Financial education for small businesses: an investment that pays off

It is necessary to maximize the potential of financial education for small business owners. This so that small businesses have a better chance of success, which drives the economy, thanks to education.

Financial education

Given that 99% of Brazilian companies are small, the small entrepreneur can be seen as the engine of the Brazilian economy. According to SEBRAE data, more than 86 million Brazilians profit from small businesses directly or indirectly and, in March of this year, they were responsible for 88% of all new vacancies in the job market. The small business owner still struggles with the lack of support to maintain his operation in the long term. Although it is not a magic solution in challenging economic times, investing in financial education is worth it.

Why is financial education important for small business owners?

Although small companies represent a considerable portion of the Brazilian economy, there are numerous challenges for their opening, growth and long-term survival in Brazil. The first things that catch people’s attention are questions of an economic nature.

Small business owners are particularly affected by periods of high inflation and interest rates, such as what we are currently experiencing. They also find it more difficult to obtain the credit they need to grow and maintain their businesses because they are subject to the highest interest rates in the market due to the nature of their customers’ demands and the difficulty of providing collateral. Only 26% of small businesses reported to SEBRAE in 2020 that the banking system provided them with a good service.

However, the lack of financial resources to manage and grow the business is another less discussed barrier. In addition to the economic environment, the SEBRAE survey on the survival of small Brazilian companies carried out in 2021 found that the entrepreneur’s lack of personal preparation and poor business planning and management were the main causes of failure of companies in less than five years.

Entrepreneurs themselves draw attention to the problem, which can be solved with financial education aimed specifically at this public. In the same survey, factors were found that would have helped to keep businesses open, with emphasis on issues related to the entrepreneur’s financial capacity, such as better planning and financial management. ECLAC went so far as to suggest that a potential factor for the voluntary decision of Brazilian companies to stop seeking credit is the lack of financial literacy, which makes it difficult for them to realize that they need the money or that a credit product would help them solve their problems.

How to improve the financial literacy of small business owners is not entirely clear

Although little explored in the literature, the perception that financial education aimed at small business owners can lead to greater business survival and, as a result, even in the country’s economic results, is corroborated by the available evidence. For example, a 2018 evaluation of System S performance found that being served increased the likelihood of formalizing business and increased demand for credit.
Internationally, the OECD has emphasized that financial education can lead to financial behaviors such as saving money and making better investment decisions. The Canadian Youth Business Foundation’s financial empowerment initiatives have increased the likelihood that loans will be repaid correctly and have lowered the rate of business failure in Canada. Financial capacity programs in Kenya, especially targeting MSEs, have led to higher revenues, better credit management and a favorable effect on the loan portfolio.

Even so, the topic can be considered little addressed, as there are not many studies evaluating the effectiveness of this type of action. Studies have found that the way interventions are carried out has little impact on people’s financial behavior and needs to be reassessed. With that, despite the importance of actions in this direction and that some are already underway in several nations, it is not clear what will actually work.
Anyway, more research on the topic is needed to better understand the phenomenon both in academia and in public policy, especially given the importance of financial education for the survival of small businesses, which are the backbone of the Brazilian economy.

What is being done globally to help small business owners with their finances?

While more research is needed, there are some experiences that highlight what is already possible. An ECLAC study on the subject in 2018 highlighted two experiences in Latin America: one in Colombia and another in Ecuador. The distinction was made because both parties assigned this responsibility to government-run development banks, which began to focus on integrating small businesses into the economy.

Public development banks have started to provide services to small entrepreneurs in both situations, including:

  • Advice on the organization of business plans to increase the probability of obtaining credit.
  • Financial and legal education covering subjects such as the value of saving money and different methods for doing so, the products and services available in the financial system, how to use them, the development of business skills, marketing, public relations and customer service, as well as as addition to innovation and entrepreneurship.
  • In Europe and the OECD as a whole, the focus has been on developing specialized skills matrices for small entrepreneurs, in order to determine the type of intervention that should be developed to achieve the desired objectives. Therefore, rather than serving as a tool for effective policy implementation, the matrix is more of a design tool for interventions. Although this type of measure has not been evaluated, the European Commission, for example, based its matrix on an inventory methodology of good practices.

The result of the skills matrix that should guide the development of public policies in the European Union includes topics such as the ability to design a budget, to find various sources of funding (including the comparison of various offers from different providers), to define strategies to mobilize resources and manage the budget to develop affordable long-term plans. Discussion papers state that policies must allow for the gradual realization of each of these objectives, which must move from fundamental to sophisticated.
Quick searches allow locating efforts in the area, whether attributing to an organization that has direct contact with small entrepreneurs and is responsible for promoting the country’s productive development the ability to develop financial training actions for this public or focusing on the development of a tool that directs the construction of political interventions, both public and private. What is missing is the size and evaluation of the initiatives.

Brazilian travel options

Brazil has a financial education strategy, and the Central Bank works in the area of financial citizenship, but discussions in the country tend to be centered on children and adolescents who are in school, so it is important to include new groups in the conversation, such as small business owners in particular.
The S System, focused on SEBRAE, currently plays the role that comes closest to training this public. For the purpose of starting and expanding businesses, information, courses and resources are accessible locally and remotely. Still, there is not much clarity about the structure of the measures, which have a distinct purpose in interventions that can be evaluated so that we can identify successful results that can be repeated on a larger scale. However, it is well known that the effort must be made regardless of the course one chooses to follow.
In particular, the effort to determine:

  • What are the requirements of this audience?
  • Which approach will serve them best?
  • Exactly how?
  • The answers to these questions depend on academics and policy makers emphasizing small business owners as the main audience for financial education policies, especially with regard to the evaluation of interventions carried out both internationally and in Brazil.
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