Latino entrepreneurs like Jonathan Garcia, CEO, Simmitri Solar are significantly less likely to have their business loans approved by national banks.| Nathan Bietz
Recent research by the Stanford Latino Entrepreneurship Initiative offers detailed insights into the difficulty Latino entrepreneurs often have finding funding for their businesses — and points to some ways these entrepreneurs may be able to improve their odds of success.
The 2020 State of Latino Entrepreneurship report found that Latino-owned businesses are significantly less likely than similar White-owned businesses to have loans approved by national banks. The report is based on a survey of “employer” businesses that have at least one paid employee other than the owner.
Overall, the survey found that 20% of Latino-owned businesses that applied to national banks for loans over $100,000 received funding, compared with 50% of White-owned businesses. The discrepancy was even larger when looking at firms with annual revenues over $1 million who were requesting similar-size loans: 29% of Latino-owned businesses got the loans vs. 76% of White-owned businesses. Even after controlling for business performance measures, the odds of loan approval from national banks were 60% lower for Latino-owned businesses.
The finding about loan approval was made possible by the inclusion for the first time of 3,500 White business owners in the survey, in addition to more than 3,500 U.S. Latino business owners. The survey covered June 2019 to June 2020 — capturing the first part of the COVID-19 pandemic but primarily looking at pre-pandemic activity. A smaller group of Latino-owned businesses was surveyed in March, June, and September 2020 to track the impact of the pandemic.
The survey found that Latino- and White-owned businesses had largely similar profiles in terms of credit risk and liquidity. About three-quarters of businesses in both groups had broken even or been profitable in the last 12 months, though White-owned businesses were, on average, slightly more profitable than Latino-owned businesses. Latino-owned businesses were younger than White-owned businesses: an average of 10 years old compared with 14 years.
The survey did not determine the reasons for the discrepancy in lending outcomes, but the findings — and the experience of some business owners — point to ways Latino entrepreneurs may be able to boost their chances of loan approval.
Build a Banking Relationship
Having a banker guide an entrepreneur through the loan application process can make the difference between approval and denial.
“The relationship you have with your banker makes a huge difference, because they’ll go to bat for you,” said Dora Herrera, president of Yuca’s Restaurants in Los Angeles and Pasadena, California, who believes her long-standing relationship with her national bank led to her getting a Paycheck Protection Program (PPP) loan during the pandemic. “We were asking questions, and the banker, instead of saying, ‘Go to the website,’ would say, ‘Sit down and let me call someone right now.’ It felt good to be talking human-to-human.”
The survey also found that Latino-owned businesses that participated in formal business organizations, such as trade associations or chambers of commerce, were more likely to be successful in getting funding. This type of networking may help business owners build relationships with capital providers as well as other business owners.
Relationships could also help with a related issue: Bankers may use the “Five C’s” — character, capacity, capital, conditions, and collateral — as a way to evaluate applicants for loans. Four of these are quantifiable, and it may be possible to make up for a deficit in one area with an excellent score in another. But character is more difficult to evaluate — especially if the banker doesn’t know the borrower well — and harder to mitigate if a lender judges it to be lacking.
“This is a very subjective measure,” said Marlene Orozco, the initiative’s lead research analyst. A lack of deep relationships between bankers and entrepreneurs could play a role, as could stereotypes about Latino immigrants.
Find the Right Bank
For Mercedes O. Enrique, president of CMS Corporation, switching banks allowed her business to use a line of credit and then, when the pandemic came, get a PPP loan. Her business gets much of its revenue from federal contracts, which can make it difficult for lenders to collect unpaid debt. Unlike her previous bank, which viewed the constraints of federal contracts as too much of a risk, her new regional bank took time to understand her business. “These people sat down and understood the business, and they saw the potential,” she said.
Enrique’s story underscores the importance of working with a bank that understands the industry where a business operates.
For example, service businesses can struggle with getting loans, said Eric Donnelly, CEO of Capital Plus Financial in the Dallas-Fort Worth area, because they often don’t have real estate or equipment. “It’s really hard to bank service businesses, because you’re not loaning on hard collateral.”
Finding a bank that understands the business can be particularly important for small businesses — and it may help to look locally.
“Community banks historically have been much more small business-friendly than national banks,” said Sean Salas, CEO of Camino Financial in Los Angeles.
Surviving the Pandemic
The pandemic has had a devastating effect on many Latino-owned businesses, especially those owned by women. Thirty percent of Latina-led companies closed during the pandemic, along with 16% of Latino-led businesses. It’s not yet clear how many of those closures will be permanent. Layoffs were also higher among Latina-led companies.
One hard-hit industry has been restaurants. When the pandemic hit, Herrera thought her quick-service restaurants were well positioned to survive the pandemic because they did not depend on in-person dining.
“We thought, ‘We dodged a bullet,’” Herrera said. “But the customers weren’t coming in, because their businesses had closed and they were at home.”
Delivery orders have helped them get by.
For other Latino-owned businesses, the pandemic has been a time to pivot. Nadine Cino is cofounder and CEO of New York-based TygaBox Systems Inc., whose main product is a reusable moving system that eliminates cardboard boxes and helps companies reduce the cost of moving. When corporate offices emptied, demand for their services fell.
So the business turned to an idea they had explored more than a decade ago: RFID technology.
“Our vision was ahead of its time, but now the time is ripe to implement the technology we’d envisioned back in 2007,” Cino said. The company is launching an intelligent network of sensors that can keep track of whether objects have been sanitized — an effort that required the company to switch its entire supply chain, including its hardware and software providers.
Other findings from this year’s report:
There are about 400,000 Latino-owned employer businesses in the U.S. Before the pandemic, they generated nearly $500 billion in annual revenue and employed 3.4 million people.
The number of Latino-owned employer businesses grew 14% from 2012 to 2017, over twice the U.S. average.
Latino-owned businesses’ revenues are growing at a faster rate than those of White-owned businesses.
The 2020 State of Latino Entrepreneurship report was produced by Marlene Orozco and research analyst Inara Sunan Tareque of the Stanford Latino Entrepreneurship Initiative. It was overseen by Stanford GSB faculty members Paul Oyer and Jerry I. Porras. Oyer is the Mary and Rankine Van Anda Entrepreneurial Professor and Professor of Economics, and Porras is the Lane Professor of Organizational Behavior and Change, Emeritus, as well as cofounder of the Latino Business Action Network.
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