every year. Latino-owned businesses will only become a bigger and more important part of the marketplace in the United States.
Getting a business loan
With all of that in mind, remember that getting a business loan is, in many ways, vital to long-term growth and expansion. So how do you get one?
Why do you need the loan?
The first question any business owner should answer before applying for a business loan is exactly why that loan is necessary. Go back to your business plan and think of where you currently stand. Are you relatively new? Ready to make a big leap in expansion?
There are nearly infinite reasons a business loan might be necessary. Maybe you need extra cash to hire more employees. Maybe you have an opportunity to buy lots of stock at a great price. Maybe you simply need more wiggle room in your cash flow.
No matter why you need the loan or what that upcoming purchase is, there's a loan that will likely work perfectly for your company.
How much money will you need?
Depending on why the business loan is needed, this could be a relatively small number or a relatively huge one. Regardless, you'll need to have a precise accounting for why the number you've requested is what it is.
- If you're hiring seasonal employees for a specific sales push, how many will you hire? How much will they earn? Will they be receiving benefits?
- If you're looking to buy a new piece of equipment, how much does it cost up front? Do you need to pay for installation or assembly? What's the cost of upkeep?
- If you're looking for a loan to generally improve your cash flow in the short term, why do you need to have that flexibility?
This is important for several reasons. Firstly, it will show lenders that you didn't pick a number at random. It shows that you are cognizant of your business's timetable and needs. Secondly, by having an itemized plan for their money, you can show your lenders exactly how their loan will result in profit. And finally, by knowing exactly why that cash is needed, you can help yourself decide which type of loan is best for you. Because depending on how much you need, why you need it, and how soon you need it, you can seek out any number of types of loans.
What type of loan do you need?
There are seemingly as many different business loan options as there are reasons you'd need one. Depending on your answers to the questions above, one or more of the following options could work perfectly for you.
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SBA Loans
Loans guaranteed by the U.S Small Business administration (SBA) aren't easy to get, but they're a tremendous option for most businesses. SBA loans function much like a regular commercial loan with any lender, with a critical difference: most of the money is guaranteed to the lender by the government.
That government backing means they're able to offer small business loans to borrowers who may be seen as a higher risk for any number of reasons. Because the money is from taxpayers, these loans require a lot of work. The government doesn't want to just give money away. SBA loans move slowly and take a long time. But if you receive one, they typically come with generous repayment terms, lower than average interest rates, and numerous resources provided by the federal government.
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SBA Microloans
The SBA also has a microloan program. They offer up to $50,000 to business owners through community-based intermediaries. They average out at around $13,000. There are lots of advantages to microloans, and particularly for those with average credit. Because they're administered through community-based financial institutions, they can be particularly great options for people from traditionally-underserved business owners.
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Commercial Loans
Commercial loans are loans at their most basic: the lender gives a certain amount of money, which the borrower repays at a given interest rate over a given amount of time. But without the backing of the SBA, a traditional commercial loan can come with more stringent repayment terms. On the other hand, since the money isn't coming from the government, there are typically fewer hoops to jump through.
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Equipment Loans
If you're borrowing money specifically to buy, lease, upgrade, update, or otherwise alter a vital piece of equipment, many financial institutions offer loans specifically for that purpose. What makes equipment loans unique is that the new equipment is held as collateral for the loan, which serves two purposes. For one, it protects the lender, just like an SBA guarantee. In an equipment loan, if a borrower can't pay the loan back, the financial institution can simply repossess the equipment and sell it. Because they have that protection, equipment loans often have relatively low interest rates.
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Merchant Cash Advances
Merchant cash advances are a great solution when you're in need of cash quickly. Providers of a merchant cash advance will give out a particular amount of money, but instead of receiving an interest rate, the repayment amount is agreed upon. And the borrower will make the payments daily, typically as a percentage of credit and debit card payments. Merchant cash advances move extremely quickly, and are very flexible. But the repayment can be very expensive, and losing a percentage of daily income can create cash flow issues.
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Business Lines of Credit
With a business line of credit, a borrower sets up a certain credit limit with a financial institution. Once that limit is decided upon, they can borrow as much or as little as is necessary. The repayment and interest will only be repaid on what is used. If your business has a credit limit of $150,000 and you use $25,000 to buy a new work truck, you'll only pay interest on the money spent on the truck. Many businesses will keep a line of credit open in case of emergency.
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Business Credit Cards
These operate exactly like a personal credit card, but the credit history and impact is on the business, not any one person. Any negative impact on a credit report will not show up in your personal credit history. Business credit cards are a great way to make purchases small and large while also insulating yourself.
What do I need to apply?
For a Hispanic business owner, just like any other business owner, organization is absolutely key when looking for a business loan. You need to know what you need in a loan, and you need to keep track of the tasks necessary to actually put that money in your company's coffers. Regardless of which type of above loan or loan programs seemed most appropriate for your business, remember that you're presenting your business as an investment which will be able to make payments on that loan.
There are plenty of documents to prepare before you apply for the loan. You'll need a copy of your business plan. You'll need proof of ownership, proof of residency, and proof of identity. You'll need your personal tax returns, business tax returns, lease information, and more. It can be a true headache. So make sure you're keeping in contact with your prospective loan officer to ensure that you're taking the right steps and have the right documents.
But in addition to the actual paperwork, maybe the most important thing you can do before you apply for any loan is to make sure your business and your credit are both in the best possible shape. And that means boosting your credit score.
If you're applying for your first business loan, your personal credit score will be key. It's the best statistical way for a lender to judge the likelihood of you repaying a loan. But the same principles apply for your business credit score if this isn't your first loan. Do everything possible to increase that score before applying.
- If you have existing lines of credit or credit cards, request an increase in credit limit from the appropriate financial institution. Using less of a high-limit line of credit will boost your credit score.
- Pay down your existing loans. Similar to increasing the limit, another easy way to improve the ratio of money spent to money borrowed is to pay down your debts. This is, of course, not always possible. Paying down a debt may very well be the reason you're seeking a loan.
- Keep lines of credit open. You want to have lots of longstanding lines of credit with solid histories. By showing future lenders that you can keep multiple accounts in good standing, you're more likely to show them that you can be trusted with additional debts.
- Double check everything. You never know when an error exists on some part of your credit history that could be holding you back from a perfect loan. So ensure every payment is entered correctly. Make sure nothing is unexpected. Finding a mistake in your credit history is a very quick way to boost your score.
What about other sources of funding?
If your credit history or score is prohibitively low or short, you may want to consider applying for a grant to fund your business instead of a loan. You can find a list of federal government grants online. These function much like a loan with one key difference: if you meet the terms of a small business grant you won't have to pay it back.
Sounds great, right? It is, if you can get one. The problem is, similar to an SBA loan, because the money is coming from the pockets of taxpayers, the process of getting a grant is very rigorous and selective. But there are lots of them. There are even non-governmental grants made by generous donors, many of which are set up to benefit specific groups of people. If you're eligible, it may be worth it to look up community-based grants for Latino and Hispanic-owned businesses.
The federal government has a page, Grants.gov, where they house a search function for all grants. You can also seek out the Minority Business Development Agency (MBDA), a part of the US Department of Commerce, which provides loans and grants specifically for underserved communities.
Owning a business is difficult work
No matter where you are, from Los Angeles to New York, or what you're doing, from selling software to building houses to opening a bar, opening and operating a business is complicated, draining, and difficult. But it can also be the best and most lucrative choice of your life.
For Latino and Hispanic men and women, there are additional inherent and institutional challenges. But if you have the right business plan, the appropriate passion, and are willing to work hard, finding a business loan is an important step to creating a business that will last.