Just as baby boomers are predicted to have a large impact on entitlement programs, so are they poised to be a primary driver of small business formation in the next decade and beyond. This has implications for lenders and financial risk managers that do business with small businesses.
While the small businesses landscape continues to be rocky thanks to recent economic cycles and the uncertainty of regulatory, health care and tax policy changes, boomers are having a sizable impact on the number of new businesses formed. Both demographic trends and recent surveys support this view.
- Baby boomers—defined as being born between 1945 and 1964—comprise approximately 75 million, or 25% of the U.S. population according to the U.S. Census, with an estimated 43 million being in their 50s.
- Although the oldest of the generation began reaching retirement age in 2011, many are extending their time in the workforce to earn supplemental retirement income to compensate for the detrimental impact the recession had on their investment portfolios. According to a Transamerica study, 62% of baby boomers plan to work past the age of 65.
- As baby boomers choose to work past 65, they are more likely to start a business than their younger counterparts. Data from the U.S. Bureau of Labor Statistics show that the likelihood of being self-employed increases with age. More than a quarter of those self-employed in the United States are 65 and older, much higher than any other age category.
- The Transamerica study reveals that approximately 27% of Americans 65 and older who are still in the workforce are self-employed. This compares to about 10% of the overall workforce. And a 2011 survey of 1,000 small business owners by Guidant Financial found that 84% of new small business owners are between the ages of 40 and 60.
- Another study by the Kauffman Foundation found that in 2011 nearly half of all startup businesses in the United States were launched by people age 45 to 64. Owners in the 55 to 64 age range accounted for 21% of the new business formations, a seven-point gain from 2007.
Not only are demographics driving the growth of new business formations, so is the predisposition of boomers to use their savings to start a new business: 85% of the Guidant Financial survey respondents believe that purchasing a business with retirement funds, as opposed to debt, is a good idea. Another study by Monster.com and Millennial Branding showed that boomers are more likely to take risks by starting a new business: 45% of boomer respondents consider themselves to be entrepreneurial, compared to 41% for Generation X and 32% for Generation Y.
In addition to being well-suited to fluidly transitioning to small businesses ownership, boomers with professional backgrounds represent a much safer credit risk than younger generations and are the ideal candidates for starting small and medium businesses—they tend to have business experience, an established network of contacts, a proven financial and credit history, existing startup capital (savings) and a lack of debt. Predicting an individual small business’ ability to meet credit obligations is not an exact science, but boomers do offer a wealth of credit history data to make more informed decisions.
Given demographic trends and favorable credit risk, there is little question that boomers will be a dynamic growth engine for small business formation going forward, and the likelihood is that they could drive business formation levels back to pre-recession levels or better.
As such, fertile ground exists for lending institutions and other companies to develop new products and services to cater to this emerging breed of business owners. There will be plenty of opportunities for lenders to grow their small business portfolios.
Data and analytics offer the building blocks for taking advantage of this boomer trend. The goal is to optimize risk management by more accurately identifying credit risk and enabling better decisions, while improving marketing ROI by targeting more relevant offers to these boomers where they are most apt to respond.
First, financial risk managers would be well advised to find ways to link data from business and consumer portfolios to identify those boomer business owners who also are retail customers. This is important because boomers’ personal credit histories can greatly inform the small business credit decision, especially in early life-stage lending. Their histories tend to include a higher number of transactions over a longer period of time, providing more information from which to make an informed decision.
This linkage also can provide companies with more marketing opportunities by identifying which of their retail customers also are boomer business owners. As much as 20% of consumer accounts in a portfolio may also be small business owners or principals, offering another avenue for lenders to more effectively identify these profitable customers.
Second, risk managers should incorporate and emphasize experiential and other nonfinancial attributes into their portfolio segmentation to better account for the boomer segment. These factors can help pinpoint small business prospects that offer the best risk-reward opportunities.
Third, as savvy, experienced businesspeople, these boomers are likely to take a greater look at the growing number of alternative funding offerings from micro-loan lenders and crowdfunding sources that utilize automated loan processing platforms to eliminate lengthy, onerous applications. Boomers may be swayed by faster, easier sources of funding.
As such, lenders would be wise to create small business offerings that reduce the “friction” in the lending process—reducing traditional document requirements as well as the time needed for manual underwriting reviews, multi-stage credit approvals, etc. Modernizing and streamlining the lending process by marrying finance, alternative data sources, analytics and technology not only would help capture the emerging boomer segment, but younger demographics as well.