Access to capital holding back Latino businesses

Access to capital holding back Latino businesses
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Latinos are three times as likely as the general population to start their own businesses, but cultural and economic factors have hampered the growth of Latino-owned businesses at a cost of trillions of dollars.

A report by the Stanford Latino Entrepreneurship Initiative (SLEI) found the lost growth amounted to a $1.38 trillion “opportunity gap” in 2012 alone.

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Minority business advocates are scrambling to identify the causes and fill the void.

Latinos tend to open businesses with “personal motivations” rather than as a result of identifying market opportunities. Because of this, Latinos are less likely to pursue capitalization opportunities that put full ownership at risk, limiting their prospects for growth.

Hispanic business leaders say the lack of access to capital was accentuated by President Obama's regulatory measures in the wake of the 2008 financial crisis.

“Hispanic businesses have it twice as bad. Under the Obama administration, the Consumer Financial Protection Bureau was so draconian that they over-regulated the financial services industry,” said Javier Palomarez, president of the U.S. Hispanic Chamber of Commerce (USHCC).

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Despite their limitations, Latino-owned businesses are still the fastest-growing segment of small businesses in the country, generating around $400 billion in annual revenue, according to the Congressional Hispanic Conference.

And Latina-owned businesses have led the charge.

The number of businesses owned by Hispanic women grew 206 percent between 1997 and 2014, compared to 68 percent growth of women-owned businesses in general, according to a report by American Express.

Those businesses have been a major driver of economic growth, but they still lag behind other minority-owned businesses in employment and revenue.

According to the report, Latina-owned businesses employed, on average, 0.4 workers aside from the owners. Women-owned firms in general had 0.8 workers on average and Asian-owned businesses employed one worker on average.

Latina businesses had average revenues of $64,479, compared to $155,477 for women-owned businesses as a whole.

Aside from the structural and regulatory challenges limiting access to investment capital, Palomarez said minority business owners often don't have the networks and know-how that other entrepreneurs take for granted.

“The USHCC is invaluable compared to a chamber that’s helping a guy who’s already got networks, connections and knows lending institutions,” said Palomarez.

The lack of connections, said Palomarez, can create a gap in the contracts available to Latino-owned businesses.

“I need to have a work order so that I can continue to grow my company,” he said.

Some Hispanic advocates are pointing to the legal hurdles they say have prevented Latinos from living up to their full economic potential. Limitations on visas for high-skilled workers, for instance, have restricted the number of innovators — the very types of people who launch new businesses — from entering the country.

Rep. Luis Gutiérrez (D-Ill.), for one, said that’s a mistake.

“Everybody talks about jobs and putting Americans to work,” he said. “Well, guess what? When are we going to invest in making sure that we create the talent pool here in the United States?”

Traditionally, slow Hispanic business growth has been attributed to a propensity to cater to crowded market segments and isolated customer bases.

But the SLEI's analysis countered that notion.

“The results counter the perception that LOBs are small because Latino entrepreneurs choose to open businesses in small industries or because of a lack of diverse customer base,” read the report.

The SLEI will release an updated version of its report in January, and the trends have not “changed substantially,” said Tiq Chapa, one of the authors, in an email.

Continued business growth has contributed to Latino confidence in the economy.

According to a report released in June by the Pew Research Center, 81 percent of Latinos expected their family's economic situation to improve over the next year, compared to 61 percent of the general population who said the same.

Latinos are the youngest demographic in the country — the median age for Hispanics is 28 compared to 38 for the population as a whole.

With more Latinos than ever joining the workforce, Latino entrepreneurship is expected to continue to rise. Latinos are also going to college in greater numbers, lessening the skills gap that helps drive the structural barriers to business growth.

In 2012, Hispanic college enrollment immediately after high school for the first time surpassed general enrollment, with 70 percent of Hispanics enrolling, compared to the national average of 66 percent, according to a study by the Congressional Hispanic Caucus Institute and the Society for Human Resources Management.