A Study of Low-Income Entrepreneurs: A Financial Capability Perspective

Background

Entrepreneurship has shown its promise as one of the most effective approaches to poverty reduction around the world as well as its potential to generate new employment and economic opportunities. However, low-income Americans face a variety of challenges and barriers to engage in entrepreneurship (Laney, Bowles & Hilliard, 2013), and a supportive ecosystem (e.g., financial services, skill training, policy incentives, market access, etc.) is needed to foster entrepreneurship. This study aims to focus on one aspect of this ecosystem, financial capability of entrepreneurs (including management of finance and access to financial services), and examines its association with entrepreneurship.

Methods

Data from the National Financial Well-being Survey (2016) is used to examine if entrepreneurship is predicted by individual financial capability when other factors are controlled for. Three samples, the full sample (n=6,359), the low-income sample (at or below the 200% poverty threshold) (n=1,507), and the higher-income sample (above the 200% poverty threshold) (n=4,852) are examined. Following the convention, we use self-employment to indicate entrepreneurship. Financial capability is indicated by: (1) a 10-item scale of financial knowledge (Knoll and Houts, 2012) to measure respondents’ understanding of different financial concepts (e.g., interest rate), (2) a 10-item Likert scale of financial skills that ranks respondents’ skill levels on managing individual finances, and (3) a count variable of financial access measuring the types of financial products individuals have (such as bank accounts, life insurance, health insurance, retirement accounts, pension, non-retirement investment accounts, and education savings accounts). Control variables include demographic and socioeconomic characteristics. Logit model is conducted on the three samples, respectively, to predict the probability of one becoming an entrepreneur.

Results

Interestingly, despite their low income, nearly nine percent of the low-income sample (n=134, 8.9%) are entrepreneurs, slightly higher than that in the full sample (n=536, 8.4%). Respondents’ financial knowledge (odds ratio=.1.21, p<.05), financial skills (odds ratio=1.15, p<.05) are positively associated with the likelihood of initiate new entrepreneurship, but financial access (odds ratio=.76, p<.05) is negatively related to the dependent variable in the full sample. The higher-income sample yields similar results. However, in the low-income sample, only financial access (odds ratio=.76, p<.05) is negatively and statistically significant and the other two indicators of financial capability are not.  

Conclusions

That fact that financial knowledge and skills are not significant in the low-income sample suggests trivial effects that traditional interventions of financial education/trainings may have on these entrepreneurs. Future research should further explore effective financial guidance services for them. On the other hand, the negative association between financial access and entrepreneurship is likely caused by the way financial access is measured in this study, which includes financial services, such as health insurance, retirement accounts, pension, and life insurance, often delivered through the employment benefit system. In other words, delivery of financial services through employment may present inherent hindrance to entrepreneurship among low-income individuals. Suggestions are proposed to improve the financial infrastructure that provides a positive entrepreneurial ecosystem for low-income entrepreneurs.