Free money. That was the promise of Matthew Lesko’s popular book, Free Money to Change Your Life. You may remember the late night ads and infomercials that ran in the 1990s, promoting the book Mr. Lesko insisted was full of little-known government programs that gave out free money for just about anything you could imagine.

If you’re familiar with the free money claims, you’re not alone. Stories like these have been around for decades. The truth is the federal government does not provide grant money for entrepreneurs to start or expand a business.

“Federal and state government agencies do not provide grants for starting a business, paying off debt, or to cover operating expenses. Government agencies do not provide ‘special’ grants for women, minorities, veterans or disabled entrepreneurs. The Federal government also does not provide grants to small business owners as part of the Recovery Act.” – U.S. Small Business Administration

What the government does provide, however, is even more valuable. The Small Business Administration (SBA) and the Department of Commerce work as intermediaries to connect minority-owned small businesses to the resources they need to compete in the market. Government agencies perform three main services with regard to helping small businesses. They:

• Guarantee bonds, facilitate loans with third-party lenders, and help entrepreneurs find venture capital;
• Provide entrepreneurs with access to contracting opportunities with the government and with other businesses; and
• Make minority small business grants to nonprofit organizations and educational institutions that either work directly with small businesses or that serve as intermediaries to other non-profits and institutions.

Looking for small business financing? Check out our Complete Guide to Small Business Financing to see all the options available to small businesses.

What is a minority-owned small business?

The SBA defines a “minority” as a U.S. citizen who belongs to one or more of the following ethnic groups: African American, Asian, Native American, or Hispanic. It’s not necessary to identify your business as minority-owned in order for your business to fare well in the private sector, but federal and state governments set aside a small percentage of opportunities and government contracts specifically for small businesses that are majority-owned and controlled by one or more members of the above-listed minority groups.

The federal government defines a small business (or small business concern) as an independently owned and operated, for-profit business, which may be known in but does not dominate, its industry. Small businesses have a tangible net worth that does not exceed $18 million. In order for a business to qualify as a small business, it must meet small business size standards with regard to the annual receipts and number of employees. The SBA provides the following industry size standards for determining if a firm qualifies as a small business:

• Manufacturing: Maximum number of employees may range from 500 to 1500, depending on the type of product manufactured;
• Wholesaling: Maximum number of employees may range from 100 to 500 depending on the particular product being provided;
• Services: Annual receipts may not exceed $2.5 to $21.5 million, depending on the particular service being provided;
• Retailing: Annual receipts may not exceed $5 to $21 million, depending on the particular product being provided;
• General and Heavy Construction: General construction annual receipts may not exceed $13.5 to $17 million, depending on the type of construction;
• Special Trade Construction: Annual receipts may not exceed $7 million; and
• Agriculture: Annual receipts may not exceed $0.5 to $9 million, depending on the agricultural product.
• Minority-owned small businesses have to be at least 51% owned by a member of a minority group. Even publicly-owned businesses must have 51% of the stock owned by one or more minorities. Also, the company’s day-to-day management is run by a member of a minority group.

Lack of capital is definitely one reason small businesses fail. But it’s not the only reason. In fact, it’s not even the top reason. Inadequate leadership is typically identified as the top reason a business failed. Other culprits include:

• Lack of product demand, low sales
• Bad or nonexistent marketing plan
• Poor money management
• A declining market
• Unexpected growth
• Fierce competition
• Inability to differentiate yourself in the market
• Not understanding the needs of your customer

Judging by this list of reasons small businesses fail, you can see that access to capital is not the only quality of a successful business. Keep this in mind as you investigate the selection of minority small business grants and other valuable resources.

Getting certified as a minority-owned business

There are two primary methods for firms to obtain minority business certification. The first is through the SBA’s 8(a) program, which provides business development assistance for small businesses owned by “socially and economically disadvantaged” individuals. Federal law defines socially disadvantaged individuals as those who have suffered “racial or ethnic prejudice or cultural bias in American society.”  Economically disadvantaged individuals are “socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities.”

The second method is through the National Minority Supplier Development Council (NMSDC). The NMSDC is a non-profit organization that encourages the success of minority-owned small businesses by providing opportunities for small businesses to sell goods and services to its corporate members. NMSDC currently has a list of 3,500 corporate members, including global brands like General Electric, Wal-Mart, Xerox, Volkswagen, FedEx, ExxonMobil, and Time Warner. In 2011, NMSDC’s corporate members purchased more than $100 billion in goods and services from member minority-owned businesses.

NMSDC’s certification process for minority-owned businesses is not easy. Business owners must apply for certification through one of the NMSDC’s three dozen regional councils located in major cities across the country. The application asks owners to submit detailed information about their businesses.

In order to qualify for minority certification, small businesses must be for-profit entities located in the United States. They must be at least 51% owned, controlled, and managed by a member of a minority group. The NMSDC considers a minority to be an individual with at least 25% Hispanic, African American, Asian-Indian, Asian-Pacific, or Native American heritage. After reviewing the application, the NMSDC interviews applicants and conducts on-site inspections of small businesses to confirm the information submitted on the application is accurate. Applicants who fail to receive minority certification have 30 days to appeal the decision. If their application is denied a second time, business owners can apply again after one year.

Do you have a business plan? When applying for minority small business grants and loans your business will certainly be asked to provide a business plan! We recommend using LivePlan to help create a sharp, professional business plan.

Minority Small Business Grants and Other Resources

The 8(a) Business Development Program

The SBA’s 7(a) program actually began as a business development law in the 1950s. Its purpose was then what it is now – to level the playing field between small businesses and big businesses by providing smaller firms with access to human resources, technical resources, contracting opportunities, and capital they otherwise wouldn’t have.

In a recent report entitled The Viability of the Minority-Oriented Venture Capital Industry: Implications of Diversifying Investment Strategies by William E. Jackson III and Timothy Bates, they indicated one of the primary challenges faced by many minority-owned small businesses is having less financing than non-minority-owned businesses. This problem may directly contribute to the fact that minority-owned businesses are generally smaller in size than their non-minority-owned competitors. The SBA attempts to remedy this problem with the 8(a) program by targeting small businesses that are majority-controlled (at least 51%) by someone who is socially or economically disadvantaged. Once accepted into the 9-year program, participants work with the SBA and its affiliates to develop the following:

• An SBA-approved business plan
• A profitable business model
• A unique business identity
• A marketing plan for landing contracts

Those familiar with the 8(a) Program sometimes refer to it as a contracting program because it helps 8(a) participants win contracts set aside by the government for small, minority-owned firms. In actuality, the 8(a) program is a business development program that helps minority-owned firms compete for government contracts in addition to helping these firms acquire commercial business. The SBA encourages 8(a) participants to maintain a healthy balance between their public and private sector contracts. Participants receive training, counseling, marketing assistance, and the opportunity to take part in a mentoring program. Participants also get access to SBA-backed loan guarantees and bonding, which can help them get access to bigger contracts.

While the 8(a) program doesn’t specifically state it’s for “minority-owned” firms, it does specify participants must be socially and economically disadvantaged. There are some ethnic groups that are presumed to be socially and economically disadvantaged, namely African Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, and Subcontinent Asian Americans. For most programs, this also includes Indian tribes, Native Hawaiian organizations, firms owned by Alaska Native Corporations, and some community development corporations.

SBA 7(a) program is one of the least expensive ways to obtain small business financing. In most cases you’ll need a credit score above 680 to be approved for SBA funding. You can check your credit score here for free. Find out more in our guide to current SBA interest rates.

Mentor-Protégé Program

As part of the 8(a) Business Development Program, the SBA pairs new program participants (protégés) with well-established, successful businesses (mentors) in the private sector. Mentors aid protégés with their business development efforts by providing a one-on-one relationship that offers protégés the feedback, advice, and accountability they need to accomplish the goals outlined in their business plans. Participants in the 8(a) program can choose to sign up for the Mentor-Protégé Program within their first four years in 8(a) as long as they have never won an 8(a) contract.

Protégé participants get the benefit of having access to some of the mentor’s resources including human resources, technical assistance, and even financial support. Mentors can help protégés raise capital by investing in protégé companies as long as the mentor acquires no more than a 40% ownership stake in the company. Mentors can also enter joint ventures with protégés to better position both companies to compete for government contracts or provide protégés with subcontracting opportunities on the mentor’s government contracts.

SBA’s HubZone Program

The federal government sets aside 3% of all federal prime contracting dollars for HubZone-certified companies. A HubZone (Historically Underutilized Business Zone) is a geographic area determined by the federal government to have limited economic growth. These areas are usually urban and rural communities. Firms that are HubZone-certified maintain a principal office in a HubZone and also hire employees who live in that HubZone.

In 2011, the government’s 3% set-aside totaled $9.6 billion in federal contract awards to HubZone-certified small businesses alone. Business owners can find out if their business is located in one of these designated areas by checking the HubZone maps. The SBA’s HubZone hotline is available from 2PM to 3PM EST every Tuesday and Thursday afternoon. Call (888) 858-2144 and use access code 3061773.

Surety Bonds Program

The SBA’s Surety Bond Guaranty Program provides project owners with the assurance that in the event a contractor fails to deliver on a contract, a surety company will either compensate the project owner for the financial loss incurred or obtain another contractor to finish the job. The SBA, through the Office of Surety Guarantees, helps small businesses obtain surety bonds by guaranteeing bonds for contracts up to $5 million.

According to the SBA, there are four types of surety bonds:

1. Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.

2. Payment Bond: Ensures suppliers and subcontractors are properly paid for their services under the terms of the contract.

3. Performance Bond: Ensures the contract will be executed according to the terms and conditions of the contract.

4. Ancillary Bond: Ensures contract requirements that are not performance-related are met

Often times it’s the case, both in the public sector and private sector, that contractors must be licensed, bonded, and insured in order to bid on and complete construction projects. In fact, the federal government requires contractors who bid on federal construction projects valued at $150,000 or more to have surety bonds covering the bid, performance, and payment of contracts. But it’s not just builders who need surety bonds. Auto dealers are required to have surety bonds in 47 of the 50 states. Health clubs buy surety bonds to reimburse members any dues paid in the event the facility closes down. Cleaning services must be bonded and insured before taking commercial or residential contracts.

Economically disadvantaged minority-owned businesses typically have a harder time securing surety bonds, particularly if the owner also has credit issues. Bonding requirements differ from industry to industry and state to state. The SBA doesn’t charge small businesses a fee for bid bonds, but collects 0.729% of the contract price for payment or performance bonds. Surety companies pay the SBA 26% of the fee they charged the small business for the bond.

You can learn more about Surety Bonds in our guide on What Is a Surety Bond? 5 Facts You Need to Know.

Small Business Investment Company Program

The SBA’s Small Business Investment Company (SBIC) Program uses private investment funds from companies across the nation and guaranteed SBA loans to provide growth capital to small businesses. SBICs are independent, for-profit companies that manage the investment of these public-private funds. While they are regulated by the SBA, each investment company licensed to use SBIC funds has its own criteria for choosing when, where, how, and with whom to invest their funds.

One thing to keep in mind about SBICs is they are investment companies that expect good returns on their investments. SBICs are not allowed to invest in re-lenders, re-investors, passive businesses, real estate businesses, farmland, project financings, or businesses that do not contribute to overall public good.

The SBA has a directory of SBIC program licensees who service small businesses in 37 states. Currently, there are no SBIC Licensees located in the following states: Alaska, Colorado, Hawaii, Idaho, Mississippi, Montana, New Mexico, Nevada, South Dakota, Washington, Wisconsin, Virginia, and Wyoming.

Loan Programs

While the government doesn’t hand out free money, it does provide small business owners with other ways to access capital. Most small business owners find it rather difficult to obtain funding for their businesses. This is particularly true for minority-owned firms, which often fall short of meeting the requirements of a traditional lender.

SBA 7(a) loans – SBA-backed 7(a) loans are small business loans that provide minority-owned businesses the chance to obtain much-needed funding while minimizing the risk third-party lenders take by funding businesses through the SBA.

The SBA doesn’t lend money directly to businesses. The SBA works with its partners to guarantee repayment of certain small business loans that lenders make to 7(a) borrowers. These government-backed loans are actually commercial loans that have been structured according to specific SBA requirements. They are made to businesses, not individuals, and are reserved for businesses that do not qualify for traditional commercial loans.

To estimate your SBA 7(a) loan costs, try our SBA Loan Calculator.

Been in business 2+ years? Credit score 680+ ? (Check your credit score here for free.) Profitable? You my be able to qualify for up to $350k in SBA financing. Apply for a fast-tracked SBA 7a loan with SmartBiz.

Visit SmartBiz

SBA Microloans – If you’re looking for start-up capital or funding to cover your operating expenses, a microloan may be the way to go. Microloans are small, SBA-backed loans from third-party lenders directly to small businesses. Loan amounts range anywhere from $500 to $50,000. The SBA allows borrowers to use microloans for working capital, inventory, supplies, furniture, and equipment. Borrowers cannot use microloans to purchase real estate or pay off debts. The average loan amount is $13,000 and borrowers have up to six years to repay microloans, usually at an interest rate of 8 to 13%. The speed at which a small business repays the loan is based on lender requirements, the amount of the loan, and the way in which the loan was used.

While the SBA guarantees the loans, it does not distribute microloans. Instead, intermediaries manage the microloan program and provide guidance, advice, and technical assistance directly to borrowers. You can download a state-by-state listing of program intermediaries here. One microloan organization that has a national presence and has a great reputation for  lending to minorities is Accion, you can find out more about them here.

Business Consortium Fund’s Loan Guaranty/Participation Program – Business Consortium Fund, Inc. (BCF) is a business development program overseen by the National Minority Development Council. BCF’s mission is to connect certified minority-owned suppliers with private sector companies. BCF also provides certified minority-owned businesses with access to funding through lines of credit, contract financing, and various types of commercial loans.

BCF helps eligible certified minority-owned firms to obtain loans from its network of affiliate lenders when they don’t qualify for financing through more conventional programs. BCF facilitated its first loan in 1987. Between 1987 and 2012, BCF served 790 minority business enterprises (MBEs), resulting in 7,342 new jobs and $226.5 million in funding for certified minority-owned small businesses.

It is more difficult to obtain funding for startups than for established businesses. For more information on startup loans, read our article here. To learn more about the way you can fund a startup with personal money, go here. And if you have more than $50k in a retirement account, read about ROBS and how a ROBS can unlock those funds for your startup without having to pay early withdrawal taxes and penalties. Or schedule a time to speak to the ROBS pros at Guidant.

Federally–funded state and local programs for minority-owned small firms

Most of the time, minority-owned small businesses in need of funding and technical assistance will seek support from non-profit organizations like the NMSDC or from state and local governmental agencies. Federal funds that do filter into the small business community do so through these types of intermediaries.

Minority Business Development Agency – The U.S. Department of Commerce’s Minority Business Development Agency (MBDA) funds 27 MBDA Business Centers (MBCs) across the nation. Minority business enterprises work directly with MBCs to take advantage of consulting services that provide MBEs with insights on getting access to capital, researching different markets, exporting goods, and acquiring contracts in their industry. According to the MBDA,, MBCs helped clients access more than $800 million in financial packages, which include working capital, equity investments, and bonding.

SBA PRIME – The SBA’s Program for Investment in Micro-Entrepreneurs funds organizations that help low-income entrepreneurs who are unable to gain access to capital through conventional means to establish or expand their small businesses. These community organizations make loans of $500 to $50,000 directly to minority-owned small businesses. These loans can be used for working capital, inventory and equipment, real estate, and renovations. For a complete list of SBA PRIME grantees, for fiscal years 2009, 2010 and 2011, you can download PDF reports directly from the SBA’s website.

State-run Minority Business Departments – Most states in the Union have a specific state department that deals with minority-owned small business concerns. Small business owners whose businesses are within close proximity to major U.S. cities can also find opportunities and resources at the local level.

Alabama

Department of Economic and Community Affairs

Office of Minority Business Enterprise

Clarence Mann

Clarence.Mann@adeca.alabama.gov

P.O. Box 5690

Montgomery, AL 36103-5690

(334) 353-5680

California

Department of General Services

Office of Small Business Certification and Resources

Jim Butler

jim.butler@dgs.ca.gov

707 3rd Street, 1st Floor, Room 400

West Sacramento, CA 95605

(916) 375 4445

Connecticut

Department of Administrative Services

Supplier Diversity Program

Meg Yetishefsky

meg.yetishefsky@ct.gov

165 Capitol Ave.

Hartford, CT 06106

(860) 713 5228

Delaware

Department of Administrative Services

Office of Supplier Diversity

Michelle N. Morin

michelle.morin@state.de.us

Government Support Services

100 Enterprise Place, Suite 4

Dover, Delaware 19904

SLC: D100

(302) 857 4552

 

Florida

Department of Management Services

Office of Supplier Diversity

Thad Fortune

Thad.Fortune@dms.myflorida.com

Office of the Secretary

4050 Esplanade Way

Tallahassee, Florida 32399-0950

(850) 487 9863

 

Georgia

Georgia Department of Economic Development

Mary Ellen McClanahan

memcclanahan@georgia.org

75 Fifth Street, N.W., Suite 1200

Atlanta, GA 30308

(404) 962 4820

 

Illinois

Department of Central Management Services

Business Enterprise Program

Frank McNeil

BEP.CMS@Illinois.gov

100 West Randolph

Suite 4-100

Chicago, IL  60601-3218

(312) 814 4190

Indiana

Department of Administration

Minority Business Development Program

Jocelyn Williams

jowilliams@idoa.in.gov

Isabel Smith

mailto:ISmith@idoa.in.gov

402 W. Washington Street, Room W469

Indianapolis, IN 46204

(317) 232 3061

 

Iowa

Department of Inspections and Appeals

Targeted Small Business Certification Program

Mann Montgomery

TSB@dia.iowa.gov

Lucas State Office Building

321 East 12th Street

Des Moines, IA 50319-0083

(515) 281 5796

Kansas

Department of Commerce

Women’s and Minority Business Development

Rhonda Harris

rharris@kansascommerce.com

1000 S.W. Jackson St., Suite 100

Topeka, KS 66612

(785) 296 3425

 

Maryland

Department of Transportation

Office of Minority Business Enterprise Program

Richelle Thomas

rthomas6@mdot.state.md.us

7201 Corporate Center Drive

Hanover, Maryland 21076

(410) 865 1242

Massachusetts

Department of Business and Technology

State Office of Minority and Women Business Assistance

Nedra White

nedra.white@massmail.state.ma.us

Reggie Nunnally

mailto:reggie.nunnally@massmail.state.ma.us

Supplier Diversity Office (SDO)

The McCormack Building

One Ashburton Place, Room 1313

Boston, MA 02108

(617) 502 8852

Minnesota

Department of Administration Materials Management Division

Targeted Group/Economically Disadvantaged Small Business Program

Stephanie Selb

mmdhelp.line@state.mn.us

112 Administration Building

50 Sherburne Avenue

St. Paul, MN 55155

(651) 201 2428

Mississippi

Mississippi Development Authority

Minority and Small Business Development Division

Bob Covington

bcovington@mississippi.org

P.O. Box 849

Jackson, MS 39205

(601) 359 3448

Missouri

Office of Administration

Office of Supplier and Workforce Diversity

Celeste Metcalf

Celeste.Metcalf@oa.mo.gov

Truman State Office Building

301 West High Street, Room 630

P.O. Box 809

Jefferson City, MO 65102

(573) 751 8130

New York

Empire State Development

Division of Minority and Women-owned Business Development

Dean Bennett

smunson@esd.ny.gov

633 Third Avenue, 33rd Floor

New York, NY 10017

(212) 803 2412

North Carolina

Department of Administration

Office for Historically Underutilized Businesses

Bridget L. Wall-Lennon

bridget.wall@doa.nc.gov

Suite 4109

116 West Jones Street

Raleigh, NC 27603

(919) 807 2330

Ohio

Department of Administrative Services, Equal Opportunity Division

Minority Business Enterprise Unit

Jacqueline Williams

jacqueline.williams@das.state.oh.us

77 South High Street, P.O. Box 1001

Columbus, Ohio 43216-1001

(614) 466 8380

Oregon

Oregon Department of Consumer and Business Services

Office of Minority, Women and Emerging Small Business

Raleigh Lewis

raleigh.lewis@state.or.us

775 Summer St. NE, Suite 200

Salem, OR 97301-1280

(503) 986 0063

Pennsylvania

Department of Community and Economic Development

Pennsylvania Minority Business Development Authority

Curtis Burwell

gs-bmwbo@pa.gov

Commonwealth Keystone Building

400 North Street, 4th Floor

Harrisburg, PA 17120-0225

(717) 783 3119

Rhode Island

Department of Administration

Rhode Island Minority Business Enterprise Compliance Office

Charles Newton

Charles.Newton@doa.ri.gov

One Capitol Hill

2nd Floor

Providence, Rhode Island 02908

(401) 574 8670

South Carolina

Governor’s Office of Small and Minority Business Assistance

Office of Small and Minority Business Assistance

Joseph Dukes

jdukes@oepp.sc.gov

1205 Pendleton Street, Suite 474

Columbia, South Carolina 29201

(803) 734 5010

Texas

Texas Building and Procurement Commission

Historically Underutilized Business Program

Rachel Snell

rachel.snell@cpa.state.tx.us

111 East 17th Street

Austin, Texas 78774

(512) 463 6958

Virginia

Department of Small Business and Supplier Diversity

Ida O. McPherson

ida.mcpherson@dembe.virginia.gov

111 East Main Street, Suite 300

Richmond, VA 23219

(804) 786 6585

Washington

Office of Minority and Women’s Business Enterprise

Cathy Canorro

ccanorro@omwbe.wa.gov

210 11th Avenue SW, Suite 401

Post Office Box 41160

Olympia, WA 98504-1160

(360) 664 9760

West Virginia

West Virginia Development Office

Small Business Development Center

Kristina Oliver

kristiana.j.oliver@wv.gov

Capitol Complex, Bldg. 6, Room 525

Charleston, WV 25305-0311

(304) 558 2960

Wisconsin

Wisconsin Economic Development Corporation

Seyom Mengesha

seyom.mengesha@wedc.org

201 W. Washington Avenue

Madison, WI 53703

(608) 210 6880

Bottom Line:

While the federal government does not provide grant money for entrepreneurs to start or expand a business, there are many agencies that have programs to support minority owned businesses. If you meet certain criteria, your business can qualify for an SBA guaranteed loan which comes with lower APRs, longer terms, and requires less down payment and collateral than similar bank loans. If you’ve been in business more than 2 years, have a 680+ credit score (check your score for free here), and have a 10% down payment, you can apply for a fast-tracked SBA 7a loan here.

Have more than $50K in your retirement account? Click here to learn how you can use this money to start or buy a business without paying early withdrawal penalties. Or set up a free consultation with the ROBS professionals at Guidant.

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