Ranks of Latino owners a growing force in USA
Yet discrimination, other obstacles remain, resulting in lower incomes
SALINAS, Calif. – On the weekends, food truck owner Orlando Osornio, 30, and his wife, Denise, sell mile-high tortas, filled with California fusion-inspired ingredients: hot Cheetos, bacon, mango-habañero sauce, or pineapple. Some come for the birria torta, or the chicken-bacon-alfredo torta.
A line of customers winds its way around the side of his tent as meat sizzles on the grills. On the other side of the mesh, Osornio and his crew pack and stack toasted buns as fast as they can.
Two years ago, when Osornio, who is Mexican American, was contemplating launching Tortas al 100, he knew one thing: He didn’t want to apply for a loan. Osornio had racked up about $30,000 in credit card debt as a teenager and said that when life smacked him in the face in his early 20s, he got serious about paying it down and fixing his credit score.
That experience, he said, was what prompted him to forgo applying for a small-business loan. Instead, Osornio estimated he and his wife spent at least $50,000 of their salaries on the bur
geoning business, including food, four grills and a tent, during its first year of operation.
Latino small-business owners such as Osornio are the fastest-growing group of entrepreneurs in the U.S. even as they battle systemic racism that has resulted in lower incomes and loan rates. Over the past 10 years, the number of Latino business owners grew 34%, compared with 1% for all business owners in the United States, according to a recent study from Stanford University. And more Latinos than ever are applying for small-business loans to launch or grow their operations.
The growing success of Latino small business owners comes as Latinos are increasingly becoming an economic force in the U.S. The same Stanford study found Latino-owned businesses contributed about $500 billion to the economy in annual sales.
A 2019 report to Congress based on data from 2017 found almost 60 million Latinos in the United States already account for $2.3 trillion in economic activity in total, which on its own would rank as the eighth-largest economy in the world. And Latinos are projected to make up 30% of the U.S. population by 2020, meaning the group’s contributions are only likely to grow.
Latino-owned businesses employ more than 3 million people, according to the 2019 State of Latino Entrepreneurship report by the Stanford Latino Entrepreneurship Initiative (SLEI), a Stanford University research program centered on Latinos in business. All told, Latino-owned businesses account for about 4% of U.S. business revenue and 5.5% of U.S. employment.
But Latino-owned companies remain smaller than white-owned firms, averaging $1.2 million in revenue compared with $2.3 million brought in by a white-owned company. That is a problem, said Jerry Porras, a professor emeritus of organizational behavior and change at Stanford Business School. He’s also co-founder of the Latino Business Action Network, a nonprofit out of Stanford University focused on empowering Latino business owners, and codirector of SLEI.
“I think that there’s really a positive story when you look at Latino businesses across the country,” he said. “The number is smaller as a base, but it’s growing very rapidly. Latinos are oriented towards starting businesses and are doing it at a significant rate.”
If Latino-owned employer firms were given the same chances, Porras said, they would generate an additional $4 billion in revenue and 1 million jobs.
Less generational wealth
Across the U.S., Latino business owners are represented in all the major industry sectors in businesses in manufacturing, education, health services, finance, construction and more.
They tend to be younger than nonLatino business owners. Roughly 33% of Latino entrepreneurs are younger than 45, compared with just 22% of non-Latino entrepreneurs.
For every 100,000 Latino adults in the U.S., on average 510 became entrepreneurs each month in 2018.
But research by the Institute on Assets and Social Policy, an institute that studies economic opportunities for people of color, shows that historic disenfranchisement of people of color has led to those very people having less generational wealth than white people.
Furthermore, policies that favor the affluent have continued to widen the gap, particularly between white families and black or Latino families.
While the income gap between blacks and whites closed somewhat from 1970 to 2016, Hispanics fell even further behind at all income levels, the Pew Research Center think tank found in 2018. Even top-earning Hispanics earned only 65% as much as whites in 2016, down from 74% in 1970.
And Hispanic people on average continue to have lower salaries than white people, research from Stanford showed.
In the end, this combination means Latinos typically have lower credit scores, which can mean higher interest rates or being turned down for loans.
According to a report submitted to the U.S. House Financial Services Committee in 2019 by UnidosUS, a nonpartisan think tank focused on the Hispanic community, banks originally had loan officers who determined the “trustworthiness” of a loan applicant. People of color often were discriminated against.
In the following decades, banks lost their loan officers to the World War II effort and soon came up with credit scores as a stand-in. However, these, too, had their issues, as they were built on longstanding disparities and have resulted in communities of color, young adults, people with low incomes and immigrants having disproportionately low credit scores.
According to the 2017 Small Business Credit Study by the Federal Reserve Banks, of applicants denied credit, 45% of Latino applicants were turned down for insufficient credit history and 37% for having too low a credit score. (Applicants could choose more than one response.) In comparison, white applicants were turned away at rates of 33% and 26%, respectively.
“I think the Latino story in some ways follows the story of why black families have less wealth than white people today,” said Urban Institute research fellow Steven Brown. “There is a lack of the same kind of resources that help build wealth.”
Brown cited restricted access to homeownership under policies such as “redlining” as a primary way Latinos were kept from building generational wealth. For decades, black and Latino neighborhoods were unfairly considered too risky for loans and mortgages, leaving residents reliant on speculators or private sales.
“When Latinos have been able to buy homes, they have historically been relegated to neighborhoods where the homes didn’t have as much value, so they’re unable to build as much wealth and pass it on,” Brown said.
In more recent years, as Latinos have become more prominent in U.S. culture, their economic standing has risen.
A 2019 study of 61,000 small-business loan applications submitted to Biz2Credit’s online marketplace found the number of credit applications from Latino-owned businesses rose 23% from 2018 to 2019.
And over the past year, Latinoowned businesses reported an average revenue growth of 14%, outpacing the growth of the U.S. economy, the Stanford report showed.
Credit crunches
While revenue climbed, though, the average credit scores of Latino business owners dipped to 588 from 594 last year, according to Biz2Credit.
According to Biz2Credit CEO Rohit Arora, that could indicate business owners are using personal credit cards to fund their business growth if their companies did not qualify for loans. Furthermore, cost management can be difficult for young businesses, and that may factor into the dip in scores.
“When credit scores are less than 600, it is hard to get traditional bank loans,” Arora said in the report his firm released.
Porras said the lack of credit can force Latino business owners to make riskier financial decisions, such as relying on personal credit cards to grow their business or taking out a loan on their accounts receivable.
“By and large, I think Latinos are very unsuccessful in securing loans from the more professional sources,” Porras said.
“It’s the smaller ones that are hurting the most,” he added, referencing business size.
In other cases, Latino borrowers may be less trusting of financial institutions as a whole, based either on past experiences or a general understanding of systemic racism by lending institutions.
“Latinos have to pay more for interest,” said Fausta Ibarra, 59, who owns Tropical Cuts hair salon in Salinas, California. “We have to pay more for everything.”
Ibarra, who calls herself a “cien por ciento” – or 100% – Mexican woman, had poor credit after issues with a house she and her sisters bought together in the early 1990s. When she applied for a loan in 1993 to open her hair salon, Washington Mutual Bank denied the loan. (The bank collapsed in 2008 during the financial crisis.)
She ended up borrowing nearly $30,000 from friends, family and coworkers, paying them back one by one.
When Ibarra tried to buy a home in 1996, her low credit still held her back. There was, however, another way, the real estate agent told her. Ibarra ended up paying more than the market price for the home, and she had to borrow from friends and family so she could put down a deposit of $10,000, twice what she was prepared to pay out of pocket. Ibarra felt taken advantage of. “Latinos have to start all over again, every day,” she said in Spanish. “I do think that Latinos can contribute more to this country if they give us the same opportunity to better ourselves and our children. I think we all want to progress, but they don’t give us the same tools they give someone who was born here.”
Turned away for loans
Today, black people and Latinos continue to be routinely denied conventional mortgage loans far more often than their white counterparts, according to Home Mortgage Disclosure Act records analyzed by Reveal for The Center for Investigative Reporting in 2018.
The analysis showed black applicants were turned away at significantly higher rates than whites in 48 cities and Latinos in 25, even when controlling for loan size, neighborhood and income.
In other instances, black or Latino applicants were steered toward highercost, riskier loans.
Bank of America, for example, agreed to a $335 million payout to the Justice Department on behalf of its mortgage lender, Countrywide. Prior to Bank of America’s purchase of the lending institution, Countrywide purposely charged 200,000-plus black and Latino borrowers more for their mortgage loans than white borrowers with similar qualifications between 2004 and 2008.
The lender advised those borrowers of color to take out risky subprime loans, even when they qualified for prime loans, or simply charged them higher rates.
Other lending institutions, such as Wells Fargo, have had similar claims levied against them.
The community factor
According to the 2019 Stanford report, Latinos get loans from local banks at a much higher rate than they do from national banks.
But local banks are disappearing across the United States, potentially leaving Latinos out in the cold. According to data provided by the Federal Deposit Insurance Corporation (FDIC), as of Dec. 31, 2001, 8,080 FDIC-insured community banks existed in the country. By Dec. 31, 2018, there were 5,406.
“The local banks are tied to the community more tightly,” Porras said. “If the community has more Latino businesses, the relationships are built up and they grow. National banks lag behind there because local banks work harder to network with the businesses in their communities.”
When local banks are not available, instead of applying to larger loan institutions, many Latinos turn to friends, family and crowdfunding for seed money.
‘Puro cash’
Osornio’s family has a saying whenever they have to pay for something. “Puro cash,” they repeat, laughing, or “pure cash” in English.
The joke is based on Osornio’s father. Years ago, when he was buying a car for his wife, the salesman asked him if he wanted to finance.
“No,” said Osornio the elder. “Puro cash.”
Despite the financial savvy his father displayed, Osornio said his parents rarely talked money management with him. All he recalls was being told credit cards were for emergencies only, a lesson that, like many teenagers, he immediately disregarded as soon as he got one of his own.
The experience of wiggling out from under a pile of debt taught Osornio that he wanted applying for a loan to be “a last resort.”
Years later, Osornio has managed to build such a successful business with his unique torta recipes that he routinely fields offers from locals to invest in or outright purchase his business – and his recipes – from him.
And that, advocates have said, is the hidden silver lining for Latino entrepreneurs: even more untapped potential.
According to a 2017 New American Economy report on the power of Hispanics in the U.S., Hispanic entrepreneurs own a large chunk of transportation and warehouse businesses, laying claim to more than 20% of the industry in 2012. They also owned about 12% of the country’s construction firms.
Advocates say that, given a chance, Latinos could grow their portion of the economy even further. But the opportunity gap between Latinos or Hispanics and their white, business-owning counterparts is wide.
“Wealth is the missing ingredient in the Latino community,” Porras said. “If we could add more wealth, people would consume more and grow the economy. How do we get more wealth? Grow businesses.”
“It’s a synergystic process,” Porras said. “In the long term, it will benefit the whole country.”
All Latinos need, Porras said, is a chance.