What does a loan mean to a small business owner? It’s money, sure. But does it have a deeper meaning? Mission-based lenders deploy loan capital in pursuit of a greater purpose – to build a more inclusive economy where opportunity and the entrepreneurial spirit can still reach the promise of an American Dream. So, are we achieving it?
Six years ago, Accion in the U.S. and Opportunity Fund came together in pursuit of an answer this question. With generous lead support from the W.K. Kellogg Foundation and JPMorgan Chase & Co., and support from S&P Global, in 2015 we launched a first-of-its-kind national longitudinal study evaluating the impact of mission-based small business loans in the United States. Today, we are excited to release the study’s key findings and final report.
Our research partner, Harder+Company Community Research, followed along in the lives of 350 entrepreneurs across the U.S. for two years. Their findings suggest that the transformative effect of a small dollar loan goes beyond the business itself: business owners report a greater sense of personal financial stability, reduced stress, and increased confidence to achieve their goals. Equally important, every business owner defines success differently, and the study revealed new insights about the needs and goals of entrepreneurs within five distinct “personas.”
Our study revealed the following outcomes for our borrowers:
Borrowers’ financial stability increased over time. Entrepreneurs in the study reported increased business and personal savings, an improved sense of financial control, and better financial management practices.
Borrowers use their businesses to set up long-term financial success. Opportunity Fund and Accion borrowers have very high rates of business survival, and more than half saw increases in both sales and profit during the study period.
Borrowers create quality jobs. 40% of study participants added new jobs during the study, and many offer both formal and informal benefits to their employees.
Borrowers attribute positive, long-lasting impact to Opportunity Fund and Accion’s services. A majority of participants said that Opportunity Fund and Accion had a significant impact on their bottom line, credit, and confidence.
Borrowers still face challenges. This study revealed that, despite these benefits, small business owners continue to face three key challenges: financial emergency preparedness, cash flow volatility, and sticking to a business plan. This is especially true for those with seasonal or niche businesses.
Diverse Journeys of Entrepreneurship
The entrepreneurs we serve have different ways of measuring success and diverse goals for their businesses. Harder+Company’s analysis revealed five types, or “clusters”, of entrepreneurs:
|Focused and Growing entrepreneurs started strong and are pursuing growth|
|Stable and Strategic entrepreneurs prioritize their families’ financial stability and rely on multiple sources of income to achieve their goals.|
Off Balance and Seasonal entrepreneurs have less stability and many have been hindered by external factors.
Retrenching borrowers have seen some growth, but are at a crossroads with their businesses.
Slowly Growing and Optimistic entrepreneurs have volatile cash flows and while they anticipate growth, haven’t charted a clear path to get there.
Understanding the different needs of our clients will help us better serve them going forward.
Applying these Findings
Learning from this research, Opportunity Fund and Action have identified two key areas to iterate and improve: Product Design & Advising Services.
This research reminded us that Main Street Entrepreneurs are not one-size-fits-all when it comes to their business goals and their capital needs. As a result, we are working to better tailor credit products to meet the distinct needs of each “cluster” of business owner identified in this study.
Different types of entrepreneurs will come to organizations like Opportunity Fund and Accion with different needs for business advising services. Whether it’s “on-demand” for a quick tune-up or a specific challenge, or long-term and structured mentoring or advising programs, we need to think about financial advice in the same way we think about the products we design – one size does not fit all here, either.
Our customers define success differently and it’s up to them, not us, to name what success looks like. Our job is to understand their goals and meet them where they are with the best-suited products and services we can offer. As lenders who are often focused on numbers, this study made it abundantly clear that confidence is just as important as cash flow.