Things That Matter

Latinos Are Running More Businesses Than Ever, But They’re Still More Likely to Be Denied Funding By Big Banks

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The United States Latino population is steadily growing and with that, the demographics are shifting. More and more Latinos are becoming the first ones in their family to go to college, enter the white collar workforce, and increasingly, open up their own businesses.

And while all this change feels like progress, it also comes with its own set of hurdles.

A new study showed that Latino-owned business are significantly less likely to be approved for loans, despite surpassing the national revenue growth average.

Latino-owned businesses are skyrocketing, but banks still don’t want to finance them. “Latino [business] revenue growth should be a key metric in helping them gain capital, but they continue to fall short,” said Stanford research analyst Marlene Orozco to NBC.

The study, conducted by the Stanford Latino Entrepreneurship Initiative, found that 50% of white business-owners who applied for a loan of $100,000 over the last five years were approved. In contrast, only 20% of Latino business-owners were approved.

Unfortunately, this phenomenon extended to federal COVID-19 relief, like the Paycheck Protection Program (PPP). PPP was meant to help small businesses who were negatively impacted by the pandemic.

The thing is, the federal government ultimately relied on traditional, large banks to approve or deny applicants.

Latinos and Black people were denied COVID-19 Paycheck Protection Program loans at significantly higher rates than their white peers.

Even when successful entrepreneurs like Los Angeles-based restaurateur David Favela applied for a PPP loan, he was denied on the basis of not being “bankable”. Favela is the owner of three successful restaurants and breweries in California as well as being a 2020 James Beard Award finalist.

He was denied a PPP loan because he hadn’t funded his businesses with “traditional” capital (i.e. a loan from a big bank). When he started his business in 2013, he relied on his own savings as well as funds from family members.

But this type of financing is common among people of color. POC often rely on family members and/or crowdsourcing to kickstart their businesses. Unfortunately, big banks look down on that sort of non-traditional funding.

Traditional banks are more likely to approve applicants they have preexisting relationships with.

And people of color are less likely to have established relationships with large banks because, well, they don’t trust them. And arguably, for good reason. So, the plight of small business-owners of color becomes a vicious and endless cycle.

“Latinos are making strides in starting businesses and growing,” said Orozco. “Despite these trends, securing financing remains a challenge.”

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