By Neil Hare and Arturo Cazares
US small businesses in general are still in recovery mode from the effects of Covid-19; however, new research from the Latino Business Action Network (LBAN) shows Latino businesses are playing an important role in the US economy through business ownership and job creation. The 2021 State of Latino Entrepreneurship Report (SOLE), by LBAN and the Stanford Latino Entrepreneurship Initiative (SLEI), highlights the large and positive economic impact of Latino-owned businesses.
Key positive findings from the report include:
- In the past 10 years, Latino-owned businesses have started at a faster rate than other groups — a 44% growth rate — compared to only 4% for non-Latino-owned firms.
- The number of employees at Latino-owned businesses has grown 55% since 2007, compared to 8% for white-owned businesses.
- In 2018, there were roughly 350,000 Latino-owned employer businesses that generated over $ 460 billion in annual revenue and employed 2.9 million people. The 2021 report also projects there are now approximately 400,000-450,000 Latino-owned employer businesses.
- Latino-owned businesses are distributed across all sectors of the economy, and in similar proportion as white-owned business, except Latino-owned firms skew higher into food services while there are more white-owned professional services. Among Latino-owned employer businesses, 19% own tech firms, while among white-owned employer businesses that number is only 14%.
The good news is tempered, however, by a disparity in how Latino-owned businesses were able to raise capital during the pandemic. For example, the report found that while Latino-owned businesses generally pose a similar credit risk as white-owned businesses, they are more likely to be asked by financial institutions to provide collateral and personal guarantees.
And, it has been well documented that in the early rounds of the Paycheck Protection Program (PPP), Latino-owned businesses received loans at half the rate of white-owned businesses. This disparity did even out during the latter stages of PPP when adjustments were made to prioritize businesses under 10 employees and minority-owned businesses.
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The good work of the Small Business Administration (SBA), Community Development Financial Institutions (CDFI), and national banks to respond should be commended; nevertheless, many Latino-owned businesses that experienced difficulties were left on the outside looking in when the program closed. The difficulty in accessing PPP loans led many Latino business owners to tap into personal savings and leverage credit card debt to stay afloat during the pandemic at a higher rate than white business owners.
Key changes necessary to foster growth for Latino businesses
So, what are the key takeaways from this research and what needs to change to ensure the growth and nurturing of Latino businesses?
1. More venture capital to Latino-owned businesses
The SOLE report showed that the share of Latino-owned employer businesses in tech is at least comparable to, if not slightly outpacing, the share of tech among white-owned employer businesses. Despite that reality, white-owned businesses received venture funding at a much greater rate than Latino-owned companies. This presents a new opportunity for venture capitalists to fund the tech segment while also supporting Latino-owned companies.
According to a recent SLEI report, Latino-owned businesses received less than 1% of the $ 487 billion invested across a sample of the top 500 largest venture capital and private equity deals in 2020. Therefore, addressing this huge gap in venture funding for the growing number of Latino-owned businesses in the technology sector is critical.
Banks can make further gains by evaluating lending processes and expanding outreach to ensure broad access and equal treatment
While tremendous progress has been made in the banking industry in terms of lending to minority-owned businesses, more can be done. In addition to evaluating internal practices, programs are needed to provide education on how to qualify for loans and lines of credit as well. Many Latino-owned firms have the financial background, credit scores, collateral, and financial capability to reduce their risk on a loan, but they may not have the documentation necessary to prove their low-risk classification. Marketing campaigns should also be developed to encourage Latinos to foster meaningful relationships with bankers and take advantage of education programs on how to best prepare themselves to qualify for financing.
SBA having a positive impact, needs to continue to enhance outreach and support
During the pandemic, the SBA rapidly scaled up its operations and created useful programs, such as PPP, to provide support to small businesses across the country. PPP data showed that at the onset of the program, businesses with pre-existing banking relationships, bookkeepers, accountants, and lawyers were able to apply for and receive funding faster than those without these resources. Thus, there was an initial disparity between Latino and white-owned businesses in accessing funds. Ultimately, Latino-owned firms did greatly benefit from PPP funds; it just took them longer to qualify — in some cases due to lack of staffing at the SBA, and in other cases, lack of financial documentation.
Annual statistics, pre-pandemic, collected by the SBA from lending institutions suggest Latino borrowers received between 4% to 9% of all types of SBA loans given from 2014 to 2019. As we return to traditional SBA lending, the SBA needs to offer dedicated outreach, education, and follow-up to ensure business owners have the support needed to access these funds. All businesses, including Latino-owned, minority-owned, and women-owned, will benefit if the SBA continues with a proactive posture.
4. Alternative sources of funding
While credit cards can play an important role in running a business, financing a business with a credit card brings higher interest rates, late penalties, and fees. Latino-owned businesses need to know how to access new sources of capital such as crowdfunding, and lower interest debt from sources such as CDFIs. They also need to understand what record keeping is necessary to apply for these alternative sources of capital.
New private lenders can, and should, offer technical assistance for businesses to come adequately prepared to access funds. Major national banks have begun to improve their internal processes and outreach to minority populations. These efforts should continue to ensure fair lending practices are possible when assessing a loan risk. At the same time, many banks are building relationships with CDFIs to engage with small businesses sooner and begin developing financial relationships. This creates another opportunity for outreach and education to ensure small businesses are prepared with financial information when trying to access the next level of funding.
Latino businesses and the future
The most positive takeaway from the SOLE report is that both Latino-owned and white-owned businesses reported an equal amount of optimism for the future: 79% and 77%, respectively.
The banking sector, venture funds, and the federal government can still play important roles in fostering growth that will benefit all business, but especially the large and rapidly growing number of Latino-owned business, creating a positive impact on the overall economy.
About the Authors
Neil Hare is President and CEO of GVC Strategies. See more of Neil’s articles and full bio on AllBusiness.com.
Arturo Cazares is the President and CEO of the Latino Business Action Networkan independent nonprofit that partners with Stanford University to empower Latino entrepreneurship across the United States.
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