Financial Literacy: Building Small Business Resilience
By Kally Zheng, Randi Zeller, Alex Maynard and Christine Jun
Executive Summary
The economic challenge to small businesses from the pandemic shutdowns is grave and unprecedented; according to Forbes, it is likely that less than 40% of small businesses can survive an economic crisis that lasts for six months. Regulators made aid available to businesses. However, data released by the Small Business Administration made clear that pandemic aid did not make its way to the small businesses that needed it most. This was also reflected in 15 interviews we conducted with various small businesses owners.
The Problem
We found that the key differentiator between businesses that secured state and pandemic aid and those who missed out was financial literacy. Financially literate business owners had a strong understanding of loan processes, a deep knowledge of their business model, and up-to-date financial records. As a result, they maximized their chance of receiving government aid by submitting a viable loan application in a timely manner. In addition, they were better situated to pivot their business model during economically challenging times.
In contrast, small business owners who were financially illiterate struggled to navigate the application process, did not know where to find guidance, and did not have organized and up-to-date financial documentation. As a result, their applications were more likely to have errors and less likely to be submitted fast enough to receive relief. Not all small business owners who applied correctly and quickly for the PPP received loans—but financial literacy turned out to be a foundational requirement for seeking it.
Our Solution
According to SBA.gov, small businesses account for 99.7% of the employer firms in the USA. Yet 81% of small businesses handle their own finances, and according to CPA Practice Advisor, 40% of small businesses are financially illiterate.
We asked ourselves how small business owners might become more financially literate, and therefore better able to pivot, obtain aid, and be more resilient in the face of disasters and other economic challenges.
We looked into existing solutions and were inspired by Women’s Economic Ventures (WEV), a community development financial institution (CDFI) based in Santa Barbara, CA. WEV is based in a region that is subject to frequent natural disasters and has developed expertise in disaster relief and building small business resilience. In particular, WEV provides incentivized financial training and loan application assistance to their client base.
How could we leverage WEV’s expertise and experience to scale financial literacy training and assistance to a broader group of small business owners?
In order to scale WEV’s model, we would need to determine who could provide the training, what would incentivize them to do so, and what would incentivize the small business owners to take the time to be trained and coached.
Who could provide training?
Training should/can be provided at a natural intercept point for small business owners
Banks and credit unions are ideal as all small business owners need to open a bank account
Other possibilities are accountants, non-profits, and insurance companies
The training would include both standard modules, that could be produced/sponsored by the government and disseminated to the trainers, and customized training and coaching tailored to clients’ needs.
Incentives would be critical for both the “trainers” and the small business owners. Incentives for trainers would be tailored to the type of institution. For example, banks may receive an increased CRA score or decreased CAMELS score. For a non-profit, it could include grants to develop materials or provide training.
Small businesses should also be incentivized to participate. WEV found that the best levers are financial incentives (e.g. lower interest rates on loans), loans or grants conditioned on participation, and communication networks.
With better financial literacy, small business owners are more empowered, more resilient, and better able to withstand disasters.
Small businesses drive local economies.
SMALL BUSINESS RESILIENCE IS COMMUNITY RESILIENCE.
On June 3rd, 2020 the Redesigning Finance students presented their work via Zoom to a panel of experts working in the finance sector.
ADDITIONAL CONTENT
Watch this video to learn more about the Women’s Economic Ventures.
Marni Brook speakS with Sandra Siepak about how the Women's Economic Ventures (WEV) is supporting Ventura County businesses during the pandemic.
