Latin American Firms Achieve Record Growth, Big Banks Still Not Funding
Edwin Sanchez, CEO of the Echez group and member of the Latino Business Action Network meets the team members remotely.
Despite being the fastest growing segment of the US small business ecosystem, Latinos continue to struggle to secure capital from domestic banks.
This is according to the State of Latin Entrepreneurship 2020 Research study of the Stanford Latin Entrepreneurship Initiative.
“Over the past five years, we’ve been able to really dig deeper into the challenges facing the Latin American segment,” said Marlene Orozco, senior research analyst at the Stanford Latino Entrepreneurship Initiative.
The Stanford report found that only 20% of Latino-owned businesses that applied for domestic bank loans over $ 100,000 got financing, compared to 50% of white-owned businesses. When looking at loans of all sizes, the percentages change, but not the gap: among Latinos, 51% received loans compared to 77% for whites.
Driven by this gap, 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 more than 3,500 Latino-owned businesses. The 2020 report expanded the data pool to include 3,500 white-owned companies as a benchmark group to compare and quantify performance.
“We are often asked what financial challenges Latinos face when it comes to other groups,” Orozco said. “So we took this task on our own this year.”
Latinos are launching businesses at a faster pace than the national average in several industries, growing 34% over the past 10 years, compared to just 1% for all other small businesses.
“The data contradicts the idea that Latinos thrive only in service-related industries,” Orozco said. “We are seeing multifaceted growth in 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 businesses have increased their revenues by an average of 25% per year, while businesses owned by Latinos have increased their revenues by an average of 25% annually. Whites increased their income by 19%.
“Latino [business] Income growth should be a key indicator to help them gain capital, but they continue to be insufficient, ”Orozco said.
Latino-owned businesses remain significantly less likely than white-owned businesses to have loan applications approved by domestic banks, despite the publication of strong metrics on a variety of key lending criteria.
“The banker told me ‘You are not bankable’ because we weren’t properly capitalized and we were relying 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 at his Los Angeles brewery.
Favela started her Mexican palace-inspired craft brewery in 2013 with her brother, two nephews, and their $ 24,000 in cash. The 2020 James Beard Award semi-finalist has expanded his business to acquire a second location in Los Angeles in 2019 and a third all-Latina location in 2020.
He is one of 86% of Latino small business owners who reported significant negative impact of the pandemic. While he successfully received PPP and EIDL assistance, his $ 500,000 7 (a) SBA loan was turned down by a local bank in California. He declined to name the bank, fearing it would affect any future financial relationship.
US Small Business Administration Office of Advocacy found in a 2020 research analysis that Hispanic-owned businesses were more likely than white-owned businesses to have their loan applications rejected outright. This data included all funding sources and was not focused solely on SBA initiatives.
Favela learned that her application was turned down due to a lack of cash to repay debts and that “no bank is lending on the basis of business plans or projections.”
“We were doubling our business year over year and using our cash flow to do it,” Favela said. “So there weren’t any significant ‘benefits’ in the last two years leading up to Covid.”
“Latinos are making strides in starting and growing businesses,” Orozco said. “Despite these trends, securing funding remains a challenge.”
In the absence of funding from the bank, Latin American business owners are turning to other sources of funding.
Favela was successful in raising $ 200,000 through equity equity, allowing local investors to take stakes in the business with donations ranging between $ 500 and $ 10,000.
“To be honest, traditional equity investors seem riskier to me,” Favela said. “We have been left to depend on human-based economic development and we have proven that it can work.”
Stanford research has found that Latino business owners are more likely to take personal financial risks to operate and grow their business compared to white business owners, who rely more on financing options that do not involve the use of personal assets as collateral. Latino entrepreneurs more often use personal or business lines of credit, personal / family savings, or business credit cards.
Stanford research shows that Latinos are generally more successful with local and community banks.
“Community Development Financial Institutions (CDFIs) have played a key role in delivering federal funds to historically underserved groups,” Orozco said.
Eric Donnelly, CEO of Capital Plus Financial, helped provide 20 PPP loans to Latino entrepreneurs affiliated with the Stanford Latino Entrepreneurship Initiative.
“There are many minority depositories and conventional banks that are interested in providing funding,” Donnelly said. “It’s a matter of finding the right person.”
The U.S. Small Business Administration highlights its network of resource partners and some additional programs, including microcredits and community benefit loans, designed to meet the needs of business owners in underserved communities.
Disclosure: NBCUniversal and Comcast Ventures are investors in Tassels.