Microbusinesses contribute significantly to both nation-wide economic activity and their owners’ household balance sheets, but many remain financially vulnerable, struggling to make ends meet and build wealth over time. Despite the central role these businesses play in the American economy, little is known about how the typical microbusiness manages its finances, the major financial challenges they face or which components of financial capability lead them to business success. Nevertheless, this combination of knowledge, access and use of safe, appropriate financial products and services is undeniably central to financial security outcomes for both microbusinesses and their owners’ households.

To shed light on the many factors that contribute to or detract from microbusiness owners’ financial capability, CFED launched a study in 2013 that gathered insights from business owners themselves, identifying their greatest challenges and initiating a conversation about the suite of solutions that might address them. This study was designed to respond to the following questions:

• What types of financial products and services are low- and moderate-income (LMI) microbusiness owners currently using?
• What financial challenges do microbusiness owners face?
• How influential are these challenges in constraining asset building and growth?

The findings from this study offer new evidence and confirm some assumptions about the microbusiness owners’ financial capability and financial needs. Our findings show that microbusiness owners’ business and personal finances are closely intertwined and reveal a number of ways in which microbusiness owners, especially the most disadvantaged among them, might be susceptible to financial shocks.

This expanded view of the financial lives of microbusiness owners suggests that addressing their financial capability needs could measurably improve the economic outlook for both the business and the owners’ household. Business ownership is a risky endeavor for any entrepreneur: a business’ profitability is impacted by external circumstances like consumers’ needs and preferences, competition from other businesses, changes in government policy, supply and production uncertainties, and any number of unexpected emergencies. These risks are further amplified when they coincide with an unstable financial footing, making every financial decision even more significant.

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Contents

Introduction
Background
Methodology
Sample Characteristics
     Business Owner Characteristics
     Business Characteristics
Findings & Analysis
     Product and Service Use Overview
     Digging Deeper: Financial Product and Service Challenges Disproportionately Affect the Most Vulnerable
     Digging Deeper: Cash Flow Difficulties
     Digging Deeper: Low Savings and Vulnerability
Implications
     Business Balance Sheets are Household Balance Sheets
     Vulnerability Begets Vulnerability
     Savings is Necessary, but Notably Absent
Conclusion
References
Appendix 1: Tables & Figures
Appendix 2: Online Survey Questions
Appendix 3: Phone Survey Questions