Latino businesses have been the fastest-growing entrepreneurial ventures in recent years. More and more Hispanics are integrating into the American economy and over time are moving from seeking employment to creating jobs, thus increasing the American business fabric.
Hispanics in the United States have more than 350,000 businesses that generate three million jobs in the economy and contribute nearly $2 trillion to the American GDP. In 10 years the number of Latino businesses has grown by 34 %, outpacing the growth of any other demographic in America.
According to the Stanford Latino Entrepreneurship Initiative (SLEI), Latino entrepreneurs tend to be more educated than the general Latino population, have higher homeownership rates and overall higher incomes, representing a path to community mobility and wealth.
From 2012 to 2017, 45 of the 50 U.S. states have seen the number of Latino businesses grow at a higher rate compared to other demographic groups. Only in 4 states did Latino businesses decrease in number.
Growth in the number of Latino businesses by state from 2012 to 2017. (SLEI)
Latino businesses also lead the initiative in job creation in the United States, growing 14 % in the number of new jobs between 2012 and 2017 in comparison to the national average of 6 %.
Much of the growth in Latino entrepreneurship has been led by women. Nearly 40 % of Hispanic businesses have a Latina at the helm, according to SLEI data. The low incomes of Latinas relative to their peers in the labor market have largely fueled this growing entrepreneurship.
The fastest-growing industries for Latino businesses are construction, finance and underwriting, transportation and warehousing, real estate, administrative support, and waste management services.
According to SLEI, Latino businesses have the potential to generate up to $1.5 trillion more in revenue for the economy, however, they face a major challenge: securing financing.
Latino businesses lead U.S. growth, but lack financing
In general, Latino businesses, despite having comparable financial performance to firms owned by entrepreneurs with no Latino heritage, have less access to bank financing.
While more than 60 percent of white-owned businesses get bank financing for loans over $100,000, only 30 % of Latino-owned businesses get such loans.
SLEI data indicate that Latino businesses have had better ROI performance after two years of business operation. However, white-owned businesses have superior returns after five years of operation.
In fact, the most recent credit studies show that Latino businesses tend to have less credit risk than other businesses.
This lack of access to financing from banks has meant that Latino businesses have to rely on a very different set of financing tools than their European-surnamed counterparts.
While the major source of financing for Latino businesses with capital greater than $100,000 is through personal or business lines of credit, white-owned businesses primarily use direct disbursements made by banks as their primary source of financing.
Latino firms, according to SLEI, have medium to high credit risk, at higher rates than non-Latino white-owned firms. These patterns are consistent with the fact that a greater proportion of Latino businesses are startups, but also suggest a limited ability to secure affordable growth capital.
Latino businesses rely heavily on financing through the use of owners’ personal savings. In general, they present more personal financial risk, so banks would be reluctant to relax credit terms for Latino startups.
According to data from lending firm Biz2credit, while the average loan from banks to a Latino firm is $47,031, white-owned companies had an average loan of $81,156, even though they have poorer credit ratings.
The data indicates that the service sector is the type of Latino business with the highest percentage of leverage, followed by construction, transportation and warehousing, and retail. The regions where Hispanic entrepreneurship has diversified the most are also the sectors with the largest Latino populations.
California is the state with the highest number of loan applications, followed by Texas, Florida, New York, and Illinois. Most of the access to credit for Latino businesses is largely due to the geographic distribution of the Latino population in the United States.
Latino business loan share by state.(Biz2credit)
The pandemic exposed strengths and weaknesses
Many Latino businesses were hard hit during the pandemic. The states where the coronavirus spread fastest, such as California and New York, are in turn the places with the largest presence of Latino businesses in the United States. By April 2020, the situation reached such a point that only 32 % of Latino businesses were active and by June, one in four Latino businesses had closed.
Originally when the government passed the CARE Act, most of the Payment Protection Program (PPP) money was given to the big banks. SLEI studies show that Latino communities have little relationship with big banks and their funding sources rely more on local banks or community development financial institutions, so at the beginning of the pandemic many Latino businesses were not helped.
During the second wave of disbursements, Latino businesses caught a break as transfers began to come through local banks and credit companies used by the Latino community.
ManyMany Latino businesses had to access loans to stay afloat, but were also forced to innovate in their strategies, such as reorganizing operating times and staff schedules, as well as launching online stores to replace sales lost due to the quarantines.
Most Latino entrepreneurs are optimistic about the future, however, many are still recovering from the pandemic and have to compete with counterparts who have greater access to the financial system, which allows for financial flexibility that many Latino businesses do not.