When you think about small business lending, what comes to mind? If you’re like most people, you probably think of the typical — banks, credit unions, online lenders. Unfortunately though, many business owners are unable to obtain the funding they need through these traditional lending institutions. Banks and credit unions, for example, may require high credit scores, a lengthy time in business, or other criteria that a borrower just does not meet. The same can be said of online lenders — those with competitive rates may have strict borrowing requirements, leaving business owners with options that are short term, expensive, and could lead to escalating debt — and eventual closure of the business.
Unfortunately, businesses in underserved communities probably know this all too well. Not only does a lack of funding opportunities impact businesses, but it also has a negative effect on the community as a whole: A lack of jobs, less access to products and services, and fewer opportunities for entrepreneurship.
There is good news, though. There are lenders and institutions that offer funding opportunities to businesses and entrepreneurs that don’t have other options. One option many are unfamiliar with is minority depository institutions, or MDIs. These institutions provide funding opportunities to many business owners who don’t have access to affordable funding elsewhere.
Sound like something that might be a good fit for your business?
Keep reading to learn more about MDIs, how they help businesses like yours, and how to determine which one is the right fit for your business.
What Are Minority Depository Institutions?
A minority depository institution (MDI) is defined in one of two ways:
- At least 51% of voting stock is owned by minorities OR
- A majority of the board members are minorities AND the institution primarily serves communities whose populations are predominantly minority based.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a minority is defined as “Black American, Asian American, Hispanic American, or Native American.”
MDIs are similar to other banks, credit unions, and financial institutions by offering consumer and business services such as checking and savings accounts, business and personal credit cards, mortgages, and small business loans and lines of credit.
What Is The Minority Depository Institution Program?
The Minority Depository Institution Program is a program launched under the Federal Deposit Insurance Company (FDIC). Goals of this program include preserving, promoting, and building capacity of MDIs for the benefit of low- and moderate-income communities.
The FDIC also oversees the Minority Depository Institutions (MDI) Subcommittee of FDIC’s Advisory Committee on Community Banking (CBAC) as a way of preserving and promoting the importance of MDIs in communities around the nation. This subcommittee serves as a platform for MDIs to collaborate, form partnerships, and promote best practices.
In order to become classified as an MDI, an institution must take steps by applying for deposit insurance and also meet the criteria discussed earlier in this post. The FDIC provides a number of resources outlining the application process, rules, regulations, and other critical information that financial institutions need to know about MDI designation.
How Minority Depository Institutions Help Small Businesses
There are a number of ways that minority deposit institutions help small businesses. One of the most important ways that these financial institutions help small businesses is by providing financial products that may otherwise be unavailable to low-income, moderate-income, and other underserved communities. By having access to funding opportunities, business owners are able to expand their businesses, receive funding to keep their business in operations, and start new businesses. This, in turn, leads to new job opportunities and access to products and services to everyone within that community.
Some of the ways that MDIs help business owners include:
Small Business Loans
Affordable loans with favorable terms are difficult for many businesses to score, but it can be nearly impossible for businesses in underserved communities. Fortunately, MDIs have financing opportunities for small businesses that find it difficult to get low-cost funding elsewhere.
Depending on the institution, there are a number of loan products available. This includes commercial real estate loans, equipment financing, or other loans that provide businesses with a lump sum of capital that’s repaid over time.
Many MDIs offer loans backed by the Small Business Administration. SBA loans are known for their high borrowing limits, long repayment terms, and competitive interest rates. Some MDIs may also offer financial products for startup businesses that don’t have the revenue or business credit score required for other loans.
Lines Of Credit
Businesses that want a more flexible financing option may qualify for a line of credit through an MDI. Instead of a lump sum, businesses are given a credit limit that can be used to pay employees, purchase supplies or inventory, or cover operational costs. As the line of credit is repaid, funds become available to use again, much like a credit card. A business line of credit is great to have to cover unexpected expenses or to manage cash flow issues.
Business Credit Cards
Many MDIs offer business credit cards to qualified borrowers. Like a line of credit, this is a flexible form of funding that can be used for anything from emergency expenses to recurring costs like utility bills or gas for a company vehicle.
Merchant Card Services
Businesses that want to accept credit cards, debit cards, and other forms of payment will need to find a merchant services provider. Some MDIs provide these services for their customers.
Businesses with employees have to run payroll, and many business owners opt to leave this task to the professionals. Many MDIs — like traditional banks and credit unions — offer payroll services for its small business customers.
Checking & Savings Accounts
Business owners should understand the importance of separating business and personal expenses. The easiest way to do this is by keeping funds in separate accounts. An MDI provides personal and business bank accounts, so you can keep your money separate. Not only will you (or your accountant) be grateful for separate accounts come tax time, but many lenders require you to have a business bank account before disbursing loans or other funding.
Personal Banking Services
Looking for a new financial institution for your personal accounts? Consider working with an MDI. Not only can you take advantage of these consumer financial products, but so can others in your community. What does that mean for your business? It means that consumers have access to bank accounts, credit cards, and loans — in other words, all types of funding that they may spend in your business.
Popular Minority Depository Institutions
Now that you have a general idea of what MDIs offer, let’s take a closer look into what to expect when working with an MDI. These are just a handful of the 150+ MDIs throughout the nation, and they were chosen for this post because of their years of success, an array of financial products and services, and the work they have done within their respective communities.
First Independence Bank
First Independence Bank is a Black-owned MDI that provides financial products and services to individuals and businesses in the Detroit Metropolitan area. This institution was launched in 1970 and has helped businesses of all sizes meet their financial goals with products such as commercial real estate loans, term loans, SBA loans, and secured lines of credit.
First Independence Bank is also the majority owner of MAC Leasing, a certified minority-owned equipment leasing company. In addition to its MDI status, First Independence Bank also meets the requirements for classification as a Community Development Financial Institution (CDFI). It is also a certified Minority Business Enterprise (MBE). First Independence Bank has won numerous Bank Enterprise Awards throughout the years for its role in providing financial products and services to distressed communities.
American First National Bank
American First National Bank is an Asian American-owned MDI that serves businesses and consumers throughout communities in Texas, Nevada, and California. Launched in 1998, this financial institution has grown to have total assets of nearly $2 billion.
In addition to being Asian American-owned, most employees within American First National Bank are also Asian American. Many employees speak multiple languages, giving them the ability to serve a variety of different customers in their native languages. American First National Bank has numerous financial products geared toward small businesses, including working capital loans, startup loans, and equipment loans.
This MDI is also very active within its communities, even offering speakers to speak about the bank and its services at schools, local businesses, and civic organizations.
Golden Bank, National Association
Golden Bank was established in 1985 and was the first minority-owned bank in the Greater Houston area. Today, the bank has expanded to serve customers in cities in Texas and California. This Asian-owned financial institution offers a number of business services, including business loans, deposits, cash management, and trade finance. Golden Bank even offers payment processing with no startup fees and a free terminal.
Golden Bank in recent years has been named a Five-Star Bank by Bauer Financial. This is the highest ranking in banking industries.
How To Find The Right Minority Depository Institution For Your Small Business
Is your business located in an underserved community? Do you need help with funds for starting your business, or perhaps you’re already in business and need capital for expansion? If your business is located in an underserved, distressed, low-income, or moderate-income community, you may benefit from the products and services offered by an MDI. Or maybe you just want to bypass the big-name banks and get a more personalized experience with a smaller, local institution — in which case, an MDI fits the bill.
Now, the next step is to find the right MDI for your business. Your business is unique and so are its financial needs. What works for one business may be a total mismatch for yours. To determine what MDI is the right fit for you, consider the following:
- Location: Unlike major financial institutions that have hundreds (or thousands!) of branches nationwide, MDIs have far fewer branches and serve a more targeted area. Make sure that the MDI you select has branches and surcharge-free ATMs that are convenient to your business.
- Eligibility: Some MDIs are credit unions that have membership requirements. This could be anything from a small monetary donation to living, working, or attending school in a specific area. Make sure that you meet all requirements before signing up.
- Products & Services: Do you need industry-specific financial products? Is there a specific type of loan or borrowing limit that you need for your business? If so, make sure that the MDI you select offers the products you need, plus other products and services your business may require in the future.
- Up-to-Date Technology: Most business owners don’t have hours to step into a branch or sit in a drive-through line for every single transaction. Look for MDIs that offer online banking services like access to your accounts, mobile services, bill pay, and online loan applications.
Also, FDIC-insured MDIs offer you protection you need in the event that the institution fails. You’ll have up to $250,000 insured, so you won’t have to worry about losing your hard-earned money.
Unsure of where to start your search? Check out the FDIC website, or review the list of MDIs supervised by the Office of the Comptroller of Currency (OCC) to get started.
Learn About Other Financing Resources For Businesses
Smaller financial institutions like MDIs aren’t for everyone, and it’s important to always explore your options first before diving headfirst into small business financing. While MDIs may be on your list, make sure to compare and weigh your other options. This includes working with a traditional bank or credit union, comparing rates with online lenders, or working with an SBA-approved lender to get a low-cost SBA loan. You can even use your personal credit profile and income to qualify for a personal loan for business. Regardless of which choice you make, take your time, do your research, and make the choice that’s best for your business. Good luck!
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