Over $700 billion in sales is generated by Latino-owned companies in the Unites States. This boost is not just beneficial for the economy — the sheer number and volume of dollars generated means that Latino-owned businesses are integral to the community. While some Latino-owned businesses are run by a sole proprietor, many more have employees, which further affects the economy on a personal level. In fact, the latest U.S. Census Survey of Business Owners (from 2012) indicated that Latino-owned companies employ 2.3 million people — and that number is expected to greatly increase based on the analyzed trends.
Growth of American Small Business is Tied to Latino-owned Companies
Twenty-five percent of new businesses in America are owned by a Latino, according to the National Bureau of Economic Research. However, these companies are often met with seemingly insurmountable obstructions to growing their small businesses. Research points to the fact that a mere 3% of Latino-owned businesses (and 6% of white-owned businesses) reach the $1M+ revenue mark, according to an article co-published by the Federal Reserve Bank of New York, the Stanford Latino Entrepreneurship Initiative, and Interise. The barriers prevent Latino-owned businesses from gaining traction to become bigger and more profitable entities.
Following are eight key findings from the aforementioned study “Latino-Owned Businesses: Shining a Light on National Trends”, co-published by the Federal Reserve Bank of New York, the Stanford Latino Entrepreneurship Initiative, and Interise.
Finding #1: Informal Financing Drives Latino Business Owners
Latino business owners are nervous about finding official financing options because they do not want to be in debt, so they tend to rely on their personal savings accounts and financial assistance from their family and friends. Often, the financing available to these small business owners does not carry terms that these owners are comfortable with. The downside of not taking on debt and using personal money to fund a business means that Latino business owners are not able to develop a strong credit report and they have difficulty scaling their businesses as they grow.
Finding #2: Latino Business Owners Are in Peril of Personal Financial Risk
Since they aren’t borrowing money in the form of a financial loan, Latino business owners are unable to build up their credit scores and expand on their credit history. Due to the aversion to financial loans, these business owners often rely on credit cards, factoring, and cash advances, all of which typically charge higher interest rates than a loan would. When they do seek financing, 47% do so using personal guarantees, vs. business assets, to secure it. Another issue is that 49% of Latino-owned business are classified as medium or high credit risk — this can be attributed to the fact that most of these companies are start-ups, as well as their issues with finding affordable growth capital.
Finding #3: Latino Business Owners Face Financial Challenges More Frequently Than White Business Owners
Latino business owners state that they deal with issues relating to operating expenses and credit availability, despite being on par in terms of growth and profitability with white-owned businesses. Additionally, scaled Latino-owned businesses have more issues with credit availability than non-scaled white-owned businesses. Funding gaps between the two groups (Latino-owned and white-owned) were vast; 28% of Latino-owned businesses received full funding, compared to 49% of their counterparts. Notably, 97% of Latino-owned businesses bring in $1 million or less — and 40% of those who sought loans were completely denied. By comparison, 23% of non-Latino-owned businesses were flat-out denied.
Finding #4: Scaled and Unscaled Businesses Saw Different Operational Challenges
Among scaled Latino-owned firms, there is a talent shortage. To answer that challenge, many companies are working to break from the crowd and be seen by talented workers by developing programs to develop talent. Unscaled firms find it difficult to gain credit to assist with cash flow management.
Finding #5: Cities with High Latino Populations Don’t Have the Most Latino Entrepreneurs
Miami and Chicago were the only two cities with dense Latino populations that saw an equal rate of entrepreneurship. Other major cities neglect to support Latino business owners due to their infrastructure issues with property values, minimum wage laws, tax rates, and local economic development.
Finding #6: Relationship Banking is Superior for Latino-Owned Businesses
Latino business owners find greater success in developing banking relationships at small banks to achieve their goals of obtaining credit, cash advances, and loans. This could be attributed to the fact that small banks have the ability to develop personal relationships with their customers; that advice is integral to a small business owner’s success.
Finding #7: Revenue Sources are Opportunities, Especially in B2B and Government Sales
Sixty-four percent of Latino-owned businesses sell their products to individuals, while 42% sell to other businesses. A mere 16% of Latino-owned firms sell to local governments, and 11% sell to the federal government.
Finding #8: Mentorship, Density of Business Networks, and Capacity Building Programs are Essential
Mentors make the world go ’round. Imparting their experience and knowledge on start-up Latino entrepreneurs helps them succeed. For example, Latinos in San Diego join trade associations at twice the national rate (of Latino business owners throughout America). Chambers of commerce are another great resource; Phoenix Latino business owners join their chamber at a rate of 28%, compared to the national rate of 10%.
Overall, Latino-owned businesses have great potential to unlock — with the help of supportive banking/financial systems and mentors. This is where companies like Imperial Advance are essential, by offering business owners: Small Business Loans, Business Line of Credit, Equipment Financing, Accounts Receivable Financing, Startup Business Funding and Franchise Financing.