Why are Small Business Loans in Puerto Rico So Limited?

Small businesses are critical to Puerto Rico’s economy—there are over 40,000 small businesses in Puerto Rico, making up 99.7% of all business establishments on the island.

The most popular industries on the island of Puerto Rico are retail trade, healthcare and social assistance, accommodation and food services, professional, scientific, and technical services, and other services (excluding public administration). Many of these industries are more susceptible to economic fluctuations and changes in demand than others.

Because of Puerto Rico’s remote island location, businesses in these and all other industries also face unique challenges compared to their mainland counterparts, such as infrastructure issues, economic challenges, difficulties finding qualified staff, and the effects of natural disasters.

In addition to these obstacles, small businesses in Puerto Rico face additional hurdles when it comes to securing the small business funding they need to meet these challenges and continue to grow. While small businesses in Puerto Rico are eligible for SBA funding, many funders “ will not fund in Puerto Rico because they believe it’s a high risk based on the general perception, whether true or false, that the economy is unstable”, according to Greenbox Capital CEO Jordan Fein.

In this post, we’ll unpack some of the factors that contribute to this perception and explore what small business funding options are available to small businesses in Puerto Rico.

Let’s get started.

Many lenders believe that Puerto Rico’s economy is unstable. Fearing the risks associated with doing business in an unstable economy, these lenders are less inclined to fund businesses on the island.

There are a number of factors that impact Puerto Rico’s economy, small businesses, and how business on the island is perceived. Let’s take a closer look at 7 of these factors and how they may contribute to the lack of access to working capital funding on the island:

Due to the island’s size and available natural resources, Puerto Rico is not able to rely on manufacturing or producing goods to support its economy as much as mainland states. Decades ago, tax incentives made available through section 936 of the tax code drew many technology- and service-based businesses to the island, but when these tax codes changed in 1996, many of these businesses left Puerto Rico, leaving behind major economic challenges.

Instead of making cuts to social programs and spending, Puerto Rico’s government borrowed money to make up for this decline in tax revenue. Bonds were the preferred method for borrowing—the island would take investors’ money and promise to pay it back with interest, and thanks to special tax incentives, any profits would be tax free. These bonds were extremely popular and many wealthy, non-Puerto Rican investors used them to generate tax-free profits. Many bonds were also sold directly to Puerto Ricans, with even less transparency due to less restrictive regulations.

Eventually, the bond program became unsustainable once investors realized that Puerto Rico would not be able to repay the investments. Bond prices tanked in 2013, and within months credit rating agencies had downgraded Puerto Rican bonds to “junk status”, creating the perception of instability and deterring many potential investors and lenders.

Spending on social programs is disproportionately high in Puerto Rico—about half of the island’s residents receive Medicaid or assistance through the Children Healthcare Insurance Program (CHIP). A high poverty rate also means more residents rely on welfare and other government benefits. Despite this, Puerto Rico receives far fewer federal dollars to assist with social spending than states with comparable populations.

Social spending cuts have had an impact on the cost of living for many Puerto Ricans and small business owners. With less money to spend, consumers are less able to support local small businesses. Businesses that generate less revenue, have lower or unstable cash flow, or are unable to provide collateral are less likely to receive funding from traditional or alternative funding sources.

Fueled by the bond crisis and other factors such as high social spending, Puerto Rico filed for a form of bankruptcy in 2017 after facing several years of high public debt. This led to the installation of a federal oversight board composed of seven board members, none of who are native to Puerto Rico.

This oversight board made deep spending cuts to address the island’s debt. Puerto Rico has no involvement in the board’s decision making, and these cuts have had a negative impact on the quality of life of many Puerto Rican citizens, including limiting pensions and Medicaid spending.

After a recent restructuring of Puerto Rico’s debt, hope is rising for economic growth independent of expected federal aid. However, opinion is very divided on whether these recent changes will benefit the people of Puerto Rico—news laws aim to attract wealthy foreigners to the island, but these policies may have detrimental effects on the local population, including limiting access to affordable housing.

The effects of these policies and cuts to much-needed social programs are far-reaching, leaving many citizens unable to support small businesses.

Puerto Rico’s public debt crisis is exacerbated by the perception of corruption in civil leadership. In 2018, public outcry and mass protests led to the resignation of Governor Ricardo Rosselló, days after federal agents began a series of arrests for corruption indictments laid against government officials and contractors, including the island’s former Secretary of Education, who pleaded guilty to federal conspiracy charges in 2021 over the mismanagement of public funds during her tenure in 2017-2019.

The unrest continued in July 2019 when a general strike inspired nearly 1.1 million people on the island to peacefully protest ongoing corruption scandals and other social issues. Over 500,000 protestors—close to ⅓ of the island’s total population—were estimated to be present in San Juan.

The perception of corruption and civil unrest can make businesses in Puerto Rico seem like higher risk investments, resulting in reduced access to capital many small businesses need to recover from events like Hurricanes Maria and Irma, as well as the COVID-19 pandemic.

Puerto Rico has weathered several natural disasters in recent years, including Hurricanes Maria and Irma in 2017. In 2019, the island received a D- score on the American Society of Civil Engineers’ Annual Report Card for America’s Infrastructure.

Sluggish aid response has been complicated by bureaucratic corruption, and many citizens and businesses are still contending with major infrastructure issues such as ongoing power outages. In 2021, thousands of people protested ongoing power outages, largely believed to be the result of poor maintenance and repair. On top of unreliable service, electricity prices are estimated to be roughly double U.S. rates, and prices have continued to rise despite frequent blackouts.

Infrastructure challenges have a direct impact on small business loans in Puerto Rico by limiting economic growth and competitiveness. Increased energy costs must also be shouldered by business owners, who are also contending with revenue shortages resulting from reduced income and social supports for their customers. These factors contribute to Puerto Rico’s elevated lending risk profile, and many lenders won’t consider applicants from the island.

Fueled by lower salaries and wages for public workers and fewer opportunities for young workers, many islanders are leaving Puerto Rico to find more lucrative work in the mainland USA. Puerto Rico’s population decreased by 4.4% in 2018, with the number of islanders moving to the mainland USA increasing by more than ⅓ in the same year.

Puerto Rico’s tax base will continue to shrink and spending needs will increase as outmigration continues and the remaining population ages, leading to greater public debt challenges that will create ripple effects for consumers and small business owners. This again contributes to the perception that Puerto Rico is a high risk environment, causing many lenders—including both traditional and alternative lenders—to avoid lending to businesses on the island.

Small businesses in Puerto Rico were significantly impacted by the COVID-19 pandemic—50% of businesses were subject to government-mandated closure, vs the national rate of just 19% national rate. Similarly, 72% of establishments in Puerto Rico told employees not to work, vs. the national rate of 52%.

Businesses on the island were most likely to ask for state or local government assistance at the start of the pandemic, and were less likely than mainland states to ask for PPP or other SBA funding during the first round of relief funding. Of the businesses that did apply, Puerto Rican businesses were over 20% more likely not to receive funding from any federal program—only 7% of small businesses received PPP relief in the first round of federal funding.

COVID-19 has subjected already-battered small business owners to even greater challenges and economic uncertainty as they continue to recover after Hurricanes Irma and Maria. With fewer businesses receiving federal relief than mainland USA and fewer options for alternative funding, small businesses in Puerto Rico are facing even greater risk as the island emerges from the COVID-19 pandemic.

Lack of access to capital is a critical challenge for small businesses in Puerto Rico. Small businesses in Puerto Rico are eligible for SBA loans, but these loans are notoriously difficult to acquire. The SBA approved just 439 loans for businesses in Puerto Rico in 2019, for a total of $78.2M—an increase of 35% and 28% over 2018. Bank loans are also available from local commercial lenders, but these loans are similarly difficult to acquire and can take months to come through.

Businesses in the mainland USA have access to a number of alternative lenders that offer faster funding with more flexible approval requirements, but many of these lenders do not fund in Puerto Rico.

Greenbox Capital is the only alternative lender that operates in Puerto Rico.

“Greenbox Capital has taken additional risk, and while it has not been easy with the natural disasters, we are looking to help as many business owners grow their business as possible. That includes, looking past some of the challenges and we believe that if we’re helping small business even in a territory like Puerto Rico, it will really impact small communities which is what we are set out to do,” says CEO Jordan.

“In all countries that we fund, we aspire to be known as the funder that thinks outside The Box or as we like to say at Greenbox Capital, thinks Inside the Box.”

With a streamlined online application, faster turnaround, and more flexible approval requirements, Greenbox Capital is able to offer more accessible funding to small businesses in Puerto Rico. “Greenbox Capital is the number one funder in PR and we expect to only continue to gain popularity amongst the citizens of Puerto Rico,” says CEO Jordan Fein.

We offer a number of funding options that can benefit small businesses in Puerto Rico, including:

• Merchant cash advances: MCAs are a non-loan form of financing known as an asset purchase or a purchase of future receivables. You’ll receive an advance of working capital when you need it, and your lender will receive a portion of your daily or weekly debit and credit card sales until the advance has been repaid. Learn more about merchant cash advances.
• Invoice factoring: Invoice factoring is a non-loan form of financing known as accounts receivable financing. Instead of receiving a lump sum that will be repaid over a certain term, a business will sell their unpaid invoices to a lender, called a “factor”. The factor owns the invoices and will advance the money your clients already owe you, typically between 70-90% of the invoice’s value. The remainder of the invoice’s value will be paid out to you once your client pays, minus any lender fees. Learn more about online invoice factoring.

There are no restrictions on how funds are used, and no collateral is required.

Compare SBA and alternative funding in Puerto Rico

Because of unique economic and regulatory factors, commercial loans in Puerto Rico can be especially difficult to obtain from traditional lenders. With a streamlined online application and flexible approval requirements, alternative lenders like Greenbox Capital make more funding available to small businesses in Puerto Rico. Funding from as little as $3,000 up to $500,000 is available, including merchant cash advances, online invoice factoring, lines of credit, and other alternative business loans, with funding delivered in as little as one business day.

1. “2020 Results of the Business Response Survey.” United States Bureau of Labor Statistics.
2. “Puerto Rico Small Business Profile, 2019.” SBA.gov.
3. “How Puerto Rico’s Debt Created A Perfect Storm Before The Storm.” Laura Sullivan. NPR. May 2, 2018.
4. “Only 7 Percent of Small Business in Puerto Rico Received Approvals for PPP Funds.” Rosario Fajardo. The Weekly Journal. April 22, 2020.
5. “The Origins of the Puerto Rican Debt Crisis.” Greg Depersio. Investopedia. January 31, 2022.
6. “Puerto Rico has a plan to recover from bankruptcy — but the deal won’t ease people’s daily struggles.” Carlos A Suárez Carrasquillo. The Conversation. February 11, 2022.
7. “Puerto Rico may be nearing the end of bankruptcy. What does this mean?” Cristina Corujo. ABC News. February 6, 2022.
8. “SBA Loans in Puerto Rico and US Virgin Islands Increase 35 Percent during Fiscal Year 2019.” SBA.gov. November 25, 2019.
9. “Small Business Pulse Survey: Tracking Changes During The Coronavirus Pandemic.” February 11, 2022. United States Census Bureau.