The State of Latino Entrepreneurship in 2017: What You Need to Know
For people interested in helping low- and moderate-income entrepreneurs build wealth, the annual State of Latino Entrepreneurship report from the Stanford Latino Entrepreneurship Initiative (SLEI) is a must-read. The 2015 edition revealed that the U.S. economy would have an additional $1.38 trillion if Latino-owned business averaged the same sales as non-Latino-owned businesses.
This February, SLEI released the 2017 State of Latino Entrepreneurship report and found that this "opportunity gap" grew to $1.47 trillion due to population and entrepreneurial growth in the Latino community. Many factors influence this disparity, but the study highlighted that national banks are underserving Latino-owned businesses relative to other external funding sources and demographic groups. That's part of the reason why only three percent of Latino-owned businesses have crossed the $1 million-revenue threshold, which indicates a firm has scaled.
This limited access to capital has detrimental effects for Latina entrepreneurs, who are leading the way in growth. Latina-owned firms grew by 87% from 2007 to 2012, and they now represent nearly half of all Latino firms. But Latinas only own 30% of scaled firms.
The study found that this disparity is partly due to women feeling unqualified to access funding from financial institutions. That fear of denial is well-founded. White women and people of color are more likely to be denied a loan or pay higher interest rates compared to equally qualified white, male business owners applying for loans. Latina entrepreneurs aren't failing to reach their potential due to a lack of drive, but because of structural barriers that perpetuate feelings of inadequacy–or, as some call it, "imposter syndrome".
Facing these shortages from national banks, SLEI found that 73% of Latino entrepreneurs use "internal funds"–personal savings or loans from family and friends–to start their businesses. This rate is comparable to the rates for Black- and Asian-owned firms, but much higher than the rate for White entrepreneurs. In fact, Latinos are more likely than any other racial or ethnic group to use personal credit cards to start their businesses. This means Latinos bear more personal financial risk when they start their businesses.
Unfortunately, Black and Latino entrepreneurs do not see more benefits from the heightened risks they take on when they plunge into entrepreneurship. Black- and Latino-owned firms have higher failure rates and lower sales and receipts relative to White- and Asian-owned firms. These extra barriers help inform why Hispanic households are 6.7% less likely to own businesses than White households, even at the same levels of income, wealth and education. Many people of color hear that they must work twice as hard to get half as far. In entrepreneurship, that may be the painful reality.
As Prosperity Now has discussed before, we know what helps create an inclusive entrepreneurship space. Community Development Financial Institutions can offer larger and longer-term loans to help Latino-owned businesses reach scale. Congress should reauthorize and expand the State Small Business Credit Initiative, a program that provided small business lending after the Great Recession. Congress should also expand the New Markets Tax Credit, which supports job creation in low-income communities.
These structural barriers are bad not just for Latinos and other people of color, but for everyone. Entrepreneurship generates ripples in local economic activity and revitalizes neighborhoods. When entrepreneurs reach their potential, everyone benefits. The "State of Latino Entrepreneurship" confirms that stubborn disparities persist, and they demand our attention.