The Pandemic Is Threatening Latino Entrepreneurship, but Local Leaders Can Help
An earlier version of this blog post reported that the US Census Bureau’s Small Business Pulse Survey showed that nearly 38 percent of all small businesses in the US reported a negative impact from COVID-19 in June. However, this rate referred only to firms that experienced a large negative impact. The rate of small businesses that experienced a large or moderate negative impact is 82.7 percent, about the same as the rate for Latino-owned businesses, as reported by the Stanford Latino Entrepreneurship Initiative. This post has been updated to reflect this number (corrected 9/22/2020).
COVID-19 has disproportionately affected the health and employment of Latino and Black families. But the pandemic is also affecting Latino-owned small businesses and the families who depend on them. The Stanford Latino Entrepreneurship Initiative’s (PDF) survey finds that in June, 83 percent of Latino-owned businesses experienced a negative impact from COVID-19.
Before the pandemic, small firms owned by Latinos were already facing barriers to prosperity. Latino-owned businesses are more likely to be startups, have higher credit risks (PDF), and thus, have limited ability to secure affordable capital. This can translate into more vulnerability to the pandemic’s economic effects: only 11 percent of small businesses in majority-Latino communities had more than 14 cash-buffer days in 2019.
Small businesses are a key path for building wealth and closing the racial wealth gap (PDF), but the pandemic is threatening Latino entrepreneurs when they are already underrepresented among US firms. Federal business relief hasn’t focused on sectors hardest hit by the pandemic, including sectors with large shares of Latino-owned businesses. But local leaders can take more targeted and tailored steps to support the hardest-hit sectors and most vulnerable firms to ensure Latino entrepreneurs can survive and thrive.
Sectors severely affected by the COVID-19 crisis are overrepresented among Latino-owned businesses
Latino ownership of small businesses had been on an upward trajectory (PDF) for the past 25 years. But the share of Latino-employer firms relative to the Latino population remains low. (Employer firms, which account for 18 percent of all US businesses, are companies with part-time or full-time employees on payroll, rather than self-employed individuals who incorporated.)
Recently released data from the Annual Business Survey reveal that although Latinos make up 16 percent of all adults in the country, only 5.6 percent of all employer firms are owned by Latinos. Among all employer firms, Latino-owned firms only employ 2.2 percent of workers, pay 1.4 percent of payroll, and make 1.2 percent of sales. Annual sales per Latino-owned firm averaged $1.3 million, almost five times lower than for all employer firms.
Latino-owned employer firms are represented at disproportionately higher rates (when the share of businesses in a sector is greater for Latino-owned employer firms than the share of businesses in that sector for all employer firms) in five sectors: construction, accommodation and food services, administrative and support and waste management and remediation services, transportation and warehousing, and other services. On the other hand, they are underrepresented in the professional, scientific, and technical services sector.
Three out of the five sectors with disproportionately higher rates among Latino-owned firms have experienced relatively more job losses because of the pandemic than the overall private sector. Accommodation and food services stands out as the hardest-hit sector in absolute terms during this crisis. About 3.3 million jobs have been lost in net terms since the pandemic began. Although this sector accounts for only 9 percent of employer firms in the US, it accounts for 13 percent of Latino-owned employer firms.
Federal support for businesses doesn’t align with where the pandemic has most affected jobs
Looking at the Paycheck Protection Program (PPP) approvals through July 31 by sector and comparing those amounts to the number of employees in small businesses within each sector (PDF) offers insights into whether federal relief helps small businesses in sectors most affected by the crisis. The program has distributed about $510 billion thus far, or $8,656 per small business employee in the country.
Small construction firms have received an average of $13,000 per employee, the fourth-highest average. Even though 16 percent of employer firms owned by Latinos are construction firms, this sector is also one of the least relatively affected by the crisis, meaning that money may not be flowing to the businesses in sectors that need it the most.
In contrast, the accommodation and food services sector, where almost a quarter of jobs have been lost and where Latinos are overrepresented as business owners, has only received an average of $5,280 per employee. This is the second-lowest average of all sectors, only after management of companies and enterprises. The professional, scientific, and technical services sector, which is underrepresented among Latino-owned firms, received the third-largest average of PPP dollars per employee.
Targeted, local supports could better help Latino-owned businesses
The PPP has fallen short of being an effective support for the most vulnerable businesses, many of which are owned by people of color. By relying on banks for its distribution, and without requirements to evaluate need or financial distress, the program may have put white-owned businesses and those in high-income areas first, in part because of the concentration of banks in higher-income areas.
The PPP, even after its rules were adjusted, is also not ideal for small businesses in the food services sector. To get their loans forgiven, business owners need to use the money in a set time frame and use at least 60 percent of funds on payroll expenses. The increase in COVID-19 cases in southern states, where most Latinos in the US live, has led to new rounds of shutdowns or changes in capacity limitations. In this uncertain environment, it is difficult for small business owners in the restaurant industry to commit to maintaining or rehiring their full payroll or rush to spend their limited cash.
A better solution for Latino entrepreneurs and other entrepreneurs of color may lie at the local level. Local and state relief funds for small businesses are better positioned to target the most distressed businesses and tailor financing products (grants and low-cost loans) to their specific needs. Localities have better connections with community development financial institutions, credit unions, and minority depositary institutions, which often have more and closer ties to minority-owned businesses and businesses in low-income communities.
Local and state governments may also leverage their relationships with local Black and Latino chambers of commerce to conduct outreach about available supports. The Chicago Neighborhood Opportunity Fund, for example, provides sizable cash grants to be accessed in combination with loan capital to businesses in commercial corridors in majority Black or Latino neighborhoods.
At the neighborhood level, small businesses provide intangible benefits through services, amenities, cultural identity, and social capital. Latino communities, which have already faced a disproportionate toll from the pandemic, need supports that ensure their families and their entrepreneurs have the opportunity to prosper.
A man walks past a store going out of business on May 5, 2020 in Brooklyn, New York City. (Photo by ANGELA WEISS/AFP via Getty Images)