Better Your Business

Underfunded Latinos grab the American dream

As the worst of the Great Recession wanes, the big banks have begun opening the money spigot for small-business lending, but cash-strapped Latino entrepreneurs are still feeling the pinch.

The irony is that this sector is launching start-ups at the fastest rate among all small businesses, which has helped buoy the economy's unemployment picture since 2008. During this time, the number of Hispanic entrepreneurs grew by 71.5 percent, according to a report by the Partnership for a New American Economy. Currently, there are more than 3 million Latino-owned businesses in the U.S., and that figure is expected to double in five years. They generate an estimated $500 billion in annual sales.

Small business hispanic couple latino
Eric Raptosh Photography | Getty Images

National Hispanic Month recognizes the growing importance of the Latino population in America today. An estimated 54 million Latinos live in the U.S. They comprise 17 percent of the country's population and are the fastest-growing ethnic group. Nielsen research shows Hispanic purchasing power is approaching a staggering $1.5 trillion.

Data from reveals where there are hotbeds of activity. It shows that the top five states for Latino-owned small-business loan applications—California (20.3 percent), Florida (20.2 percent), Texas (14 percent), New York (11.7 percent) and New Jersey (4.2 percent)—represent more than 70 percent of the loan requests made by Latinos in the past two years.

Read MoreMinorities: The force fueling small-business growth

Although the number of successful businesses owned by Latinos is rising, their owners still face big challenges in securing the financing needed to help them expand. This is hampering their ability to build revenues.

Biz2Credit announced last week the average annual revenue for Latino-owned businesses was $69,518.56, while for non-Latino-owned businesses, the figure was $86,501.47, a nearly $17,000 difference. Meanwhile, the average credit score for Latino-owned businesses was 611.7, compared to 622.3 for all others.

Interestingly, the average operating expenses for Latino-owned companies were lower ($20,981.19) than for non-Latino businesses ($29,455.54). On the surface, this seems like good news. However, many of these companies are operating out of homes rather than offices, which add to overhead. This may be fine for a landscaping company or catering business, for instance. But if an entrepreneur realistically plans to take his or her business to the next level, it is important to have an infrastructure in place and accurate accounting records. This can be a struggle for many business owners.

Because of their lower credit scores and revenue, Latino entrepreneurs face greater scrutiny from banks. The impact of these financial realities is that Latinos often must turn to high-interest, non-bank lenders. These so-called alternative lenders include firms that provide payday loans and cash-advance companies. In some cases, these lenders charge interest rates as high as 30 percent to 40 percent.

This situation causes a catch-22 scenario for business owners: They might need money to operate, but by borrowing at such steep rates, they very well could wind up in worse financial straits than before. Even when the business owner gets out of a cash-flow crunch or expands a business to generate more revenue, he or she may wind up working long hours, mostly to pay off debt.

Fortunately, there are ways to avoid financial institutions that charge outrageous interest rates. For instance, the SBA has a number of lending programs geared specifically to minority owners. Another option is nonprofit microlenders, such as Accion East, a reputable source of funding for Latinos, women and disadvantaged groups. Accion offers business loans up to $50,000 to companies that have been in business only a short length of time or have an insufficient credit history.

Read MoreSmall businesses still reeling from credit crunch

For the long term, Latino-owned businesses must improve their business credit scores in order to improve access to the credit markets. This requires paying debts off on time and better attention to accounting details and formalizing record-keeping—even for businesses that frequently deal in cash payments. As scores rise and mitigate some of the risk that scares away banks, Latino entrepreneurs can escape from the cycle of borrowing high-cost money from unscrupulous lenders.

I recently discussed the state of entrepreneurship with former SBA Chief Hector Barreto, who led the agency from 2001 to 2006 and is now the chairman of The Latino Coalition.

"Capital is the oxygen that small businesses need to grow," said Barreto, who believes that many young Latino entrepreneurs don't have much experience with how the banking system works. "The process can be daunting, and sometimes it takes numerous attempts to secure funding. Being able to access capital is of critical importance for the long-term growth of any company."

I have heard firsthand that the process of applying for small-business loans can be very intimidating for Latinos and other ethnic groups. Language skills and culture barriers come into play. Fortunately, the SBA provides a number of resources that can help, including links to Minority Business Development Centers, Small Business Development Centers (Centros de Desarrollo Empresarial) and the agency's 8(a) Business Development Program, which helps socially and economically disadvantaged individuals through a wide range of assistance programs. This information is available in both English and Spanish.

The good news is that increasing percentages of the Latino population are native-born, have grown up speaking English, and may not face some of the language and cultural hurdles that hinder their parents and grandparents. Small-business ownership is a stepping stone for the advancement of any ethnic group. As their numbers and experience increase, lenders would be wise—and indeed will profit from—making funding decisions that help fuel Latino entrepreneurship.

—By Rohit Arora, CEO of Biz2Credit, a small-business lending marketplace that publishes the Small Business Lending Index, followed by the SBA and the President's Council of Economic Advisors