Latinos: The force behind small-business growth in America

In a country built by immigrants, numbers represent the strength and ability to move forward both culturally and economically. Such is the case for Latinos, a growing force in the United States currently representing 18 percent of the overall population — a number expected to grow to 30 percent by 2060.

The economic impact Latinos have in the country as a group is growing at a steady rate, and according to Nielsen, a global information measurement firm, Latinos are "the most influential segment since the baby boomers," representing a $1.5 trillion consumer market.

The economic impact extends beyond the Latino consumer to the Latino entrepreneur. The State of Latino Entrepreneurship 2015 Report, created by the Stanford Latino Entrepreneurship Initiative (SLEI), highlighted data that reveal the economic impact that Latino-owned businesses (LOBs) have on the U.S. economy.

Housed within Stanford University's Graduate School of Business, the Stanford Latino Entrepreneurship Initiative is a unique research collaboration between Stanford University and the Latino Business Action Network (LBAN), a 501(c)3 not-for-profit organization located in Palo Alto, California. This report also debunked several myths regarding the markets and industries in which LOBs are found.

Latinos are significantly impacting the growth in number of small businesses in the United States. The State of Latino Entrepreneurship 2015 report revealed that between 2007 and 2012, the number of LOBs grew by 46.9 percent compared to just 0.7 percent for non-Latino owned businesses, an extraordinary level of entrepreneurship that suggests Latinos play a substantial role in local job creation and economic development.

A closer look at the growth in the number of small businesses between 2007 and 2012 shows that 86 percent of the growth in all small businesses during this time can be attributed to LOBs In fact, without LOBs the United States would see a serious drop in the number of small businesses.

Debunking the myths of Latino biz

There are two common theories posed by many that deserve note. One is that LOBs are smaller because they sell primarily to Latinos and thereby are not taking advantage of the complete U.S. market. The research debunked this myth as it found that 80 percent of LOBs sell to the complete domestic market.

The second theory proposed is that LOBs are smaller because LOBs oversubscribe to small slow-growth industries. The research debunked this myth as well, as it found that LOBs are actually over-indexed in the top fastest-growing industries in the country.

The study did reveal one of the main reasons LOBs remain small: access to capital. The research shows that 70 percent of Latino entrepreneurs cited that their most common source of capital is personal savings, with credit cards, personal bank loans and "friend's loans" being the following most used options.

Surprisingly, only 6.1 percent of LOBs in this panel have financed their business with a commercial loan and roughly 2.4 percent have financed their business with a government loan. This indicates that the traditional sources of capital — such as VCs, angel investors, bank business loans and debt financing — have been almost totally absent in the funding of LOBs.

We surveyed more than 2,000 Latino-owned businesses and found that by 2012, there were 3.3 million LOBs — 90 percent of which were family owned. The study also revealed that the 3.3 million LOBs had an average of 8.6 employees per firm and an average of $155,806 in sales per firm annually, employing 2.3 million workers and generating a total of $473 billion in sales.

Perhaps the most important insight revealed by the study was the "opportunity gap," which refers to the current gap between the average yearly sales generated by LOBs and not Latino owned business (NLOBs). The potential impact on the U.S. economy if LOBs generated the same level of sales as NLOBs was calculated over the period of 2002–2012. A pattern was found to exist over these years.

For example, in 2012 alone, if all LOBs averaged the same yearly sales per firm as all NLOBs, $1.38 trillion would have been added to the U.S. economy. The results were astonishing, as they represent an incredible opportunity for growth and economic development. This serves as undeniable evidence that investing and creating new opportunities for Latino entrepreneurs is key for a thriving economy.

— By Jerry Porras, professor emeritus, Stanford University and chairman of LBAN; and Remy Arteaga, executive director of LBAN

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