Despite being the fastest-growing segment of the U.S. small business ecosystem, Latinos continue to struggle to secure capital from national banks.
That’s according to the State of Latino Entrepreneurship 2020 research study from the Stanford Latino Entrepreneurship Initiative.
“Over the last five years we’ve really been able to dig deep into the challenges facing the Latino segment,” said Marlene Orozco, lead research analyst of the Stanford Latino Entrepreneurship Initiative.
Stanford’s report found that only 20 percent of Latino-owned businesses that applied for national bank loans over $100,000 obtained funding, compared to 50 percent of white-owned businesses. When looking at loans of all sizes, the percentages change, but not the gap: among Latinos, 51 percent received loans versus 77 percent for whites.
Driven by this discrepancy, Latinos have been more likely to seek and receive funding from sources that expose them to more personal financial risk.
The annual study examines data covering over 3,500 Latino-owned businesses. The 2020 report expanded the data pool to include 3,500 white-owned businesses as a benchmark group to compare and quantify performance.
“We’re often asked what capital challenges face Latinos as it relates to other groups,” said Orozco. “So we took that task on our own this year.”
Latino-business leads revenue growth
Latinos are starting businesses at a faster rate than the national average across several industries, growing 34 percent over the last 10 years compared to just 1 percent for all other small businesses.
“The data counters the idea that Latinos are only growing in service-related industries,” said Orozco. “We are seeing multifaceted growth across states and industries including construction, finance and insurance, transportation, and real estate.”
Beyond industry expansion, the report showed that over the past two-years, Latino-owned firms grew revenue at an average of 25 percent per year while white-owned businesses grew revenue at 19 percent.
“Latino [business] revenue growth should be a key metric in helping them gain capital, but they continue to fall short,” said Orozco.
Amid pandemic, more bank loan rejections
Latino-owned businesses remain significantly less likely than white-owned businesses to have loan applications approved by national banks, despite reporting strong metrics on a variety of key lending criteria.
“The banker told me ‘You’re not bankable,’ since we weren’t properly capitalized and relied on our own cash flow to grow,” said David Favela, founder and CEO of Border X Brewing in California.
Favela launched his Mexican-palate inspired craft brewery in 2013 with his brother, two nephews and their collected $24,000 in cash. The 2020 James Beard Award semi-finalist expanded his business to acquire a second location in Los Angeles in 2019, and third all-Latina run location in 2020.
He is one of the 86 percent of Latino small business owners who reported significant negative impact by the pandemic. While he successfully received PPP and EIDL assistance, his 7(a) SBA loan for $500,000 was denied by a local bank in California. He did not want to name the bank fearing it could impact any future financial relationship.
The U.S. Small Business Administration Office of Advocacy found in a 2020 research analysis that businesses owned by Hispanics were more likely than those owned by whites to have their loan application denied outright. This data included all funding sources and was not solely focused on SBA initiatives.
Favela was told his application was rejected because of a lack of cash to service debts, and that “no banks are lending based on business plans or projections.”
“We were doubling our business year over year and using our cash flow to do so,” Favela said. “So there were no significant ‘profits’ in the last two years before Covid.”
“Latinos are making strides in starting businesses and growing,” Orozco said. “Despite these trends, securing financing remains a challenge.”
Finding new funding sources
Lacking funding from the bank, Latino-business owners are turning elsewhere for funding.
Favela found success raising $200,000 through crowdsourced equity capital, allowing local investors to take stake in the business with donations between $500-$10,000.
“To be honest, traditional equity investors feels riskier to me” said Favela. “We’ve been left to depend on human-based economic development and we’ve proven that can work.”
Stanford’s research found that Latino business owners are more likely to take on personal financial risk to operate and grow their firms relative to white business owners, who rely more on financing options that do not entail the use of personal assets for collateral. Latino entrepreneurs more often to rely on personal or business lines of credit, personal/family savings, or business credit cards.
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Stanford’s research shows that Latinos typically have more success with local and community banks.
“Community development financial institutions (CDFIs) have been key in distilling federal funds to historically underserved groups,” said Orozco.
Eric Donnelly, CEO of Capital Plus Financial, helped provide 20 PPP loans to Latino entrepreneurs affiliated with the Stanford Latino Entrepreneurship Initiative.
“There are plenty of minority depository Institutions and conventional banks wanting to provide funding,” said Donnelly. “It’s a matter of finding the right fit.”
The U.S. Small Business Administration highlights its Resource Partner network, and some additional programs including microloans and community advantage loans, designed to meet the needs of business owners in underserved communities.