Monday, October 15, 2007

Microbusinesses as Assets

By: Karuna Jaggar, Women's Initiative Director of Public Policy and Research


CFED's Assets and Opportunity Scorecard for California gives us a C overall, although we get an A for business development opportunities.
California's citizens face mixed prospects when it comes to their opportunities to build and preserve assets. On one hand, the state's households have the 11th highest average net worth in the country. On the other, the state ranks 36th in asset poverty — the proportion of households without sufficient assets to subsist above the poverty level for three months if income were to be interrupted.
Long-term financial independence requires assets as well as adequate income. Families must be able to both cover their basic needs, and have enough in reserve to keep them from slipping into poverty when circumstances change unexpectedly.

Furthermore, assets are critical in obtaining adequate income to begin with. For instance: education and even car ownership are strongly linked to earnings. Anecdotal stories from Women’s Initiative’s clients indicate that owning assets often leads to additional asset acquisition: home-equity loans pay for children’s college, stocks provide down payments on homes or capital for business growth, and so on. It's this combination of sufficient income and assets that allows families to be truly self-sufficient in the long term.

Businesses are a unique and powerful type of asset. They increase income, in the way that education does, and they also increase in value over time like real estate. Microenterprises typically have very low start-up costs, making them a relatively accessible asset for low income individuals, particularly compared to buying a home.

For asset-poor individuals with no credit or poor credit, starting a business is a uniquely accessible way to build on work experience, ingenuity and vision to grow an asset.  This can then be leveraged to acquire additional assets. Starting one’s own business can be a critical strategy for low income individuals to build powerful assets that are transferable across generations, helping to break the cycle of inter-generational poverty.

While asset poverty is a grave problem for all California families, current research has shown that women and people of color own disproportionately fewer assets than men and whites. Strikingly, the median net worth of a white-headed household in California is nearly $151,000 while that of a minority-headed household is just over $16,500. There is a need for additional research on the linkages between microenterprise and assets, with particular focus on inequalities linked to race and gender.

Data analysis of the most recent Women's Initiative client outcome data shows an overall trend of increasing wealth, with asset growth outpacing liabilities resulting overall gains in net worth. Average wealth at program entry is $9,288. Survey respondents report that their wealth increases a remarkable four-fold to $38,626 within twelve months.

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