Latino entrepreneurs face – and can overcome – obstacles to financing
Latin American entrepreneurs like Jonathan Garcia, CEO of Simmitri Solar are significantly less likely to have their business loans approved by national banks. Nathan Bietz
A recent study from the Stanford Latino Entrepreneurship Initiative offers a detailed look at the difficulty Latin American entrepreneurs often face in securing financing for their businesses – and indicates how these entrepreneurs might improve their chances of success.
The 2020 State of Latino Entrepreneurship report found that Latino-owned businesses are much less likely than similar white-owned businesses to get loans approved by domestic banks. The report is based on a survey of “employer” companies that have at least one paid employee other than the owner.
Overall, the survey found that 20% of Latin American-owned businesses that requested loans of more than $ 100,000 from national banks received funding, compared to 50% of white-owned businesses. The gap was even larger for businesses with annual revenues over $ 1 million that requested loans of a similar size: 29% of Latino-owned businesses obtained loans versus 76% of Latino-owned businesses. white people. Even after controlling for business performance measures, the chances of national bank loan approval were 60% lower for Latin American-owned businesses.
The conclusion on 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 Latin American business owners. The investigation covered from June 2019 to June 2020 – capturing the early part of the COVID-19 pandemic but focusing primarily on pre-pandemic activity. A small group of Latin American-owned businesses were surveyed in March, June and September 2020 to track the impact of the pandemic.
The survey found that Latin American and white companies had broadly similar profiles in terms of credit risk and liquidity. About three-quarters of businesses in both groups had reached breakeven or been profitable in the past 12 months, although white-owned businesses were, on average, slightly more profitable than Latin American-owned businesses. Latin American firms were younger than white-owned firms: on average 10 years versus 14 years.
The survey did not determine the reasons for the gap in loan results, but the results – and the experience of some business owners – indicate how Latin American entrepreneurs may be able to increase their earnings. chances of loan approval.
Build a banking relationship
A banker guiding an entrepreneur through the loan application process can mean the difference between approval and denial.
“The relationship you have with your banker makes a huge difference because they will fight for you,” said Dora Herrera, president of Yuca restaurants in Los Angeles and Pasadena, Calif., Who believes her long-standing relationship with her national. . the bank led her to obtain a PPP (Paycheck Protection Program) loan during the pandemic. “We were asking questions, and the banker, instead of saying, ‘Go to the website’, was like, ‘Sit down and let me call someone right now.’ It was nice to talk man to man. “
The survey also found that Latin American companies that participated in formal business organizations, such as trade associations or chambers of commerce, were more likely to be successful in obtaining financing. This type of networking can help business owners build relationships with providers of capital as well as with other business owners.
The relationship you have with your banker makes a huge difference as they will fight for you.
Relationships could also help solve a related problem: Bankers can use the “five C’s” – character, capacity, capital, terms, and collateral – as a way to assess loan applicants. Four of them are quantifiable and it may be possible to compensate for a deficit in one area with an excellent score in another. But the character is more difficult to assess – especially if the banker does not know the borrower well – and more difficult to mitigate if a lender judges that he is in default.
“This is a very subjective measure,” said Marlene Orozco, lead research analyst for the initiative. A lack of deep relationships between bankers and entrepreneurs might play a role, as may stereotypes about Latino immigrants.
Find the right shore
For Mercedes O. Enrique, president of CMS Corporation, changing banks allowed her company to use a line of credit and then, when the pandemic struck, to obtain a PPP loan. His business derives a large portion of its revenue from federal contracts, which can make it difficult for lenders to collect unpaid debts. Unlike his old bank, which saw the constraints of federal contracts as too much of a risk, his new regional bank was slow to understand its business. “These people sat down and understood the business, and they saw the potential,” she said.
Enrique’s story highlights the importance of working with a bank that understands the industry in which a business operates.
For example, service companies can struggle to get 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 is very difficult to bank service companies because you do not lend on material guarantees.”
Finding a bank that understands the business can be especially important for small businesses – and it can be worth looking locally.
“Community banks have always been much more pro-small business than national banks,” said Sean Salas, CEO of Camino Financial in Los Angeles.
Survive the pandemic
The pandemic has had a devastating effect on many Latin American businesses, especially those owned by women. Thirty percent of Latino-run businesses shut down during the pandemic, along with 16% of Latino-run businesses. It is not yet known how many of these closures will be permanent. Layoffs were also higher among companies run by Latinas.
Restaurants are a hard hit industry. When the pandemic hit, Herrera believed his quick-service restaurants were in a good position to survive the pandemic because they weren’t dependent on in-person meals.
“We thought, ‘We dodged a bullet,” Herrera said. “But the customers weren’t coming because their businesses had closed and they were home.”
Delivery slips helped them get by.
For other Latin American-owned businesses, the pandemic has been the turning point. Nadine Cino is the co-founder and CEO of New York-based TygaBox Systems Inc., whose main product is a reusable moving system that eliminates boxes and helps businesses lower moving costs. When corporate offices emptied, demand for their services declined.
The company therefore turned to an idea it had explored more than ten years ago: RFID technology.
“Our vision was ahead of its time, but now is the time to implement the technology we envisioned in 2007,” Cino said. The company is launching a smart network of sensors that can track whether objects have been disinfected – an effort that has required the company to change its entire supply chain, including its hardware and software vendors.
Other findings from this year’s report:
There are approximately 400,000 Latin American-owned employer businesses in the United States. Before the pandemic, they generated nearly $ 500 billion in annual revenue and employed 3.4 million people.
The number of Latin American-owned employer businesses increased by 14% between 2012 and 2017, more than double the US average.
The incomes of Latino-owned businesses are growing at a faster rate than that of white-owned businesses.
The State of Latin American Entrepreneurship Report 2020 was produced by Marlene Orozco and research analyst Inara Sunan Tareque of the Stanford Latino Entrepreneurship Initiative. It was supervised 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 co-founder of Latino Commercial Action Network.