First published April 2014
Though micro-businesses contribute significantly to nationwide economic activity and their owners’ household balance sheets, many still struggle to make ends meet or build long-term wealth. Today, little is known about how the typical micro-business manages its finances, the major financial challenges they face or which components of financial capability lead them to business success. To begin to bridge this gap in understanding, CFED released a groundbreaking new study titled In Search of Solid Ground: Understanding the Financial Vulnerabilities of Microbusiness Owners.
With support from MasterCard’s Center for Inclusive Growth, CFED launched the study in 2013, surveying 716 micro-business owners from 43 states and conducting phone interviews with 214 owners from two target markets: Miami and Minneapolis. The findings reveal that micro-business owners’ business and personal finances are often inextricably tied and that they are dealing with significant financial vulnerabilities that reach far beyond access to credit. Among the main findings:
- Cash flow problems—lacking sufficient liquidity to cover business expenses at the time they arise—are key drivers of financial insecurity for both micro-business owners and their households.
- Remarkably low short- and long-term savings levels compound these challenges even further, preventing micro-business owners from mitigating income-expense mismatches, weathering emergencies or meeting long-term goals that contribute to greater financial stability.
- Difficulty accessing appropriate financial products and services, especially credit, also compounds micro-business owners’ financial security: those that are vulnerable for other reasons—young startups, less formal businesses, those generating lower household incomes for their owners, those with fewer employees and minority-owned businesses—are more likely to experience difficulty accessing financial products that suit their needs.
The study’s findings help tell a more nuanced story about what constitutes financial capability and offer new insights into the types of solutions that might resolve micro-businesses’ greatest financial challenges. Going forward, CFED will engage partners in a national dialogue focused on moving from research to action. We hope you will accept CFED’s invitation to stay engaged!