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The Varied Financial Health Needs of Underserved Entrepreneurs

Thursday, August 2, 2018

Financial Health Network welcomes Gina Harman and Luz Urrutia as guest bloggers. Gina currently serves on Financial Health Network’s board of directors and Luz is a past member of Financial Health Network board of directors.

Guest post co-authored by:
Gina Harman, CEO, U.S. Network, Accion
Luz Urrutia, CEO, Opportunity Fund

As mission-based small business lenders, Accion and Opportunity Fund primarily serve individuals who fall outside of the traditional financial system due to challenges such as limited credit history or lack of collateral. Many of the entrepreneurs we serve go into business to build greater financial security for themselves and their families. Yet, since our organizations began lending in the U.S. more than two decades ago, we have been limited in our ability to understand the impact of our work on our clients’ financial health.

After teaming up on a multi-year study to evaluate the impact of our lending and advising services in the U.S., we now have greater visibility into clients’ unique financial goals and journeys than ever before. This research, conducted by Harder+Company Community Research, was made possible through lead funding from the W.K. Kellogg Foundation and JPMorgan Chase & Co., with additional support from S&P Global.

The good news

We are encouraged to learn that, two to three years after receiving their loans, our borrowers cited statistically significant increases in their feelings of financial control and their ability to withstand a financial emergency, as well as a statistically significant decrease in anxiety related to finances. What’s more, the majority of our clients attributed their success in a range of areas to the lending and advising services we provide, from increased financial stability to improved confidence.

Percent of entrepreneurs who said their lender had “a lot” of positive impact

The not-so-good news

Despite these improvements, the majority of clients surveyed at the end of the study had not taken steps to prepare for a financial emergency (55%) and said that finances are a significant source of stress (58%). We also learned that although most business owners closely tracked their daily income and expenses and many adopted more sophisticated tracking tools over the course of the study, few are able to use this information to forecast and prepare for financial downturns.

Financial health as a lens for customer centricity

Being customer centric means being equipped to tailor services to a business owner’s unique needs. This can be achieved through segmentation, or the process of grouping customers based on shared characteristics. Employing a technique called cluster analysis, researchers at Harder+Company segmented borrowers based on a variety of outcomes at the end of the study, which revealed five distinct segments of entrepreneurs, each with unique goals, challenges, and successes. Unlike traditional analysis by owner demographics or business size and stage, financial health emerged as the most useful lens in understanding the customer. As distinct as these clusters are in many characteristics, they do not differ substantially in terms of industry sector, business revenue size, or along demographic lines including age, gender, and ethnicity or average loan size.

The outcome variables that proved to be key in identifying customer segments were:

  • Change in sales and profit during the past six months
  • Change in personal/household savings during the past six months
  • Employment outside of business
  • Ability to draw a salary from the business in the past six months
  • Business financial stability (i.e., sufficient revenue to cover expenses and withstand a financial emergency)
  • Personal and business financial services used such as business savings account, credit card, insurance, retirement account
  • Business tracking tools used
  • Comfort with current level of business debt
  • Personal financial security, such as financial stress and ability to plan

5 clusters reveal unique experiences and needs

Focused and growing: Comprising 44% of participants, this group of entrepreneurs was growth-oriented from the beginning. In the six months prior to each round of data collection, this group saw 72% and 77% increases in sales, respectively.

“Long term, 2017 and 2018, I want to increase my revenue stream at least by 100%. And I am trying to bring in more people to work for me as well as a partner for my business.”

This group of entrepreneurs reported high levels of financial stability at the end of the study. For example, more than 98% of participants in this group said they had sufficient monthly revenue to cover operating costs and 68% reported having sufficient cash reserves to withstand a financial emergency.

Stable and strategic: Including 12% of participants, all of the entrepreneurs in this group balance multiple income sources, and many prefer it that way. Examples include a New York-based music producer who also acts on the side and a New Mexico-based couple who opened a motel while continuing to operate their network engineering consulting firm.

Business owners in this group value financial stability and personal fulfillment, and this is reflected in their gains in financial health at the conclusion of the study. Compared to the previous year, they reported greater preparedness for a financial emergency (61% vs. 42%), reduced anxiety over finances (45% vs. 61%) and reduced stress concerning their business debt (13% vs. 45%). 87% said they feel able to handle their financial future.

Off balance and seasonal: 9% of the sample falls into this group, characterized by unexpected hardships and seasonal cash flow. At the conclusion of the study, the vast majority reported recent decreases in sales (83% of borrowers), profit (87.5%), and take-home pay (71%).

“The seasonality of the business is the hardest part. It’s feast or famine.”

By the end of the study, this group saw significant decreases in their perceived ability to handle their financial future (from 62.5% to 25%) and their sense of control over their financial situation (from 33% to 12.5%). Perhaps as a result, entrepreneurs in this group were more attuned to day-to-day cash flow and more likely to use advanced financial tracking methods than those in other groups.

Retrenching: This group, which includes 19% of the sample, had the highest proportion of borrowers (one in four) who used the loan specifically to launch a business. Most (69%) had experienced increases in sales or profits, but only 2% were taking a salary from the business at the end of the study (down from 43% in the previous year).

Follow-up interviews shed more light on this discrepancy. Some interviewees said they didn’t take a salary from the business because their personal financial needs were covered by another source of income and they would prefer to reinvest the profits into the business. Others noted that they don’t separate personal and business expenses and that their take-home pay from the business goes directly to pay living expenses (i.e. they don’t consider their take-home pay a salary).

Slowly growing and optimistic: The borrowers in this group, comprising 17% of the full sample, experienced slow and incremental growth while managing inconsistent cash flow with limited financial reserves. More than half of these entrepreneurs reported increased sales and profit at the end of the study, but only 20% had increased their savings and 19% actually depleted their savings over the study period.

“I have seasons where I can earn two, three times what I would make in a weekly paycheck. And then there are weeks when I don’t make much.”

More than three quarters of entrepreneurs in this group said that monthly revenue was sufficient to cover operating costs at the end of the study, but less than half (44%) said they were able to meet business debt and other obligations on time. Only 9% said they had sufficient cash reserves to withstand a financial emergency.

Significance for financial service providers

Looking at each cluster reveals a deeper and more nuanced picture than can be gleaned from the aggregate findings. For example, it is clear that the financial health needs of an entrepreneur in the off balance and seasonal group who is struggling to survive day-to-day cash flow challenges are different from those of an entrepreneur from the focused and growing group who is pursuing business growth from a strong financial foothold. Findings from this research demonstrate the value of applying a financial health framework not only to understanding the impact of financial services, but also to understanding and addressing unique customer needs.


To learn more about Financial Health Network’s Financial Health work, visit www.finhealthnetwork.org.

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