Overall smaller but growing rapidly

As National Hispanic Heritage Month comes to an end this week, let’s take a look at the situation for Hispanic small business owners and entrepreneurs. Overall, based on various sources, Hispanic-owned businesses are growing rapidly, seeking financial fuel for that growth, but still smaller in size than non-Hispanic-owned businesses.

Less sales but…

Nearly one-fifth of Hispanic-owned businesses (18%) employ more than 10 people, according to the Census Bureau. Annual business survey (ABS). This is not much different from the share of non-Hispanic companies (21%). Yet, of all small businesses (those with 1 to 499 employees), non-Hispanic businesses are larger in terms of sales (85% more) and payroll (60%) per business, on average. These gaps are not as wide among the smallest of small businesses. Among small businesses with less than 20 employees, non-Hispanic-owned businesses are only 23% larger in terms of average sales per business and 28% larger in terms of average payroll per business.

Similarly, in its annual report Latino-Owned Business StudyBiz2Credit finds that Latino-owned businesses have lower average annual revenues (8% less than non-Latin businesses) and lower average revenues (19% less).

Some of these numbers largely reflect the stock of existing small businesses rather than the flow of new businesses. On that last point, Latinos have been building new businesses at a much faster rate than other racial and ethnic groups over the past decade. This has helped stimulate a strong appetite for external financing among Latino entrepreneurs.

… Faster rates of entrepreneurial entry…

According to Kauffman indicatorsbased on census data, Latinos have highest ‘new entrepreneur rate’ every year since 2002. In some years, their rate is more than double that of other ethnic groups. One particular comparison is remarkably striking. From 2010 to 2013, the rate of new entrepreneurs declined steadily for each ethnic group in the Kauffman/Census data. Since 2013, the rate has increased more or less continuously for each group until 2021. Yet the rates have diverged over this period. Consider these 2013 vs 2021 comparisons:

  • Latinos: rate of 0.38% in 2013 —> 0.54% rate in 2021
  • Asians: rate of 0.28% in 2013 —> 0.36% rate in 2021
  • Whites: 0.27% rate in 2013 —> 0.33% rate in 2021
  • Blacks: rate of 0.19% in 2013 —> 0.28% rate in 2021

(The New Entrepreneur Rate measures the fraction of people working full-time in a business who were not previously employed. A rate of 0.54% means that 540 Latinos out of 100,000 were newly engaged in running a business. .)

This high entry rate means that Hispanic-owned businesses are on the whole younger than others. Forty-eight percent of Hispanic-owned businesses in 2019 (the latest year for which data is available from the Census Bureau’s ABS) had been in operation for five years or less. The comparable number for non-Hispanic businesses was 37%.

This rapid growth is reflected in summary statistics from the Stanford Latino Entrepreneurship Initiative (SLEI), which reports that over the past decade, the number of Latino-owned businesses has increased by 35%, compared to 4.5% for white-owned businesses.

…which stimulates demand for financing

From 2016 to 2021, depending on the Small Business Credit Survey (SBCS), Hispanic business owners sought external financing at high rates compared to other racial and ethnic groups. In three of those five years, in fact, Hispanics had the highest rate of funding requests.. Biz2Credit also sees strong demand for financing among Latino-owned businesses: in 2021-22, the share of Latino-owned businesses seeking financing increased by 10%.

However, high demand does not necessarily translate into high levels of funding. In the Biz2Credit report, the average amount approved for non-Latino businesses was 43% higher than for Latino-owned businesses. In SBCS data, over the past five years, on average, 64% of Hispanic-owned businesses that sought financing were looking for less than $100,000. That compares to 52%, on average, among white-owned businesses.

When seeking external funding, where do Hispanic business owners apply? Over the past three years—excluding all applications for the Paycheck Protection Program (PPP)—Hispanics have the highest rate of job applications at major banks compared to other racial and ethnic groups. Interestingly, they have the lowest funding request rate among smaller banks.

How has the pandemic affected Hispanic small businesses?

By all accounts, Hispanic business owners demonstrated high levels of resilience as they emerged from the Covid-19 pandemic – and their performance reflects this.

According to Biz2Credit, Latino-owned businesses experienced faster revenue and profit growth in 2021-22 compared to non-Latino-owned businesses. Compared to 2020-21, Latino-owned businesses saw 4% growth in average annual revenue and 11% growth in average revenue, compared to declines of 5% and 11%, respectively, for non-Latin American companies.

As with all business owners, the pandemic has created some pessimism. The ABS Census finds that in 2021, Hispanic business owners were slightly more worried about their business than non-Hispanics. Sixty-eight percent of Hispanic business owners were either “somewhat” or “very concerned” about the financial health of their business, compared to 60% of non-Hispanic business owners. Yet SLEI’s latest report, released earlier this year, revealed very high levels of optimism among Latino entrepreneurs emerging from the pandemic.

Finally, the experience of the pandemic may have resulted in permanent changes among Hispanic business owners in their use of government loan support programs. In 2016 and 2018, according to the SBCS, only 25% and 27%, respectively, of Hispanic business owners applied for loans backed by the Small Business Administration. In 2020, this figure jumped to 52%; similar spikes were seen among other racial and ethnic groups. Not surprisingly, given the enormity of P3s, but these numbers exclude requests for government-backed emergency assistance. In fiscal year 2022, which ended Sept. 30, Hispanic-owned businesses received 10% of SBA-approved 7(a) loan guarantees. This share had not exceeded 8% in the previous five years.

Regardless of the lasting effects of the pandemic on the individual behavior of Hispanic-owned businesses, the long-term trends of rapid new business formation and strong demand for funding look set to persist. This will influence communities, industries, workers and the economy in general.

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