Emerging from COVID: An Opportunity to Reinvent Credit for Latino-Owned Businesses

The Q4 2020 Latino Small Business Credit Survey edition is a review of 2020 highlighting credit trends relating to Latino-Owned Businesses (LOBs). Based on our report findings, Camino Financial offers policy guidance for the new Biden-Harris administration to promote the financial inclusion of LOBs.

The report shows the lack of PPP and other government relief programs reaching the Latino business community. Only 2.5% of LOBs without a pre-existing relationship with a lender received government relief, compared to 16.5% for those with a pre-existing lender relationship.

In addition, the report shows the emergence of Haves and Have-Nots within the LOB community. The survey shows that lenders are targeting larger businesses with longer operational history and higher credit scores. This asymmetric approach to lending creates barriers for LOBs that skew lower on their size and credit history, preventing them from obtaining capital.

• In 2019, LOBs based in Low to Moderate-Income (LMI) areas were 10.6% smaller and generated $25.4K less than those based in non-LMI areas.
• Whereas in 2020, LOBs based in LMI areas were 25.1% smaller and generated $64.7K less than those based in non-LMI areas.

Based on report findings, Camino Financial recommends the following: 

Define “micro businesses” and design loan programs around this large cohort: When LOBs apply and qualify for PPP or other government loans, they often do not receive the full amount requested, and must look to private lenders to bridge the difference.

• In Q4 2020, more than 85% of LOBs earned less than $300k in annual revenue, roughly half the size relative to the national average.

Target relief in LMI areas: In order for lenders to gain confidence in lending to more sectors, the Biden administration must focus on recovery for businesses in LMI areas that are historically left out.

• 87% of LOBs operate in low to moderate-income (LMI) areas.

Create simple onboarding and training programs: Offering the appropriate credit and educational experience will increase creditworthiness and decrease the negative bias effect against smaller LOBs.

• Education and training raise loan approval rates by 6.6x according to our annual credit survey.