Mispricing Opportunity: Lending to Immigrant Founders

Mispricing Opportunities: Underserved Small Business Segments

Immigrant communities are the heartbeat of American entrepreneurship. They’re launching startups, scaling innovations, creating jobs, and driving economic growth. According to payroll company Gusto, immigrants have formed about around 20% of new businesses, with rates over 40% in some states. A more recent study at MIT reveals, on a per capita basis, newcomers are 80% more likely to start their own businesses than US-born citizens. In fact, many of the biggest names in tech—Google, SpaceX, and Zoom—were founded by immigrants, highlighting the fact that nearly 55% of America’s billion-dollar startups have immigrant origins.

But despite their entrepreneurial drive and solid track records, immigrant business owners face steep barriers to accessing affordable funding sources. The data is clear: immigrant and minority entrepreneurs are denied bank loans more frequently than average applicants regardless of their credit scores - even if they are found to have lower delinquencies. These founders face higher scrutiny around income verification and asset documentation, creating a nearly impenetrable barrier to capital.

This underserved market is significant. About 5 million new businesses (mainly small or micro) are formed every year, with around 20% owned by immigrants. Assuming half of these immigrant-backed businesses survive their first 5 years and roughly 40% of them seek a loan, this translates into approximately 300 thousand potential new credit customers in the market annually. Of these, 70% could get approved for a loan averaging nearly $500 thousand each*. For lenders, they might have looked into but essentially ignored a more than $70B lending market by origination volume. Moreover, such credit relationships might unlock cross-selling opportunities, creating extra revenue streams to lenders.

Drivers of Mispricing

The challenges for immigrant founders are often systemic. Language barriers, cultural obstacles, and rigid documentation standards make for a complex landscape. Without conventional documentation, US credit histories, or W2 incomes, many simply don’t fit the mold set by traditional underwriting standards. This gap leaves many entrepreneurs relying on costly equity financing or informal funding from personal or family sources. Yet hope on the horizon. The fintech sector is stepping in, offering innovative, tech-driven solutions designed to serve this overlooked market segment.

Technologies Unlocking Origination and Underwriting

With advancements in artificial intelligence (AI) and Open Banking regulatory reforms (like 1033 rulemaking), we’re seeing real change in how lenders assess creditworthiness. Cash flow-based underwriting model looks beyond credit scores, focusing instead on business dynamics like bank transactions, customer relationships, and revenue streams. Take this scenario: a small business supplies materials to a reputable, large-scale manufacturer. That stable client relationship could be the key factor in determining lending eligibility.

APIs and alternative data sources generated through AI/machine learning technologies could additionally include 20-500 data points, making risk assessment more comprehensive. On individual entrepreneurs specifically, their alternative personal scoring could be as accurate as traditional methodology. Combined with conventional scores, total assessment results could offer a nearly 5% lift on model predictive performance for risk differentiation.

Innovative Funding and Distribution Channels

As origination and underwriting evolve, so do the sources and methods of distributing originated small business loans along the credit value chain. Here’s a breakdown:

1. Diverse Funding Sources: The cautious stance of traditional banks has paved the way for private funders to step up. Percent and YieldStreet have been democratizing access to small business lending, allowing a broader range of individual accredited investors to get involved. Additionally, companies like Bluevine leverage larger-scale asset managers/private credit funds to support small businesses at scale.

   
   

2. Digitized Distribution Platforms: Platforms like iCapital, CAIS, and Moonfare are making institutional private credit more accessible and streamlined. These platforms enable wealth advisors (e.g., RIAs and independent broker-dealers) to connect private credit funds with accredited investors and family offices, minimizing operational burdens. For investors, this approach offers exposure to lending opportunities that are diversified and professionally managed, similar to a mutual fund experience.

   
   

3. Secondary Market Innovations: Secondary markets for small business revenue-based financial assets are creating an exciting new space. An increasing number of secondary marketplaces have emerged and allowed investors to trade small business loan shares like stocks. By leveraging innovations like blockchain, these markets could unlock new funding channels for entrepreneurs, even as they remain niche for now. Micro Connect Financial Assets Exchange (MCEX), for example, is a licensed revenue-based financing exchange out of China. It enables small businesses to raise capital through revenue-based financing that can be traded like stock shares or ETFs. MCEX has set an inspiring example for US lenders and investors, showing a transparent, flexible, and scalable pathway for funding for small business owners in America, combining liquidity with steady cash distributions.

Immigrant and minority-owned businesses are indispensable to the American economic growth. But traditional funding hasn’t kept pace, leaving many small business loans mispriced. As technology reshapes lending and distribution, the small business financing market is set for a transformative evolution, bringing inclusivity, cost savings, and increased liquidity to the forefront.

Notes:

• Triangulated using average SBA (7) loan size as well as interview data by the author
• Information only. No investment advice provided in this article
• Revenue-based financing can be packaged into loans and other credit instruments; only focused on loans in this article

Feature Image*: Google co-founder Sergey Brin (left) came to the US at the age of 6*