Many fledgling Latino businesses are strapped for cash, a report released Friday by researchers at Stanford University’s Graduate School of Business found, and credit scores could be to blame.
There are an estimated 5 million Latino-owned businesses in the U.S., according to the Stanford Latino Entrepreneurship Initiative (SLEI). Though the total number of businesses in the U.S. declined from 2007 to 2012, the number of Latino-owned businesses grew by 46%, the report found.
Although they apply for funding at comparable rates to white business owners, Latino-owned businesses are far less likely to secure it, the report found. Only 28% of Latino business owners receive the full funding amount they apply for, compared to 49% of white business owners, according to the Stanford researchers.
“In other words, Latino business owners are denied more often than white business owners,” the report said.
The downside of personal credit scores
One potential solution, the SLEI report said, could be more education about different means of applying for funding. Providing a business credit score rather than a personal credit score makes business owners more likely to access capital, but Latino business owners are more likely to use their personal credit score, the report found. A business credit score, like a personal credit score, indicates the credit risk of a business when applying for a mortgage or other personal loan.
Business owners who understand and use their business credit score are 41% more likely to be approved for a loan, but the majority of all small business owners (72%) surveyed for the Stanford report did not know their business credit score and 60% did not know how to find it.
“Our study found that only one-third of Latino-owned employer and scaled firms use a business score to access capital,” the study said. “This means that many firms with proven track records continue to rely on the owner’s personal credit scores when seeking funding for the business.” The Stanford report defined a scaled business as one that had $1 million in gross revenue in a year.
Latino communities see improvements
As the Latino small business world continues to grow, so does the quality of life for all Latino people in the U.S., according to the American Human Development Index, a yearly report from Brooklyn, N.Y.-based nonprofit Social Science Research Council’s Measure of America project.
The index is a composite rating based on health, education and income and was introduced in 2008 as an alternative to GDP (gross domestic product, or the value of goods and services produced by a country) as a measure of society’s progress.
It found the Latino community has seen its quality of life improve more than any other group in the U.S. in the past decade, with index scores increasing 22% over the past 10 years compared to a just 6.4% increase overall in the U.S.
White men experienced the smallest improvement in well-being since 2008, aside from Native American men, who were the only group to experience a decline in their well-being.
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