Edwin Sanchez, CEO of the Echez Group and member of the Latino Business Action Network, meets with team members from a distance.
Despite being the fastest growing segment of the US small business ecosystem, Latinos continue to struggle to raise capital from national banks.
This is the result of the State of Latino Entrepreneurship 2020 research study by the Stanford Latino Entrepreneurship Initiative.
“Over the past five years we’ve had a really deep look at the challenges facing the Latino segment,” said Marlene Orozco, senior research analyst for the Stanford Latino Entrepreneurship Initiative.
Stanford’s report found that only 20% of Latin American owned companies applying for national bank loans of $ 100,000 received funding, compared to 50% of white owned companies. For loans of all sizes, the percentages change, but the gap does not: 51% of Latinos received loans versus 77% of whites.
Because of this discrepancy, Latinos are more likely to have sought and received funding from sources that put them at greater personal financial risk.
The annual study examines data from over 3,500 Latin American-owned companies. The 2020 report added 3,500 white-owned companies as a benchmark group to the data pool to compare and quantify performance.
“We are often asked what capital challenges Latinos face in relation to other groups,” Orozco said. “So this year we took on this task alone.”
Latino business leads to sales growth
Latinos are setting up businesses faster than the national average in multiple industries and have grown 34% over the past 10 years, compared with just 1% for all other small businesses.
“The data contradicts the idea that Latinos only grow in service industries,” Orozco said. “We’re seeing multi-faceted growth in all states and industries including construction, finance and insurance, transportation and real estate.”
Beyond the industry’s expansion, the report showed that Latin-owned companies averaged 25% annual revenue for the past two years, while white-owned companies achieved 19% revenue.
“Latino [business] Revenue growth should be a key metric for raising capital, but it continues to lag behind expectations, “said Orozco.
Rejection of bank loans
Latin American-owned companies remain significantly less likely than white-owned companies to have loan applications approved by national banks, despite strong metrics reported on a variety of key lending criteria.
“The banker told me that you were not bankable because we were under capitalized and relied on our own cash flow to grow,” said David Favela, founder and CEO of Border X Brewing in California.
David Favela, Founder and CEO of Border X Brewing in his Los Angeles office.
Favela founded their craft brewery inspired by the Mexican palate in 2013 with his brother, two nephews, and their raised $ 24,000 in cash. The 2020 James Beard Award semi-finalist expanded their business to acquire a second location in Los Angeles in 2019 and a third location across Latina in 2020.
He is one of the 86% of small business owners in Latino who have had a significant negative impact from the pandemic. While successfully obtaining PPP and EIDL assistance, his 7 (a) SBA loan for $ 500,000 was rejected by a local bank in California. He didn’t want to name the bank because he feared it could affect future financial relationships.
The US Small Business Administration Office of Advocacy found in a 2020 research analysis that Hispanic-owned companies were more likely than white-owned companies to have loan applications turned down immediately. This data spanned all funding sources and did not just focus on SBA initiatives.
Favela was told that its application was denied because of a lack of cash to service debt and that “banks do not lend based on business plans or projections.”
“We have doubled our business year on year using our cash flow,” said Favela. “So in the last two years before Covid there were no significant ‘gains’.”
“Latinos are making strides in starting and growing businesses,” said Orozco. “Despite these trends, securing funding remains a challenge.”
Finding new sources of funding
In the absence of bank funding, Latino entrepreneurs turn to funding elsewhere.
Favela managed to raise $ 200,000 through crowdsourced equity, allowing local investors to participate in the deal with donations between $ 500 and $ 10,000.
“To be honest, traditional stock investors feel riskier for me,” said Favela. “We have been dependent on human-based economic development and have proven that it can work.”
Stanford’s research found that compared to white business owners, who rely more on funding options that do not use personal assets as collateral, Latino business owners are more likely to take personal financial risk to run and grow their businesses. Latino entrepreneurs are more likely to rely on personal or business lines of credit, personal / family savings, or business credit cards.
Stanford’s research shows that Latinos tend to have more success with local and municipal banks.
“Community Development Financial Institutions (CDFIs) have been key to distilling federal funding for historically underserved groups,” Orozco said.
Eric Donnelly, CEO of Capital Plus Financial, helped Latino entrepreneurs affiliated with the Stanford Latino Entrepreneurship Initiative provide 20 PPP loans.
“There are a lot of minority and conventional bank custodians willing to provide funding,” said Donnelly. “It’s about finding the right fit.”
The US Small Business Administration highlights its Resource Partner Network and a few additional programs, including microcredit and Community Advantage Loans, that are tailored to meet the needs of business owners in underserved communities.
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