Negative Economic Shocks and Financial Capability of Low-Income Entrepreneurs

Background: The COVID-19 pandemic has devastating impacts on small businesses in the US, especially those owned by low-income entrepreneurs. The federal government has created the Paycheck Protection Program (PPP) of 660 billion dollars in the first two rounds to help small business owners cover payroll expenses and other expenses. State and local governments have also offered emergency relief funds and assistance programs for small business owners and entrepreneurs. Despite these efforts, many low-income entrepreneurs are still struggling with their financial well-being during the economic lockdown. This, on the other hand, denotes the importance of financial capability in helping low-income entrepreneurs in the face of negative economic shocks. This study aims to examine the relationships between financial capability, negative economic shocks, and financial well-being among low-income entrepreneurs.

Methods: We use a sample of self-employed entrepreneurs (N = 505) from the 2016 National Financial Well-Being Survey conducted by the Consumer Financial Protection Bureau (CFPB). Nearly one quarter of entrepreneurs have their household income below 200% of the federal poverty line (n = 115). The dependent variable of financial well-being is measured by the CFPB’s validated 10-item scale (range: 0-100). Main independent variables include (1) a binary indicator of negative economic shocks in the previous 12 months (whether having reduced pay or financial difficulties on self-owned businesses), (2) ability to raise $2,000 in 30 days to absorb shocks (range: 0-4) (3) a CFPB-validated 10-item financial skill scale (range: 0-100), and (4) a measure of access to financial services (range: 0-5). A series of hierarchical linear regression models are conducted for analysis.

Results: After controlling for demographic and socioeconomic characteristics (Model 1), low-income entrepreneurs have their financial well-being score 5.91 points lower than their counterparts with income above 200% of the federal poverty line (p<.001). The addition of indicators of negative economic shocks (Model 2) slightly reduces the difference in the financial well-being scores between the two groups. Negative economic shocks are negatively related to entrepreneurs’ financial well-being (b = -5.91, p<.01). Such association does not appear to vary by the income level of entrepreneurs (Model 3). All three indicators of financial capability-absorbing financial shocks, financial skills, and financial access-are statistically and positively associated with financial well-being (p<.001), and they also negate the significance of income and negative economic shocks in analysis (Model 4).

Discussion: To assure long-term financial security and financial well-being of small businesses (especially those owned by low-income entrepreneurs), it is important to provide support for them to get through economic downturns and improve their ability to absorb negative economic shocks. Financial capability (e.g., access to financial services and resources and financial skills) play an important role in mitigating negative economic shocks on their financial well-being. Policies and services for low-income entrepreneurs should be proactive and prepare small business owners for potential financial risks. To promote financial capability of low-income entrepreneurs should be a key goal of such policies and services.