Reasons Small Black-Owned Businesses Don’t Get Loans

(Author’s Note: I Wrote this to assist small Black owned businesses, but the information can be used by anyone. Black owned businesses were created during the Reconstruction Era out of necessity, and this information has a specific audience. If it doesn’t apply, please let it fly. Thanks)

Learn What You Don’t Know First

Someone recently created a post online in a Florida Black Business Owner group I’m a member of about their inability to get a small business loan. The person posing the question wondered why it’s easier to get a car loan than it was a small business loan with good credit (the person noted a credit score of 750), with no other details were provided about what they’ve done to position themselves to be awarded a small business loan. The comments that followed ranged from ignorant conspiracy theories such as “the man” was holding them down, to other silly comments which insisted White people were trying to keep Black business owners from growing.

I have been a grant writer for almost 20 years, so I’m familiar with many of the processes for getting loans because much of the same materials used to demonstrate lending worthiness are used to secure grants and for day-to-day nonprofit organizational business operations/governance. I was pretty floored at the lack of knowledge most business owners had about the process. It was pretty shameful, especially since there is so much information available in communities and online available for free.

There was only one online commenter offering a reasonable, rational explanation regarding potential reasons a small business loan application could be declined, but it did not go far enough either. Social media is terrible for trying to share information that takes years to attain. I wanted to respond, but it wasn’t possible to write an essay on Facebook. Besides, people hate reading long posts. Social media has made us dumber than ever.

The two things that continued to stick out to me was that: (1) people don’t know what they don’t know, and (2) they aren’t interested in finding out what they don’t know. Most of the Black folks in the group blamed the White man for not being able to successful get a business loan. I get the same from Black folks wanting to know about grants for business. No matter how much I tell them there is no such thing as a grant for their business type, they won’t listen. Black folks will pay a snake oil salesman to tell them a lie before believing me who will give them the truth and consider it a free consultation.

Make it make sense ya’ll.

I’m tired of people walking around willfully ignorant in 2020, so I’m trying to be intentional about the topics I write about. Building Black communities and supporting Black business are two areas I’m interested in talking about more seeing where there country is headed. I’m all for helping, but Black people MUST do a better job of learning as much as the can instead of jumping into bad situations head first then needing a bailout.

Learning about how to acquire a small business loan is so easy Black people. Anyone seriously interested in acquiring a small business loan would find out what it takes from any number of free resources (including free Google) to achieve their goals of expanding their business, purchasing equipment, or hiring more staff.

Black folks, if you want to know something, research it. Start some where and continue searching until all of you’ve found all of the answers. And stop wanting to get everything for free. Investing in yourself is a worthwhile investment. White people may indeed be obstacles at the bank, but going in the door half-assed from the get-go is a no-no. Don’t give them anything to turn you down. You should go in to see lenders with more than they’ve asked for

Business Loan Process

As I noted earlier, “the White man” isn’t out to get you all the time Black people. Sometimes you simply don’t want to do the work of putting yourselves and your businesses in the position to win. Getting a business loan takes more than just having a good credit score and a winning smile. Lenders care about the facts. The paper trail. The electronic footprint of your business. They act as investigators to protect the interests of the lending institution and investors who would like to know if your business will be able to pay back what’s borrowed.

There are many other factors that go into a lender’s decision on whether or not a small business is ready and capable of handling a small business loan beyond a good personal credit score. Understanding the necessary requirements BEFORE your business applies for a small business loan will help determine whether or not your business ready to approach a bank. Transparency is everything, and many Black businesses don’t take the time to do the management business that legitimizes them in the business world.

Loan Requirements

One of the biggest reasons Black businesses don’t receive business loans is because they aren’t able to fully explain why they need the money. The purpose of the business loan is one of the most important questions a lender will ask a prospective borrower, and he/she will need to respond properly or risk being declined.

Asking for a loan to pay off old debt is saying to lender you cannot afford to be in business or your business isn’t really profitable enough to sustain itself. If you want a loan to pay of debt, you’re likely not getting a loan because it says to loan officers your business is already in over it’s head. Business cash flow is central to a lender’s decision making.

Lenders mostly lend small businesses money to:

  • Improve Cash Flow
  • Use as Payroll
  • Expand Small Businesses
  • Purchase Inventory & Equipment

If your motive for a business loan doesn’t align with any of these reasons noted above, you’re going to be declined. Your words verbally and on paper matter, so if you’re not on the up and up it will eventually be discovered.

Business Type

The type of business you have matters and whether or not that business is scalable is also important. Most lenders want to know if your business is profitable, if it has the potential to earn revenue, and if the business has a positive public view. Some Black business have a not-so-good online presence. If your business is not familiar to lenders and they are researching you, it’s important to look for yourself to see what they’ll discover.

Some types of small businesses are viewed more favorably by lenders than others. Those types of businesses also tend to be the types lenders are willing to risk lending to. Is your small business the type lenders believe have high growth potential (profits)? Just because you believe your business is good doesn’t mean a lender should or will. Let’s face it, some businesses simply aren’t good fits for lending.

Business Experience

Does your small business have the track record which demonstrates it has the experience of being managed properly. Lenders want to know if you have a strong business presence. Problems arise in the lending process when a business is fairly new, if there have been cash flow issues, has a bad track record of managing finances, or when the business lacks a paper/electronic footprint.

Are you registered with the Small Business Administration? Did you register as a minority owned business? Are you filing business tax returns prepared by tax professionals/accountants? Is your business in compliance with state, local, and federal laws/regulations? Do you have a business mentor successful in your area of business to help you win? Mentors are free. So are the Small Business Administration Programs. You just need to upload the information and complete the process. The information is usually the problem most Black businesses run into because they aren’t able to provide supporting documentation. That’s all on the business owner.

Other ways to demonstrate your business has the experience necessary to maintain and/or expand are Profit and Loss Statements (monthly for up to 7 years), Tax Returns, Annual Business Revenue and Profit Statements, Balance Sheets, Proof of Major Purchases, Disclosure of Debts (used to calculate your debt service coverage ratio), Accounts Receivable and Accounts Payable, and Bank Statements.

Employer Identification Number (EIN)

State and Federal Employer Identification Numbers (EIN) are used by lenders to track a businesses tax returns. Anyone can put anything on a tax return and present it to lenders, so they compare what you the business owner(s) have provided as verification against tax return transcripts acquired directly from the Internal Revenue Service. If the numbers don’t fit, they must acquit!

If your business doesn’t have an EIN, in a lender’s eyes it’s not a legitimate, tax paying entity. You can be a business all day long in your mind, and you can even operate a store front in some instances, but if you’re not filing business tax returns annually and paying taxes, your business doesn’t exist to lenders. An EIN legitimizes your business. Is your business legitimate? The White man has nothing to do with whether or not your business acquires an EIN or files a business tax return. Stop blaming White people for everything.

Business Plans

You need a business when approaching a lender about a loan or when seeking investments from prospective investors. A good business plan could take weeks or even months to prepare if you are creating it yourself. A business plan should accurately detail your businesses goals, finances, competition, and other pertinent info necessary to wow lenders. The business plan needs to be realistic, otherwise you’re not able to convey to lenders the amount you’re asking for is reasonable and feasible.

A raggedy business plan can often be a deal breaker for small Black businesses. Business owners can create a pretty comprehensive one for free on the Small Business Administration’s website using their free business plan tools, but you’ll need to do some research to compile some info such as market analysis and competition. If you have a plan already and you’d like an unbiased eye to assess it, contact your local SCORE office to get help from a volunteer expert for free. Free is the magic word Black people.

The tools are there for you to use, and they aren’t just available to White people. They are FREE and available to anyone who seeks them out. You don’t need to be an expert at everything, but you do need to get help with the things you don’t know how to do. There is nothing wrong with getting help to achieve your goals if you need it. Your business plan is a road map for lenders. It tells them what to expect and shows them where you are going.

Credit History

Lenders will do both a personal and business credit check on prospective borrowers seeking small business loans. Having personal credit is fine (and necessary) to demonstrate credit worthiness, but establishing and maintaining business accounts and business credit is essential to prove to lenders you can pay them back, on time and in full! Business and personal credit histories are only two criteria used to determine whether a borrower is worthy. A credit score of 650 or higher is ideal for banks or Small Business Administration loans (SBA).

Every business has a credit score and it’s a requirement to get a small business loan. Many banks use the FICO SBSS (Small Business Scoring Service) to determine a businesses credit score. Before approaching a lender, know what your business credit score is. Lenders can pull your credit score at any time during the process. Be ready. You are in control of your business and your vision. Don’t let misinformation keep you from getting the funding you need to grow your business. The White man may be in charge of making most decision about us getting small business loans, but your Black business doesn’t have to give he/she any reasons to turn down your application.

Developing a business credit history separate from your personal history is a must for business lending. It’s a requirement and people who play the game get the money. There are no short cuts.

Collateral

Every borrower won’t need collateral, but every borrower should have it just in case. Prospective borrowers need to have a fixed asset or equipment that can be used to secure your loan in the event you default. If seeking a loan from alternative sources, you may need to provide other sources of collateral (i.e. blanket liens). Lenders will feel better about lending to small business owners if they have collateral to use in order to secure the loan.

Criminal History

I realize many people with criminal histories cannot secure employment, which is why they have taken the small business/entrepreneurship route. What most small business owners do not realize is that depending on the type of crime committed, your loan application could be denied. Crimes include embezzlement, aggravated assault, attempted murder, perjury, or other crimes of moral turpitude. The same applies for partners. While some lenders like the SBA will guarantee financing, they don’t want to lend to people who may lie, cheat, steal, or kill causing them to lose out on their investment.

Do a background check on yourself and anyone responsible for managing your business to avoid surprises. If you’ve repaid your debt to society and you’re an upstanding citizen, there is no need to be ashamed of your past. Understand we live in a punitive society and you may need to explain the crime prior to receiving a business loan. If a criminal background is an issue but you believe you have a lucrative business opportunity, I strongly suggest going to your local SCORE office to get a mentor. The best way to prove your business is a worthwhile investment is to show them.

Disclosures

Be prepared to disclose any and all affiliations with other business to ensure there aren’t any conflicts of interest. Also, if your business has multiple owners or if you have partners, it may be more difficult to have your business loan approved. Partners may have interests which conflict with your business. A bank or lender may not want to take the risks. Partners should have completed forms documenting affiliations during the on boarding/incorporating process. There are all types of forms to collect such information. Find the one that best suits your disclosure needs to provide to banks in the event they are requested.

Understanding the direct and indirect connections your business has prior to approaching lenders will make the application process much smoother and is less humiliating if your partners have questionable ties, criminal backgrounds, or conflicts of interest.

Licensing, Leases, and Permits

Does your business require licenses and permits to operate? Do you have them all? Do you know what’s required? Lenders will want to know your business is in compliance with local, state, and federal regulations (where applicable) to operate appropriately. If your business gets shutdown, it doesn’t make any money and it can’t pay the business loan off. Get your paperwork in order. Don’t give lenders any reasons to turn you down. If you have licenses and permits in several different business/personal names, that’s a red flag that you co. It makes lenders start digging. Eventually the truth will come out.

A commercial lease is necessary to prove your business has property to operate for the duration of the lease. Lenders want to know if your business has a location to operate so a loan can be repaid. This is a reasonable piece of proof any small business should be able to provide. If you’re operating a food truck of other type of mobile business, be prepared to explain how that works.

Legal Agreements and Contracts

Who do you do business with? Lenders will want to know who small businesses contract with, business bylaws, partnership agreements, real estate and purchasing agreements, operating agreements, and sales and other financial documents. These documents will allow lenders to assess whether there are any future legal issues when are coming down the pipe.

The Interview

You will need to discuss your loan application and the desires for your small business with a lender. If you aren’t good at speaking to others in business settings, practice. It doesn’t matter how good you look in clothing and how good your business looks on paper. If you cannot impress lenders with your words that you’re trustworthy, your business plan presentation likely won’t secure the loan you need. Some folks need to practice public speaking. Learn small business terms, operations management and fiduciary management terminology so that your interview won’t need to be dumbed down. It’s your responsibility to understand the language of you want the money. Make a good first impression. It could be your last one.

In Closing

As you can see, there are so many criteria used to evaluate whether a business is worthy of receiving a loan it’s way more than just a a good personal credit score. Can we please stop saying the “White man” is your obstacle to your loans, and every institution isn’t outright conspiring against your business?

Sometimes Black people simply don’t do their due diligence before approaching lenders for small business loans. Information is free and available to the public. Try using Google to look up the small business lending processes and how to prep your business for the intrusive rigor that comes with getting a small business loan.

Find several checklists available online to use as guides to help your business figure out what is lacking before stepping to lenders asking them to take a risk on your business visions. Sometimes, getting a small business loan is easier to secure from credit unions than they are banks. Banks and credit unions function different, therefore the outcomes may be different. Credit unions are more vested in communities and small business than the big banks are. Banks are also pro-profit. Credit unions are nonprofit, meaning they are more likely to give chances to small minority owned businesses and they tend to put your local community first.

Now that you know better, get your stuff together and grow your businesses. And don’t tell your friends about this essay, share it and make them read it. They’ll be smarter and more knowledgeable for it.

And don’t forget to follow me on Medium (unless you’re easily offended of course). I offend often, but it’s because I love you. So don’t take it personal. When we are all well, we are all well and I want us to be well.❤️

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