New research is showing racial bias in banking, particularly toward the fastest growing group of small business owners in the United States: Latinos.
Data collected by the Stanford Latino Entrepreneurship Initiative shows Latino business ownership grew 34% over last 10 years compared to 1% growth from all other business owners.
In addition, Latino businesses grew revenue at a faster rate and Stanford University’s research shows the growth is seen in all sectors, not just the service sector. Even more, the trend has been tracked across the U.S. in 45 out of the 50 US states.
However, despite the growth in the number of Latino-owned businesses and the growth in revenue from these businesses, Stanford’s research shows a Latin-owned business is 60% less likely than a white-owned business to be approved for a loan from a major national bank.
The trend is hurting the continued growth of these business owners, but as Stanford’s research shows, it is also hurting economic growth and national job growth.
The owner of Border X Brewery in California, David Favela, experienced the difficulties of obtaining a loan from a big bank despite years of successful revenue growth in his bushiness. Favela opened up the first Border X Brewery eight years ago, simply to brew beers with his family in a small, rented space.
“We just wanted to make unique beer for ourselves and family, and the customers found us. Soon, started drinking all of our beer and we ran out of capacity,” said Favela.
Within two months, the family pooled together resources to open a second Border X Brewery tap room and eventually a third as demand just kept growing.
“In 2019, we nearly doubled our revenue,” Favela explained.
At the beginning of 2020, Favela and his brewery were nominated for a James Beard award, one of the highest and most prestigious awards in the food and beverage industry. Even through the pandemic, it found ways to stay afloat.
“We have been through three shutdowns. We have bounced back. We have pivoted and created new business models,” said Favela.
Favela decided to continue capitalizing on its growth and further expand, it would need a loan from a major bank. Favela, prior to being business owner, was a managing executive in the tech sector. He holds an MBA from the University of San Diego and is a graduate of several Princeton and Stanford business programs. So, he understands what is typically necessary for a business loan. He was confident his background and seven years of revenue growth in the business would be more than enough to get secure a loan. However, his application was denied and said he was told, “Your business is not bankable.” The words stung and confused him.
He thought, “Well why not? I mean there are a lot of businesses out there that, with a solid business plans and connections, they can get millions.”
Stanford’s study provided some possible answers to Favela and his experience. In addition, to the school’s research showing a Latino-owner is 60% less likely to get approved for a loan in comparison to white counterparts, it also found that only 20% of Latino-owned businesses that applied for national bank loans over $100,000 obtained funding. About 50% of similarly positioned white-owned businesses obtain funding.
“There’s lots of implications, in terms of the opportunity lost with not supporting Latino-owned businesses,” said Marlene Orozco.
Orozco is the lead research analyst at the Stanford Latino Entrepreneurship Initiative, which conducted the study. Her research shows the lending disparity is not only hurting these business owners, but all of us.
“We found that there would be an additional $1.5 trillion added to the U.S. economy if in fact this opportunity gap were closed, so you can see there is a lot of money being left on the table,” she said. “This also translates to another number, millions of jobs. Latinos are not just essential workers, given that they are starting businesses at a faster rate, they’re also employing Americans."
Stanford’s research also shows recent SBA measures for loans specifically committed to minority businesses in the PPP loan program is a first step to equitable lending. However, there is also a substantial need for implicit bias training at big banks. Doing so will further continue and capitalize on the growth of the fastest growing sector of small businesses, Latino-owned businesses.