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August 2, 2017

Latino‑Owned Small Businesses: Critical to U.S. Economic Success

There’s no question that Latino-owned small businesses are critical to U.S. economic success. After all, Latino entrepreneurs have the highest growth rate of all ethnic groups in the United States, and Latino-owned businesses are responsible for hundreds of billions of dollars in sales annually. Despite these successes, many Latino-owned small businesses lack the financing necessary to grow.

Last month, I discussed these critical issues with staff from the Aspen Institute’s Latinos and Society Program after attending a forum that they hosted on Latino business growth. The Aspen Institute highlighted my thoughts, which we’re republishing below, and the perspectives of several other attendees in a blog series about the challenges and solutions to scaling Latino-owned businesses.

This topic is directly relevant to the work of the Outreach & Education team at the New York Fed, where one of the priorities is providing insight into small business financing conditions to help firms thrive in today’s economy. A key example of this small business work is the Small Business Credit Survey, which the New York Fed and regional Reserve Banks issue annually. The Survey examines the financing conditions and credit environment that small businesses face. And for the first time this fall, we’ll have a special report based on Survey findings that takes an in-depth look at minority-owned small businesses. Be sure to look for it in the coming months.

This post originally appeared on the Aspen Institute blog.

Driving the Success of Latino Entrepreneurs

July 17, 2017 • Latinos and Society Program

Claire Kramer Mills is Assistant Vice President and Community Affairs Officer at the Federal Reserve Bank of New York. She agreed to answer a few questions after attending The Aspen Institute Forum on Latino Business Growth, a three-day convening held by the Aspen Institute Latinos and Society Program.

Why is it important for non-Latinos to care about this and play a role in solution-making?

Simply put, U.S. economic success depends on Latino business success. In sheer numbers, Latino-owned businesses are already a large and growing economic force, generating $473 billion in sales and employing 2.3 million workers in 2012 alone. Yet, despite their size, an opportunity gap looms large; very few Latino-owned businesses are growing above $1 million in annual revenues. The barriers to business growth are complex but boil down to access to training, access to procurement opportunities, and access to capital. Tackling each challenge will take a diverse set of perspectives, including those of non-Latinos who understand the importance of supporting these businesses, to propose concrete innovations and build coalitions for change.

What’s at stake if we don’t develop solutions for scaling Latino-owned businesses? Why is this topic important for American prosperity?

The stakes are high. Any discussion about jobs in America should begin with the sources of new firms and drivers of their success. Young firms — those that are less than five years old — are the real drivers of job growth in America, and the composition of these new firms is changing. Immigrant entrepreneurs now comprise 30 percent of new entrepreneurs in the United States. Among ethnic and racial groups, the rate of Latino entrepreneurship is highest and growing; Latinos comprised 24 percent of entrepreneurs in 2016, up from 10 percent in 1996. To thrive, early stage firms need to be able to vie for contracts and to secure expansion capital. Without capital, early stage firms will either stagnate or die — which means lack of access to capital could cause a sizable and growing jobs gap as the proportion of Latino-owned businesses grows.

How will you move forward and implement what you learned from the forum in your own field of work?

The forum both affirmed ongoing work and highlighted new opportunities. The Federal Reserve Banks have been tracking small business capital needs for several years, namely through the annual Small Business Credit Survey. This work has shown widespread and persistent small dollar funding gaps meaning that most loan applications were for less than $250,000, and applicants often received less than or none of the funding requested. It’s also illustrated the need for products and services that help early stage entrepreneurs build personal credit histories and scores — because lack of or low credit scores are key contributors to credit denial. Our future work will focus on:

  1. Deeper segmentation by type of business (including a closer look at start-ups, minority and women owned firms, and more) to identify specific challenges facing growing firms that haven’t yet scaled to the $1 million revenue mark
  2. Identifying particular opportunities among high growth Latino and Black entrepreneurs
  3. Building broader coalitions to collect rich data and ensure that the data reach innovative policymakers, funders, and service providers

What did you learn from the forum that surprised you or challenged your previously held opinion?

Only 2 percent of Latino-owned businesses have scaled to $1 million or beyond in annual revenues. This figure really struck a chord with me — because the 2 percent isn’t driven by Latino-owned businesses over-representation in slow-growth industries or failure to expand beyond the Latino market. Instead, it’s due to under-realized sales to large corporations (with large procurement budgets) and limited access to capital. These two factors, of course, are connected. Without bridge financing, it’s difficult to take on new contracts, and absent diversified revenue streams, access to capital at the best terms and interest rates is severely limited.

From the capital perspective, large shares of Latino-owned businesses simply aren’t served well by the financial mainstream — either lenders deem them too risky or do not think they have sufficient track records. We need to focus attention on alternative channels of capital — including nonprofit community development financial institutions, credit unions, and online lenders — and their ability to safely and transparently serve Latino-owned businesses by providing capital and credit reporting mechanisms that enable Latino-owned businesses to establish and build strong credit reputations.

We’ve seen how important it is to promote understanding of how the success of the American Latino community, and the success of this nation, are deeply intertwined. One way is through Latino economic advancement. How do you maintain momentum in promoting this understanding?

An important way to continue promoting an understanding of the importance of Latino-owned businesses is by providing clear, tangible data about their contributions and the challenges they face. In the New York Fed’s Outreach & Education team, one of our goals has been to fill in knowledge gaps about small business financing conditions and helping policymakers identify potential solutions. The Federal Reserve Banks’ Small Business Credit Survey is one of our key tools for collecting information about business performance, financing needs and choices, and borrowing experiences of small businesses. In fact, for the first time this year, we are issuing a report that examines minority-owned firms in depth, including a focus on Latino-owned businesses, which will come out this fall.

This is the fourth in a series of posts on the Aspen Institute Forum on Latino Owned Business Growth. Participants from local and national economic and enterprise development and support organizations, Latino business owners, financial institutions, philanthropy, government and academia will share their perspectives on the challenges and solutions to scaling Latino owned businesses.

This article was originally published by the New York Fed on Medium.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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