NB Financial Health
Immigrants Create Jobs – Small Loans Can Help: New Research on the Impact of Supporting Underserved Entrepreneurs
All the political attention currently focused on immigration is shining a bright light on issues at our ports of entry. But an important fact is being lost in the heated debate over our U.S. borders: Recent immigrants are some of the most entrepreneurial among us. And they’re creating prosperity not just for themselves and their families, but also, as new research from the community development financial institution Opportunity Fund reveals, creating jobs and driving economic growth in our communities. To take just one prominent example, immigrants and their children have helped found 60 percent of the most highly valued tech companies in the U.S. (currently worth $3.8 trillion).
Entrepreneurship is a revered pathway to success in America because it is seen as an egalitarian pursuit—open to anyone with a little moxie who is willing to work hard—that benefits the country through economic activity and valuable services. However, the truth is that the path to entrepreneurship is not always open to immigrants and other underserved entrepreneurs with little or no credit history, because they are shut out of our credit markets. Immigrants often face a Catch 22: They have no credit score because they’re new to the country, but they can’t get any kind of affordable credit to help build a credit score because they don’t have a previous credit history. When these entrepreneurs can’t get a loan to launch a business – or even buy a new piece of equipment, finance an expansion or stabilize their cash flow – an avenue to success is closed off.
The ‘Eye-Opening’ Impact of Small Loans
It doesn’t have to be this way. And it doesn’t require vast investments of capital to make a dramatic, large-scale impact on people’s lives. Recent research by Opportunity Fund and a team of researchers at UC Berkeley’s Net Impact shows that it is possible to use small loans to build an onramp to the mainstream economy and expand the benefits of entrepreneurship to people with limited or no credit.
Opportunity Fund has made more than 13,800 loans to small and micro business owners—many of whom are immigrant entrepreneurs—who can’t get a loan from a traditional bank. More than a third of Opportunity Fund borrowers have received two or more loans as their businesses continue to grow. Nearly 2,000 repeat borrowers form the sample for this study, and the research analysis focused on their business revenues, credit scores and job creation over time—in some cases up to 10 years. What we found is eye-opening:
- Opportunity Fund helped more than 1,000 borrowers establish credit over the past decade, with those in this study achieving an average score of 630. This is below the median range of 670 to 739, which is considered a “good” score, but well above 579, which is considered “poor” credit.
- Among the repeat borrowers who came to Opportunity Fund with an existing credit score, 33 percent saw that score increase at least 25 points—which could mean the difference between a sub-prime and prime score.
- Repeat borrowers increased their business revenue by an average of 51 percent between their first and most recent loan.
- These borrowers employ an average of 2.9 people—more than 5,600 people total.
- Sixteen percent of borrowers created one or more new jobs between their first and most recent loans.
Making Small Bets on Underserved Entrepreneurs
The research shows that Opportunity Fund loans, which have a median size of $21,000, are helping these entrepreneurs build a positive credit history, and providing them with the working capital they need to expand operations and hire or retain employees. Making small bets on underserved and immigrant entrepreneurs leads to a big social payoff: prosperity, jobs and increased economic activity.
There are thousands of entrepreneurs who are seeking a small amount of capital to build a business and pursue their dreams – and who can’t find help from traditional lenders. However, if we can build a financial system that is willing to make loans to people who have little or no credit history because they are immigrants or their businesses are too small, we will all reap the rewards—economic mobility and security for entrepreneurs, and jobs and increased economic activity for the communities where they operate.