November 27, 2022

Opinions expressed by Entrepreneur contributors are their own.

It is well-known that women- and minority-owned businesses are terribly far behind in accessing capital to fund their startups and small businesses. According to the American Express State of Women-Owned Businesses, women own 49 percent of the businesses in the U.S., but account for less than 10 percent of the country’s earned revenue. That’s a staggering, painfully frightening statistic as we move well into the twenty-first century. Some point the finger at the male and his privilege; others blame financial institutions. Many equate the lack of social capital possessed by women and minorities with less early-stage friends and family funding. That funding can provide a platform to build a business and provide opportunities for a healthier balance sheet when seeking additional funding. It could be all or none of these reasons. So, let’s start focusing on solutions. If 49 percent of the businesses in the U.S. accessed 49 percent of the capital available, then it stands to reason that 100 percent of our businesses would thrive. Pollyanna-ish thinking? Maybe, but it takes money to make money. The more successful all of our businesses are, the better individual finances and the economic development in our cities, which of course impacts all else for the positive.

Where is the money, anyway?

The earliest stage of funding is, of course, self-financing. Not everyone has a nest egg ready to hatch the funds needed to invest in a new venture. But most owners of nascent businesses do have a circle of (loosely defined) friends and family. Make a list of everyone who might consider providing some of those golden friends and family early-stage dollars. Then, as a business owner, approach these people the same way you would approach a financial institution. Have a basic business plan, financial projections and a log of what you have invested in the business thus far — both time and money. Know what you can afford to give them in return — interest on the money they invest in you or some type of payment in kind of product or services. The key, though, is that no matter who the funder is — parent, sibling, cousin, neighbor — this is a legitimate business transaction. Treat it as such and show the individual the respect you would show to a banker or angel investor. Be prepared, honest and realistic in your projections of time and return. Put everything in writing and have all parties sign documentation. Have a disclaimer for what happens if your business does not see the success you plan for. Be sure all parties fully understand the risks involved. Don’t make promises that you may not be able to keep. A classic opportunity to undersell and overdeliver. Give realistic projections but err on the side of more conservative estimates. When you exceed your projections, your friends and family will be thrilled. But if you promise a lot more and don’t deliver, you lose credibility.

The next stage is debt-backed funding — anything that requires a repayment with interest. This can take many forms — microloans, credit unions, traditional banks, Small Business Administration (SBA) loans or home equity lines of credit (HELOCs). To be successful in this route, you must start cultivating these lender relationships well in advance of submitting a loan application. Start asking other business owners to introduce you to their lenders. Do some research and see what lending institutions in your area have a history of cultivating relationships and doing business with women and minority-owned businesses. Find local support organizations that exist to support the underrepresented founder and ask them to help you network with those lenders. Set up introductory meetings with lenders, even in the very early stages of your business. I am an optimist, and I truly believe that lending institutions want to have a mixed portfolio of business owners as clients — they just don’t know them yet. So, be bold and get to know them first. Once you have cultivated relationships with a few bankers, share your business plan and ask what it will take for you to gain approval for a loan. Lenders will want to see a track record of revenue and proof you can pay the loan back with interest in a set term. You might be pleasantly surprised at how quickly they can help you meet their lending requirements. Along the way lenders will want to share in your success. Lenders are human and desire to help others, especially those who ask for help.

Related: Minority-Owned Small Businesses Aren’t Getting Stimulus Loans …

When it gets even more challenging for women and minorities

The smallest percentage of funding for women and minorities is from the angel and venture funding arenas. These are individual investors who have pooled significant sums of money to invest as a group into qualified businesses. Each investor hopes for a significant payoff down the road, making the betting process intense. That is the bad news. The good news is that you may not need these types of funding. Venture and angel funders are looking for quickly scalable businesses, for the most part. A business where a large (think $250,000 to multi-millions) amount of funding will catapult the business into the high growth category in a short period of time. What is great for the founder is the fast cash. What is not so great is nothing comes without a price. Investors will want a significant amount of cash or control, or in some cases, both. A founder must accept that the investors might even come in and replace you as the leader of the organization. If this is the cash route that is ultimately right for your business, do your homework. Hire a good attorney and a certified public accountant (CPA) to protect you during the negotiation process. Also, know that the percentage of venture funds is even lower for women; only two percent of venture capital is invested in female-founded companies. There is hope on the horizon with more women and minorities becoming investors themselves but keep your options open. Seek out venture capital or angel organizations that vet their applicants blindly. Connetic Ventures in Covington, Kentucky is a great example. Their proprietary product, Wendel, vets applications blindly. Over 50 percent of the applications that make it through their filtering process are women and minorities. Problem solved, right? If the screening process does not indicate race, gender, age, socioeconomics or disabilities, only the idea or concept itself is being vetted. That is terrific news for all entrepreneurs and supports the notion that a diverse team is a winning team.

Related: 3 Ways to Support Minority-Owned Businesses

Steps to ensure funding

  1. Create a solid business plan and start showing progress on that plan.
  2. Build a wide and deep network of people who can help you financially.
  3. Create an advisory board of seasoned and trusted professionals.
  4. Maintain excellent and thorough financial records.
  5. Check your credit score and improve it as much as possible. 
  6. Effectively market your business in your community. 
  7. Write a friends and family funding plan and start making the asks. 
  8. Begin building relationships with bankers, microloan organizations and local small business and entrepreneurial support entities. Research angel and venture capital funders who have businesses in your industry as part of their portfolio.

What can the funders do to solve this problem?

Asking funders to solve this problem is where it gets more challenging. Federal banking regulations have very strict truth in lending guidelines. They can’t just make it easier for women and minority groups to receive loans. We all still have to qualify and have the means to repay the loans. However, lending organizations can create more incentives and opportunities around building relationships with women and minorities as potential lending customers. Many banks have women’s networks, programs for minority-owned businesses and are hiring more people to help cultivate those relationships. A strategic focus on diversity in their consumer base is a critical piece of the overall solution that the lenders can bring to the table. The solution to the funding crisis faced by women and minority-owned businesses is a two-way street. Those with the money, bankers and other lenders, need to seek out and cultivate relationships; entrepreneurs in need of funding must be prepared and confident. Getting both sides of the equation working together will create an environment where all business owners can equally access funding. That funding will help in creating more sustainable businesses, offering more jobs to the community and growing our economy. A win-win-win outcome for all.

Related: This VC Went From Representing Huge Artists to Funding Women …

https://www.entrepreneur.com/article/420230