Latinx Businesses: Getting the capital to grow
In 2013, David Sanchez started his business, 10 Management, a Chicago-based, integrated talent management firm representing models, hair and makeup artists, photographers, and social media influencers. "I bootstrapped to start the business,” says David. “I saved about $30,000, and I did that through modeling before I started the company. I just self-funded it. I've always been self-sufficient.”
Bootstrapping through startup is common among today’s Latinx entrepreneurs: Nearly half of currently operating Latinx-owned businesses were started in the past six years, most relying on personal savings or funding support from friends and family.
While Latinx-owned businesses have undergone tremendous growth - one in four new US businesses are Latinx-owned, contributing over $700 billion in annual revenue to the economy - these businesses are starting faster, but staying smaller: Latinx-owned companies are twice as likely as white-owned employer firms to be microenterprises, or firms with $100,000 or less in annual revenues.
Latinx-owned businesses face significant hurdles in securing the capital needed to grow, according to a report published by Interise, the Federal Reserve Bank of New York, and Stanford Latino Entrepreneurship Initiative:
- They bear greater personal financial risk, related to lower credit scores and limited credit histories;
- face significant financial challenges due to the racial and ethnic wealth gap;
- and report a lack of financial knowledge and know-how.
"These smaller institutions most often approved lines of credit, which provided working capital allowing the business owners to hire staff and cover operational costs related to the kick off of new contracts before they realized receivables," the report reads.
Accordingly, small business owners are most satisfied by small banks (73%) compared with applicants at large banks (53%).
David described his experience financing the growth of his company: "I was always with a big bank. I went to them for a line of credit. They denied me. Then I learned how important it is to have a strong relationship with your banker. A local community bank provided the line of credit my business needed." 10 Management wants to grow to $3 million by 2020. Only seven percent of Latinx-owned businesses in Chicago fall within this revenue range.
The success rate for Latinx-owned businesses to secure financing differs depending on their revenue size. The success rate for companies that have grown to scale - achieved annual revenue above $1 million - shows “a nearly identical pattern to the success rate of white-owned businesses, with nearly half received all of the financing sought.” In contrast, 40 percent of unscaled Latinx-owned businesses received none of the financing they were seeking, and another 38 percent received only some financing. Here, there is an opportunity to service the lending needs of growth-oriented, Latinx-owned small businesses.