Smaller Overall But Growing Fast

As National Hispanic Heritage Month wraps up this coming week, let’s take a look at how Hispanic small business owners and entrepreneurs are doing. Overall, based on various sources, Hispanic-owned businesses are growing fast, seeking financial fuel for that growth, yet still smaller in size than non-Hispanic-owned businesses.

Smaller Sales But …

Nearly one-fifth of Hispanic-owned firms (18%) employ more than 10 people, according to the Census Bureau’s Annual Business Survey (ABS). That’s not much different from the share among non-Hispanic-owned businesses (21%). Yet among all small businesses (those with 1 to 499 employees), non-Hispanic-owned businesses are larger in sales (85% larger) and payroll (60%) per firm, on average. Those gaps are not as wide among the smallest of small businesses. Among small businesses with fewer than 20 employees, non-Hispanic-owned firms are just 23% larger in average sales per firm and 28% larger in average payroll per firm.

Similarly, in its annual Latino-Owned Business Study, Biz2Credit finds that Latino-owned businesses have lower average annual revenues (8% lower than non-Latino businesses) and lower average earnings (19% lower).

Some of those numbers largely reflect the stock of existing small businesses rather than the flow of new businesses. On the latter score, Latinos have been creating new businesses at a much faster pace than other racial and ethnic groups over the last decade. This has helped drive a strong appetite for external financing among Latino entrepreneurs.

… Faster Rates of Entrepreneurial Entry …

According to the Kauffman Indicators, based on Census data, Latinos have had the highest “rate of new entrepreneurs” 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 fell steadily for every ethnic group in the Kauffman/Census data. Since 2013, the rate has risen more or less continuously for every group through 2021. Yet the rates have diverged over that time. Consider these 2013 v. 2021 comparisons:

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

^{(The rate of new entrepreneurs measures the fraction of people working full-time on a business who weren’t before. A rate of 0.54% means 540 Latinos out of 100,000 were newly engaged in running a business.)}

This high rate of entry 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 are available from the Census Bureau’s ABS) had been in business for five years or less. The comparable number for non-Hispanic businesses was 37%.

That rapid growth is reflected in summary statistics from the Stanford Latino Entrepreneurship Initiative (SLEI), which reports that, over the last decade, the number of Latino-owned businesses grew by 35%, compared to 4.5% for White-owned businesses.

… Which Drives Demand for Financing

From 2016 to 2021, according to the Small Business Credit Survey (SBCS), Hispanic business owners applied for 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 applying for financing. Biz2Credit likewise finds strong demand for financing among Latino-owned firms: in 2021-22, the share of Latino-owned businesses applying for financing rose by 10%.

High demand does not necessarily translate to high levels of financing, however. In the Biz2Credit report, the average approved amount for non-Latino firms was 43% larger than for Latino-owned businesses. In the SBCS data, over the last five years, on average, 64% of Hispanic-owned businesses that sought financing were seeking less than $100,000. That compares to 52%, on average, among White-owned firms.

When they do seek external financing, where do Hispanic business owners apply? Over the last three years—excluding any applications for the Paycheck Protection Program (PPP)—Hispanics have the highest rate of applying at large banks compared to other racial and ethnic groups. Interestingly, they have the lowest rate of applying for financing at small banks.

How Has the Pandemic Affected Hispanic Small Businesses?

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

According to Biz2Credit, Latino-owned firms enjoyed faster growth in revenues and earnings in 2021-22 compared to non-Latino-owned businesses. Relative to 2020-21, Latino-owned businesses had 4% growth in average annual revenues and 11% growth in average earnings, compared to declines of 5% and 11%, respectively, for non-Latino-owned firms.

As for all business owners, the pandemic created some level of pessimism. The Census ABS finds that, in 2021, Hispanic business owners were slightly more worried about their business that non-Hispanics. Sixty-eight percent of Hispanic business owners were either “somewhat” or “very concerned” about the financial health of their firm, versus 60% of non-Hispanic business owners. Yet the most recent report from SLEI, released earlier this year, found very high levels of optimism among Latino entrepreneurs coming out of the pandemic.

Lastly, the pandemic experience may have led to permanent changes among Hispanic business owners in their use of government lending support programs. In 2016 and 2018, according to the SBCS, just 25% and 27%, respectively, of Hispanic business owners applied for Small Business Administration guaranteed loans. In 2020, that leapt to 52%; similar spikes were observed among other racial and ethnic groups. That’s not surprising, given the enormity of PPP—yet these figures exclude applications for government-backed emergency assistance. In fiscal year 2022, which ended September 30th, Hispanic-owned businesses received 10% of approved 7(a) loan guarantees from SBA. That share had not been over 8% in the prior five years.

No matter the lasting effects of the pandemic on the individual behavior of Hispanic-owned businesses, the long-term trends of rapid new business creation and strong demand for financing seem likely to persist. That will influence communities, industries, workers, and the broader economy.