New Study Concludes: Latino Entrepreneurs Face Hurdles in Accessing Capital to Grow their Businesses

If you’re one of the more than 815,000 Latino-owned small businesses in California, there’s a 40 percent chance you’ve been denied capital by a bank or other commercial lender because of lower credit scores and other perceived risks, according to a new study released Sept. 7 by the Small Business Finance Fund (SBFF), a community development financial institution (CDFI) established to stimulate economic growth among small businesses, particularly those owned by women, minorities and veterans.

“Latino small business owners have untapped potential as economic engines and job creators throughout California, but remain hampered by restricted access to capital driven by perceived risk factors in the lending community that has stunted Latino business growth,” said Robert Villarreal, president of SBFF, an affiliate of CDC Small Business Finance, one of the nation’s largest nonprofit lenders.

Findings of the SBFF-commissioned study, Fueling California’s Economic Growth: A Study on Latino Business and Access to Capital in California, were revealed by Latino business leaders and other groups that have been fighting for decades to secure funding for Latino entrepreneurs throughout the state.

The study, authored by the National Association for Latino Community Asset Builders (NALCAB) with the support of JPMorgan Chase, provided an overview of Latino business in California, the lending environment they face, perspectives on best practices for lending to Latinos, and recommendations to improve the lending environment for Latino entrepreneurs.

Coming out of the great recession of 2008 to 2010, Latinos were the fastest growing segment of small business owners, according to the U.S. Census Bureau’s 2015 Survey of Business Owners.

“Latino entrepreneurs have passion and good ideas for small businesses, but all they lack is access to capital to help them grow,” said Villarreal who added that traditional bank financing is limited for Latino-owned small businesses and relies heavily on loan approvals through Small Business Administration guarantees in their 504 and 7(a) programs.

For the study, NALCAB drew on quantitative data from federal, state and local government agencies as well as university and public think tanks. NALCAB also interviewed lending experts from national and regional banks, government entities and non-profit financial lenders.

Key obstacles and observations noted in the study:
– The majority of Latinos rely on personal savings as their main source of capital, followed by credit cards and personal loans from friends (aka “bootstrapping”).
– Most banks are reluctant to offer loans less than $250,000, the level of capital critical to many Latino entrepreneurs to jump-start and/or grow their small businesses.
– Lower credit scores among Latino business owners continue to be a hurdle. Banks typically seek FICO scores of at least 720.
– Targeted Latino outreach is limited among traditional lenders. Most community banks with assets below $10 billion are not targeting Latino small businesses in any manner. CDFIs are doing a fair job providing SBA Community Advantage (7a) loans up to $250K and less.

Bankers interviewed for the study said that common obstacles to providing financing to Latino entrepreneurs include incomplete business records and inadequate documentation – undesired consequences of the cash-based nature of their businesses.

“It’s been a catch-22 for Latinos,” said Villarreal. “With lower credit scores, it’s very difficult to qualify for the larger loans they need to grow their businesses. In many cases, they turn to quick, online lenders with egregious payback terms. It’s not a sustainable scenario.”

Key recommendations to enhance access to capital for Latino small business owners:

1. Strengthen mission-driven lenders that provide culturally-relevant products and services to Latinos
Banks can help strengthen CDFIs and other lenders by designating funds for Latino communities in order to meet bank Community Reinvestment Act (CRA) obligations. A standardized referral system should be developed that enables traditional financial institutions to guide Latino entrepreneurs to CDFIs and other mission-based lenders rather than simply rejecting an application for credit. CDFIs are reliable conduits to SBA loans, a critical source of capital for small businesses.

2. Provide Technical Support to Potential Borrowers
Rather than using rigid credit guidelines, flexible eligibility criteria should address the unique credit, collateral and cash flow situation of Latino entrepreneurs. Banks and other lending institutions should also work with community partners to provide Latino entrepreneurs guidance while applying for loans and other business assistance after the loan has funded. Credit coaching and business mentoring is important for both start-up and existing Latino small businesses.

3. Coordinate Engagement of Latino-serving Institutions
Bringing disparate organizations together in coordinated efforts to address deficiencies in the development of Latino businesses is vital. Engagement with municipal economic development departments, chambers of commerce, lenders and political leaders across community and ethnic boundaries will embed Latino entrepreneurs in the broader social and business establishment.