Op-ed: The financial outlook for the Hispanic small business community in 2021
Latino business owners operate in sectors hit hard by Covid-19 and are less likely to receive PPP loans than White entrepreneurs, but Hispanic business formation and revenue was growing before the pandemic and can recover with the right public policy and financial support.
Often hailed for higher-than-average rates of entrepreneurialism and new business formation, the Latino community has been struck particularly hard by the Covid-19 crisis.
The Stanford Latino Entrepreneurship Initiative reported in May that 86% of Latino business owners had felt immediate negative impacts from Covid, a rate higher than other ethnic groups. Help was also harder to come by for Latino business owners, who had less cash on hand when requesting Covid assistance in the form of PPP loans, and were only half as likely as their White counterparts to receive the federal loans.
Still, the pandemic tells only half the tale of where Hispanic businesses stand today, because prior to the crisis, Latino entrepreneurs were making great strides — increasing their funding, improving their credit, and their revenue growth. That means that there is underlying strength in the Latino business community that can help in their emergence from the ravages of Covid-19.
The 2019-2020 period was, in some ways, a record-breaking year for Latino entrepreneurs, buoyed by the strength in the general economy. The average annual revenue of Hispanic-owned businesses increased 10% to over $525,000 yearly. Credit scores among Latino entrepreneurs rose from an average of 588 to 618. But this expansion was also tempered by the reality of growth costs. Average operating expenses represented 67% of revenue in 2020 vs. 45% in 2019. And despite the improving revenue numbers, average Latino business revenues were still $96,000 lower than White-owned businesses’, underscoring the challenges that lie ahead.
The impact of Covid and the path forward
Construction, accommodation and retail services, retail trade, and transportation and warehousing still represent the plurality of Latino-owned business. Unfortunately, these are also among the sectors hardest-hit by Cpvod. Industries such as finance and information, among the least affected by the Covid crisis, are led by or employ some of the lowest percentages of Latinos. This partly explains why Latino unemployment has exceeded the national average during the crisis.
Lower access to capital — whether in the form of PPP relief loans or private capital — has also slowed the recovery of Latino entrepreneurs. This is reflected in growth and recovery statistics. Only 6.7% of Hispanic business owners report they are profitable and growing vs. over 14% of the general business owner population. In part, this is because a sizeable percentage of PPP funding was distributed through major banks and financial institutions, which have a more limited presence and less-established relationships with Latino communities.
The path forward for Latino entrepreneurs rests on a variety of factors, some which touch on public policy, government intervention, and societal forces. Among the societal forces are higher Covid infection rates within the Latino community (impacting the natural consumer base for many Hispanic-owned businesses); less access to quality child care during the crisis; and less-established business histories.
For Latino businesses to grow and thrive after this crisis, some think tanks, such as the Brookings Institution, have called for PPP funds to be allowed to cover more business costs, rather than employee salaries. (Hispanic businesses tend to have fewer employees, but more need to cover operational costs.) Credit unions, smaller, local financial institutions, and non-traditional lenders in communities of color should also play a larger role in distributing these funds, experts argue.
Still, the shape of the economic recovery and its impact on Hispanic businesses post-Covid is dependent in large part on how businesses adapt to the new climate and demand. Those businesses that can more readily accommodate shifting demand patterns, such as virtual or delivery offerings, have sustained operations with more resilience. And those that can evolve with the times as we emerge from this crisis will be better equipped to profit when Covid is tamed and we return to some semblance of “normal.”
In some ways, the community-based, tight-knit relationships of many Hispanic businesses are among their greatest strength. As demand returns across sectors of the economy in 2021, those with relationships that withstood the crisis stand to profit. For the Latino business community, involvement with their US Hispanic Chamber of Commerce or their local chapters can pay off, as networking within the community can lead to valuable connections, more assistance with fundraising, and accessing federal or local business assistance programs.
The “new normal” will be both a great test and opportunity. For the Latino business community — one that has embraced entrepreneurialism fully, despite some disadvantages — their hallmark resilience may be the winning ticket.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.