Latino companies, according to the Stanford Latino Entrepreneurship Initiative, have been … [+]
“They are very resilient. They want to grow: they are very ambitious, even in difficult times.”
That’s Barbara Gomez-Aguinaga, deputy director of the Stanford Latino Entrepreneurial Initiative (SLEI) and lead author of SLEI’s latest State of Latino Entrepreneurship report. She discusses the report, which highlights the rapid revenue and payroll of Latin American-owned companies and their strong recovery from the COVID-19 pandemic. They could grow “even more,” she says, if they faced a “level playing field.” Lending and contracting in particular offer opportunities for this.
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Pre-pandemic: rapid growth
According to SLEI, Latino entrepreneurs have been outpacing their peers in revenue and wage growth for many years. And there have simply been more. Between 2007 and 2019, based on US Census Bureau data, the number of Latino owned employer businesses grew by 34%. The number of white businesses declined by 7% during that period.
Annual growth rates in revenue and payroll were higher for Hispanic-owned companies than white-owned companies each year through 2019 through 2019.
Pandemic: closures, slower growth, rising inequalities
In the early months of the 2020 pandemic, millions of Americans shut down their small businesses. According to Rob Fairley, from February through April 2020, the number of “active business owners” in the United States dropped by 22%. There was some recovery in the following months, but the burden of closure was not shared equally between racial and ethnic groups.
Among blacks and Latinos, the decline in active entrepreneurs in those months was 41% and 32%, respectively. The SLEI report, based on its research, finds that median revenue growth rates from 2019 to 2022 were 25% for Hispanic-owned companies and 9% for white-owned companies. That’s a significant difference in total, but it may mask an important nuance in individual years.
In his latest report Prior to this, SLEI found that Latino-owned businesses were more likely to report specific negative impacts from the pandemic, such as business closures. Latino business owners were slightly more likely to report persistent negative impacts in 2021 than their white counterparts in that report.
It is also possible that the higher growth in the 2019-22 period represents a lower base. Honestly finds, according to Census data, that Latinos have lower average business incomes than blacks, whites and Asians. Not surprisingly, revenues for Latino entrepreneurs shrank between 2019 and 2020, albeit with a smaller decline than for black and Asian entrepreneurs. The SLEI has also consistently found that Latino-owned companies are less likely to be profitable and are more likely to report smaller profit margins. Fairlie points to differences between entrepreneurs in education and industry as possible explanations for different business incomes. More than a quarter of Latino entrepreneurs (28%) are early school leavers, far more than other groups. And there is a greater concentration of Latino companies in the construction industry.
Strong credit box, weak credit approval
Based on its research, the SLEI report found a decline in demand for financing between 2021 and 2022. Across all types of financing (credit cards, bank loans, etc.), Latino and white companies both sought “substantially less financing in 2022 compared to 2021 .” The biggest decline for both white and Latino businesses was the use of personal/family savings for funding.
The most incredible finding regarding credit in the SLEI report is the difference in bank loan approval rates. SLEI’s analysis showed that,
“at the time of application for loans from the national bank, [Latino-owned businesses] (1) have gross sales 3 times greater than [White-owned businesses](2) have similar business and personal credit scores… and (3) have lower outstanding debt on average than [White-owned businesses]. Nevertheless, [Latino-owned businesses] to have lower approval rates than [White-owned businesses] when applying for loans over $50,000.
(emphasis added)
That is striking. This is what Gomez-Aguinaga called a “systemic disparity that hinders the continued success” of Latino companies. This is confirmed by the era Small business credit check (SBCS), published annually by the 12 banks of the Federal Reserve System. In that study, 43% of white entrepreneurs with low credit risk got all the financing they sought, while only 24% of Hispanic entrepreneurs with low credit risk did.
The differences in approval rates are everywhere. For bank loans over $500,000, approval rates for whites are 85%, compared to 67% for Latinos. For loans between $50,000 and $99,999, the difference in approval rates is 38 points: 78% versus 40% for whites and Latinos, respectively.
Oddly enough, it’s the opposite for loans under $50,000: Latinos report a 64% approval rate, compared to 49% for whites. In the SBCS, a slightly higher share of Hispanic business owners with a “median/high credit risk”, 53%, received all or most/part of the financing they sought, compared to 52% for whites.
Pre-pandemic results in the SBCS showed that Hispanics are not that different from whites in the amount of credit demanded. In a Report 2019, the SBCS found that 63% of Hispanic entrepreneurs of those applying for credit sought less than $100,000, compared to 59% of white entrepreneurs. Similar stocks of each looked for bigger loans. Still, the pandemic caused some divergence.
In a 2022 SBCS report, while a similar proportion of Hispanic entrepreneurs sought more than $100,000 in financing as they did in 2019 (64%), a higher proportion of white entrepreneurs did: 52%. The SBCS findings also indicated that, compared to Asian and black entrepreneurs, a higher proportion of Hispanics had “met financing needs,” but about half the proportion of whites.
Can contracting help to stimulate further growth?
The most interesting part of the latest SLEI report deals with government and corporate contracts. Since this was the SLEI’s first year looking at procurement, Gomez-Aguinaga said, it was “difficult to assess changes.” Still, there are some striking results: While a higher proportion of Latino companies in the SLEI survey report having a government or corporate contract, “they get dramatically smaller contracts that take longer to complete.”
Amazingly, their dollar value is to Latino-owned companies that receive contracts from the federal government 31 times smaller than for white-owned companies. The discrepancy for business contracts is much smaller, 3.3 times greater for white-owned businesses. Again, while the federal procurement difference is striking, it’s hard to know what to make of this. Does this difference have to do with the age of the company? Sector? Geography? Are construction contracts (where, as Fairlie points out, Latino entrepreneurs are overrepresented) from the federal government smaller than in other industries? Could that explain some of the discrepancy? What other differences are at work here unnoticed?
Nevertheless, procurement is an important opportunity for small businesses and entrepreneurs of all types our work at the Bipartisan Policy Center. Hundreds of billions of dollars are spent each year by governments and businesses to purchase goods and services from others. It’s a “huge opportunity for entrepreneurs,” Gomez-Aguinaga said. And it’s an area where “policymakers can have an influence – they can control that now.” For those in Washington, state capitals, or even corporate headquarters trying to figure out how to do more for small businesses, that’s a good place to start.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.