Economic Development

We Need More than Loan Packages to Save the Backbone of American Business

March 27, 2020  • Abigail Golden-Vazquez & Mark Madrid

Latino business owners punch above their weight in entrepreneurialism, yet they are also among the most vulnerable in the face of the coronavirus-induced economic standstill. The record-breaking economic stimulus package unanimously passed by the Senate on Wednesday offers an unprecedented $377 billion in disaster assistance dollars to small businesses under the Small Business Administration; however, many are rightly concerned that the funds will not reach Latino business owners fast enough — or ever.

Latino entrepreneurs are responsible for starting 1 in 4 new businesses; their businesses represent 14% of all US businesses, and they contribute $700 billion to the economy annually. However, according to the 2019 Stanford Latino Entrepreneurship research report, under normal conditions a full 14% of Latino-owned businesses said that they could not operate for even one month without resorting to layoffs, outside borrowing, or the sale of assets and equipment.

“For small retailers, it’s not a matter of weeks, but a matter of days that could determine survival”

The economic contraction resulting from the coronavirus will be catastrophic for a majority of businesses, at least in the short-term. However, it will be particularly devastating for Latinos business owners who already struggle to access capital and face restricted liquidity, regardless of the impact of a global pandemic. Despite having successful viable businesses, many lack the credit scores to qualify for loans— never mind that for many, taking out additional loans on top of existing debt may serve to hamstring them even further. Additionally, a significant number lack the legal status to qualify for the stimulus package.

Furthermore, the types of businesses that many of Latino entrepreneurs own, such as retail, restaurants, services and hospitality, make them particularly vulnerable to the economic crisis created by Covid-19.  While businesses in healthcare, those with digital or online capacity, and those with the ability to adapt quickly to the new normal may do well, a great majority will face closure if immediate action isn’t taken.  “For small retailers, it’s not a matter of weeks, but a matter of days that could determine survival,” said Sean Salas, CEO and co-founder of Camino Financial, a fintech firm which focuses largely on offering loans to mostly Latino microenterprises.

The Latino Business Action Network, which collaborates with Stanford Graduate School of Business Executive Education to offer a scaling program for Latino entrepreneurs, has seen immense concern from its graduates about the accessibility and timeliness of disaster financial assistance at the federal, regional, state and municipal levels to keep them afloat.  These are some of the most promising businesses with access to resources. If they are deeply concerned about their viability, imagine the positions and urgency of the 97% of unscaled firms.

If they are deeply concerned about their viability, imagine the positions and urgency of the 97% of unscaled firms.

Salas shared that the industry is seeing a material increase in request to defer or reschedule payments and the situation is likely to get worse if small businesses remain closed throughout April. Simultaneously lenders are seeing capital sources starting to dry up exactly when small businesses need them most. Maria Rios, CEO of Nation Waste, Inc., a successful waste management firm headquartered in Houston, says that while she has not reported a decline in demand for her services, she is already seeing an increase in failure of payment for services. Tiq Chapa, Partnerships Manager at StartX, a nonprofit startup accelerator, argues that we should be thinking of alternative ways to distribute cash to smaller businesses, as loans could be debilitating at this time. “We need to help businesses survive right now- we need to think about getting them to July 1st.

To save the entrepreneurs behind new businesses in America and ensure they can survive, we will need to get cash into their hands as quickly as possible, through loans and/or alternative capital sources such as Community Development Financial Institutions (CDFIs) serving businesses that don’t qualify for traditional bank loans, private equity extending equity checks, or fintech companies employing alternative credit criteria to approve loans. The leadership and actions of the financial service sector is also needed to catalyze quicker capital access.

In the face of an uncertain financial future, loan deferrals, payment rescheduling, loan forgiveness, and even grants will all be required. Many entrepreneurs will need access to markets and technical assistance to move their businesses online, or to change business models to accommodate the new norms of social distancing. Corporate America could also offer more flexible terms for diverse suppliers.  Above all, it is crucial to remember that we are all in this together, and this is an all hands-on deck situation. We must be creative, act fast, and understand that what we do now will determine who will remain standing.

 

 

About the Authors: Abigail Golden-Vazquez is Vice President and founding Executive Director of the Aspen Institute Latinos And Society Program, and Mark Madrid is CEO of the Latino Business Action Network.

About the Aspen Institute Forum on Latino Business Growth:

The Forum on Latino Business Growth was founded by the Aspen Institute Latinos and Society Program and is a consortium of stakeholders supporting Latino, minority and small business growth committed to increasing the number of scaled Latino-owned businesses and closing the $1.47 trillion dollar opportunity gap.  In recognition of the potentially catastrophic impact of coronavirus and social distancing on Latino entrepreneurs, members of this group held a series of virtual meetings to support each other in getting support resources and capital to those who will need it most, especially Latino entrepreneurs.

About LBAN:

LBAN is national 501 (c)(3) nonprofit with the purpose of strengthening the United States by improving the lives of Latinos and the goal to double the number of $10 million, $100 million, and $1 billion Latino-owned businesses by 2025.  LBAN collaborates with Stanford University to champion the Stanford Latino Entrepreneurship Initiative.