About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual Fiduciary Financial Planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
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 percent of BIPOC business owners receive at least a portion of funding requested from a bank, compared to 80.2 percent 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 percent higher than white business owners.2
These factors can 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
Thousands of grant opportunities are 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 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 percent 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, however, as doing so may result in 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 your financial advisor first. They can help determine how this may impact your financial wellbeing 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 fairly 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 fairly quickly, which is helpful for those in urgent need of funding.
If you’re considering going this route, check 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.
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 to help navigate the important decisions ahead.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a family, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. So if you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments, we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
In the August Newsletter, I explore how you should invest money for your short-term goals after you've established an emergency fund. I also discuss how a Financial Advisor can help you avoid emotional decision-making with U.S. News and World Report and how to know if your Financial Advisor is the right fit for you. There are also blog posts where I outline how to complete a mid-year financial check-up and 5 college planning mistakes to avoid.
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