Advice for Accessing Capital as an Underserved Minority Entrepreneur

Q&A with Alex Guerrero, CDO of VEDC

Access to capital is just one of the many problems that women and minority entrepreneurs from underserved communities face when they are trying to start a business. According to a study conducted by the Minority Business Development Agency, minority-owned businesses are less likely to receive loans than non-minority-owned firms and, when they do receive loans, the dollar value tends to be lower while interest rates are higher. However, minority entrepreneurs often also lack access to mentors, advisors, and the right networks.

We spoke with Alex Guerrero, Chief Development Officer of Valley Economic Development Center (VEDC), about the challenges that entrepreneurs from underserved communities face and the resources that VEDC provides to help them succeed in their business endeavors. Guerrero explains that his goal is to help entrepreneurs accomplish their dreams and to create quality jobs at the same time. His parents were immigrants who came to America and were able to buy a house and raise six children even though they worked minimum wage jobs, which he says is something we’re never going to see again unless we do something “drastic.” 

Learning About Alternative Financing Options

One hurdle that women and minority small business owners from under-served communities have to overcome is getting information about the financing options that are available to them after they get declined from traditional financing, which many people think is the only way to get access to capital. Guerrero says he wishes VEDC had a big budget they could spend on marketing to make sure they are reaching everybody that could benefit from their services. He tells us that they usually go door-to-door along major streets in LA and hand out flyers. The most common reactions that they get are: “we don’t believe you, this is too good to be true” and “I’ve never heard of you guys, where have you been all our lives?”

VEDC is a non-profit small business lender that provides loans and micro-financing options to small businesses, particularly those owned by women and minorities, that don’t qualify for traditional financing. They have a program designed for what they call ‘emerging entrepreneurs,’ with micro loans starting at $500. On the higher end, they provide loans as high as $5,000.

Beyond Access to Capital

There are circumstances in which a business is not ready for a loan. In those cases, VEDC doesn’t abandon these businesses, instead, they provide resources so that those businesses can move forward and be in the right shape to get a loan from a Community Development Financial Institution (CDFI) like VEDC, and eventually be eligible to build a relationship with a bank. Guerrero’s team listens to each entrepreneur, since products vary depending on the story of the entrepreneur and they all have different reasons for going to see someone at VEDC. In his words, VEDC “is not a vanilla-product kind of company” since they treat each case differently. They oversee two women business centers–one in Los Angeles and the only one in the state of Nevada. They also offer workshops, about 46 a year, that can help entrepreneurs get in the right shape to get access to capital. Guerrero emphasizes how important it is for entrepreneurs to understand that oftentimes their business needs advice and not capital.

Understanding Risk

Starting a business, especially when coming from underserved communities, is risky. Since most women and minority entrepreneurs coming from these types of communities do not meet the requirements for a traditional bank loan, it is important to be aware of the risk that comes along with being entrepreneurial.

When we asked Guerrero what aspiring entrepreneurs should understand about the risks that startups face, he said that entrepreneurs don’t have the risk gene in their genes, which he thinks is admirable and respectable. He quoted someone at a conference that said he wasn’t an entrepreneur because he’s scared. Guerrero thinks entrepreneurs often don’t even care about what lies in front of them. However, in order to keep their businesses running smoothly and growing to the point of being able to qualify for traditional capital, entrepreneurs need to understand the risks of their particular situation and how to mitigate them, whether by finding the right insurance coverage or getting advice from a mentor in the same field.

How to Become More Bankable

VEDC looks at three things when deciding whether to give a loan to a small business owner: credit, cash flow and collateral, whereas a traditional bank usually also looks at character, capacity, and conditions.  In order to be able to receive a loan from VEDC, an entrepreneur must meet two of the three conditions, and they should be able to explain why one of the three is not in good standing.  

Small business owners need to understand what kind of debt they can take on to be able to decide whether a loan is the right one for them. Unfortunately, entrepreneurs in America don’t have a lot of options when they get declined from traditional bank loans, so there is not a lot of room for choice. This lack of choice becomes the tipping point where predatory lenders can come in and actually take out a business.

Guerrero highlights the importance of knowing your business’s numbers. In his opinion, knowing the numbers and having a business plan is something that an entrepreneur needs to have figured out before walking into VEDC, or any lending institution. He says it is a challenge that he sees repeatedly, since a lot of people have great ideas and stories but do not understand their numbers. According to Guerrero, someone going to VEDC should have a business plan and should know how their growth happens and when it is going happen, as well as whether they need technical assistance or if they are going to need access to capital. A common red flag that Guerrero and his team see is someone coming in and saying “how much money do I qualify for?” Instead, small business owners should have the answer to the question of how much money they need.