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Minority Loans to Start a Business: A Financing Guide for Minority Business Owners

Date modified: November 21, 2023
A minority loan can help you receive more equitable funding for your small business. Keep reading to learn more about the terms, conditions, and requirements of a minority loan.
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As an entrepreneur ready to take the next step with your business, you might be aware that there are dedicated minority business loans. These aren't just fallback options; they are opportunities that can give your business a competitive advantage.

This guide is about tapping into those opportunities. We'll walk you through a variety of small business financing solutions – from loans with favorable terms to grants designed to empower businesses like yours.

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Whether you're starting up or scaling up, you'll find straightforward advice on how to navigate the financing landscape, connect with the right funding sources, and put capital to work effectively for your business.

Let's explore these options together and chart a path for your business to thrive in a dynamic market.

What is a Minority-Based Business?

A minority-based business, also known as a minority-owned business, refers to startups and small businesses that are owned, operated, and controlled by individuals who belong to certain racial or ethnic minority groups.

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Generally, at least 51% of the ownership must be held by individuals from minority groups. These groups may include, but are not limited to:

  • African Americans
  • Hispanic Americans
  • Native Americans
  • Asian Americans
  • Pacific Islanders

To be officially recognized as a minority-owned business, the company can choose to undergo a certification process. This process is conducted by various organizations and agencies, such as the National Minority Supplier Development Council (NMSDC) or the U.S. Small Business Administration (SBA).

While certification is not mandatory, a minority-owned business certification comes with several benefits, including access to loans, grants, and government contracts specifically designed to support minority entrepreneurs. Additionally, minority-owned businesses can take advantage of training and development programs and networking opportunities after certification.

5 Financing Options for Minority Businesses

Minority-owned businesses often face challenges like any other business, including limited access to capital and resources. To help overcome these financial obstacles, business owners can apply for minority business loans. These are special types of financing aimed at supporting minority-owned businesses by offering favorable terms, lower interest rates, and reduced collateral requirements.

If you’re a minority business owner, consider the following types of financing opportunities:

Community Development Financial Institutions (CDFIs)

Community Development Financial Institutions (CDFIs) aim to foster economic growth by providing financial products and services to people and communities underserved by traditional financial institutions. CDFIs are certified by the U.S. Department of the Treasury and include institutions such as banks, credit unions, nonprofit organizations, and venture capitals.

CFDI loans can range from as low as $500 to as high as $2 million, depending on the institution and the specific loan product. Terms also vary, with some loans offering terms of up to 10 years or more.

CDFIs provide the following benefits:

  • Increased Accessibility: The primary goal of CDFIs is to make business financing more accessible to entrepreneurs from underserved communities who may not be eligible for traditional loans. As a result, many CDFIs have more relaxed requirements and qualifications. Some CDFIs don’t have minimum credit score requirements, while others may require a minimum score of 600.
  • Competitive Rates: CDFIs typically offer lower interest rates on their financial products. In 2021, rates were between 4% and 9%.
  • Access to Support and Resources: In addition to financial aid, CDFIs also provide technical assistance, training programs, and mentorship to help small businesses start and grow sustainably.

Despite the benefits offered to minority entrepreneurs, your business must be in an underserved area to qualify for CDFI assistance. Additionally, eligibility checks and loan funding timelines can take several months.


As the name suggests, microloans are small-sum financing options extended to business owners to cater to their startup or expansion needs. The typical loan amounts range from $500 to $50,000, with repayment terms between six months to several years. Interest rates also vary depending on the minority businesses' creditworthiness, with rates ranging from single to double digits.


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The funds acquired through microloans can be used for various minority-owned business purposes, including rent, payroll, purchasing inventory and equipment, marketing, and utilities.

Microloans offer the following perks:

  • Quick Funding: The application and qualification process for microloans is generally fast, which can expedite access to funds for minority businesses in need of immediate funding.
  • Flexible Eligibility Criteria: Unlike traditional loans, microloans often have more flexible eligibility requirements, which can be beneficial for new or smaller businesses that might not have established credit histories.
  • Small Loan Amounts: The ability to borrow a smaller amount of money can result in quicker repayments and lower overall interest payments.

SBA 7(a) Loans

Minority-owned businesses with a longer history of business looking for lower interest rates can turn to the Small Business Association (SBA) for financial assistance. The SBA(7a) loan is a government-backed loan program designed to provide financial assistance to small businesses, with a special emphasis on minority-owned businesses.

Minority businesses may be eligible for up to $5 million in funding through an SBA 7(a) loan. SBA minority loans come with two interest rate options – variable and fixed. Variable rates hover around 10.5% to 13%, while fixed rates are slightly lower at around 5% to 8%. SBA loan terms are fairly flexible, typically up to 10 years for most loans and 25 years for real estate acquisitions.

The SBA doesn't lend money directly. Instead, the SBA partners with lenders to offer loans and guarantees a portion of the loan will be repaid if the borrowing business defaults. The SBA’s guarantee is a percentage of the loan amount. For smaller-sum loans, the SBA may guarantee more – typically, around 80% of the outstanding loan, reducing the risk for lenders. As a result, lenders may be more inclined to lend larger amounts of money at lower interest rates.

However, the SBA guarantee doesn’t completely get minority-owned entrepreneurs off the hook for repayments. Borrowers are still required to repay the SBA if it covers the loan, and the SBA typically requires a personal guarantee from individuals who have at least 20% ownership in the company.

With SBA 7(a) loans, minority-owned businesses benefit from the following:

  • Partial Guarantee: Since the SBA guarantees a portion of the loan to the lender, eligibility requirements may be more flexible. As a result, lenders may be willing to lend larger amounts or offer lower interest rates.
  • Competitive Rates: SBA loan rates are capped, resulting in lower rates compared to traditional lenders. 
  • Larger Amounts: The SBA offers flexible loan amounts, allowing minority businesses to cover a variety of small and large expenses, like marketing initiatives, equipment and inventory purchases, and even commercial real estate acquisitions.
  • Quick Turnaround: On average, the application turnaround time for SBA 7(a) loans is five to seven days. If approved, minority business owners can receive funding more quickly compared to bank loans.

Startup Loans for Minorities

Many minority entrepreneurs have dreams of becoming small business owners, but they might not have the operational, financial, or credit history to qualify for traditional loans. These businesses aren’t out of luck, as they may be eligible for minority loans to start a business – particularly business startup loans.

Startup loan amounts vary based on the lender, with some offering financing up to $750,000. Rates and terms are determined by the borrowed amount, with average ranges including 8% to 17% and five to ten years.

Minority startup business loans can help cover the expenses associated with establishing a business, such as buying a commercial property or warehouse, ordering office equipment and inventory, and operating expenses.

For new minority-owned businesses, startup loans can provide the financing needed to get operations off the ground. Here are some additional benefits:

  • Build Business Credit: New businesses that are just starting out likely don’t have an extensive operational, financial, or credit history. By making on-time startup loan payments, the business can establish a positive history. This can be beneficial in the future when looking for additional funding.
  • Accessibility: Startup loans are often designed with new businesses in mind. As a result, the eligibility criteria may be more relaxed to account for limited credit scores and time in business.
  • Retain Ownership: When investors finance a startup, they typically receive an ownership stake in the company. Small, minority-owned businesses may want to retain complete ownership of their companies. Startup loans can be a win-win for minority businesses that need funding and want to retain ownership.

Small Business Grants for Minorities

While loans for minority businesses may result in larger financing amounts, not all entrepreneurs want to repay a loan with interest. For these minority-owned businesses, small business grants may be an alternative financing option that doesn’t need to be repaid.

Rear view of four women with arms around each other

Minority business grants are offered through government agencies and private organizations to assist the company with specific business activities. Typically, the business will need to use the funds for a specific purpose, such as research, business development and growth, or sustainable initiatives.

Grants for minority-owned businesses vary in amount, depending on the government or private entity that is offering them. On average, grants are around $50,000 to $70,000. Despite the smaller sums, grants are highly sought after because they do not need to be repaid.

Minority-owned businesses can explore various grant opportunities through the following:

  • Federal Agencies: Aside from the SBA, federal grants are offered through:
  • Small Business Innovation Research (SBIR)
  • Small Business Technology Transfer (SBTTR)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Energy (DOE)
  • U.S. Environmental Protection Agency (EPA)
  • National Institutes of Health
  • State Governments: Minority business owners can search for state-specific grants through the State Business Incentives Database, the U.S. Economic Development Administration (EDA), and Small Business Development Centers (SBDCs).
  • Private Organizations: Finally, grants can be available through the FedEx Small Business Grant Contest, National Association for the Self-Employed (NASE) Growth Grant, and Second Service Foundation.

Sum Up

Minority-owned small businesses are the lifeblood of local economies, but many struggle to secure the financing necessary to open a shop or remain in operation. With minority business loans, you don’t have to struggle.

These loans can provide the funds necessary for minority entrepreneurs to acquire inventory and equipment, rent or buy commercial space, and hire employees. Explore your minority business financing options today to see if you qualify for a cash boost.

FAQ About Minority Loans

We believe that all business owners should be well-informed about financing before applying for a loan or grant. Here are some additional questions and answers to help you make a smarter decision:

Can I Qualify for Minority Business Loans with Bad Credit?

One of the main qualifications for any business loan is meeting the lender’s minimum credit score requirements. While all lenders will check the businesses and owner’s credit, some lenders may offer more flexibility to small businesses and startups.

Typically, lenders require a minimum credit score of 600. However, this doesn’t bar minority-owned businesses from financing if they have damaged credit. Minority business loans with bad credit may still be available.

Some lenders may consider business income alongside credit scores when determining eligibility. Others may require a guarantor or collateral to secure the loan. In most cases, the lender will impose higher interest rates for minority businesses with bad credit.

Are There Any Costs Associated with Getting Certified as a Minority-Owned Business?

Yes, depending on the certifying agency, there might be application fees involved. The fees vary based on the size of your business and the specific agency you are working with. However, some agencies might offer waivers or reductions for small businesses.

Are There Any Mentoring or Networking Programs Available for Minority Entrepreneurs Aside from the Financial Benefits?

Yes, many organizations, such as the Service Corps of Retired Executives (SCORE), NMSDC, and SBA, offer mentorship programs, workshops, and networking events tailored for minority entrepreneurs. These opportunities can help business owners gain the skills, knowledge, and contacts necessary for business growth.

Are There Industry-Specific Financing Options Available for Minority-Owned Businesses?

Certain grants or loan programs might be tailored to specific industries, such as technology, healthcare, or manufacturing. Minority entrepreneurs can research industry-specific financing options through the federal, state, and private entities mentioned above. Many online search engines allow businesses to filter by industry or other relevant criteria.

Do I Need a Business Plan When Applying for These Financing Options?

While not always mandatory, a comprehensive business plan can significantly enhance your chances of securing financing. It demonstrates to lenders and grantors your financial projections and repayment capabilities, understanding of the market, and strategy for growth.

Can Minority Business Owners Apply for Multiple Grants or Loans Simultaneously?

Yes, business owners can apply for multiple funding sources. However, before committing to multiple loan repayments, ensure you can meet the obligations of each if awarded.

What Happens If I Default on a Specialized Minority Business Loan?

Defaulting can have several consequences, including damaging your business credit, potential legal action, and losing assets if they were used as collateral. If facing difficulties with repayment, communicate with your lender early. They might offer solutions or restructure your loan repayment.


Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.