Written by: Lorraine Martinez, Star Funding
Every small business owner’s dream is to secure the business capital needed to launch and grow their venture. From venture capitalists to small business loans, there are a lot of options out there for entrepreneurs. Unfortunately, choosing which path to take and security ongoing funding opportunities as a business grows and changes can be a rocky road.
For entrepreneurs, choosing to pitch to VCs can require sacrificing a percentage of ownership in their own company in exchange. For those looking to traditional bank or credit card loans to start a small business, it can be nearly impossible with limited or no financial history. That’s because the process requires the lender to analyze the recipient’s credit history and past financial statements. Potential funding roadblocks such as these can mean the difference between survival or shut down for small businesses and they are exponentially more impactful to minority-owned businesses.
“The numbers don’t lie and they show that businesses owned by women and persons of color are at an inherent disadvantage when it comes to seeking and receiving funding from traditional lenders like banks and credit cards,” says Avi Levine, Vice President of Star Funding. “While roughly 80% of white business owners receive at least a portion of the funding they request from bank lenders, only about 66% of businesses owned by minorities receive loans from their banks, according to data from the Federal Reserve.”
Additional statistics from the Minority Business Development Agency (MBDA) and Minority & Women-owned Business Enterprises (MWBE) show that that these businesses that do receive at least partial funding from a traditional lender pay higher interest rates on loans. For many business owners who receive support through minority-owned small business programs, access to capital is the final step toi launching and growing a successful business that they can’t leap. “The funding gap for minority- and women-owned businesses, particularly small businesses, is as apparent as it is wide,” Levine says.
Unfortunately, access to business capital often inherently discourages small business owners from even seeking traditional funding in the first place. In fact, according to the Federal Reserve’s 2020 Small Business Credit Survey, only roughly one in every three Black business owners reported facing “no challenges” when applying for a loan through a bank. For minority business owners who did not report facing challenges when applying for loans, the amount and degree of information they were asked to provide by lenders, including bank and personal financial assets, was two to four times greater than reported by white-owned businesses.
In response, small business owners are looking to more non-traditional methods of financing. For example, New York City-based Star Funding offers small business owners two non-traditional funding choices: Purchase Order Financing and Accounts Receivable Financing. These options allow the funder to analyze the unique opportunities identified by the small business, from pending or upcoming POs, rather than the business’s prior two years (or longer) of profit and losses (P&Ls) on their balance sheet. These non-traditional funding options provide unique alternatives for minority-owned business owners to grow their business with much needed capital injections, based on the work in their pipeline.
“We don’t need to analyze your bank account, P&Ls, or credit history to make the decision on whether or not Star Funding can finance your business,” Levine says. “Instead, we look at the present opportunities you have before you.”
That’s a big deal for restaurant owners impacted heavily by the pandemic over the past year, whose financial losses suffered in 2020 will impact their ability to grow and sustain their business this year, based only on P&L data. For all businesses with POs to fill that need instant capital to do so, PO-based funding offers an alternative to traditional business bank loans that have not served minority-owned businesses equally in the past. If those POs present an opportunity for the business to grow in 2021, there’s a good chance that a non-traditional funder like Star Funding can help finance those transactions and help get those companies back on track for growth and success.
Lorraine Martinez leads new client onboarding initiatives and underwriting PO Finance transactions at Star Funding, where she’s worked since 2003. Her career includes hands-on work in manufacturing, including managing overseas production for a mid-sized clothing retail brand in the U.S. Star Funding is a non-traditional business lender providing purchase order financing and other innovative funding options for startups and growing businesses.