Lesson 4: Access to Capital
What You’ll Learn: The old adage that “it takes money to make money” is as true today as it was when JP Morgan was building his empire. Whether its startup capital to get your idea off the ground or bridge funding to get you through slow times, money can be a make or break proposition for any business. We’ll walk you through some of the options and help point you in the right direction.
Access to Capital (continued)
Other Ways to Fund a Business
It’s no secret that securing financing can be a challenge for some, particularly in underserved and underrepresented communities.
Between 2007 and 2017, minority-owned businesses grew by 79%, about 10 times faster than the overall growth rate for small businesses in general over the same period. Before the pandemic, that put the number of minority-owned companies at about 11.1 million.
Despite leading in business creation, minority business owners historically have a much harder time accessing small business loans than their non-minority counterparts. Even if they are approved, the interest rates may be statistically higher and the total loan amounts lower. Many business owners won’t even apply for small business loans, either because of the poor terms or the fear of being rejected.
This disparity in access to capital can create additional barriers to starting a business. For instance, Hispanic and African-American business owners report wealth levels that are 11 to 16 times lower than their white counterparts. The U.S. Census Bureau estimates that half of all Hispanic families have less than $8,000 in wealth, and half of African American families have less than $5,550. These lower levels of wealth and liquidity can create a substantial barrier for entry into business as there is less available cash to finance a startup. This problem is exasperated by geographical and industrial distributions, which may be deemed as risky by traditional funders.
There are other options available, such as business plan competitions, industry-specific contests, microloans and funding through the Community Development Institutions Fund, or CFDI Fund.
The Community Development Institutions Fund is a network of banks and credit unions that serve people who are otherwise locked out of the financial system. CDFI’s focus on developing long-term relationships with members of the community to strengthen financial literacy, establish savings strategies, build credit, and fund small businesses, microenterprises, nonprofits, commercial real estate and affordable housing.
Business plan competitions are another avenue. Many of these not only come with cash prizes but mentorship, technology tools, coaching and marketing support. There are numerous business planning competitions conducted by nonprofits, business startup organizations and corporations throughout the country. The U.S. Department of Commerce’s Minority Business Development Agency (MBDA), which helps minority firms with access to markets, contracts and consulting, also has opportunities such as the Enterprising Women of Color Grant Competition and Inner City Innovation Hub Competition.
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Microloans are another possibility. These small loans are particularly suited to businesses in the startup phase that don’t require large amounts of cash. Microloans can range from $500 to $35,000 and are funded through private institutions and the Small Business Administration. The term of the loan can be two to six years with favorable interest rates. A business plan is essential for any startup seeking a microloan. The downside is that microloans typically have higher costs to administer the loan since it costs a lender the same to lend $1,000 or $100,000.
In action: OlyKraut is a small, woman-owned, gourmet sauerkraut company in Olympia, Washington that began in 2008. Early on, the owners took advantage of training from Enterprise for Equity that led to microloan funding for expansion. The owners started their small enterprise on a shoestring, and once their product became popular, used two consecutive microloans under $10,000 to expand production with a kitchen upgrade and some additional equipment. They recognized that honoring their values by sourcing locally, using only organic ingredients and paying their employees well would give them an edge in the market. The infusion of cash was vital to the company’s success and enabled them to grow.
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There are many other ways to fund a business or expansion. To guide you, the Washington State Department of Commerce has created a great online resource guide, Startup Wisdom: 27 Strategies for Raising Capital.