Latino-owned businesses, according to the Stanford Latino Entrepreneurship Initiative, have been … [+]
“They’re very resilient. They wish for growth: they’re very ambitious, even in difficult times.”
That’s Barbara Gomez-Aguinaga, associate director of the Stanford Latino Entrepreneurship Initiative (SLEI) and lead author of SLEI’s latest State of Latino Entrepreneurship report. She’s discussing the report, which highlights the rapid revenue and payroll of Latino-owned businesses and their strong rebound from the COVID-19 pandemic. They could grow “even more,” she says, if they faced a “level playing field.” In particular, credit and contracting provide opportunities to do that.
Pre-Pandemic: Rapid Growth
According to SLEI, Latino business owners have for many years been outpacing their peers in terms of revenue and payroll growth. And there’s simply been more of them. Between 2007 and 2019, based on U.S. Census Bureau data, the number of Latino-owned employer businesses grew by 34%. The number of White-owned businesses, meanwhile, fell by 7% during that time period.
Annual growth rates in revenue and payroll were higher every year for Latino-owned businesses than for White-owned businesses through 2019.
Pandemic: Closures, Slower Growth, Widening Disparities
In the early months of the pandemic in 2020, millions of Americans closed their small businesses. According to Rob Fairlie, from February through April 2020, the number of “active business owners” in the United States fell by 22%. There was some recovery in subsequent months, but the burden of closure was not shared equally across racial and ethnic groups.
Among Blacks and Latinos, the decline in active business owners was, respectively, 41% and 32% during those months. The SLEI report finds, based on its survey, that median revenue growth rates from 2019 to 2022 were 25% for Latino-owned businesses and 9% for White-owned businesses. That’s a significant difference in the aggregate, but it may mask some important nuance in the individual years.
In its last report prior to this one, SLEI found that Latino-owned businesses were more likely to report specific negative impacts from the pandemic such as business closure. Latino business owners were, in that report, slightly more likely to report continuing negative effects in 2021 than their White counterparts.
It’s also possible that the higher growth over the 2019-22 period represents a lower base. Fairlie finds, according to Census data, that Latinos have lower average business earnings than Blacks, Whites, and Asians. Earnings for Latino business owners, not surprisingly, shrank between 2019 and 2020, albeit with a smaller decline than Black and Asian business owners. The SLEI has also consistently found that Latino-owned businesses are less likely to be profitable and more likely to report smaller profit margins. Fairlie points to differences among business owners in terms of education and industry as possible explanations for differential business earnings. Over one-quarter of Latino business owners (28%) are high school dropouts, far higher than among other groups. And, there’s a higher concentration of Latino-owned businesses in the construction sector.
Strong Credit Box, Weak Credit Approval
Based on its survey, the SLEI report found a drop in demand for financing between 2021 and 2022. Across all types of financing (credit cards, bank loans, and so on) Latino- and White-owned businesses both “pursued substantially less financing in 2022 compared to 2021.” The biggest drop for both White- and Latino-owned businesses was in the use of personal/family savings for financing.
The most incredible finding regarding credit in the SLEI report is in the difference in bank loan approval rates. SLEI’s analysis showed that,
“at the time of application for national bank loans, [Latino-owned businesses] (1) have gross revenue that is 3 times larger than [White-owned businesses], (2) have similar business and personal credit scores … and, (3) have lower outstanding debt on average than [White-owned businesses]. Nonetheless, [Latino-owned businesses] have lower approval rates than [White-owned businesses] when requesting loans above $50,000.”
(emphasis added)
That is striking. This is what Gomez-Aguinaga referred as a “systemic disparity that poses barriers to the continued success” of Latino-owned businesses. It is corroborated by the annual Small Business Credit Survey (SBCS), published annually by the 12 banks of the Federal Reserve System. In that survey, while 43% of “low credit risk” White business owners received all the financing they sought, just 24% of “low credit risk” Hispanic business owners did.
The approval rate differentials are all over the place. 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 approval rate difference is 38 points: 78% versus 40%, respectively, for Whites and Latinos.
Oddly, it’s the opposite for loans less than $50,000—Latinos report approval rates of 64%, compared to 49% for Whites. In the SBCS, a slight higher share of “median/high credit risk” Hispanic business owners, 53%, received all or most/some of the financing they sought, versus 52% for Whites.
Pre-pandemic results in the SBCS found that Hispanics don’t differ all that much from Whites in the amount of credit sought. In a 2019 report, the SBCS found that, among those applying for credit, 63% of Hispanic business owners sought less than $100,000, compared to 59% of White business owners. Similar shares of each sought larger loans. Yet the pandemic induced some divergence.
In a 2022 SBCS report, while a similar share of Hispanic business owners sought more than $100,000 in financing as in 2019 (64%), a higher share of White business owners did: 52%. The SBCS findings also indicated that, compared to Asian and Black business owners, a higher share of Hispanics had “financing needs met”—but about half the share of Whites.
Can Contracting Help Spur Further Growth?
The most interesting part of the latest SLEI report is on government and corporate contracting. As this was the first year the SLEI looked at procurement, said Gomez-Aguinaga, it was “difficult to assess changes.” Still, there are some arresting results: while a higher share of Latino-owned businesses in the SLEI survey report having a government or corporate contract, they “obtain dramatically smaller contracts that take longer periods to secure.”
Astoundingly, for Latino-owned businesses that receive federal government contracts, their dollar value is 31 times smaller than for White-owned businesses. The discrepancy for corporate contracts is much smaller, 3.3 times larger 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 business age? Sector? Geography? Are construction contracts (where, as observed by Fairlie, Latino business owners are overrepresented) from the federal government smaller than in other sectors? Could that account for part of the discrepancy? What other differences, here unobserved, are at work?
Nevertheless, procurement is a key opportunity for small businesses and entrepreneurs of all types, as our work at the Bipartisan Policy Center has explored. Hundreds of billions of dollars are spent each year by government and corporations procuring goods and services from others. It’s a “huge opportunity for businesses owners,” said Gomez-Aguinaga. And, it’s an area where “policymakers can have an impact—they do have control over that right 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.
