Why Latino biz is leaving $1.4 trillion on the table
One focus of the Republican debate on the economy last night was immigration. Donald Trump, echoed by several other candidates, again called for increased border security between the U.S. and Mexico.
But when it comes to Latinos and the U.S. economy, absence won't make the heart grow fonder. A new report from the Stanford Latino Entrepreneurship Initiative (SLEI) shows that the number of Latino-owned businesses is expanding at a breakneck pace -- three times the national average -- and that the Latino population is a major force in the country's economy.
And yet, on the whole, Latino businesses lag in revenue behind those owned by non-Latinos. The result is a $1.4 trillion economic opportunity for the U.S. To get there, Latino entrepreneurs will have to move beyond concerns about losing control of their companies and learn about potential sources of capital for expansion.
"The glass is half full -- how do we get it fuller?" said Sol Trujillo, chairman of Trujillo Group Investments and a member of the SLEI board. "What's missing as a next layer is access to what we could call the angel investor network. Latinos for a lot of reasons haven't had access to them. We're looking to build out those ecosystems."
According to the study, a 592 percent growth in the country's Latino population between 1970 and the present has created a consumer market already worth $1.5 trillion. Separately, the number of Latino-owned businesses has grown from an estimated 1.2 million in 1997 to 3.3 million in 2012. That's 12 percent of all businesses in the U.S., compared to the roughly 17 percent of the population that Latinos represent.
But the size of those businesses trail that of businesses owned by non-Latinos. The average annual sales for a Latino business in 2012 was $156,000 compared with $573,000 for non-Latino businesses. That's a total annual gap of $1.4 trillion that could be added to the national economy.
To answer why there could be such a gap, SLEI interviewed panels of 1,831 and 368 Latino business owners. Some common reasons offered for the relatively small size of Latino businesses -- choice of industries and an all-Latino customer base -- weren't accurate. The study found no significant difference in the industry distribution between Latino and non-Latino businesses, and 80 percent of Latino businesses sold to both Latino and non-Latino customers.
What the study did find, however, was "an interesting misalignment between the mindset of the Latino business owner and the reality of the state of their business." Although owners wanted growth for their businesses, 54 percent of the companies were growing slowly, stagnant or shrinking in size.
One reason is that Latino owners were "motivated primarily by internal, non-economic factors." Instead of business for its own sake, they wanted something to pass on to family members, wished to work with family and friends, and prized control over their financial future.
The latter factor, in particular, ironically poses a major damper on ambitions and possibilities. Latino owners were less likely than non-Latinos to look to conventional funding sources to gain capital for expansion. They tended to rely on credit cards or friends, and 90 percent were concerned that outside sources of funds would cause them to lose control over their businesses.
A majority were unfamiliar with U.S. Small Business Association loans and the federal Small Business Innovation Research program, two of the largest government-backed funding sources for small business expansion.