Co-Authored with Diego Quezada
After Rosa Macias and her husband, Venancio, moved to the United States from Mexico in 1990, they sold furniture at weekend swap meets. In later years, they partnered with a family member to open a furniture shop on the east side of town in Phoenix, Arizona. Rosa and Venancio soon opened their own store, Muebleria Del Sol. Today, the Del Sol Group, which includes four large furniture stores, brings in $6 million in revenue per year.
This story from Rosa and Venancio is not an exceptional case but emblematic of the recent dramatic rise in Latino entrepreneurship. From 1990 to 2012, Hispanics added new entrepreneurs almost 10 times faster than the overall population.[1] Latino entrepreneurs are starting businesses, employing people and helping them earn paychecks, pay their rents and generate money in the economy. According to the Small Business Administration, 2.3 million people work at Hispanic-owned businesses.
Even with this growth, Latino Americans still face structural barriers that limit their ability to grow the economy more.
Case in point, Latino-owned businesses still make far less than white-owned businesses. CFED's Assets and Opportunity Scorecard reports that on average, white-owned businesses are valued nearly three times as high as businesses owned by people of color. According to a Stanford Latino Entrepreneurship Initiative study, if Latino-owned businesses averaged the same sales as non-Latino-owned businesses, they would have an extra $1.38 trillion in the economy. Since the Latino population is growing as a share of the population – at 17% of the American population today, Latinos are expected to make up 30% of the population by 2060 – unlocking the potential of Latino entrepreneurship stands as an economic imperative. Whether people like America's growing diversity or not, it's happening, and making our economy more inclusive will help everyone.
One myth critics bring up to explain the relative lack of growth in Latino-owned business is that Latinos cater to their own demographic group. The research rejects this theory. According to the aforementioned Stanford study, only 20% of Latino-owned businesses have a "mostly Latino" consumer base. Overall, Latino-owned businesses do not rely on Latino customers.
Latino-owned businesses have not reached their potential because of structural barriers. Black and Latino entrepreneurs experience more denials when seeking financing for small businesses, even when other factors – their educational backgrounds, financial profiles, even their clothes – are identical. Only 6.1% of Latino-owned businesses finance their business with a commercial loan, and just 2.4% do so with a government loan. Latino entrepreneurs thus have few opportunities to start and grow their businesses through conventional capital sources.
And even if Latino entrepreneurs manage to secure loans, they pay higher interest rates. One study found that these higher rates were statistically significant. More broadly, the Federal Reserve revealed that business owners of color pay interest rates 32% higher on average than what their white counterparts pay.
One policy to promote Latino entrepreneurship is the State Small Business Credit Initiative (SSBCI), a 2010 program designed to provide lending to small businesses after large banks cut back on this lending in the wake of the Great Recession. Forty-two percent of SSBCI loans were made in low- or moderate-income communities from 2010 to 2014. SSBCI's funding expires in 2017, though; Congress should reauthorize SSBCI and expand it, implementing goals that set benchmarks for loans given to entrepreneurs of color. The Center for American Progress and Brookings Institute have both called for expanding SSBCI to expand credit opportunities for women and people of color.
Latino-owned businesses are already doing so much for the U.S. economy. They could do much more if we removed structural barriers like limited access to capital. If policymakers want to spur economic growth, buttressing growing, dynamic Latino-owned businesses should stand at the center of their agenda.
Diego Quezada is a Program Associate @CFED
[1] Although we would prefer to use the term "Latino" in this blog post, we have used the term "Hispanic" when citing sources for data integrity.