Introduction
It has generally been difficult for Latinos to start their own businesses; they need to go through a long process fraught with barriers. These barriers include low educational attainment, lack of previous business or management experience and, among immigrants, lack of English language fluency. Perhaps the most important constraints are insufficient funds to cover the initial and operating expenses and the lack of an extended network of business relationships for viable operations.
This essay addresses the following four questions: 1) What are the main reasons U.S. Latinos and recent immigrants decide to become business owners?; 2) Why are Latino business owners reluctant to seek loans from formal financial markets to start their operations?; 3) What are the internal and external factors that prevent Latino business owners from participating in the financial markets?; and 4) What are the internal and external factors that bank and other financial institutions face when working with Latino businesspeople?
Since 1980, the Latino population in the United States has experienced significant growth, outpacing the growth rates for Whites, Blacks, and Asians. In July 2018, the number of Latinos living in the United States reached 59.2 million, which represents 18.1% of the total U.S. population. Population forecasts show that by 2060 the Latino population will represent 28% of the national population. Similarly, the Latino population has experienced steady growth in Michigan, reaching 509.8 thousand in July 2018, representing 5.1% of the state population.
In the last 20 years, the number of Latino-owned businesses (LOBs) has increased considerably. The United States Hispanic Chamber of Commerce estimates that there were over 4.37 million Latino-owned businesses operating in the nation in 2018, while in 2002 the number of LOBs was only 1.57 million. During the period from 2002 to 2018, the number of Latino-owned businesses increased by 2.8 million businesses, reflecting a growth rate of 178.3%.
The rapid growth in the number of LOBs makes them an important component of the nation’s economy. For example, their sales and receipts also experienced an impressive growth of 35.1% only in the last 10 years. With a larger market share, they also created large numbers of new jobs. In Michigan, LOBs, with a solid growth and in the extent of their operations, show the same trend as that at the national level. Clearly, there is a high correlation between Latino population growth and the increase in the number of Latino-owned businesses.
Notwithstanding the solid growth in the number of LOBs and in the scope of their operations both at the national and Michigan levels, their failure rates are very high, reaching more than 50% within the first five years of their business operations. That being the case, it is important to understand the factors that hinder and those that facilitate business success.
There are two well-known reasons that Latinos establish new businesses. The first is the “push effect.” That is, Latinos often have to create their own businesses due to the discrimination they face in the labor market. Immigrants especially lack supportive networks that facilitate information regarding job openings and referrals to potential employers. Mexican and Central American immigrants are particularly subject to discrimination and have to create their own businesses to support their families.
On the other hand, this is not the case for Cuban and South American immigrants who arrive in this country with relatively high levels of education, previous business experience, extended business networks in the United States and abroad, and with enough financial funds to start up a new business. This approach is known as the “pull effect.” They seek opportunities in the market to make investments for the creation of new businesses. These Latino immigrants create a larger number of new businesses than their local counterparts.
According to a report from the Latino Entrepreneurship Initiative at the Stanford Graduate School of Business (2017), “Between 2007 and 2012, the growth rate of both non-employer and employer Latino firms nearly outpaced the growth rate of White-, Asian-, and Black-owned firms combined. Without the increased numbers of Latino firms created during that period, the total number of firms in the United States would have decreased” (p. 6). Also the report holds that “Latino businesses are growing at an even faster rate than the U.S. Latino adult population” (p. 7), and that “Latino entrepreneurs exhibit strong enterprising qualities through their engaged networking behaviors, above-average levels of higher education, and strong family histories of entrepreneurship” (p. 9). Further, “Entrepreneurship also allows a vulnerable segment of this population, undocumented immigrants, to overcome the structural barriers to pursuing employment in the United States . . . federal and state laws do not require proof of immigration status to start a business” (p. 10).    
Martinez and Avila (2019) studied the motivations for entrepreneurship among Latinos and White Americans. Their study found that “Latino business owners ranked one financial motivation item (gaining financial security for my family) and one self-realization motivation item (utilizing my skills and abilities) as their top motivations for starting a business. By comparison, White business owners ranked two self-realization motivation items as their top motivations for starting a business (gaining the satisfaction of owning a business and utilizing my skills and abilities)” (p. 14). This study also found that “Latino business owners face structural inequalities that often ‘push’ them into business ownership as an approach of circumventing racism and low wages or other barriers to earning a living in the mainstream labor market” (p. 16).
Coronado and Martinez (2018) report, based on a qualitative study of 32 LOBs in three Michigan cities, some of the challenges they face when starting a business. Among these challenges, the authors cite the lack of access to loans provided by banks and other financial institutions. Other challenges are their language constraints, envy, racial and sexist incidents and how they respond to them, and intragroup competition by fellow Latino entrepreneurs. They also found that “Minority business owners, including Latinos, face significantly higher loan-application rejection rates and tend to pay higher interest rates than their White counterparts” (p. 53). They also found that “Latinos have depended on unconventional funding sources when starting a business. Support from family and friends along with social capital have often been the sources of funding for Latino start-up businesses” (p. 54).
The authors state that “Another concern for Latino business owners is the perceived lack of trust or support within the Latino community itself. Participants spoke of a degree of intra-ethnic competition occurring among Latino business owners” (p. 59). A minority of them “claimed that members of their own group are not always welcoming of other Latino businesses, and believed that envidia [envy] has been directed toward their businesses in different ways” (p. 60).
The distribution of LOBs is not even across the country; these businesses tend to locate in areas with high concentrations of Latino population. LOB projections from GEOSCAPE for 2017 show the South Atlantic region with the highest number of Latino firms, 668,000, followed by the Pacific region with 533,000, and the East North Central with 410,000 firms. Cubans and South Americans are concentrated in the South Atlantic region, while Mexicans and Mexican Americans are in the Pacific and East North Central regions.
A report from the Federal Deposit Insurance Corporation (FDIC, 2017) indicates that, “In 2017, 6.5 percent of U.S. households were ‘unbanked,’ meaning that no one in the household had a checking or savings account” (p. 1). Additionally,
18.7 percent of U.S. households were ‘underbanked,’ meaning that the household had an account at an insured institution, but also obtained financial products or services outside of the banking system. Specifically, a household is categorized as underbanked if it had a checking or savings account and used one of the following products or services from an alternative financial service (AFS) provider in the past 12 months. Some of these products or services are money orders, check cashing, international remittances, payday loans, tax refund anticipation loans, rent to own services, pawn shop loans, or auto title loans. (p. 1)
The report also shows that, “unbanked and underbanked rates were higher among . . . Black and Hispanic households” (p. 2).
The FDIC report also states the top reasons that unbanked households indicate for not having a bank account. It states that they “Do not have enough money to keep in an account; don’t trust banks; avoiding banks gives more privacy; account fees are too high and unpredictable; credit or former bank account problems; banks do not offer needed products or services; inconvenient locations and service hours” (p. 4).
Latinos mainly use their household savings as the primary source for starting and developing a business. The FDIC publication reports that, “The savings rate increased substantially among Hispanic households from 42.5 percent in 2015 to 48.2 percent in 2017. Moreover, savings rates among younger households increased more than savings rates among older households” (p. 8). The FDIC report also states that, “Unbanked households generally saved using informal methods, while underbanked and fully banked households generally saved using formal methods. Unbanked households that saved primarily kept savings at home, or with family and friends, while underbanked and fully banked households saved primarily using savings accounts” (p. 9).
According to the FDIC report, “80.2 percent of unbanked households had no mainstream credit, compared with 21.9 percent of underbanked households and 14.1 percent of fully banked households. Differences by race and ethnicity were substantial: 36.0 percent of Black households and 31.5 percent of Hispanic households had no mainstream credit, compared with 14.4 percent of White households” (p. 10).

Participation of Latino-Owned Firms in the Financial Markets
An ongoing research project at the Julian Samora Research Institute analyzed data published by the U.S. Bureau of the Census Economic Census from 1992 to 2012 that included the number of Latino firms and their annual sales and receipts. The analysis also included the major national cities with a large concentration of LOBs. Data from the U.S. Survey of Entrepreneurs for 2014, 2015, and 2016, for firms with employees, includes the financial sources start-up firms use to fund their initial operations, the sources and amounts required for their operations, and the reasons Latino firms are reluctant to participate in the formal financial markets. While these data sets contain data for many racial and ethnic groups, the JSRI research project extracted data only for Hispanic, Equally Hispanic-Non Hispanic, and White-owned businesses to make comparisons among these three groups.
In recent years, Latino households in general and LOBs in particular have experienced increasing access to the formal financial markets. This is evident through a percentage growth of the financial services they are utilizing in their daily activities and business operations. As shown in Table 1, the percentage growth for all financial services is remarkable. There is a significant difference in the growth between Latinos and non-Latinos in the use of these services. Table 1 shows the impressive gains Latinos have made in the use of all standard products, especially in opening Checking and Savings accounts (61%), 529 accounts (59%) giving high importance to the education of their children, and 401K accounts (57%) to support their retirement income.

Table 1. Percentage Growth of Financial Services Users by Ethnic Group, 2012-2017

The most important constraint LOBs with small operations face is the lack of access to credit in the formal financial market. Researchers agree that there are external and internal reasons as to why LOBs cannot access credit in these markets, which have made LOBs reluctant to seek bank loans and look for alternative funding sources. The JSRI research project, like others, found that LOBs rely on their own savings, loans from close and extended family members, credit from suppliers, short-term loans from informal lenders, and personal credit cards to fund their business operations.  
The study also found the following reasons Latinos do not use formal lenders: 1) Culturally, LOB managers are reluctant to assume debt and to take financial risks; 2) They deal with language barriers and low educational attainment levels; 3) They lack previous business experience; 4) They lack a well-developed business plan, which should include the required financial statements; 5) They lack well-developed business networks; 6) They have low personal and/or business credit scores; and 7) They do not have the necessary collateral to support the loans.
The most important external reasons why LOBs do not have access to credit markets are: 1) The discrimination they face by the banking industry, indicated by the number of loan applications rejected compared to other racial groups and the high interest rates charged on their loans; 2) The lack of bank agencies located in Latino predominant neighborhoods or close to where Latino businesses are located; 3) A conflict with the hours of operations by the banks and the time when LOB managers can visit the bank. 4) Banks do not have culturally competent and Spanish-speaking staff.

Funding Sources for Latino Start-up Businesses
The majority of Latino business owners rely on their own funds to start up their operations; they count on their own and family savings, on loans and investments from family and friends, loans from suppliers, and personal/business credit cards. The ongoing JSRI research found that 77% of Latino firms tend to rely on trade credit from suppliers, 76% count on credit cards, and over 67% obtained some type of credit from family, friends, and employees to start up their businesses (See Table 2).

Table 2. Funding Sources for Start-up Latino Businesses – 3 Year Average (Percentages)

When considering LOBs with less than two years in business, which are assumed to be recent start-ups or with few months of operation, the research project found that these firms rely on the same funding sources, but at slightly lower rates. Over 75% of LOBs depend on credit from suppliers, 70.5% bank on credit cards, and 61% on family and friends. The lower rates could be explained in part by the absence or few business relationships these firms have with their suppliers or by their low credit scores and/or lack of credit history with credit card companies.
JSRI’s research project also evaluated, based on the U.S. Census data, the funding amounts by sources these companies accessed. The results for all firms show that LOBs obtained up to 62.8% of financial resources mainly from the owners’ savings, 34% from banks and other financial institutions, and 16.2% from family friends and employees. The results also show that LOBs obtained funds from these three sources in the ranges from $10,000 to $24,999 and from $250,000 or more. The disproportion between these two funding ranges shows the presence in the financial markets of small and large LOBs with different funding requirements and access to funds.

Table 3. Funding Amounts by Sources for Latino Firms – 3 Year Averages (Percentages).

In addition to these funding sources, LOBs reported obtaining funding from two other sources, although at lesser amounts. These funding sources are Angel investors and venture capitalists (2.8%) and government grants (1.2%). Funds obtained from these sources were at lower rates than the other three sources cited above and at lower amounts. We assume that the main reasons for the lower rates are the difficulty that LOBs have to access these funding sources and the lack of knowledge they have about them.
The analysis for firms with less than two years in business shows the same trend as the one for all firms, at higher percentages for all sources, but not for funds obtained from banks and other financial institutions. A higher demand for credit at the initial stages of the business development explains in part the higher percentages of funding obtained from these sources by LOBs. On the other hand, the lower percentages of funding obtained from banks and other financial institutions are due to the lack of credit history, low credit reports, and business experience. As is the case for all firms, the most common funding bracket for LOBs with less than two years in business is $10,000 to $24,999.
An analysis regarding the avoidance by Latino businesses of external funding is included in the U.S. Bureau of the Census, Survey of Entrepreneurs. It shows the top reasons reported by LOBs. For all firms, “Business did not need Additional Funding,” (87.8%), “Did not want to accrue debt,” (6.7%), “Did not think Additional Funding would be approved by lender,” (6.1%), and “Decided finance cost would be too high,” (3.6%) were the most important reasons for why LOBs avoid requesting external funding (See Table 4).

Reasons Why Latino Businesses Avoid External Funding
Table 4. Reasons for Why Latino Businesses Avoid External Funding – 3 Year Average (%).

For firms with less than 2 years in business the main reasons for avoiding external funding were “Business did not need Additional Funding,” (85.8%), 2.0% lower than for all firms; “Did not want to accrue debt,” (7.9%), 1.2% higher than for all firms; “Did not think Additional Funding would be approved by lender (7.4%), 1.3% higher than for all firms; and “Decided finance cost would be too high” (4.4%), 0.8% higher than for all firms. Some of the reasons for these higher percentages include: most of these firms are newcomers and do not have enough business experience to support their operations; they do not have a long-term business relationship with their banks; there is a cultural practice for assuming debt and avoiding risk; and these firms did not have enough guarantees to support new loans as collateral.

The Supply Side of Financial Markets
As stated above, the Federal Deposit Insurance Corporation (FDIC) reports in 2017 high percentages of Latino households as unbanked (14%) and underbanked (28.9%). Although these figures have been decreasing, they are still high and create potential opportunities for banks in their efforts to attract new Latino customers.
According to the Latino Entrepreneurship Initiative (LEI) from the Stanford Graduate School of Business (2018), there are “Two key facts [that] underscore the economic importance of Latinos and Latino-owned businesses: 1) Latinos own an increasing number and a share of businesses and 2) Latinos start approximately one in four new businesses in the U.S.—a critical source of new jobs in the economy” (p. 6).  And, “Latinos owned 12 percent of all businesses in 2012, up eight percent from 2007. Between 2007 and 2012, the number of total Latino-owned businesses grew by 46 percent compared to a 0.2 percent decline in the number of non-Latino-owned businesses” (p. 6).
This large number of Latino-owned businesses has a direct impact on the U.S. economy, with their total sales and receipts reaching $474 billion in 2012, increasing by 35.1% from 2007. Over 36% of LOBs reported an increase in the number of jobs they created in the last 12 months. LOB revenues are over $700 million per year. Lending to Latino-owned businesses reached $1.4 billion, creating a huge business opportunity for banks and other financial institutions.
At the national level, we can observe that Latino immigrants create more businesses and their rate of business ownership is currently higher than for U.S. born Latinos and similar to non-Latino owners. Immigrant Latino male businesses are highly concentrated in construction, while immigrant female businesses are concentrated in other services, which includes beauty and cleaning services (Fairlie, 2018).
These figures demonstrate the important role LOBs play within the U.S. economy and the huge opportunity banks and other financial institutions have in working closely with them by establishing long-term relationships based on mutual trust, offering financial products especially designed for Latinos, and, most importantly, providing them access to formal financial markets.

Approaches Banks Use to Evaluate Credit Applications and Recommendations
Since access to credit is the main constraint LOBs face to start up and operate their businesses, banks have been searching for new ways to evaluate and facilitate their credit applications. The FDIC identifies two approaches banks are currently using for this purpose. The first is the structured approach, which is used mainly by large banks and is based on a well-structured process loan officers need to follow to evaluate and approve a loan application. It includes a detailed review of the applicant’s business plan and financial statements, followed by an evaluation of standard financial ratios, personal and business credit scores, business experience and managerial capabilities of the business operators, and the guarantees offered as collateral. Loan officers assign scores to each of these steps, and the final score results from adding the scores of each step. Banks have set minimum scores needed to approve a loan application.
In contrast, small regional banks use the relationship approach to evaluate loan applications. This approach is based on the long-term social and business relationships developed between these banks and their customers, which is centered on mutual trust. Most of these banks have a proactive approach to develop relationships through an active participation of the banks’ officials and loan officers in community organizations and events where they have the opportunity to interact with their customers. Bank customers also seek to develop and nurture these relationships through continuous investments in their social capital with bank administrators and loan officers by periodic visits to the bank’s agency to make financial transactions.
The social and business relationships with the loan applicant could be considered by loan officers at the time of evaluating the loan application. A high percentage of these bank customers run small businesses and do not have a well-developed business plan including the most current financial statements. Their personal and business credit scores are low, and cannot offer collateral as a guarantee. In most of these loan applications, loan officers need to be flexible when evaluating them based on the time the applicant has been the bank’s customer, the trust level with the applicant, his/her past credit history, and the business’ potential growth and profitability.
In many cases, the loan officer’s approval is enough; in others, the loan officer submits a report to his/her supervisor, the bank’s credit committee, and top administrators for the loan’s final approval. In some cases, bank administrators and auditors, in order to comply with FDIC regulations, reject the loan application approved by the loan officer.
Regardless of their ethnicity, small business owners reported greater success at small banks when getting a loan approved or obtaining a line of credit or cash advance. LOBs reported a 60% credit success at small banks, compared with 31% at large banks (Acevedo, 2018). Latinos who obtain a business loan are much more likely than non-Latino White business owners to use personal guarantees such as cash, real estate, and other assets to secure the loan.
Trust is a key ingredient for the development of any type of relationship. It requires mutuality and can increase through time through regular interaction by the parties involved in the relationship. Developing trust with their customers is a necessary condition for bankers and loan officers to attract new customers and to maintain the current ones. “Banks and non-depository lenders must rebuild confidence among LOBs who have lost trust in them. . . . First generation Latino immigrants over-index relative to non-Latinos in distrust of financial institutions. . . . This trend must be reversed by building a sustainable lending model that aligns long-term economic incentives between borrowers and lenders” (Salas, 2016, p. 8).

Banking Internal Factors Aimed to Attract and Grant Loans to Latinos
Banks and other financial institutions have begun to recognize the important role Latino households and businesses currently play within the U.S. economy based on the constant growth of the Latino population, their purchasing power, and the number of businesses owned. These factors provide them a huge opportunity for attracting and working closely with both Latino households and Latino-owned businesses. Banks have been making changes in their procedures, offering new products specially suited for Latino communities, modifying their offices, and hiring Spanish-speaking personnel with broad cultural awareness.
Bank and other financial institutional representatives have also realized the need to implement specially designed programs to improve trust levels with their Latino customers. However, as a first step, they need to make changes within their internal culture and offer services in Spanish by bilingual, bicultural staff. In addition, they are opening agencies in Latino predominant neighborhoods to facilitate access to Latino households and LOBs to their services. The physical configuration of the new facilities aim to welcome new customers. They are also offering new products tailored for Latino households and LOBs which should be easy to understand, flexible, and in Spanish.
Banks need to offer financial education programs especially designed for the Latino community given the high percentage of unbanked and underbanked Latino households. These programs should include basic themes such as how to open and manage checking and savings accounts, how to establish a credit history, how to obtain information about credit scores, the requirements for applying for a credit card and a bank loan, how to manage a bank loan, and how to utilize mobile banking. The training programs for LOBs should also include such topics as how to develop a business plan and work with financial statements such as the balance sheet and the income statement.
The following are specific financial programs banks are currently implementing to better serve the Latino community and to attract new customers from this community.
Cash Paychecks: Given the high percentage of unbanked Latinos who currently cash their paychecks at local stores and other facilities, banks are offering these services with lower or no fees. In addition, banks are offering debit cards, to reduce the risk of losing cash, that the customer can use at any ATM. The customer can reload his/her card with the next paycheck.
Savings Accounts: Banks, after developing a trusting relationship with their new customers through cashing paychecks for at least six months, are encouraging them to open savings accounts in order to develop a long-term financial relationship.
Small Loans: In order to facilitate the development of a credit history, banks offer small loans to those customers who opened savings accounts. In this way, bank customers learn how to manage a loan through periodic payments to the principal and interest rate.
Remittances: Many Latin American countries rely on the remittances their nationals send back to their families as a source of hard currency. In 2018, immigrants from these countries sent an estimated $85 billion to their original countries. The total amount of money is likely significantly larger than what is reported because these estimates do not include the transfer of other assets, such as gifts, or informal monetary transfers (Budiman and Connor), which are usually done outside the banking system. Banks want to grab this very profitable business by charging lower fees and offering these services through extended hours and on weekends.

External Factors that Prevent Banks from Attracting More Latino Customers
Federal and State agencies are in charge of supervising banking operations through policies and regulations with which banks need to comply. The Federal Reserve and the Federal Deposit Insurance Corporation are in charge of supervising individual banks at the federal level. The Division of Supervision and Regulation of the Federal Reserve exercises and oversees the Board’s supervisory and regulatory authority over a variety of financial institutions and activities with the goal of promoting a safe, sound, and stable financial system that supports the growth and stability of the U.S. economy. The Federal Reserve carries out its supervisory and regulatory responsibilities and supporting functions primarily by promoting the safety and soundness of individual financial institutions supervised by the Federal Reserve. It takes a prudent and macro approach to provide the supervision of the largest, most systemically important financial institutions.2
The FDIC promotes safe and sound financial institutional practices through regular risk management examinations, publication of guidance and policy, ongoing communication with industry officials, and the review of applications submitted by FDIC-supervised institutions to expand their activities or locations. When appropriate, the FDIC has a range of informal and formal enforcement options available to resolve safety-and-soundness problems identified at these institutions. The FDIC also has staff dedicated to administering off-site monitoring programs and to enhancing the agency’s ability to timely identification of emerging safety-and-soundness issues.
The FDIC promotes compliance by FDIC-supervised institutions with consumer protection, fair lending, and community reinvestment laws through a variety of activities, including ongoing communication with industry officials, regular compliance and Community Reinvestment Act (CRA) examinations, dissemination of information to consumers about their rights and required disclosures, and investigation and resolution of consumer complaints regarding FDIC-supervised institutions. The FDIC also has a range of informal and formal enforcement options available to resolve compliance problems identified at these institutions and their institution-affiliated parties.3
In addition, loan officers and bank administrators report to the bank’s upper management and Board of Directors and need to comply with the internal policies and regulations developed by them. Further, the bank’s upper management and Board of Directors are interested in increasing the bank’s revenue and reducing its operating costs. These conflicting approaches could harm or block any new initiative bank administrators are trying to implement in order to attract a large number of Latino customers and LOBs.

Conclusion and Recommendations for Future Research
Latino-owned businesses currently play an important role within the nation’s economy. Their numbers have been increasing over the last 30 years, the amount of their sales and receipts is over $1 billion per year, and they have become a source of job creation. Despite the important achievements of the Latino population and Latino-owned businesses, they face several internal and external constraints when they decide to start a business, of which external funding is probably the most important.
Banks and other financial institutions have realized a huge business opportunity working with Latino-owned businesses and Latino households. They have started offering financial products tailored to the Latino community and begun adopting policies and regulations in order to attract new customers and better serve this community. Banks have started making internal adjustments to facilitate their business relationships with the Latino community.

Endnotes
1A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
2https://www.federalreserve.gov/econres/bsrstaff.htm
3https://www.fdic.gov/about/strategic/strategic/supervision.html

---