By Robert Albro, Associate Director, CLALS
March 26, 2025
Latina-owned business in Columbia Heights, Washington DC. Credit: Elizabeth Albro
Building upon its previous research on Latino entrepreneurship, with the generous support of the Wells Fargo Foundation, AU’s Center for Latin American and Latino Studies recently launched a project to assess the effectiveness of community development financial institutions (CDFIs) for Latino small businesses in the DC-metro region. CDFIs provide bespoke financial services and investment capital to underserved communities, and the economic crisis caused by the pandemic highlighted their crucial role as bridging institutions connecting minority small businesses with the resources they needed to stay afloat. But how have CDFIs gone about their work since the pandemic?
Together with our community partner, the Greater Washington Hispanic Chamber of Commerce, we surveyed representatives of CDFIs throughout our region to better understand how they interact with Latino business owners, but also post-pandemic challenges in doing so, as they seek to support this increasingly important community for our region’s economy. Here we report on preliminary results that show how the effectiveness of CDFIs depends upon their greater attention not just to the specific needs of Latino small business owners but also to the social and cultural circumstances, and communities, within which these small businesses operate.
CDFI’s have been a source of inspiration and innovation when it comes to engaging sometimes hard-to-reach minority small business owners. These include pioneering the use of cohort models when providing assistance, as a way to build peer relationships and support a more networked community of minority business owners. They also include the use of equity impact scorecards to help weigh disparities when evaluating eligibility for business loans. They further encompass a more strategic use of microloans and sustained efforts to rethink traditional risk evaluation systems, which have served as barriers to entrance for minority start-ups. But the role of CDFI’s as critical mediators between minority business owners and the formal financial system remains underappreciated.
Latinos are an increasingly important part of the U.S. economy, primarily through business ownership and job creation. They continue to start businesses at a faster rate than any other group, and are projected to be almost a third of business owners by 2050. But, despite comparable liquidity, credit risk and default rates, when compared with counterparts, Latino small businesses encounter more obstacles accessing capital for start-up, growth, and to survive downturns. They are, for example, 60 percent less likely than White-owned businesses to be approved for a bank loan. This disparity is a major contributor to the long-standing racial wealth gap among small business owners in the U.S.
Recent economic disruptions have also highlighted the greater vulnerability of Latino businesses. Less than half of Latino immigrants nationwide have a relationship with a bank. With less access to lending institutions, Latino business owners have relied disproportionately on personal funds, home equity, and informal social networks, leaving them more financially exposed in times of crisis. The Pew Research Center reported that Latino household wealth fell 66 percent as a result of the 2008 Great Recession, the largest decrease among any group.
During Covid-19, Latino business owners struggled to access capital to weather the pandemic. If more likely to seek funds, they were less likely to receive them from private lending sources. The Small Business Administration reported a success rate of 7 percent for Latino-owned businesses who applied to receive Paycheck Protection Program (PPP) funds provided by the federal CARES Act in 2020, compared to 83 percent for White-owned enterprises. In 2021 the Federal Reserve reported that Latino businesses were less than half as likely as White-owned businesses to receive a PPP loan. Such disparities highlight the urgency to understand the factors that continue to limit Latino asset building, and to identify successful alternatives for engaging Latino small businesses.
Overall, survey responses prioritized the bridging function of CDFIs. On the one hand, representatives of CDFIs emphasized the importance of not simply understanding the specific concerns of Latino business owners, but also the need to be actively present “in the community.” This included, as one respondent put it, “hyper local knowledge,” not just about specific industry sectors, socioeconomic status or tax rates, but about extra-financial social contexts impacting Latino business success, such as new immigration policies or incipient gentrification in a given neighborhood.
Being “in the community” encompassed the necessity of meeting business owners “where they are at.” Respondents emphasized strategies of direct personal contact, such as texting over email, the importance of “personal visits” to places of business, providing information in Spanish, access to bilingual financial professionals, use of social media platforms popular with Latinos, and outreach through Spanish-language media. This extended to attending family and other local celebrations, and was about “establishing trust” with a group, Latino small business owners, often suspicious of formal institutions. One takeaway is that CDFIs illustrate the need for lending institutions to adopt a more expansively encompassing approach to culturally informed “community engagement,” as a core competency of their work with minority small businesses.
On the other hand, respondents repeatedly emphasized that throughout the pandemic, and going forward, it has been challenging to make Latino business owners aware of their financial assistance options. For many, this boils down to a pervasive lack of “financial literacy.” Microenterprises and small businesses often do not keep adequate records and do not maintain basic financial management and accounting practices, which make it hard for them to provide the necessary documentation to qualify for grants or loans. Much of what CDFI staff spends their time doing is helping business owners “put their financial house in order.” Overcoming such informality remains a major challenge. If CDFIs are critical conduits connecting Latino small business owners to formal financial institutions, a second takeaway is the need to offer basic financial literacy assistance further upstream, prior to the business start-up phase, perhaps in coordination with immigrant-serving nonprofits and conceived as one among a set of core wraparound services.
This research project highlights the critical role played by CDFIs in connecting Latino small business owners with resources for success, but also bridging informal and formal dimensions of business practice, and often underserved minority communities with local and regional small business ecosystems. In our current environment, where federal funds supporting the work of CDFIs are under threat, it is increasingly important to bring attention to their value.
*The research for this post was made possible by a grant from the Wells Fargo Foundation. We thank Victor Burrola, who leads Wells Fargo’s philanthropy in the Greater Washington DC region, for his support throughout.
