SAN FRANCISCO--(BUSINESS WIRE)--Small businesses are vital components of our nation’s economy, accounting for 14.3 million of the 22.9 million net new jobs created between 1993 and mid-2013, according to the Small Business Administration’s March 2014 Frequently Asked Questions About Small Business. It is thus vital that the business community know what makes a financially healthy small business.
As part of the Small Business Financial Health Initiative (SBFHI), more than 19,000 businesses were surveyed to uncover the behaviors and practices of successful small businesses. Researchers created an algorithm to analyze the more than 900 responses from companies across the country. These small businesses were large and small, profitable and unprofitable, and had owners with a wide range of experience. Ultimately researchers determined each company’s level of financial health and scored them on a range from “excellent” to “poor” based on three categories:
- knowledge about financing products
- the credit experiences of business owners
- financial planning and management practices
The results showed that businesses in the “excellent” range had experience navigating the lending landscape, had more available credit, and frequently monitored their business cash flow. Whereas businesses scoring in the “poor” range had less knowledge about financing products, lower personal credit scores, less access to financing and fewer formal financial management practices in place.
“The question of whether businesses have adequate access to the financial products and services they need is complex,” said Chinwe Onyeagoro, CEO and co-founder of FundWell, a technology platform that helps small businesses access loans. “This study begins to shed light on some of the factors that affect the quantity and quality of demand for credit.”
The full report can be downloaded here.
“It likely comes as no surprise that knowledge, experience and mature business practices are associated with healthy businesses,” said Dr. Craig Everett, director of Pepperdine University’s Private Capital Markets Project and lead researcher on this study. “What is most exciting, though, is that this study will provide an analytical framework with which the financial health of individual businesses can be assessed.”
The study also explored the conditions of women- and minority-owned small businesses, and found that those businesses scored lower than their peers in the credit experience and financial planning and management categories but achieved higher scores in the funding product knowledge section.
"The dearth of financial information on small business health restricts access to credit. The small business financial health index introduced in this report serves as a new tool for identifying deficiencies that need to be addressed over time to help close that credit gap,” said Ian Galloway, Senior Research Associate, Community Development, Federal Reserve Bank of San Francisco.
The Small Business Financial Health Initiative is a joint project of the Community Development divisions of the Federal Reserve Banks of Chicago and San Francisco, Pepperdine University Capital Markets Project and FundWell, Inc. The purpose of the initiative is to raise awareness about small business financial health, in order to highlight policies, investments, financial and technical assistance resources needed to help small businesses achieve their goals. This report presents the results and findings from a Financial Health Business Survey that was administered in 2013 and initiates a discussion around the factors that drive the sustainability and growth of small enterprises.
“Having a better understanding of the drivers of small business financial health is an essential piece of the puzzle,” said Susan Longworth, Senior Business Economist, Community Development, Federal Reserve Bank of Chicago. “The insights gleaned from this initiative can be used to inform both policy and programs.”
The core project team includes: Chinwe Onyeagoro, chief executive and founder of FundWell; Craig R. Everett, assistant professor of finance at Pepperdine University's Graziadio School of Business and Management and director of the Pepperdine Private Capital Markets Project; John K. Paglia, associate dean of Fully Employed Programs, associate professor of Finance, and director of Accreditation; Susan Longworth and Robin Newberger, senior business economists in the community development and policy studies division at the Federal Reserve Bank of Chicago; and Ian Galloway, senior research associate at the Federal Reserve Bank of San Francisco.
The survey was administered from September 5, 2013 to February 18, 2014 following meetings with advisory groups in Illinois and California, during which small business experts helped develop questions based on their experiences of what constitutes small business financial health. The survey was sent to 19,472 businesses, which included over-sampling of minority- and women-owned businesses in order to compensate for a lower response rate from these groups. There were 940 small business owners who answered the survey.
About the Federal Reserve
The Federal Reserve System is the central banking system of the United States. It was created in 1913, with the enactment of the Federal Reserve Act. Its duties today are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions. Through the Community Affairs program, it engages in outreach, educational, and technical assistance activities to help financial institutions, community-based organizations, government entities, and the public understand and address financial services issues affecting low- and moderate- income persons and communities. Its unique structure includes a federal government agency, the Board of Governors, in Washington, D.C., and 12 regional Reserve Banks. The Chicago Federal Reserve Bank (http://www.chicagofed.org) serves the Seventh Federal Reserve District that consists of Iowa, and most of Illinois, Indiana, Michigan and Wisconsin. The San Francisco Federal Reserve Bank (http://www.frbsf.org/) serves the Twelfth Federal Reserve District, which consists of Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, Washington, Guam, American Samoa, and the Northern Mariana Islands.
About the Pepperdine Private Capital Markets Project
The Pepperdine Private Capital Markets Project at the Pepperdine University Graziadio School of Business and Management (http://bschool.pepperdine.edu/privatecapital) is the first simultaneous, comprehensive, and on‐going investigation of the major private capital market segments. The research seeks to understand the true cost of private capital across market types and the investment expectations of privately‐held business owners; providing lenders, investors and the businesses that depend on them with critical data to make optimal investment and financing decisions, and better determine where the opportunities to create lasting economic value may be realized.
FundWell (www.thefundwell.com) is an online resource that matches small businesses seeking funding with a growing number of bank loans, non-bank debt funding, and other credit related financing options. At its core, FundWell is endeavoring to create much needed efficiencies in the small business capital raising market for small businesses and lenders and in doing so:
- Increase transparency of funding options in order to streamline the capital raising process, drive down the cost of debt financing, and improve terms for borrowers
- Disseminate the information and insights necessary to help small businesses improve their financial health and increase funding approval rates
Since 2012, FundWell’s online financing marketplace and financial health information has reached over 24,000 small businesses, working in partnership with over 300 lending partners across the country that span 13 different types of loan products from merchant cash advances and microloans to bank loans, SBA loans and factoring.