Editor's Note: In celebration of Hispanic Heritage Month, we're posting a series of articles on some of the financial challenges Hispanics face. You can also read our previous stories on Tres Steps for Buying Your First Casita and How to Get Started Saving for Una Buena Jubilación. Stay tuned for future installments and come back to Ask Experian anytime for information that can help everyone achieve their financial goals.
Hispanics are certainly revving the engine of small business growth in the U.S. A report by Stanford University found that Latino-led firms continue to be created at faster rates than the national average, with more than four million businesses on record in 2016. If it's also your American sueño to launch a business, managing the financing will be a big part of your business plan. Most likely you will need a loan to get the business off the ground or to take it to the next level of growth. Whether you have a tiendita, want to join a franchise operation, have a construction company or any other venture, smartly budgeting and obtaining financing will be key to your success.
What Are Some Things to Consider Before Applying for a Small Business Loan?
Establish a Good Credit History
If you do not have a lengthy credit history—which can include using credit cards or paying a car loan—consider opening a business credit card. Applying is easy and using a card is a good first step in establishing a history of managing credit and making payments. Make sure to pay your statements in full and on time each month to demonstrate that you are a good candidate for a loan.
What is the difference between using personal credit or business credit? When launching your business you may use your personal credit to fund start-up costs but the goal should be to transition to establishing business credit. The reasons are the following: many creditors do not rely on an owner's use of personal credit to judge the financial health of the business so it may be hard to get a much needed business loan; using personal credit could put your personal assets at risk if your business in ever in financial trouble such as if you need to file for bankruptcy; and in the future you will be able to obtain much larger funding amounts compared to what you can secure with just personal loans. Plus, as you grow your business, it will just become more challenging to co-mingle personal credit, debt and assets with all of your business finances.
Check Your Credit Scores and Credit Report
In order to be a candidate for a loan, you must have good personal credit scores. Potential lenders will base their decision partly on your scores because it is like a grade on your creditworthiness. However, if you have established credit in the business' name such as opening a business credit card, you will establish a business credit score and credit report, which will also be used in determining whether to extend you credit.
The business score is calculated from information in the business credit report which includes various traits about the company and its financial history such as credit utilization ratio, payment history, outstanding debts and company size. It also may include information about the business owners and officers.
A business credit report shows the same types of information as a personal credit report, but it is specific to a business's debt repayment and public records, such as bankruptcies or judgements.
Find the Right Loan and Lender
While you may look to family and friends for financial investments—66% of Hispanic entrepreneurs have received financial gifts or loans from la familia according to the Stanford report—to grow your business you will probably need larger financing at some point.
To start, consider looking into micro loans and capital from non-profit organizations. These are also good options if you are denied a traditional loan from a bank. But the amount they offer is lower, typically less than $50,000. However, once you secure a loan, it will make it easier to get other types of financing down the road as long as you make your payments on time.
Once you determine how much you need, explore the different loan options and compare the loans based on the annual percentage rate (APR) and terms. Try to select the package with the lowest APR.
Get Certified as an MBE
Having a minority-owned business certificate can help you tap into many public- and private-sector financing programs. There are different certifications for access to various funding sources, and where to apply depends on where your business is located and what kind of funding you are interested in using. The most well-known lender is the Small Business Administration's 8(a) Business Development Program, which helps minority-owned companies win contracts in the public sector. In order to comply with the Small Business Act, certain government agencies need to complete their federal contracts with 8(a) participants.
To qualify, the business must be owned and controlled by U.S. citizens who are 'socially and economically disadvantaged'—this refers to individuals who are 'subjected to racial or ethnic prejudice' and includes, but is not necessarily limited to, Black, Hispanic, Native American, Asian-Pacific, and Subcontinent Asian. The website provides information in English and Spanish.
It may be challenging at first for funding doors to open but there are many organizations that can help you such as the following:
- is a microfinance organization that provides loans, financial education and capital
- is an association supported by the U.S. Small Business Association that offers free workshops and access to tools and templates for administering your business and volunteers that provide business mentorship
- Minority Business Development Agency
- has centers across the country that can help you with loans and more
- U.S. Hispanic Chamber of Commerce
- local chapters can point you in the right direction to many funding sources as well as provide a network in your community
Latinos' hard working and entrepreneurial spirit helps advance the community and create a better future for their children. If you have the drive and determination to launch a business, explore all of the many resources available and make sure to manage your finances wisely so that you can open your business doors rápidamente.