Written by Neil Hare and Arturo Casares
Small businesses in the US in general are still in recovery mode from the effects of Covid-19; However, new research from the Latino Business Action Network (LBAN) shows that Latin companies play an important role in the US economy through business ownership and job creation. The State of Latin American Entrepreneurship (SOLE) 2021 Report, released by LBAN and the Stanford Latino Entrepreneurship Initiative (SLEI), highlights the significant and positive economic impact of Latino-owned businesses.
Key positive findings from the report include:
- In the past 10 years, Hispanic-owned businesses have started at a faster rate than other groups—a 44% growth rate—compared to just 4% for non-Hispanic-owned businesses.
- The number of employees at Hispanic-owned businesses has grown 55% since 2007, compared to 8% for white-owned businesses.
- In 2018, there were approximately 350,000 Latino-owned employer companies that had annual revenues of more than $460 billion and employ 2.9 million people. The 2021 report also notes that there are now approximately 400,000-450,000 Latino-owned employer companies.
- Latino-owned businesses are distributed across all sectors of the economy, and in similar proportions to white-owned businesses, with the exception of Latino-owned businesses which are more inclined toward food services while there are more white-owned professional services. Among Latino-owned employer firms, 19% own technology companies, while among white employer firms that number is only 14%.
However, the good news is tempered by the disparity in how Latino-owned companies have been able to raise capital during the pandemic. For example, the report found that while Hispanic-owned businesses generally pose similar credit risks to white-owned businesses, financial institutions are more likely to require them to provide collateral and personal guarantees.
It has been well documented that in the first rounds of the Paycheck Protection Program (PPP), Latino-owned businesses received loans at half the rate of white-owned businesses. This disparity diminished during the later stages of the PPP when adjustments were made to prioritize companies with fewer than 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 should be commended for responding; However, many of the Latino-owned companies that have run into difficulties, were left to outsiders for consideration when the program closed. Difficulty obtaining PPP loans has prompted many Latino business owners to tap into personal savings and tap credit card debt to stay afloat during the pandemic at a higher rate than white business owners.
Key changes needed to boost business growth in Latin America
So, what are the main points from this research and what needs to be changed to ensure the growth and nurturing of businesses in Latin America?
1. More venture capital for Latino-owned companies
The SOLE report showed that the share of Latino-owned companies in tech is at least comparable, if not slightly superior, to the share of technology among white employers. Despite this fact, white-owned businesses received project financing at a much greater rate than Latino-owned businesses. This presents a new opportunity for venture capitalists to fund the technology sector while also supporting Latino-owned companies.
According to a recent report by SLEIAnd Latino-owned companies received less than 1% of the $487 billion invested across a sample of the 500 largest venture capital and private equity deals in 2020. So, addressing this huge project financing gap for the growing number of Latino-owned companies in the tech sector is critical. Importance.
2. Banks can gain more by evaluating lending operations and expanding access 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 assessing internal practices, programs are needed to provide education on how to qualify for loans and lines of credit as well. Many Latino-owned businesses have the financial background, credit scores, collateral, and financial ability to reduce loan risk, but may not have the documentation to prove their low-risk rating. Marketing campaigns should also be developed to encourage Latinos to foster meaningful relationships with bankers and to take advantage of education programs on how best to prepare themselves to qualify for financing.
3. If the SBA has a positive impact, communication and support should continue to be strengthened
During the pandemic, the Small Business Administration has rapidly expanded its operations and created useful programs, such as public-private partnerships, to provide support to small businesses across the country. PPP data showed that at the start of the program, companies with prior 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 access to funds. Ultimately, Latino-owned companies benefited greatly from PPP funds; It has taken them longer to qualify—in some cases due to a lack of staff at the SBA, in others, a lack of financial documentation.
Annual, pre-pandemic statistics collected by the Small Business Administration from lending institutions show that Latino borrowers received 4% to 9% of all types of SBA loans granted from 2014 to 2019. Communication, education, and follow-up to ensure business owners have the support needed to access to this money. All businesses, including Hispanic-owned, minority-owned, and women-owned businesses, will benefit if the Small Business Administration continues to be proactive.
4. Alternative funding sources
While credit cards can play an important role in running a business, financing a business with a credit card results in higher interest rates, penalties, and late fees. Latino-owned businesses need to know how to access new sources of capital like crowdfunding, and lower interest on debt from sources like 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, provide technical assistance to businesses to come in adequately prepared for the funds. The major national banks started improving their internal operations and reaching out to minorities. These efforts must continue to ensure fair lending practices are possible when assessing loan risks. At the same time, many banks are building relationships with CDFIs to engage with smaller businesses sooner and start developing financial relationships. This creates another opportunity for networking and education to ensure that small businesses are equipped with financial information when trying to reach the next level of financing.
latin business and the future
The most positive finding from the SOLE report is that Hispanic and white-owned businesses report an equal amount of optimism for the future: 79% and 77%, respectively.
The banking sector, investment funds and the federal government can still play important roles in promoting growth that will benefit all businesses, but especially the large and rapidly growing number of Latino-owned businesses, creating a positive macroeconomic impact.
About the authors
Neil Hare is the President and CEO of Global Value Chain Strategies. See more of Neil’s articles and full bio at AllBusiness.com.
Arturo Casares is the President and CEO of Latino Business Networkan independent non-profit organization partnering with Stanford University to enable Latin American entrepreneurship across the United States.
Related: 10 ways to better support women-owned businesses