Latinos are starting businesses at a faster rate than the national average across almost all industries.
Latino-owned businesses play an important role in the U.S. economy. As the fastest growing segment of the U.S. small business ecosystem, the number of Latino-owned businesses has grown 34% over the last 10 years compared to just 1% for all other small businesses. Were it not for the growth in the number of Latino-owned firms, the total number of small businesses in the U.S. would have declined between 2007 and 2012. We highlight below key findings from this report that depict pre-pandemic trends among Latino-owned businesses and areas of additional focus heightened by the pandemic. All data reported henceforth are for Latino-owned employer businesses (LOBs) and White-owned employer businesses (WOBs), unless stated otherwise.
Latinos are starting businesses at a faster rate than the national average across almost all industries. The number of employer LOBs has grown by 14% between 2012 to 2017, over twice the U.S. average of 6%. Additionally, the number of employer LOBs grew across 44 out of 50 U.S. states, and grew at a faster rate than the national industry average across 13 of the 15 industry sectors that include a substantial number (over 1,000) of employer LOBs. Among these industries, the growth rate is highest in the following industries: 1) Construction, 2) Finance and Insurance, 3) Transportation and Warehousing, 4) Real Estate.
Latino-owned employer businesses are growing revenues at a faster rate than White-owned employer businesses. Over the past two years, Latino-owned firms grew revenues an average of 25% per year while WOB revenue grew at 19%.
Less credit for Latinos
Latino-owned employer businesses are significantly less likely than White-owned employer businesses to have loan applications approved by national banks, despite reporting strong metrics on a variety of key lending criteria. Only 20% of LOBs that applied for national bank loans over $100,000 obtained funding, compared to 50% of WOBs. Considering only scaled firms (annual revenues greater than $1 million) requesting a similar size loan, only 29% of Latino-owned businesses were approved, compared to 76% for WOBs. If loans of all sizes are considered, 51% of LOBs were approved for all or most of their loans requested from national banks, compared to 77% of WOBs. Importantly, after controlling for business performance measures, the odds of loan approval from national banks are 60% lower for Latinos. We explore business performance measures below:
Credit: Latinos who own employer businesses are no more likely to have high credit risk than their White counterparts. Additionally, when considering credit performance, among the most credit vulnerable business owners (e.g., undocumented and microbusiness owners) the default rates are no higher than those among non-Latinos.
Profitability: While WOBs are more likely to operate profitably than LOBs, three quarters of all LOBs report breaking even or generating profit in the last 12 months — a similar rate relative to WOBs. This is despite the impact of the coronavirus generating greater losses than in previous years. • Liquidity: LOBs and WOBs report comparable liquidity with 52% of LOBs and 55% of WOBs reporting they have ample liquidity to operate without the need for credit. • Business age: Given the recent booming growth in the number of Latino-owned businesses, it follows that LOBs are younger than WOBs. On average, LOBs are 10 years old while WOBs are 14 years old. The median age for both is 12 years.
Scaled Latino-owned employer businesses are more likely to seek and receive funding from sources that expose them to more personal financial risk compared to White-owned employer businesses. After accounting for application rates, our survey data show that the top sources of funding (over $100,000) with the highest approval rates for scaled LOBs include: 1) Personal or business lines of credit (51%) 2) Personal/family savings (43%), 3) Business credit card(s) (40%), 4) Personal/family home equity loan (37%). On the other hand, the top sources for scaled WOBs include: 1) Business loans from national banks (76%), 2) Business loans from local or community banks (45%), 3) Private equity (36%), 4) Personal/family home equity loan (34%).
Latino-owned employer businesses that participate in formal business organizations (e.g., chambers of commerce and trade associations) are more likely to experience funding success. LOBs that leverage formal business organizational networks are more than twice as likely to experience funding success as those that did not engage in any networking activities (63% versus 28%). Our data show that businesses that leverage organizational and personal networks are more likely to come in contact with capital providers, which may provide opportunities to build the relationships needed to facilitate funding requests.
Owned businesses led by women were most negatively impacted
For both Latino and White-owned businesses, those led by women are most negatively impacted by the pandemic. Twice as many Latina-led companies experienced closure compared to Latino-led businesses (30% versus 16%). Layoffs were also higher for Latina-led companies (17% versus 12%). This gender gap holds among WOBs as well. The difference in industry distribution by gender does not fully explain the gap in business closure by industry. We see some differences in having cash on hand. Only about 1 in 10 Latina-owned businesses have enough cash on hand to survive beyond 6 months compared to 2 in 10 Latino owned businesses. This gap is less pronounced for WOBs. In addition, working from home is also more challenging for Latina-led businesses. Only 20% report that most of their employees can work remotely, compared to 34% of Latino-led and 48% of White-male-led companies.
Conclusion
While the 2020 SLEI Survey of U.S. Business Owners was administered during a time of unprecedented change, the findings are nonetheless informative in capturing prepandemic trends and foreseeable challenges. Through the direct comparison of a benchmark group, White business owners, we quantify the business performance of Latino-owned businesses and their experiences in accessing capital as the need for financing continues to grow.
In particular, we highlight that among multiple measures and criteria considered for funding, Latino-owned and White-owned businesses display comparable performance. We find that Latino-owned employer businesses are outpacing their White counterparts in revenue growth. On other measures, we find comparable credit risk among employer businesses. Mystery shopping studies in the business lending process have found that at the initial point of engagement, minority entrepreneurs are provided different information and shown different products.
Collectively, this research speaks to the opportunity for lending institutions to assess their practices at initial intake and their overall lending outcomes among small business owners. The Consumer Financial Protection Bureau is tasked with understanding the small business lending market and may support in implementing federal guidelines. Importantly, gathering data about the borrower’s racial and ethnic background is an important first step. SLEI research will continue to track these critical metrics over time.
From the demand side, these findings also speak to the active role that Latino entrepreneur may take with their lending providers, including establishing relationships before the need for capital arises, inquiring about the reasons why their request for funding was not approved, and locating lending institutions amenable to their needs. We find that CDFIs are increasingly filling this need.51 We also find that formal business organizations are playing an important role in the business ecosystem for Latino entrepreneurs, especially as it relates to providing information and contacts around financing. As we home in on the experiences of Latinos through a comparative lens, we may better understand how to expand access to capital for those historically underserved by financial institutions but consistently contributing to the entrepreneurial dynamism of the United States.
Source: The 2020 State of Latino Entrepreneurship report.
THE SIXTH ANNUAL STATE OF LATINO ENTREPRENEURSHIP REPORT
This is the sixth annual State of Latino Entrepreneurship report where we have collected robust survey data from Latino-owned businesses across the country to provide a timely account on the fastest growing segment of the U.S. business population. This year, we administered our national survey amid a global pandemic and vast social unrest, and the unique disruptions businesses faced over the past year are clearly visible in the survey responses.
This report highlights the impact of Latino-owned employer businesses in the U.S. economy and compares their experiences to those of White-owned employer firms in the United States. This year, we not only surveyed U.S. Latino business owners but also a comparison group of White business owners to identify similarities and differences in their experiences. We collected a sample of 3,500 White owned businesses and 3,500+ Latino-owned businesses. Additionally, we captured time-series data from a smaller cohort of Latino-owned firms over the months of March, June, and September 2020, to capture the progressive impact of the pandemic on Latino-owned businesses.
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