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February 03, 2021 - Small Business

Access to Capital-Funding Opportunities for Minority-Owned Businesses in Government Procurement (Guide 4 of 4)

SBA Issues Final Rule on Appeals Process for PPP Loan Review Decisions

Capital is the lifeblood of small businesses and fundamental to their formation and growth. However, obtaining capital can be difficult for minority-owned business enterprises (MBEs), as a lack of access to capital is one of the primary barriers for MBEs hoping to enter the government contracting world. Access to capital and access to contracts form a symbiotic relationship: MBEs need both simultaneously to survive. They seldom arrive at the same time, however.  MBEs often lack access to capital both at startup and in subsequent years, making it difficult to compete for government contracts.  According to a study by Stanford Institute for Economic Policy Research, the average MBE has $500 of outside equity at its foundation compared to $18,500 for non-MBEs.[1]

Challenges that MBEs face

  • Lower personal wealth levels are a barrier to entry
  • MBEs may receive lower loan amounts than non-MBES, are more likely to be denied loans, and are more likely not to apply for loans because of rejection fears.

The federal government has established a number of programs to attempt to redress this imbalance.  Federal SBA-backed loans are three times more likely to go to MBEs than conventional loans.


What type of funding is this?

SBA 7(a) Standard LoanPrimary program for providing financial assistance to small business.
Provided by private lenders (usually banks) & partially guaranteed by SBA
SBA Express LoansSimilar to the 7(a) standard program but provides funding much faster
SBA 504 LoanProvides small businesses with long-term, fixed-rate financing
Loans are made through partnership with a non-profit certified development company (CDC) & a private lender
CDC provides 40% of total project costs (SBA guaranteed), lender covers up to 50%, and borrower contributes 10-20%
SBA MicroloansSmaller loans made by non-profit community-based organizations
Community Advantage LoanOffers loans through mission-oriented lenders (usually nonprofit financial intermediaries)
Lenders are required to make at least 60% of loans in underserved markets

What can this funding be used for?

SBA 7(a) Standard LoanWide range of purposes including new construction, expansion/renovation
SBA Express LoansWide range of purposes including new construction, expansion/renovation
SBA 504 LoanUseful to acquire fixed assets for expansion or modernization and owner-occupied real estate
SBA MicroloansWorking capital, supplies, machinery, equipment
Community Advantage LoanWorking capital, equipment, real estate

Who qualifies for this funding

Business must (1) be a small business under SBA lending size standards (which differ from contract standards), (2) must  be unable to get similar financing elsewhere, (3) must demonstrate it can repay the loan, (4) the owner must invest their own money in the business, (5) must have good credit. Often borrowers must contribute a down payment of up to 10%.

SBA lenders may have additional criteria as well including capital requirements & collateral.

How much funding is available to MBEs?

SBA 7(a) Standard LoanUp to $5 million
SBA Express LoansUp to $350,000 available; temporarily raised to $1 million from CARES Act
SBA 504 LoanNo cap on the loan, depends on the project size, but maximum SBA contribution is up to $5 million
SBA MicroloansFrom $500 to $50,000
Community Advantage LoanFrom $50,000  to $250,000

What are the repayment terms?

SBA 7(a) Standard LoanOffers 10-year repayment period, with extensions for loans for equipment & real estate (25 years)
SBA Express LoansOffers 10-year repayment period, with extensions for loans for equipment & real estate (25 years)
SBA 504 LoanLoan repayment period is 10-25 years
SBA Microloans6 year repayment period, may require you to engage in additional training programs
Community Advantage LoanMaximum 10 years for working capital & up to 25 years/or life of the asset for fixed asset purchase

What are the benefits of this funding?

SBA 7(a) Standard LoanModerate interest rates (5.5-11.25%), can be negotiated
SBA Express LoansModerate interest rates (7.75% to 9.75%), can be negotiated
Fast turnaround for approval (24-48 hours)
SBA guarantee ensures a higher approval rate
SBA 504 LoanLowest interest rates ~(2.2 to 2.3%), can be negotiated
Longer terms can help free up cash flow for small businesses
SBA MicroloansModerate interest rates, 7.75%-8.5%) can be negotiated
Easily accessible (MBEs received 48% of microloans in 2018), may not require collateral and are amenable to borrowers who are rebuilding their credit
Community Advantage LoanModerate interest rates (7%-10%)
Offers management & technical assistance
Access to affordable credit

What are the drawbacks?

SBA 7(a) Standard LoanLonger approval process
SBA Express LoansSBA guarantees only up to 50% of Express Loans
More difficult to obtain than traditional SBA loans for early-stage companies, thus lower odds of approval
SBA 504 LoanMore stringent requirements (credit & solid financials) than other SBA loans
Owners are required to guarantee at least 20 percent of loan
Cannot be used to buy inventory, consolidate debt
SBA MicroloansCannot be used for real estate or to repay debt
Longer approval process
Borrowers must sign a personal guarantee
Community Advantage LoanLower amount of funding available

How do I apply?

SBA 7(a) Standard Loan7(a) Loan Application Checklist
SBA Express LoansSBA Express Loan Program
SBA 504 LoanSBA 504 Loans
SBA MicroloansContact your local SBA District Office & reach out to a Microloan Intermediary Lenders
Community Advantage LoanContact your local SBA District Office

Additional info

SBA 7(a) Standard Loan
SBA Express LoansThe amount available to MBEs is highly dependent on the lender
SBA 504 LoanCDCs are more likely to approve loans that help meet a public policy goal, including revitalizing a community, updating facilities to meet health & safety requirements, or increasing MBEs
SBA MicroloansMicroloans are designed to assist early-stage businesses, particularly owned by women, low-income, veteran, and MBEs;
Community Advantage Loan

Certification and verification of MBEs will also help firms compete in more state and local government procurement. Contact the National Minority Supplier Development Council for more information.

[1] pg. 8