The numbers of Latino-owned U.S. businesses are expanding rapidly, keeping pace with changes in the nation’s demographic. But businesses owned by Latinos tend to see slower growth than those owned by people who are not Latino. Research released this week seeks by the Stanford Latino Entrepreneurship Initiative sought to find out why.
“All of this report’s research analysis indicates that LOBs (Latino-owned businesses) are dramatically smaller in size than NLOBs (non-Latino-owned businesses), although Latinos rank highest in entrepreneurial activity,” say the authors of State of Latino Entrepreneurship. “Latinos have been relatively unsuccessful in effectively scaling their companies.”
The experts conclude that most assumptions about the reasons why don’t hold up. There’s no remarkable difference between the industries that Latino and non-Latino entrepreneurs enter, nor is there much difference in the markets they serve. Instead, differences in access to capital and awareness of resources is mostly to blame, the authors say.
And that’s of national importance, they argue: “The U.S. economy faces a future in which almost one out of every three workers and one out of every three consumers will be Latino. Their ability to provide skilled labor and to have sufficient resources to consume will determine the future health of our national economy.”
The report authors point to data indicating that the number of Latino small businesses is growing at two to three times the rate of the national average, and they cite a 2015 Kauffman report that claimed Latinos had the highest rate of new entrepreneurs in 2014, “with an index of 0.46 compared to 0.29 for Whites and 0.22 for African Americans.”
The Stanford group also conducted ongoing surveys of more than 2,000 Latino business owners.
It found that Latino-owned businesses were less likely than non-Latino owned businesses “to look to conventional institutional capital sources, like banks, for funding and were more likely to use credit cards.” Many survey respondents said they had been turned down for funding–mostly by banks.
“Approximately 42 percent of our respondents have been denied capital by outside sources, such as banks and commercial lenders, while 54 percent have either never asked or never been denied outside capital,” the study says. “This provides an opportunity for banks and commercial lenders to better engage Latino business owners, especially those that have been in existence for multiple years, as it is crucial to growing the strength of our LOB’s.”
When it comes to government funding, Latino-owned businesses seem to be unaware of the opportunities. Noting that the U.S. Small Business Administration, the Small Business Investment Company, and Small Business Innovation Resource grants “three of the largest and most well-known government funding programs for small businesses,” the report authors say that “27 percent of survey respondents have never heard of the SBA, 71 percent have never heard of the SBIC, and 79 percent have never heard of SBIR.”
Latino entrepreneurs were also unlikely to connect with local small business resources. “Only 16 percent of respondents have engaged with general chambers of commerce, 14 percent with Hispanic chambers of commerce, 10 percent with trade associations, 7 percent with economic development organizations, and 2 percent with Latino business oriented nonprofits,” according to the research.
Some differences in funding-seeking approaches could be explained by entrepreneurs’ motivations, the study suggested. Latino entrepreneurs are much more likely than others to be motivated to start a business not by marketing opportunities, but by the drive to build something to pass down to children, parents or family members, working with family or friends, or having control of their financial future, they said.
But, the authors concluded, “Latino business owners’ tendency to make decisions based on the effect on their social network could be a hindrance to their growth and longevity.” Companies that endure and grow, they say, are led by people who are passionate about their business’s contribution to the world.