Untapped Latino Entrepreneurship Would Grow the Economy. Here’s What Can Help.
As Prosperity Now has written about before, Latino entrepreneurs face structural barriers that hamper their ability to grow businesses. Only 3% of Latino-owned businesses have generated $1 million in revenue, a threshold that indicates a firm has scaled. In fact, the U.S. economy forgoes 9.5 million jobs by not investing in the entrepreneurship and growth of all underrepresented groups.
And a new report from the Aspen Institute—based on a convening of 27 thought-leaders, experts and practitioners in June 2017—presents some innovative solutions to address this opportunity gap in our economy.
As the study points out, Latino-owned businesses are 22% less likely to pre-qualify for loans than other businesses, partly due to credit issues. Community Development Financial Institutions (CDFIs) have stepped in to provide financing for entrepreneurs lacking access to mainstream financial institutions, but could do more. The use of alternative data—the reporting of rent, utility and telecommunications payments that are typically not factored into major credit scoring models—can help open up CDFIs to serve more business owners. Black and Hispanic households are nearly twice as likely to be credit invisible or unscoreable than White families, so alternative data reporting can create a more inclusive marketplace.
CDFIs can also buttress the growth of Latino-owned business if they offer larger and longer-term loans. CDFIs have traditionally provided loans of $50,000 or less. These loans may serve some businesses well, but they are too small to lift more Latino-owned business to the $1 million revenue threshold. The SBA Community Advantage program recently supported CDFIs to offer loans up to $250,000. More partnerships like this one should emerge to assist more Latino-owned businesses reach scale.
Of course, these policy changes can help Latino entrepreneurs improve their credit, but won’t change the discrimination that also affects their access to capital for growth. Negative stereotypes of Latinos persist in mainstream society, and media companies perpetuate these harmful narratives.
Allied organizations can support the work of the National Hispanic Media Coalition, for instance, to expand the pipeline of Latino media content creators. Financial networks such as CNBC and Bloomberg should feature more Latino companies and business leaders to counteract the dominant narrative asserting that Latino-owned businesses consist mostly of food trucks and landscaping. These efforts to fight public perceptions and reduce discrimination will take time, but they will eventually allow Latino entrepreneurs to gain social capital and strengthen their businesses. And since the Latino population is growing as a share of the U.S. population, unleashing the potential of Latino-owned businesses will benefit the entire country.
A confluence of factors – from the negative narratives surrounding Latino-owned businesses to the outdated credit standards that lock millions of people out of building wealth – have prevented Latinos from growing more of their businesses at scale. Opening the CDFI sector to allow alternative data and offer larger loans will help in the short term; and empowering Latinos to build their power and influence in the media ecosystem will help in the long term. Latino-owned business growth potential is a huge opportunity for Latino economic advancement and the country’s future. We shouldn’t miss it.