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California’s small businesses — with an estimated 1.2 million owned by people of color and 1 million owned by women — power our communities and employ half of our state’s private sector workforce.

But entrepreneurs of color and women entrepreneurs struggle to obtain the credit needed to keep their business going. Women entrepreneurs start companies with 50 percent less capital than male entrepreneurs, and minority business owners are denied loans at nearly 3 times the rate of non-minority owners.

On top of that, the financial crisis was especially hard on small businesses owned by women and people of color, as large banks cut back on lending. They’ve significantly reduced or eliminated loans below a certain threshold, typically $100,000 or $250,000, as a way to avoid spending time on less-profitable applications from smaller businesses. This is problematic, as the Federal Reserve says that over 50 percent of small businesses are seeking loans of under $100,000, leaving a critical gap in the small business loan market.

So what’s a small business owner to do? Pacific Community Ventures’ (PCV) Director of Marketing and Communication Patrick Duggan gives us his insight. PCV is a 501(c)(3) nonprofit community development financial institution (CDFI) that engages small businesses, impact investors, and policymakers by empowering them with working capital, free advice and mentorship, and access to the networks they need to grow their companies.

Charleen and Christine from Kainbigan | Photo Credit: PCV

Start With Your Bank

First, make sure you have your finances in order and understand what kind of loan you need. According to our friends at NerdWallet, traditional bank options include term loans, lines of credit and commercial mortgages to buy properties or refinance. Talk to the banker at the branch that you do your business banking out of.

Traditional banks generally offer the lowest rates to small business borrowers. But, the bank is going to have specific criteria with regards to cash flow and collateral that your business will need to meet.

Small businesses have a tougher time getting approved due to factors including lower sales volume and cash reserves; add to that bad personal credit or no collateral, and many small-business owners come up empty-handed. Getting funding from the bank can also take longer than other options, but the lower APR can make it worth the wait.

If your banker can’t make you a loan, ask for a referral to any credit unions or community-based financial institutions in your area who may be able to offer you a similar loan with more relaxed criteria. The East Bay Economic Development Alliance is also a great source of referrals.

Did the bank turn you down? Or, are you one of the thousands of California cash-based businesses that aren’t banking yet? Let’s look into a loan from the Small Business Administration.

PCV clients Three Babes Bakeshop | Photo Credit: PCV

Look Into SBA Loans

The U.S. Small Business Administration provides a loan guarantee to local banks, credit unions, and nonprofits which allows them to make which loans to small businesses they might not normally make. The SBA provides guarantees on general small business loans under its 7(a) loan program, as well as short-term microloans. SBA-backed loans range from about $5,000 to $5 million, with an average loan size of $371,000. Applications are screened using FICO’s SBSS score, a small business credit score.

When you’re getting ready to approach an SBA loan lender, make sure to check out Venturize. It’s a free nonprofit resource to help small business owners understand their options, and what they need to get funded. You can contact the SBA’s Northern California regional office and they’ll point you to the best SBA lender for your business. If you’re looking for a loan below $50,000, you can also check out the microlender locator at the California Association of Micro-Enterprise Opportunity.

SBA loans have relatively low APR, and they’re more flexible than a traditional bank when it comes to small business. While many businesses, even younger ones, can qualify for an SBA loan – having a limited business history makes it more difficult.

So where do you go if the bank, and your local SBA lender, say they can’t help? It’s time to look online for alternative lenders – but not the ones you’re thinking of.

PCV's Interior Design Fair | Photo Credit: PCV

Time To Consider Alternative Lenders

In the last six years, a plethora of online lenders promising small business owners “quick and easy” cash have been popping up. These lenders aren’t disclosing the hidden fees, high-interest rates, and prepayment penalties that can quickly drive a small business, out of business.

The rapid rise of unregulated, online alternative lenders provides an unprecedented but confusing variety of financing options, many of them designed more to help a lender’s bottom line than to help a small business succeed.

Go Beyond the First Page

If you’ve been turned down by the bank or SBA, going online can seem like a compelling – and immediate – solution. But the take the time to read well beyond the first page of search results. For example, if you punch “loans for small businesses” into Google or Bing, you’re going to be bombarded with ads for companies advertising “low-cost” and “instant” loans.

The top results you see will most likely be national, high-interest rate lenders simply because their high-interest rates can support the marketing budgets necessary to “get in front” of their more reasonably priced competition. So dig down a little into the results you’re seeing. The best choice for your small business is probably appearing lower down the page – or even a couple of pages in. By digging down a little, you’ll find a nonprofit lender with a much lower rate.

PCV Client CORE Foods | Photo Credit: PCV

Don’t Rely Solely on Google

A big mistake that small business owners make at this stage is relying on search results alone. Take 10 minutes to pick up the phone and call your local Small Business Development Center (SBDC) or city economic development office. They’re great resources for finding reliable and reputable small business lenders.

In fact, there are hundreds of nonprofit alternatives to online lenders! If you’re a small business owner and you aren’t familiar with CDFIs, they’re probably your future best friend.

Community Development Financial Institutions – like Pacific Community Ventures – offer low-cost loans but are more flexible than a traditional bank. CDFIs are institutions that are 100% dedicated to delivering responsible, affordable lending to help underserved communities join the economic mainstream. For example, we specialize in working with small business owners who’ve had a hard time accessing capital, like female entrepreneurs, entrepreneurs of color. And a full 100% of our borrowers had been previously turned down for SBA or traditional bank loans.

PCV team members Andrea and Aimee | Photo Credit: PCV

To find your closest CDFI, head to the CDFI finder and plug in your location and what you’re looking for. This will bring up any CDFIs in your area.

Since CDFIs like ours are focused on strengthening communities and creating local jobs, we’ll do everything in our power to work with you to secure what you need to grow your business. And in the event that a CDFI can’t fund you, most of us are part of broader networks that can help you raise the funds you need.

The Bay Area is rich with lending resources for local businesses or mission-aligned small businesses. Consider lenders who are focused on one industry (e.g., New Resource Bank or RSF Social Finance in sustainability or food systems), have a strong community presence (e.g., Community Bank of the Bay), or focused on local money (Beneficial State Bank). They tend to have the best networks to refer you to a nonprofit or another service provider.

In the next three years, PCV will lend $5 million to small businesses in the East Bay. If you’re in Alameda or Contra Costa counties and you’ve been in business for at least one year, then PCV would love to hear from you!

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