Young entrepreneurs: separating business and personal finances, safe digitalisation, and consumer protection in supply chains
Focusing on entrepreneurship as a solution tends to position young entrepreneurs as being collectively responsible for solving systemic issues of underemployment and poverty. The risk for young people to start and scale a business needs to be shared by institutions and at the systemic level.
As micro-business and small-scale employers, young entrepreneurs are in a unique situation to pass on vital knowledge and skills to their employees through their own financially inclusive behaviour. However, we find that only 19% of young female entrepreneurs and 26% of young male entrepreneurs have a bank account. An average of only 20% of entrepreneurs had a bank account for their business use, while 53% had a bank account for their personal use.
Digital accounts and business accounts can help separate a person’s business from their personal finances, a number of stakeholders highlighted. It was clear in our stakeholder interview with the ILO that a digital or a business account that is separate from personal finances can create credibility and enhance consumer protection for young banking clients. We saw this reflected in the comments from young people in our survey. When asked how financial products can help manage their money, the comment from one young woman explains:
[I would like] a business bank account because it enables me to … easily save, send, and receive money for my business … and it sometimes makes customers [more likely to] do transactions with me because they … believe my business is legit and credible.
However, to use digital and business banking for their business, it is also important for young people to have the information they need to access financial products and services safely. Consumer protection for young consumers of financial products and services was also highlighted in ILO and IFC stakeholder interviews. Digital regulation, for instance, could help young entrepreneurs in providing the protection needed as businesses and consumers.
A lack of information—and a lack of relationship built with providers—means what young people need is not matched by the products and services on offer. Of the young people we surveyed, 62% say they feel they have the financial products and services they need, dropping to 39% for business use (see Graph 1: What are the barriers for young people?). There are a number of heightened barriers for micro-businesses including cost, lack of collateral and lack of information. (see Graph 3: What are the barriers for micro-businesses?). At the same time, three-quarters (75%) of young business users of bank accounts say they assume they would not be eligible for products and services on offer. (see Graph 8). Section 11: Financial Literacy, explores further the importance of information and trust.
Young entrepreneurs face constraints in accessing documents and collateral, and this is particularly acute for young women entrepreneurs, as we discuss in more detail in the next section. Among the biggest constraints for young people who want to build or scale a business is that young people are typically seen as a high-risk segment due to lack of a formal job, collateral, and documents. Due to this, service providers offer high rates and requirements to young people to manage this risk.21 The Global Partnership for Financial Inclusion (GPFI) and the World Bank Group undertook a global stocktake of ‘programs that finance youth entrepreneurs in a profitable and sustainable manner’. The GPFI and the World Bank Group report suggest that to curb the high rates that providers apply for young clients to manage risk, providers should apply more ‘flexible criteria’ for young clients. Risk can also be managed in other ways22 and products need to be tailored to suit youth entrepreneurs.23
Many of our stakeholders—backed by existing research—point to a range of tailored ways to assess credit-worthiness, manage risk, or deal with lack of access to collateral. In Islamic Finance, for instance, alternative forms of assessing credit-worthiness can be used. These can provide inclusive opportunities for women and young graduates.24 Our stakeholder interview with the Islamic Development Bank highlighted the inclusivity of skills over collateral in these models:
What about the woman who has no job? What about young graduates? They just graduated and have no job. But they have skills. Just people that can [be financed] through Islamic finance because it's timing finance… It is not important for you to have income, but if you have skills—you have skills, they can provide you money based on your skills.
The financial health of young entrepreneurs is not only affected by their own behaviour and decisions but by those within their supply chains. Micro-businesses face constraints in maintaining their cash flow, particularly when there are supplier payment issues.25 When asked what financial information would her to help manage her money, one survey respondent replied:
[I need] Information on how to avoid losses when people are slow to pay.
Financial strain is often caused by delayed payments. The IFC stakeholder interview explains that this has important knock-on effects to financial health and resilience:
As companies navigate supply chain disruptions in the pandemic, some of them have cancelled contracts and delayed payments for products or services. These actions are detrimental to the survival of vulnerable suppliers, including small and growing businesses. The financial well-being of these suppliers is affected because they need to pay interest on loans taken to deliver on contracts, but they’re not getting paid. These challenges have raised attention to an urgent need for trainings on crisis management and strategies to build resilience.
The impact of supply chains on micro-businesses’ ability to repay loans is particularly acute in manufacturing enterprises. A small share (17%) of the young people that we asked say they would like to have loans from a bank for their business use. In many of these cases, the credit is wanted to buy small-scale equipment to start or grow their business; for example, some young people in the open comments in the survey said they would like credit to buy “a sewing machine”, “incense making”, or other equipment. Many micro-businesses in low- and middle-income countries are engaged in small-scale manufacturing. Solvezy is an ecommerce martketplace for businesses that aims to simplify growth for MSMEs in India, owned by Standard Chartered Bank. The initiative, which came out of SC Ventures - the innovation investment unit of Standard Chartered works to tackle the impacts of supply chain constraints on entrepreneurs. By connecting suppliers to other businesses in the marketplace it enables them to manage and grow their business in a safe digital environment.
An International Finance Corporation (IFC) global program—Sourcing2Equal—finds that women-owned businesses in particular face supply chain barriers to competing with larger businesses. The program aims to “connect thousands of women entrepreneurs to new market opportunities via corporate procurement by 2023 in four countries.”26 Capacity building, market creation, and a functioning supply chain are all needed to support the financial health of individuals and businesses. However, as the IFC stakeholder interview explains, there are not enough interventions that provide solutions to supply chain issues, particularly for women:
One of the challenges that is in the market right now is few financial institutions (FI) offer products or services specifically designed to fully include women. For example, in Sub-Saharan Africa, sixty percent of FIs collect data on women’s needs but only fourteen percent use this data to inform targeted solutions to women.
GPFI and the World Bank Group report on the global stocktake, ‘Unlocking Finance for Youth Entrepreneurs: Evidence from a Global Stocktaking from the Global Partnership for Financial Inclusion’, suggests that financial service providers should work to develop products that are more suited to young entrepreneurs.27
Spurred on by both existing studies and by our research, the Futuremakers Forum 2022 has been packed with workshops, break-out sessions, and mentoring opportunities that seek to do exactly that—work with young people to create solutions that help them work towards realising their full potential.
Our stakeholder interview with Standard Chartered highlighted that harnessing digital opportunities is a key part of its approach to reach new people and improve lives and communities across the globe through financial inclusion:
Through partnerships and technology, we’re driving access to financial services at scale and connecting clients to opportunities that promote economic inclusion. Our goal is to reach 20 million active clients over the next few years, with most coming from the mass market. By developing these new solutions and digital business models, we’re able to grow our business while unleashing opportunities for millions of people.
In contexts without sufficient decent jobs, entrepreneurship has become an important means for young people to make a living. This is particularly the case for young women who face additional barriers to getting a good job.28 The views of young women business owners are detailed in the next section; the responses of young women show a lack of financial control, collateral, and formal documentation all impact on their financial inclusion and the ability of their business to grow.
