There are over 2 million Black-owned businesses in America.1 Statistically speaking, many BIPOC business owners have historically experienced a funding gap. Around 66.4% of BIPOC business owners receive at least a portion of funding requested from a bank, compared to 80.2% of white business owners. When BIPOC business owners do receive funding, the amount loaned, and the interest rates show discrepancies as well. BIPOC business owners receive, on average, $30,000 less at an interest rate of 1.4% higher than white business owners.2
These factors may affect how business owners decide to fund their business, as a bank loan may not always be a feasible option. If you’re considering alternatives to receiving a loan from the bank, here are five funding opportunities for small business owners.
Apply for Grants
There are thousands of grant opportunities available to new small business owners, with some specifically designed to assist BIPOC individuals. Grants can range from a couple thousand to hundreds of thousands of dollars, and eligibility requirements will vary greatly.
Review grant applications and requirements from reputable sources including:
- The Minority Business Development Agency
- SBA 8(a) Business Development Program
- National Association for the Self-Employed
Ask Friends & Family
Nine percent of Black business owners receive loans from family members.2 While it’s never easy to ask loved ones for money, it may end up being a good funding option for some. A loved one may offer more lenient interest rates (or forego interest altogether). If you have older relatives, they may already have a sizeable inheritance set aside for you. There may be an opportunity to discuss options, like gifting a sum of the inheritance now instead of waiting until after their passing. It’ll be advantageous for all parties to work with a knowledgeable advisor who can help discuss the potential tax and legal implications of receiving monetary gifts from loved ones - especially if it’s a sizeable amount.
If you want to try funding your own small business, you’re in good company - 44% of Black business owners used their own cash to start their business. If you’re considering a bootstrap approach to building your business, look at what resources you’ve already accrued. This may include savings accounts, cash or other liquid assets, and retirement accounts (such as a 401(k) or IRA). Take caution when withdrawing from retirement accounts, as doing so may result in tax penalties if certain criteria are not met. Additionally, withdrawing early from a retirement savings account will impact how much is available to you once you’ve reached retirement.
If you’re considering self-funding, talk to a financial advisor first. She can help determine how this may impact your financial well-being now and toward retirement.
Use Credit Cards
In some instances, you may find it advantageous to fund your small business using a credit card. Depending on the card type and your qualifications, you may be able to get approval for a large credit limit. This could be helpful for those who are unable or unqualified to obtain a small business loan. Additionally, credit cards may be approved relatively quickly, which is helpful for those in urgent need of funding.
If you’re considering this route, scrutinize the fine print for important information such as interest rates, rewards or perks, sign-up bonuses, and yearly fees. There are plenty of small business credit cards available, take some time to research the right option for you and your business.
Crowdfunding can be beneficial in two ways: it helps raise capital for business owners and it promotes awareness of a new brand or business. There are multiple crowdfunding platforms business owners can choose to use when searching for potential investors. Typically a reward (such as a sample product) or equity in the business is exchanged in return for an investment made on a crowdfunding platform (like on the CNBC show Shark Tank).
If you’re a new business owner embarking on the adventure of entrepreneurship, it can be a relief to know bank loans aren’t your only option. As you determine the right way to fund your business, consider working with an experienced financial advisor who can help navigate the important decisions ahead.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.