If you want to grow your business, you need cash. Lots of growing business owners borrow money from family or friends, personal credit cards or tap into savings. But what if you want to get a loan?
Access to capital is a must for any business. Unfortunately, though, Black and Brown business owners can face unique obstacles when it comes to getting approved for a business loan or line of credit. According to the Federal Reserve, 80.2% of White business owners receive at least a percentage of the funding they request from a bank, compared to 66.4% of Black, Indigenous and People of Color (BIPOC) business owners.
Read on for 5 reasons you may not be getting approved (and what to do about it).
1. Your Net Worth
As an entrepreneur of color, you may struggle to secure a loan because you have a lower net worth when compared to that of your counterparts. In financial terms, net worth is usually made up of assets; Essentially you subtract what you owe from what you own. If you get a negative number, that’s not good. A negative net worth is perceived as a higher risk for lenders and underwriters, making them hesitant to approve your business loan or credit application.
How to Breakthrough
Net worth, while important, does not guarantee positive cash flow. Cash flow is about the actual movement of cash in and out of your business. To breakthrough this barrier, you might focus on building a strong financial foundation for your business. In other words, keep accurate bookkeeping records and use the money you have wisely. If you can show a trend over time of more money coming in, than goes out, lending officers may work with you.
Additionally, exploring alternative funding options like microloans, crowdfunding, or grants targeted toward minority-owned businesses may help bridge the gap.
2. Your Location
Location plays a crucial role in loan approval for businesses, especially for brick-and-mortar establishments like retail stores or restaurants. Your business may be physically located in an area with limited economic development (aka da hood), leading to reduced access to resources and financial institutions.
How to Breakthrough
While changing your physical location might not be feasible, you can utilize technology, the internet, and social media to reach a broader customer base. Establishing an online presence and investing in e-commerce platforms can increase visibility, attract new customers, and demonstrate market demand to potential lenders.
3. Your Credit History
While not true for all Black and Brown people, a huge portion of our communities is just now figuring out how to leverage good debt. Our parents told us to buy everything with cash. This may have been good advice back then, but not using credit today means you won’t show a history of using it wisely. A strong credit history is essential for any loan application – as it reflects your ability to repay debt.
How to Breakthrough
To improve creditworthiness, start small. Your business credit (EIN) and personal credit (SSN) are separate entities. Work on raising your personal credit score first. If you have bad credit, you can start with a secured card. If your personal credit score is somewhat okay, you may be eligible for a department store or gas credit card. When you get the card, buy something small and pay it off over time. Then do it again.
Once you see your personal credit start to rise, use the same principles to build your business credit. Apply for and then purchase a notebook or desktop PC on a Dell or other business store card. Then pay it off over time. Doing so can help you secure financing and better terms, while keeping your personal credit unaffected.
4. Your Time in Business
In their Brookings Institute Commentary, “Who is driving Black business growth? Insights from the latest data on Black-owned businesses” authors Andre Perry, et al. share that businesses owned by people of color have multiplied significantly in recent years: “From 2019 to 2020, Black-owned businesses grew by 6,351 firms, or 4.72%—behind Latino or Hispanic (8.19%) and Asian American (5.33%) firms, but above white-owned businesses, which shrunk by 0.9%.”
In short, there’s a lot of new businesses out there. If that’s you, congratulations!
Be aware though that newer businesses can appear a bit suspect to lenders who prefer a track record of success to gauge your likelihood of repaying a loan or staying current on a line of credit. If you have been in business five years of less, it can hinder loan approval.
How to Breakthrough
A good business plan (one that highlights your company’s potential and long-term vision) could help you overcome this obstacle. Demonstrating a well-thought-out strategy and providing evidence of demand for your product or service can instill confidence in potential lenders.
By the way, writing a business plan isn’t as complicated as you might think. In fact, I share Growmetix® quick & dirty process for writing a business plan in our FREE eGuide: Your Business Plan in 5 Easy Steps. Whether you are writing your first business plan or updating an old one, this template will help you get results.
Click here to download the FREE eGuide now.
5. Your Network
Ever heard the saying, “It’s not what you know, but who you know”? An additional barrier you might encounter when seeking a business loan is limited access to networking opportunities and mentors. Many financial decisions rely on relationships and connections. And unfortunately, getting a business loan or line of credit probably isn’t the kind of favor Pookie or Ray Ray from down the street can call in for you.
How to Breakthrough
To breakthrough, you will need to be intentional about building relationships before you need a loan. Make it a habit to seek out and attend networking events, industry conferences and workshops where you’ll find potential lenders or investors. Join a local business association or volunteer with industry associations to meet other entrepreneurs who can provide valuable guidance and open doors to financial opportunities.
Getting the capital you need for your business can be a challenging journey for entrepreneurs of color, but it’s not impossible. By improving cash flow, leveraging technology to expand your reach, building a strong credit history, crafting a solid business plan, and seeking out networking opportunities, you can breakthrough these unique barriers and secure the funding you need to build or expand your business.
Want to amplify your effort? Growmetix® Business Breakthrough℠ coaching program gives you unlimited access to expert advice from an experienced business coach who’s been right where you are. We can help you make better business decisions and leverage the cash you already have, to scale even faster. Click here to get started now.
