With CFED’s Help, Microbusiness-Serving Organization Addresses Outreach Issues
By Amanda Blondeau on 02/23/2017 @ 11:34 AM
Over the last year and a half, CFED invested in Northern Initiatives, a microbusiness-serving organization, to help them better understand the client experience and utilize those insights to innovate their services. Northern Initiatives’ online portal contained helpful financial tools and resources for clients, but was underutilized.
Together, we explored what it would take to help microbusiness owners navigate around and learn about business finance from the online portal, redesigned the portal with these requirements in mind, and tested a draft version of the new portal with 18 business owners in Northern Initiatives’ client base. These user tests revealed that clients generally liked accessing Northern Initiative’s resources and coaches through an online portal, but wanted even more guidance on how to find and use the content.
Since reporting on the project, Northern Initiatives revised the online portal and solicited additional feedback from 9 additional clients in a second round of user tests. This blog post shares Northern Initiatives' experience in conducting the user tests and advice to other practitioners that are interested in conducting user tests within their own programs.
What changes did you make to the portal after seeing the results of the first user test?
We made three immediate changes to the portal.
- We removed the peer forum - The user tests revealed enough confusion or distaste for a forum that we decided to remove it for now. This may be a feature we add in later. However, in this phase, we want to focus on the content and facilitating customer connections with a coach.
- Added a ‘Contact a Coach’ page - One of our goals for the portal was for customers to have access to tools and a basic understanding of the content we provide to support and grow their businesses. We also wanted them to be able to contact a coach to help implement what they learn in the portal. This feature was lost, so we wanted it to be part of the main navigation. In addition, borrowers had varying preferences on how they wanted to communicate with a coach, so we provided all contact details so that they could choose.
- Eliminated multiple menus leading to the same information – Our original design included multiple menus that accessed the same locations on our web portal, which led to navigation confusion for our customers. We eliminated some of these menus to create direct paths to our portal content.
Why did you decide to do a second round of user tests with the updated version of the online portal?
Through the user tests we received a wealth of feedback on what users liked, didn’t like and what was missing from the portal. There were some areas that we knew needed to be changed, but didn’t have enough information to know the end product. Therefore, we needed to develop a next round of prototypes to test these features. In the second prototype, we primarily focused on the development of a dashboard that users could customize, revision of the initial page to make it easier for first time users to select and work toward a goal, and simplified navigation and organization of content.
What did it take to set up and conduct this round of user tests?
We started by revising the prototype Design Criteria based on the feedback of the first user tests. While we were doing this, we updated the prototype Testing Outline provided by CFED, which focused on the activities we were testing, minimum prototype functionality, scenarios and prompts to aid in testing, how we would measure success of the activity and follow-up questions. The Design Criteria and prototype Testing Outline helped to frame what we needed to do. Once that was complete, we worked with our portal developer to create a next round of prototypes to test the revisions we heard in the first round. Then user tests were conducted with nine people in-person.
What did you learn from the user tests? What was the most surprising finding?
It was very interesting to watch users interact with the portal. What did they click? What words did they react to? What content did they prefer? Everyone had strong opinions. Upon logging in, users first had the ability to either work toward a goal or browse all resources. Almost everyone selected a goal and did not see the browse button. They were able to find a goal they wanted to work on, so that was positive. However, when they wanted to work on a new goal, they were confused. They figured the home button would bring them back to the original screen. Instead, it brought them to a dashboard, while the “Select a Goal” feature they were looking for was located on the top of the page.
We also learned that users had a hard time with the portal because there were multiple ways to get to the same information. The resources we included in the goals section could also be found by browsing all resources. Instead of this being useful, we found it caused confusion. We learned that consistent and simple navigation is needed and consistency is key.
We also found that most users preferred focused/relevant videos (under five minutes) and interactive tools or templates. They liked the overview and then the ability to implement. Some users preferred to read, so it is important to have a mix.
What advice would you give to community organizations seeking feedback from clients on their products or services through user tests?
Go into the tests with a plan; it is easy for the users to go down a path that is interesting, but doesn’t get you the feedback you need to truly test the prototypes. What activities are you testing? What indicators will you measure? What follow-up questions will you ask to gather further insights? This plan also helps when developing the prototypes. It gives a clear structure to what you want to test and what indicators you will measure. Indicators in our example could be the number of clients that choose a goal versus the number of clients that browse.
Be patient with the process. Many times we set the deadline for launch before we test. It may take multiple tests to get it right, but this will save your organization time and money in the long run. Also, you will have a higher chance of success. So talk to your customers and don’t wait to launch once you have it perfect. Instead, build the product or service with your customer.
About the Author
Leveraging eleven years of community development experience, Amanda Blondeau became the inaugural Director of Northern Initiatives Business Advancement Center in 2010. As the Center Director, Ms. Blondeau is responsible for the development and implementation of services and resources for microenterprises in 46 counties of rural Michigan and five Wisconsin Counties.
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Policies Should Promote Entrepreneurship for People with Disabilities
By Diego Quezada on 01/09/2017 @ 11:30 AM
People with disabilities stand as one of the most economically disadvantaged groups in the United States. The poverty rate for working-age adults with disabilities is nearly three times higher than that of working-age adults without disabilities. Moreover, disability does not affect people uniformly across racial and ethnic lines. Black and Latino people over the age of 50 are more likely to have a mobility disability than similarly situated White people, for example.
Even if they manage to secure employment, people with disabilities also face pay inequities compared to their colleagues who do not have disabilities. For every dollar workers without disabilities make, those with disabilities make just 64 cents. Employers are concerned with the costs associated with accommodating disabilities and the perceived lower productivity of those with disabilities. Moreover, employers remain leery of hiring people with intellectual disabilities.
Seeking employment to achieve financial security stands stubbornly out of reach for too many people with disabilities. One way to address these discouraging issues is self-employment and entrepreneurship.
The Chicago Add Us In (AUI) initiative aims to empower people with disabilities to build financial security through entrepreneurship. This program offers candidates a course in entrepreneurship that includes the development of a business plan. Promising plans are recommended for start-up funding. In 2013, 10 people signed up for the entrepreneurship course, six of whom received funding.
Programs like AUI represent the best of policy interventions designed to reduce disparities in the United States; people who come from marginalized backgrounds should be equipped with the resources to empower themselves and pursue their aspirations. Moreover, entrepreneurship stands as a unique, appealing pathway to financial security for people with disabilities. Aside from the inequities people with disabilities face in the traditional job market, business ownership allows them to accommodate their disability. Entrepreneurs with disabilities have more control over the nature, time and location of their work – factors that many wage or salaried workers often do not control.
The U.S. Department of Labor, which oversees and funds Chicago AUI, should expand this project to programs across the country. The national AUI initiative strives to expand the capacity of small business owners to hire people with disabilities and place marginalized people with disabilities in an employment experience. But the Chicago program is the only one funded by the Department of Labor that offers an entrepreneurship option.
Self-employment and business ownership should become more of a priority for training programs for people with disabilities. When the traditional market offers bleak prospects for people with disabilities to secure and sustain gainful employment, public policy efforts should turn to entrepreneurship as a strategy. With more investment in people with disabilities, people can finally know that having a disability doesn't relegate them to a precarious financial life.
Structural Barriers Persist for Female Entrepreneurs
By Diego Quezada on 12/22/2016 @ 09:00 AM
Women are growing as a share of all business owners. The number of women-owned business has increased by 7% since 2001, and women-owned firms now make up 30% of all U.S. businesses. These firms are also becoming more diverse; the number of firms owned by women of color has skyrocketed from just under 1 million in 1997 to nearly 3 million in 2015.
Even so, the American economy is losing out on all the potential benefits of these women-owned firms. In an age when 40% of households with children have women as the sole or primary breadwinner, women still face structural barriers to owning businesses. As a result, we're all missing out on economic growth and employment opportunities.
Starting a business is a challenge for anyone, but it is even harder for women. A longstanding wage and wealth gap between white, male-headed households and households headed by single women, especially women of color, persists. Single Black and Latina women own a fraction of a penny for every dollar owned by a White man. These lower levels of wealth make internal investment and external borrowing more difficult for female entrepreneurs.
In addition to the wealth gap, women's lack of access to capital exacerbates their disadvantages compared to male entrepreneurs. Women are more likely to be denied a loan or to pay higher interest rates compared to equally qualified male business owners applying for loans. People of color in general also face these inequities, as CFED has written about before. Women are even less likely to apply for business loans due to a fear of denial. It's no surprise, then, that women begin their businesses with about half of the financial capital of male-owned businesses, and these disparities widen over time.
Women don’t have more successful businesses because of a lack of drive, but because of these structural barriers. Public policy reforms therefore can open the door to facilitate female entrepreneurship and reduce income and wealth inequality. One such reform is the expansion of the New Markets Tax Credit (NMTC).
Established in 2000, the NMTC serves as an investment mechanism to support job creation in low-income communities. This program allows individuals or corporations to receive tax credits in exchange for making equity investments in community development entities, which are private organizations recognized by the IRS as providing investment capital in low-income communities. An Urban Institute evaluation found that 30 to 40% of these NMTC investments would not have proceeded without the program. Congress should expand the NMTC, and applications that serve female entrepreneurs and entrepreneurs of color should receive favorable consideration.
Business ownership is an important wealth generator, and women are growing as a share of all business owners. We should celebrate these gains; business owners earn more money than those who do not own businesses, a finding that remains true across gender and racial lines. But structural barriers leave female entrepreneurs – especially women of color -- at a sizable disadvantage to their male counterparts, and prevents other women from entering business ownership in the first place. Removing these barriers will spur economic activity and create jobs that will benefit everyone.
Challenges Remain to Unleash Potential of Latino-Owned Business
By Diego Quezada and Lillian Singh on 11/16/2016 @ 10:00 AM
Editor's Note: This article originally appeared on the Huffington Post on November 7, 2016.
After Rosa Macias and her husband, Venancio, moved to the United States from Mexico in 1990, they sold furniture at weekend swap meets. In later years, they partnered with a family member to open a furniture shop on the east side of town in Phoenix, Arizona. Rosa and Venancio soon opened their own store, Muebleria Del Sol. Today, the Del Sol Group, which includes four large furniture stores, brings in $6 million in revenue per year.
This story from Rosa and Venancio is not an exceptional case but emblematic of the recent dramatic rise in Latino entrepreneurship. From 1990 to 2012, Hispanics added new entrepreneurs almost 10 times faster than the overall population. Latino entrepreneurs are starting businesses, employing people and helping them earn paychecks, pay their rents and generate money in the economy. According to the Small Business Administration, 2.3 million people work at Hispanic-owned businesses.
Even with this growth, Latino Americans still face structural barriers that limit their ability to grow the economy more.
Case in point, Latino-owned businesses still make far less than white-owned businesses. CFED's Assets and Opportunity Scorecard reports that on average, white-owned businesses are valued nearly three times as high as businesses owned by people of color. According to a Stanford Latino Entrepreneurship Initiative study, if Latino-owned businesses averaged the same sales as non-Latino-owned businesses, they would have an extra $1.38 trillion in the economy. Since the Latino population is growing as a share of the population – at 17% of the American population today, Latinos are expected to make up 30% of the population by 2060 – unlocking the potential of Latino entrepreneurship stands as an economic imperative. Whether people like America's growing diversity or not, it's happening, and making our economy more inclusive will help everyone.
One myth critics bring up to explain the relative lack of growth in Latino-owned business is that Latinos cater to their own demographic group. The research rejects this theory. According to the aforementioned Stanford study, only 20% of Latino-owned businesses have a "mostly Latino" consumer base. Overall, Latino-owned businesses do not rely on Latino customers.
Latino-owned businesses have not reached their potential because of structural barriers. Black and Latino entrepreneurs experience more denials when seeking financing for small businesses, even when other factors – their educational backgrounds, financial profiles, even their clothes – are identical. Only 6.1% of Latino-owned businesses finance their business with a commercial loan, and just 2.4% do so with a government loan. Latino entrepreneurs thus have few opportunities to start and grow their businesses through conventional capital sources.
And even if Latino entrepreneurs manage to secure loans, they pay higher interest rates. One study found that these higher rates were statistically significant. More broadly, the Federal Reserve revealed that business owners of color pay interest rates 32% higher on average than what their white counterparts pay.
One policy to promote Latino entrepreneurship is the State Small Business Credit Initiative (SSBCI), a 2010 program designed to provide lending to small businesses after large banks cut back on this lending in the wake of the Great Recession. Forty-two percent of SSBCI loans were made in low- or moderate-income communities from 2010 to 2014. SSBCI's funding expires in 2017, though; Congress should reauthorize SSBCI and expand it, implementing goals that set benchmarks for loans given to entrepreneurs of color. The Center for American Progress and Brookings Institute have both called for expanding SSBCI to expand credit opportunities for women and people of color.
Latino-owned businesses are already doing so much for the U.S. economy. They could do much more if we removed structural barriers like limited access to capital. If policymakers want to spur economic growth, buttressing growing, dynamic Latino-owned businesses should stand at the center of their agenda.
1. Although we would prefer to use the term "Latino" in this blog post, we have used the term "Hispanic" when citing sources for data integrity.
Immigrants Can Play Role in Boosting Economic Growth through Entrepreneurship
By Diego Quezada on 11/11/2016 @ 12:00 PM
Recent headlines suggest that the American economy is bouncing back – the Census Bureau found that the U.S. median household income rose by 5.2% last year, to $56,500. A lot of Americans, however, are not feeling the economic recovery and for good reason. The median household still makes 1.6% less in inflation-adjusted terms than it did in 2007, just before the financial crisis.
What's one reason for this lackluster recovery? The rate at which people start businesses has declined for the last three decades, and it shows no signs of reversing. Entrepreneurship plays an important role in spurring economic development in communities and economic mobility for workers and their families, so this trend is worrying.
There's a common-sense solution to help spur entrepreneurship. As CFED has written about before, immigrants are the most entrepreneurial group of people in the United States. The Partnership for A New American Economy found that these rates of entrepreneurship aren't limited to particular education levels or nationalities. In 2014, 10.6% of immigrants who identified as Asian were self-employed entrepreneurs, and 11.6% of Hispanic immigrants were entrepreneurs. By comparison, the rate for U.S.-born Americans was 9.1%.
In fact, immigrants from the Middle East and North Africa (MENA) – a group that has come under particular criticism during this past election season – has had an outsized role in starting businesses. Even after removing Israeli nationals from this group, the entrepreneurship rate among MENA immigrants is higher than that of the entire U.S. population rate. Entrepreneurial activity from MENA immigrants has helped jumpstart Detroit's economic comeback – Middle Eastern-owned businesses in Detroit generate between $5.4 and $7.7 billion in wages and salary earnings each year.
In August, the White House proposed a new rule to allow immigrant entrepreneurs to stay in the country for up to five years. Immigrants who have an “active and central role” in an American company founded in the last three years have to show that they've raised at least $345,000 from U.S. investors, and immigration officials would approve applicants on a case-by-case basis. Although it's a step in the right direction and could boost economic growth, the narrow parameters of this rule limit its scope.
Too often in our political debates, people assume that the United States has a fixed number of jobs, and immigrants and natives compete for those slots. The political rhetoric doesn’t match up with the evidence on economic growth. Immigrants start businesses, helping create jobs for themselves and native-born Americans. If more people realize these facts, hopefully the next Congress can act to create broader reform to help the economy reach its full potential.
Entrepreneurship Can Serve as Pathway Towards Stability for Formerly Incarcerated People
By Diego Quezada on 10/27/2016 @ 02:00 PM
The recently concluded Assets Learning Conference convened participants on a variety of topics and target populations. One session covered a particularly vulnerable group – formerly incarcerated individuals. From discrimination of employers to restrictions on housing to high fees associated with parole and probation, people re-entering mainstream society face a plethora of challenges that threaten their financial wellbeing. However, entrepreneurship programs are emerging as a tool to help formerly incarcerated people overcome these financial barriers.
It is critical to consider the current climate of the criminal justice system to understand who is most impacted. Overwhelming evidence suggests that Black people face harsh disparities in the system. Black Americans are more likely to be arrested for drug crimes despite the fact that white people use illegal drugs at comparable rates. Black people are also more likely to have their cars searched, be offered a plea deal that includes prison time and serve longer sentences than white Americans for the same offense.
This evidence helps explain the growing political consensus in favor of criminal justice reform. Former presidential candidates as distant as Ted Cruz and Bernie Sanders have spoken of reducing the prison population. Additionally, criminal justice issues and the prison system have penetrated into the cultural ethos of the country. In just the past two months, hip-hop icon Jay Z narrated a short film on mass incarceration for the New York Times, and filmmaker Ava DuVernay released the critically acclaimed Netflix documentary 13th, which also explores the issue. Improving re-entry opportunities for the incarcerated is essential to reforming the criminal justice system, and several emerging programs use entrepreneurship as a re-entry strategy.
During the Assets Learning Conference session on formerly incarcerated people, the Aspen Institute’s Joyce Klein discussed her recent publication, Prison to Proprietor. This publication highlights nascent programs that are focused on building entrepreneurial skills for formerly incarcerated people. Lifelong Information for Entrepreneurship (LIFE) is a 32-week course covering business development and re-entry planning for female prisoners. An evaluation of LIFE found that participants were 41% less likely to recidivate than a control group.
Another program, Defy Ventures, serves a primarily male population of returning individuals. Participants attend a five month program that combines job readiness training, business development and financial management and introduces them to mentors and investors. Defy Ventures has served more than 475 formerly incarcerated people who have started more than 100 businesses in industries as diverse as cleaning services, event management and construction. The recidivism rate for Defy Ventures participants is less than three percent.
Although these programs are making positive, incremental progress, we need large-scale change. There are no dedicated public funding streams that support entrepreneurship among currently or formerly incarcerated people. Most programs are funded by foundations and individual donors.
These programs lower recidivism rates, which translate into lower costs for the government. The case for public investment couldn't be clearer. Let's not permanently exclude people from building wealth for themselves and their families, especially when seventy percent of us have committed criminal activity that could land us in jail. Learning from our mistakes is part of life, and mistakes shouldn’t prevent us from creating and sustaining better lives for ourselves and our families.
Despite Progress, Barriers Still Face LGBTQ Entrepreneurs
By Diego Quezada on 10/21/2016 @ 10:00 AM
The visibility of lesbian, gay, bisexual, transgender and queer (LGBTQ) people in mainstream American culture has skyrocketed in recent years. In 2014, Apple CEO Tim Cook became the first chief executive of a Fortune 500 company to publicly identify as gay. Television shows now incorporate, and sometimes even center, the experiences of queer characters. Some hailed the Supreme Court's 2015 decision affirming same-sex marriage as a constitutional right as breaking down the last vestiges of LGBT discrimination in the United States.
The affluence of prominent figures and well-publicized legal victories obscures a more complex, bleaker picture of queer people. Twenty-one percent of LGBT people have incomes of less than $12,000, compared to four percent of the general population. Black Americans in same-sex couples are more than twice as likely as Black Americans in opposite-sex marriages to live in poverty. More than one in four LGBT Americans could not afford to feed themselves at least once in the past year, with particular disparities hitting LGBT Americans who also identify as people of color, female or bisexual.
Unfortunately, this bleak reality extends to LGBT entrepreneurs. A July 2016 study by StartOut revealed that LGBT entrepreneurs are at a distinct disadvantage in growing their businesses, particularly among those who do not identify as male. Seventy percent of female lesbian, bisexual and transgender entrepreneurs raised fewer than $750,000 in funding; by comparison, 47% of male gay, bisexual and transgender entrepreneurs raised more than $2 million. Just three percent of female lesbian, bisexual and transgender business owners have revenues of more than $5 million, compared to 12% of gay male, bisexual and transgender entrepreneurs.
Moreover, the study found that LGBT entrepreneurs are fleeing states that lack protections based on sexual orientation and gender identity for more inclusive states. From 2005 to 2014, LGBT entrepreneurs left states like Arizona, South Carolina and Texas for states like California and New York, shutting out people from those states from more than one million jobs.
In order to address these disparities and enable LGBT entrepreneurs to build businesses across the United States, states should adopt policies barring lending discrimination based on sexual orientation and gender identity. The ability to access credit stands as a critical path to help people obtain loans to jumpstart their businesses. But only 21 states and the District of Columbia hold such protections based on sexual orientation, and three fewer have laws protecting gender identity.
The fact that someone previously went by another name or gender has no bearing on someone's creditworthiness, but lenders are free to refuse to extend credit based solely on these prejudices. In fact, the StartOut study found that 37% of LGBT entrepreneurs are not out to investors. North Carolina's controversial new law HB2, which limits public restroom access for transgender people and restricts municipalities from passing nondiscrimination ordinances that offer protection based on sexual orientation and gender identity, represents a step backward in the fight for economic empowerment for marginalized communities.
Despite the victory of marriage equality and visibility of some queer Americans to live openly, too many LGBTQ people face obstacles to achieve food security, financial stability or to start a business – especially for those who hold other marginalized identities. As long as the lived experiences of queer people remain more difficult than their heterosexual and cisgender counterparts, there will be more work to do.
Startup Propels Immigrants' Entrepreneurial Activities
By Diego Quezada on 09/09/2016 @ 10:00 AM
If you've paid any attention to the 2016 presidential election, you've seen how immigration is such a heated political issue. But beneath all of the rhetoric, real people's lives and their impact on the American economy stand. The most entrepreneurial group of people in the United States wasn't born here. Although they make up just 13 percent of the U.S. population, immigrants now start more than a quarter of new businesses. Between 1995 and 2005, immigrants started 52 percent of all new Silicon Valley companies. Immigrant-founded companies have a collective value of $168 billion and create an average of 720 jobs per company.
Despite all their contributions to job creation, too many immigrants find barriers to starting businesses. Without the ability to transfer their credit histories from other countries, immigrants cannot prove their reliability to borrowers. In fact, more than 42.4 million immigrants living in the United States have limited access to credit. These limited options force many immigrants to turn to exploitative payday loans that can charge interest rates as high as 300 percent.
As a result, many immigrants today toil in low-paying jobs that don't reflect their skills. According to a 2014 Migration Policy Institute report, about 20 percent of foreign-born adults who had post-secondary degrees from abroad were working in low-skilled jobs compared with 12 percent of the U.S.-born population. Too many people are locked in jobs that don't allow them to meet their personal and professional goals or maximize their economic productivity.
Nova Credit, a cross-border consumer credit reporting startup, made their official product launch Aug. 15. Instead of essentially starting over when they arrive to the United States in the eyes of financial institutions, immigrants would show those institutions their credit reports and payment behavior. If Nova Credit succeeds in their goal of providing credit history to immigrants, they would create a $600 billion lending opportunity for American institutions.
This startup represents the best of American policy – helping motivated, entrepreneurial immigrants thrive rather than making it harder for them to succeed and pushing them away. Enabling immigrants access to loans will further unlock their potential on the economy. Everyone in the United States, immigrant and native-born alike, will benefit when people with great ideas have the freedom to turn those ideas into job-generating companies.
Looking More Closely at Microbusinesses Sheds Light on Other Aspects of Financial Security & Inequality
By David Meni, Graduate Intern on 08/23/2016 @ 10:00 AM
Being supportive of small businesses in the United States can often be like supporting apple pie or baseball. With every election season comes the inevitable parade of campaign commercials with B-reel footage of a smiling baker or construction worker, evoking the American entrepreneurial spirit.
However, many efforts to support “small” businesses in the United States don’t help the country’s millions of microbusinesses—those with 1-5 employees, including the owner. These firms constitute more than 90% of all small businesses and are responsible for a significant share of national employment relative to their size. In fact, during the Great Recession, microbusinesses were the only kind of firm that were still creating jobs.
If there’s one thing to know about microbusinesses, it’s this: if just one in three of them hired an additional employee, the United States would reach full employment.
Despite the fact that microbusinesses are such a powerful force in the U.S. economy, a minority of federal funds for small business go to these firms, and microentrepeneurs face barriers to financial stability in everything from financing to everyday cash flow.
CFED’s newest Fact File on microbusinesses highlights the importance of these firms in the national economy, diagnoses their financial challenges and elevates the potential of microentrepeneur support in advancing goals of racial and gender equity.
Here’s an overview of how microbusiness development is informed by some of CFED’s other work.
Predatory Lending Regulation Should Help Businesses, Too
One of the biggest hurdles facing microbusinesses and the entrepreneurs that run them is a lack of appropriate financing. Many traditional lenders are only providing business loans of $1 million or more. Since the Great Recession, that amount of smaller loans given out by traditional lenders has gone down year after year, even as larger loans have rebounded.
But demand for smaller business loans is high: 68% of small businesses are seeking loans less than $250,000, and 50% want loans less than $100,000. With the Small Business Administration’s financing of small loans remaining nearly flat since 2010, many business owners (and soon-to-be business owners) have had to turn to high-cost alternative lenders like Merchant Cash Advances (MCAs).
These loans have all the issues we’ve written about with predatory payday loans to consumers, but are for many thousands of dollars instead of a couple hundred. On average, an MCA has an interest rate of 94%, saddling business owners with monthly payments that are nearly double their income. These unsustainable loans prevent many microentrepeneurs from hiring or growing their business.
While the Consumer Financial Protection Bureau has come out with a proposal on how to rein in the debt trap of small-dollar consumer lending, such rules would not apply to these predatory business loans—despite the fact that they’re essentially mega-payday loans.
Microbusiness Support Could Address the Women’s Wealth Gap
My fellow graduate intern, Anna Mahathey, published a great blog series this summer about the harsh realities of the gender wealth gap in everything from retirement savings to asset limits. Though the growth of new women entrepreneurs since the recession has been high, women-owned businesses have more difficulty securing equity financing, accessing reliable networks and mentors, and growing their enterprise.
Since women are over-represented in the microentrepreneurship space, additional support, research and funding for businesses of this size could go a long way towards helping address the gender wealth gap and ensuring women entrepreneurs gain a more stable foothold in their retirement savings and other personal assets.
The Racial Wealth Divide is Also Fueled by Business Assets
“The Ever Growing Gap,” a report CFED and the Institute for Policy Studies published this month to illustrate how far-reaching the racial wealth divide is in the US, paints a bleak picture. The report finds that it will take centuries for Black household wealth to catch up to where white wealth was in 2013. Other households of color don’t fare much better.
While the racial divide in homeownership is one of the biggest drivers of this wealth gap, it is also driven by differences in business value between white entrepreneurs and entrepreneurs of color. The average value of a white-owned business is more than eight times larger than that of a Black-owned business. Much of the reason for this persistent gap in business value comes from a vicious cycle of financial insecurity facing microentrepreneurs who lack sufficient credit and savings to launch and sustain their businesses. Since entrepreneurs often leverage their own savings or the equity of their home to start and maintain a business, lower levels of wealth for people of color translates into more difficulty in sustaining entrepreneurship.
The silver lining here is that a bit of support for businesses owned by people of color goes a long way. Research conducted by FIELD at The Aspen Institute found that microenterprise development programs helped level the playing field for non-white business owners, increasing business survival rate to be on par with white-owned firms, and boosting business revenues and owner take-home pay.
Microbusinesses and entrepreneurship have always been important issues for CFED. As our new Fact File shows, the field of microbusiness intersects with so many of our other policy and advocacy areas.
Using Human Insights to Design Products that Help Real Humans
By Amy Lahti, Guest Contributor on 08/02/2016 @ 11:00 AM
“You can’t be smarter than the collective intelligence of your customers.”
That’s a great quote from Steven Gary Blank, from an interview he did with Entrepreneur Magazine a couple years ago. Over the last two years, working with CFED, on our project to deliver WESST’s financial tools curriculum in an on-demand format, we’ve found that there is so much truth in that statement. For us, customer interviews have given us more insight into our clients and what they need from us than we had even thought possible.
I’ve been a part of developing many, many projects over the course of my career. The projects pretty much all started off the same way: with incredible enthusiasm and excitement about this new initiative or product, and what people thought it could produce in terms of results. But for me, the enthusiasm was always tempered with a lot of doubt. What if we launch this, and no one likes it or uses it? Is that feature we’re spending so much time and money developing really something people want? I know a few people SAID they wanted this to do X, but will they really use it for X? Are we picking the right colors? The right graphics? Does this look appealing to anyone but us? Inevitably, after launch, we would find that guesswork and theorizing had produced some elements that were right, and some elements that were completely off-base. The process always felt, to me, like taking a standardized test with a blindfold on. Sure, you’re likely to get some things right, but you’d get a lot more answers right if you took the blindfold off!
Now that I know about design thinking and how to gather insights about clients, thanks to WESST’s work with CFED, I feel like we’re definitely working without a blindfold! Every time we put a concept board or prototype in front of a client in a customer interview or user test, we learn more than I had thought was possible. We find out not just how they feel about our project, but how they feel about WESST, what they really need to be successful entrepreneurs and more.
We’ve now gone through four rounds of concept and prototype testing, and the product we have now is completely different than the one we conceived. And that is a wonderful, amazing thing! We’re not lying awake at night, worrying that when we launch our product, we’ll be greeted with puzzled looks, forced smiles or comments like, “Well, that’s certainly interesting!” We know how clients will react to the product, because they’ve already reacted to it in prototype form. We’ve been able to tweak features, solve problems and anticipate obstacles—all because our customers told us what they wanted, what they needed and what they felt was possible from the product. Sure, there’s been some guesswork. But with the user testing process, we’ve been able to test our guesses with real users, in a real-use environment, and then make changes if necessary.
At WESST, we believe in “walking the walk” and following the same advice we give to entrepreneurs. I have become an evangelist for the process of customer discovery, customer interviewing and user testing with my clients who are in a development process because I have seen the results for myself. There is no better cure for doubt and uncertainty than information, and there’s no better source of information about client preferences than the clients themselves. Steven Gary Blank is right: you can’t be smarter than the collective intelligence of your customers. That’s why we’re thankful to CFED for teaching us about human insights research and design, and how to have the courage to ask the tough questions at the right time.
Amy Lahti has nearly 15 years of experience working for large companies and small businesses on projects involving strategic communications, marketing and sales, training and development, and social media. A passionate advocate for effective organizational development, Amy is skilled at identifying the challenges organizations face, and creating customized solutions. Amy is a proud native New Mexican who grew up in Las Cruces and graduated from ENMU in Portales with a B.S. in Communications/Journalism. Amy has an M.S. in Organizational Leadership from Colorado State University’s Global Campus, and also holds a Professional of Human Resources (PHR) certification. She loves cooking, reading great nonfiction books, collecting board games, and spending time with her husband and son, and her parents.
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Practitioners Discuss Challenges, Opportunities for Entrepreneurs of Color in Webinar
By Diego Quezada on 07/29/2016 @ 11:00 AM
Four Bands Executive Director Lakota Mowrer used this apt analogy during CFED's July 12 webinar on entrepreneurial success and the racial wealth divide. Four Bands works to help American-Indian people build strong and sustainable small businesses and increase their capability to build assets and wealth. But, as her comment suggests, it’s often an uphill battle. Along with two other panelists serving African-American and Hispanic communities, Mowrer shared her reflections on the heightened difficulties facing the entrepreneurs of color with whom she works.
According to CFED's Assets & Opportunity Scorecard, white-owned businesses are valued nearly three times as high as businesses owned by people of color on average. Additionally, the median household wealth of white households is 13 times that of Black households, and 10 times that of Latinx households.
Entrepreneurs who start with little comparative wealth find themselves in a more precarious situation from the beginning. It is much more difficult for them to overcome obstacles that arise with the ebbs and flows of business, she said. This hurdle and other financial vulnerabilities experienced by entrepreneurs of color—especially African Americans—are explored in CFED’s recent field scan, Unstacking the Deck: Toward Financial Resilience for African-American Entrepreneurs.
In addition to having fewer financial resources, entrepreneurs of color also experience other disadvantages. Because of systemic discrimination and exclusion, people of color encounter more difficulties and distrust when interacting with social, economic and public systems. “Financial institutions have been like gatekeepers,” Mowrer said. “They’ve master-scripted a lot of the language around financial statements and financials to only make sense to an elite group of the population.”
Beto Yarce, Executive Director of Ventures, noted that undocumented immigrants struggle to access traditional loans in the absence of a social security number. To meet this need, his organization has begun offering loans to those with Individual Taxpayer Identification Numbers (ITIN), something many traditional lenders won’t do. However, this door to opportunity remains out of reach for many undocumented workers who have few contacts in the United States and might avoid interacting with financial institutions for fear of deportation.
Yarce also said that recent immigrants often have limited social networks, and therefore have far less access to collateral that might help them secure loans, mentors and model entrepreneurs. This challenge was echoed among African-American entrepreneurs in the South in Unstacking the Deck.
Taken together, all these mitigating factors—fewer financial resources, distrust of powerful institutions and less expansive social networks—further prevent entrepreneurs of color from building wealth through business ownership.
Fortunately, though, many Community Development Financial Institutions (CDFIs) and nonprofits are addressing these challenges and envisioning new solutions. Ventures offers a financial management training program for entrepreneurs with limited resources, for instance. Gaynelle Jackson, the President of the Alabama Micro Enterprise Network (AMEN), added that CDFIs should look to the untapped potential of rural communities. She said that a lot of CDFIs aim their outreach exclusively at urban communities, neglecting a rural population that is also underserved.
Most importantly, all three speakers reminded their fellow practitioners of the importance of meeting business owners where they are and helping them achieve success as they define it. “There are many businesses that don’t want to be big,” Jackson said. “They’re very happy meeting the needs of their clients and being a force in their community, and that’s okay. We should celebrate where they are and the kind of business they want to be ... and help them grow based on how they define growth.”
Mowrer, Jackson and Yarce all agreed that creating policies and programs that support entrepreneurs of color will create positive ripple effects for their communities, many of which can’t be measured in dollars earned or jobs created. “I started out talking about assets as a financial asset [but] sometimes we should redefine what an ‘asset’ is,” Jackson said. “If you’re the one raising the flag about a political issue or a justice issue, if you’re the one that is the role model for kids in your community—that’s an asset, that’s good will.”
Learn more about the challenges facing entrepreneurs of color by watching our July 12 webinar.
Heading South to Investigate the Cash Flow Problems Facing Black Entrepreneurs
By Lauren Williams on 07/11/2016 @ 09:00 AM
Next week, CFED’s Entrepreneurship and Applied Research teams will travel to North Carolina, Georgia and Mississippi to meet with and learn from African-American entrepreneurs. While we are there, we will listen to their stories so we can piece together a deeper understanding of their unique experiences and gain insight into what needs to be done to transform more Black-owned businesses into wealth-building enterprises. All of this work, which CFED is carrying out thanks to the support of Capital One and Prudential, is part our ongoing effort to identify the opportunities and challenges facing self-employed African-Americans in the southeastern United States, which are outlined in our new field scan, Unstacking the Deck: Toward Financial Resilience for African-American Entrepreneurs.
The deck was stacked against many African-American entrepreneurs long before they even started their businesses. Most entrepreneurs, regardless of race, rely on personal savings and net worth to launch their enterprises. But according to the 2016 Assets & Opportunity Scorecard, the median net worth of white households in the US ($110,637) is more than 15 times greater than that of African American households ($7,113)—leaving Black entrepreneurs at a significant disadvantage. This severe imbalance means African-American business owners are much more likely to start out drastically undercapitalized and are less equipped to absorb the losses that most businesses experience in their early days. When their businesses survive beyond the startup phase, African-American entrepreneurs remain more exposed to financial risk than their white counterparts should they run into routine business problems. CFED believes that the effect of this risk is demonstrated by the chasm between business revenues of white- and Black-owned businesses in states like Mississippi and Georgia, where the average sales of white-owned businesses outpace those of Black-owned firms by 16 times and 13 times, respectively.
Cash flow difficulties—the inability to cover one’s business expenses with cash on hand—pose a significant risk to many financially vulnerable businesses. Our new field scan is based on a more nuanced understanding of this problem, which is based on our recent conversations with 35 small and micro-business practitioners and financial institutions in nine southern states. What we learned from these experts suggests that African-American entrepreneurs in the South experience a level of vulnerability exacerbated by a preexisting lack of wealth, discriminatory lending, lack of supportive financial institutions, under-resourced social networks and much more.
When we head to eastern North Carolina, southwestern Georgia and the Mississippi Delta in the coming weeks, we will continue to expand our understanding of the experiences, challenges and strategies African American entrepreneurs use to overcome cash flow difficulties and collaboratively explore new ways to address them. To keep learning along with us, join our webinar next week—Race, Entrepreneurial Success and the Wealth Divide—or find us at the 2016 Assets Learning Conference.
Unstacking the Deck For African-American Entrepreneurs
Editor's Note: This article originally appeared on the Huffington Post.
America consistently hails the iconic entrepreneur: we perpetuate a lofty, myopic, unrealistic standard of entrepreneurial success defined by trendy inventions, fast-paced growth and billion dollar profits. But by painting this whitewashed picture of entrepreneurism, we delude ourselves about the reality of American business ownership. Tiny, lower-revenue businesses are the norm for most entrepreneurs. Eighty percent of all firms and 79% of white-owned firms have no paid employees at all; a whopping 96% of Black-owned businesses have no paid employees. The truth is: most entrepreneurs’ firms don’t grow quickly, employ people or earn much money. And, more importantly, entrepreneurial success has far less to do with exceptional skill than with one’s ability to weather repeated failure and financial loss. It starts with the cards you’re dealt—and the deck looks very different for African-American entrepreneurs.
For many African-American entrepreneurs, the deck is stacked against them long before they even begin. Most entrepreneurs rely on personal savings and net worth to launch their enterprises. But the 2016 Assets & Opportunity Scorecard reveals that the median net worth of white households in the U.S. ($110,637) is more than 15 times that of African-American households ($7,113). This severe imbalance means that African-American entrepreneurs are much more likely to start out drastically undercapitalized and less equipped to absorb the losses that most businesses experience in their earliest days.
When their businesses survive beyond startup, African-American entrepreneurs remain more exposed to financial risk than their white counterparts should they run into routine business problems down the road. Take cash flow difficulties, for instance: the inability to cover one’s business expenses with cash on hand. Difficulty managing cash flow was the most frequently reported challenge facing low- and moderate-income entrepreneurs in CFED’s 2014 In Search of Solid Ground study. All entrepreneurs experience cash flow problems at some point, caused by drivers like low or inconsistent sales, emergencies or unexpected expenses, mismatched payment and receipt cycles and difficulty making informed financial decisions. Taken alone, these challenges aren’t unusual or even inherently problematic. They become dangerous, though, when an entrepreneur can’t draw on their resources or abilities—whether on their own or within their wider social networks and systems—to prevent or address them.
On top of lacking sufficient wealth to draw on in case of a cash flow gap, African-American entrepreneurs have a harder time getting loans that might help them weather such challenges. African-American entrepreneurs have relatively fewer illiquid assets like homes, land, equipment or vehicles, which makes it harder to collateralize traditional loans, and many face further constraints due to damaged or nonexistent credit histories. Discrimination in lending forces many to face higher loan denial rates and pay higher interest rates than white-owned businesses. Further, the disappearance of retail banks and long history of exploitation and exclusion by mainstream financial institutions has driven many African-American entrepreneurs to regard financial institutions in general with hesitation and distrust. These challenges and many others are results of a long history of racial discrimination affecting interpersonal relationships, institutions and constraining social networks.
As a result, the slightest volatility in cash flow might put a sizeable dent in a business’s potential revenues and threaten their household’s financial well-being. And Black-owned businesses don’t earn as much in average revenues as white-owned firms to begin with. Nationwide, the average revenues of white-owned firms ($641,742) are over eight times those of Black-owned firms ($73,226). It’s even worse in the South: in states like Mississippi and Georgia, white-owned firms’ average sales outpace those of Black-owned firms by 16 times and 13 times, respectively.
An entrepreneur’s revenues directly affect their ability to build equity—the value of their investments and retained earnings—in their business. This is what separates businesses that purely generate income from those that become valuable, transferrable assets for their owners. Any attempt to resolve the vast Black-white wealth divide requires that we examine the underlying drivers of African-American entrepreneurs’ financial vulnerabilities—like cash flow difficulty—and explore ways to address them. To this end, CFED’s latest research, Unstacking the Deck: Toward Financial Resilience for African-American Entrepreneurs in the South, begins to dig deeper by telling the story from the perspective of practitioners who work closely with African-American entrepreneurs in the South. Next, we’ll head to the field to talk with African-American entrepreneurs themselves in Georgia, Mississippi and North Carolina. By helping us articulate why and how they experience cash flow difficulties and what would help weather them, we’ll move closer to solutions that unlock African-American entrepreneurs’ ability to build wealth through business ownership.
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Is Development Without Displacement Possible?
Editor's Note: This article originally appeared on the Huffington Post.
On June 8, 2015, the city of Seattle began its 23rd Avenue Corridor Improvements Project. The project included construction to improve traffic flow, modify the driving lanes and widen sidewalks. However, this construction disrupted pedestrian and vehicle traffic tremendously and hurt small, primarily minority — and immigrant-owned businesses.
What happened? The city made a needed investment in a minority community but neglected to work with residents and businesses within that community to ensure improvements did not lead to business closures and displacement. Infrastructure construction can have negative impacts on small business revenues in particular, but there are ways municipalities can mediate this issue.
The revitalization effort in the Central District of Seattle was conceived and initiated in a silo. It was community development that did not include the voices of the community. This exclusion could have resulted in a multitude of “Closed for Business” signs along the thoroughfare.
Fortunately, due to the efforts of dedicated small business owners, the coordination of the Seattle-King County NAACP, especially Gerald Hankerson the president and Sheley Secrest the vice president and economic development chair, and the work of other coalition partners, the small businesses owners were able to communicate their needs, fears and displeasures to the city.
Indeed, some felt that this initial investment was designed to shut down minority businesses, as a precursor for gentrification and the eventual displacement of African-American residents from the area.
In February after months of advocacy and initial refusals from municipal government, Seattle Mayor Ed Murray agreed that municipal investment to prevent displacement was needed and proposed a business stabilization fund to protect affected establishments.
The stabilization funds are for microbusinesses, those with five or fewer employees. As we and our partners have recently discussed, few small businesses have employees and of those that do, still fewer are owned by people of color. The stabilization fund allows business owners adversely affected to request up to $25,000 to keep their businesses open. Nearly one year after construction began, the affected business owners have or are in the process of receiving stabilization funds and for some, even this may be too little, too late.
Still, this is a win and a shining example of how municipalities can move responsible development forward without displacing the entrepreneurial lifeblood of the neighborhood. Though the advocates involved were initially labeled as anti-development, they eventually were able to win changes in the development plan that would support the local businesses. Development without mass displacement is possible, but it must be done in conjunction with and in support of the local community.
To learn more about this story and what development without displacement takes, hear from Sheley Secrest.
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Bob Friedman, “Economic Superhero,” Honored with AEO’s Founding Vision Award
By Lauren Williams on 06/09/2016 @ 11:00 AM
On May 19, CFED Founder and Chair Emeritus Bob Friedman was presented with the Association for Enterprise Opportunity’s (AEO) Founding Vision award. This award recognizes his lifelong efforts to ensure that entrepreneurship can be a key to opportunity for everyone, especially the most economically vulnerable in our country. As Connie Evans, President & CEO of AEO noted, “Bob has dedicated his life to closing the wealth gap in America, in whatever form it expresses itself, from the racial wealth gap to the geographic and gender gap. He is an economic superhero for our times.”
For those who know Bob, “economic superhero” might just be the perfect title. His long history of fighting for an opportunity economy dates back to his childhood, when he first began using his own privilege to help others who weren’t “born lucky” (as he puts it). Economic justice has been the driving principle of his career; it’s what compelled him to found AEO in 1991, just 12 years after founding CFED and starting our journey of building opportunity for all. The result? In its 25 years of existence, AEO has served millions of low-income entrepreneurs, connecting them with the resources they need not only to grow their businesses but also to become the bedrock of financial strength in their communities.
Of course, if you asked Bob, he’d deny the “economic superhero” claim, preferring instead to heap praise on the many others who brought AEO into the world. “Founding AEO was one of the most collaborative, spirited and memorable experiences of my life, and a real feat of democracy for the 30-odd founders and innovators in the field,” Bob noted. But among this field of innovators, Bob stands out as a pioneer, and the AEO award honors his vision, his passion and his dedication. Here at CFED, we’ll add modesty to that list of his laudable qualities.
As nonprofit cousins, CFED is honored that AEO chose to honor Bob with the Founding Vision award, and we congratulate AEO on a quarter-century of service to economically vulnerable entrepreneurs. Here’s to 25 more!
Q&A: Alternative Small Business Lending
By Lauren Williams on 06/01/2016 @ 12:00 PM
Yesterday, we hosted the third webinar in our Exploring Financial Capability & Access for Entrepreneurs Listening & Learning Series, this installment focusing on the new financial frontier of alternative small business lending. It was a jam packed session: participants heard profiles of four different alternative lending models and a discussion on what considerations business owners and practitioners who work with them should make as they explore this market. Check out the webinar recording and PowerPoint slides if you missed it.
Since we weren’t able to get to all the audience questions during the course of the webinar, we’d like to keep the conversation going here. Our speakers, listed below, responded to all the questions received during the webinar in today’s blog:
- Metta Smith, ACCION New Mexico
- Mohan Kanungo, Mission Asset Fund
- Jonny Price, Kiva Zip
- Louis Caditz-Peck, Lending Club
- Spencer Cowan, Woodstock Institute
Have another lingering question for the panelists? Drop it in the comments on this blog, and we’ll do our best to respond!
Q: We heard a lot about potential predatory practices within the context of a less regulated alternative online lending market, but only as it relates to small business borrowers. Why don’t the same problems exist with consumer loans offered on the same platforms?
Louis: It's not just online lending that's lacking in regulatory protections, but small business lending. Consumer lending laws generally apply to both banks and nonbanks, online or offline. Small businesses lack some of these same protections, whether or not their lender is online.
In his presentation, Mohan shared a story about Alicia, a Mission Asset Fund client who started her tamale business going door-to-door selling 100 tamales a week. Alicia was initially able to access a regular Lending Circle to get working capital to support her micro-business even though she was "credit invisible.” Then she graduated to their direct loan program to use her money towards a down payment on a van so she could transport her tamales to catering jobs.
Q: What role did the Lending Circle play in helping Alicia improve her credit score?
Mohan: MAF reports borrowers’ repayment history to all three credit bureaus — Experian, Equifax and TransUnion. According to California Senator Lou Correa, “one-third of people who participate in Lending Circles lack any type of credit history when they enter the program. After completing a single lending circle, these individuals can grow their credit scores to approximately 600, and gain access to mainstream credit.” Now, after building her credit and demonstrating a successful business history, Alicia has accessed other nonprofit lenders and sought larger loan amounts for projects including building out her tamale factory.
Q: How does MAF seek Lending Circle partners in different communities?
Mohan: MAF hosts a monthly Becoming a LC provider webinar for nonprofits interested in bringing Lending Circles to their community. We also organize in-person roadshows/events to learn more and even hear from a provider in-person about what it is like. Anyone interested can also submit an inquiry here so my team knows to reach out and explore our potential partnership.
Q: How might providers working with small business owners connect their clients to Lending Circles?
Mohan: Please direct them to www.LendingCircles.org, where potential participants can learn about the Lending Circles program, type in their zip code to identify a provider near them and start an application using their mobile phone. If none exists or you anticipate there being a particular need for the community you serve, you might consider partnering with MAF as a 501(c)3 nonprofit.
Q: If Lending Circle loans are zero-interest, how does MAF get money to support your program?
Mohan: MAF is a 501(c)3 nonprofit committed to creating a fair financial marketplace for hardworking families. We get most of our support from major financial institutions through CRA credits, as well as foundations interested in serving particular regions and issue areas. We also receive support from the philanthropy arms of tech giants like Google.org and the Salesforce Foundation, private companies like Experian, individual donors and even grants with local government (e.g. the City and County of San Francisco supports our LC for Business Program).
Q: How long does it take for Kiva US lenders to receive a return on funds given to borrowers?
Jonny: While Kiva US lenders’ loans are repaid roughly 90% of the time, they don’t receive a return on their funds. They are lending for philanthropic reasons, rather than financial-return-seeking reasons. Kiva loans are typically repaid in 12 to 36 months, depending on the term of the loan. The money is returned to the individual lenders as the borrower repays the loan. Imagine a lender lends $25 to a borrower whose loan term is 36 months. Every month, that lender will get $0.69 back in their account, until eventually, after 36 months, they have received the full $25 back in their account.
Q: What are the terms of Kiva US loans?
Jonny: Loan terms are up to 36 months in duration. Grace periods of up to 6 months are available for agriculture loans. Every Kiva loan is 0% interest, no fees.
Becoming Your Own Boss Brings On Unique Financial Capability Needs
By Kate Griffin on 05/03/2016 @ 11:00 AM
We just wrapped up another exciting Financial Capability Month—did you catch it? (If not, don’t worry; you can find everything you missed here.) One of the highlights this year was the rollout of this really cool way to visualize the lifecycle, in which we tried to capture what financial capability looks like at different moments in people’s lives. It’s still a prototype, and we’d love to have your comments on it!
One thing we have heard from you already, though, is that we missed a key point in the lifecycle — small business ownership. Thank you! You’re right. Entrepreneurship continues to be an important pathway to financial empowerment for many Americans, and business owners have unique financial capability needs.
As we think about the financial capability needs of business owners this National Small Business Week, we’re taking note of the things we’ve learned from In Search of Solid Ground and our ongoing fieldwork with three committed small business development organizations.
The opportunity in that moment of starting or growing a business is very interesting because the business owner is not only focused on the health and sustainability of the business, but also on generating income for herself and her family. And building a strong business with dependable revenue requires knowledge of good business financial management practices, as well as access to financial products and wrap-around services that can bolster the business owner’s success. This financial capability goes beyond an entrepreneurs’ internal ability to manage cash flow to include access to deals, customers, markets, and financial products and services — and in communities of color that access is often restricted.
These days, we’re seeing a lot of interesting, innovative developments aimed at building entrepreneurs’ financial capability—from technological tools designed with business owners in mind to ways to help entrepreneurs build a bigger cash cushion.
But there is still a lot more to be done to give entrepreneurs the tools they need to reach their financial goals. As In Search of Solid Ground showed us, minimizing cash flow volatility — and increasing business owners’ ability to manage that volatility — is one key to building financial capability. What else should we be looking at? Let us know in the comments!
Building the Financial Resilience of Entrepreneurs of Color in the South
By Lauren Williams on 03/03/2016 @ 09:30 AM
Today, we’re excited to launch a new research-driven initiative—Toward Financial Resilience for Entrepreneurs of Color—to explore and address financial vulnerabilities facing entrepreneurs of color in the South. Over the next year, with the support of Capital One, we’ll be reflecting on decades of work by organizations aiming to serve entrepreneurs; interviewing experts for their insights; and working directly with entrepreneurs of color in the South to gain a deep understanding of their experiences and needs. This information will put us on the pathway to designing solutions that meet the needs of these entrepreneurs, and to get started on the right foot we need your help.
Are you or someone you know working with entrepreneurs of color in the South who experience cash flow volatility or inconsistency? Do you offer solutions to help address those challenges? We want to learn from your experiences! Please tell us what you think we should know.
So far, we know that cash flow difficulties among low- and moderate-income business owners are pervasive and severe, and that cash reserves are incredibly low. In communities of color—especially those facing persistent poverty—business owners are less likely to have liquid reserves, other household assets or credit to draw on in the event of a cash flow gap. Among business owners of color, both the depth and breadth of the racial wealth divide and the dearth of safe, affordable small business credit options amplify the dangers of cash flow inconsistency and make the endeavor of launching a small business even riskier than it should be. In every state, the value of businesses owned by entrepreneurs of color is generally far less than that of businesses owned by white entrepreneurs. This disparity is most pronounced in Southern states, including Mississippi, Alabama, Georgia, North Carolina, South Carolina and Tennessee. In Mississippi, for example, white-owned businesses are valued at over eight times the value of businesses owned by people of color.
To avoid reinventing the wheel, CFED will start this project by spending the next few months—from now through May—interviewing experts on these issues. Then, we’ll get the story from business owners themselves during visits to communities in the South between June and July. During these trips, we will conduct in-depth, qualitative interviews with entrepreneurs. Only then will we begin to explore pathways to building solutions.
Want to contribute to the conversation? Please email Lauren Williams, CFED’s Associate Director of Entrepreneurship, at email@example.com.
Why Banks Don’t Want to Lend to Small Businesses (and 3 Things that Could Help)
It’s one of the most frustrating realities facing today’s small business owners and small business owners-to-be: 68% of small businesses are looking for loans of $250,000 or less and 50% of small businesses are looking for loans that are less than $100,000, many traditional lenders have retreated from providing these smaller loans. Instead, they’ve opted to serve those seeking $1 million or more for their business needs. Given that there’s so much demand from small business owners looking for amounts way under $1 million, why aren’t banks serving these entrepreneurs more?
A few weeks ago CFED staff joined a packed room on Capitol Hill for an event hosted by Small Business Majority exploring just this question. Spanning a panel across the room were eight leaders from the private and nonprofit sectors, focused on alternative small business lending policy and practice, who spoke about the high cost of traditional lending, the exciting developments in FinTech (Financial Technology) and the progress of the Small Business Borrowers’ Bill of Rights.
As Brian Graham from Alliance Partners pointed out, small business loans of under $250,000 are simply not as profitable for traditional lenders because underwriting costs, which range from $3,000 to $4,000, tend to be the same regardless if bank makes a $1 million loan or fraction of that amount.
Another issue is access to credit. Big businesses have more access to large financing markets and can get credit very cheaply, while small businesses have little or no access to the same type of credit. As Aaron Klein from the Bipartisan Policy Center discussed, historically when an entrepreneur wanted to start a small business they tapped into their own savings, home equity or credit cards for capital.
But in a post-recession economy where households are trying to rebuild depleted savings, home values are still recovering, and almost one in three credit users don’t have access to revolving credit, it’s no wonder— as John Arensmeyer from Small Business Majority pointed out — that 91% of small businesses list access to capital as a top area of concern. All these barriers for small businesses lead them to look for options in the alternative small business lending space that, unlike traditional bank lending, is unregulated.
Despite concerns, there are some promising changes taking place in the alternative small business lending market to fill this void — especially through the advances of FinTech. With more efficient technology, lenders are able to lower their overhead and underwriting costs and pass those savings to small business owners. For example, lenders such as Lending Club are using technology to drive down the cost of credit by connecting borrowers and investors.
Other lenders like Fundera are not only using technology to meet the needs in the market, but they are driving forward the use of common applications and universal disclosures to create a more transparent experience for the borrowers.
But it’s not all good news for entrepreneurs. While some in the alternative small business lenders space are working to provide responsible products, others are offering predatory products that are harmful to the health of the business. Among those are products such as Merchant Cash Advances, which are eerily similar to consumer payday loans and can cause even more harm because the loans are much larger in scale. Adding to this, small business owners are not necessarily more knowledgeable consumers of financial products than anyone else, which makes them vulnerable to falling into debt traps. Unfortunately, unlike the broader consumer lending space, alternative small business lending resides in a grey area when it comes to regulations.
So what can we do to make sure entrepreneurs get access to the capital they need to start promising new businesses? Here are three ideas:
- If the federal government took steps to incentivize innovation in the FinTech — especially as it relates to small business lending — and broader adoption by traditional lenders, it could potentially create an environment in which the traditional market could serve more fully the needs of entrepreneurs seeking $250,000 or less. Additionally, bringing more banks and other traditional lenders back into the sub-$250,000 small business lending space could create more competition and better value for small business borrowers seeking the capital they need.
- While the Dodd-Frank Act provides CFPB with the ability to collect data around small business lending, they have yet begun to collect this data. Developing prudent regulations requires that we understand this market more fully, including who is and is not being served. Collecting this data is the first step towards protecting small business entrepreneurs, particularly minorities and other vulnerable groups, from being preyed upon as they try to establish themselves.
- The Small Business Borrowers’ Bill of Rights is a great first step to creating a standard of shared values and practices around access, inclusion and transparency to support small business owners and their endeavors. As an industry-led effort, this document appropriately defines what responsible lending should look like in the small business space. Unfortunately, as with anything voluntary, the lenders who don’t sign on are the ones of most concern. The industry should continue to bring other lenders onboard to continue to build momentum towards a fair and transparent marketplace.
Protecting small businesses and giving them the opportunity to access responsible credit in a competitive market is just as critical as protecting individual consumers. Many small business owners have put their lives on the line to create new opportunities for their families and communities. Encouraging the values of the Small Business Borrowers’ Bill of Rights — access, transparency and inclusion — through industry-led efforts and thoughtful government policy will give rise to a market that secures the role of good lenders, strengthens small businesses and strengthens our workforce.
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New Research Explores What Business Owners Want in Financial Capability Solutions
By Lauren Williams on 02/08/2016 @ 12:00 PM
Most entrepreneurs launch their businesses because they have a passion or skill to share with the world and a desire to make a meaningful living. But all too often, they struggle to master the financial management knowledge, skills and behaviors needed to succeed in the long-run.
That's why, in 2015, CFED launched the Microbusiness Solutions Learning Cluster to help three business development organizations better understand their clients’ needs and build solutions that enhance their financial capability. Today, we’re excited to share major outcomes from this project that can inform your efforts to design creative, client-focused products and services.
In Finding Common Threads, we explore a set of themes about the desires, values and behaviors shared by financially vulnerable entrepreneurs. To learn more, join us for a webinar on Wednesday, February 10 from 2-3 pm EST! You’ll hear directly from each organization about the client insights they uncovered, the methods that generated these new understandings and the ways in which these insights influenced their solutions.
Over the past year, each organization dedicated time, energy and resources to gather insights about their clients’ challenges and needs, create solutions to address them and collect feedback to validate and improve their solutions by testing them with clients. Through this process, CAMBA redesigned an in-person workshop series on using mobile technology to manage business finances, Northern Initiatives enhanced its online training system and WESST designed a mobile app to make its in-person financial management training more accessible on-demand. The findings from these experiences are captured in greater detail in the following briefs:
Questions? Contact Lauren Williams at firstname.lastname@example.org or 202-207-0131.
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