Just as baby boomers are predicted to have a large impact on entitlement programs, so are they also poised to be a primary driver of small business formation in the next decade and beyond. This has implications for lenders as they seek to grow their small business portfolios.
While the small businesses landscape continues to be rocky thanks to recent economic problems and the unknown of regulatory, healthcare and tax policy changes, we see boomers as having a sizable impact on the number of new businesses formed. Both demographic trends and recent surveys support this view.
Boomers, defined as those 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.
In so doing, baby boomers 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 U.S are 65 and older, much higher than any other age category. And a study by the Kauffman Foundation found that in 2011 nearly half of all startup businesses in the U.S. 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.
Safer Credit Risk
What are the implications for financial institutions? In general, boomers with professional backgrounds represent a much safer credit risk than members of younger generations and are the ideal candidates for starting small and medium businesses. After all, 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.
Given demographic trends and favorable credit risk, boomers will likely provide 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 credit decisions, while improving marketing return on investment (ROI) by targeting more relevant offers to these boomers most apt to respond.
First, lenders 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. These 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 lenders with more marketing opportunities by identifying which of their retail customers also own businesses. Equifax data analysis shows that as much as 20% of consumer accounts in a portfolio may be comprised of small business owners or principals.
Second, lenders should incorporate and emphasize experiential and other attributes into their portfolio segmentation that can help to account for the boomer segment. This can include a minimum number of transactions over the life of a person’s credit history, specified number and size of loans repaid, total assets owned and recent salary data. These factors can help pinpoint small business prospects that offer the best risk-reward opportunities.
Finally, as savvy, experienced businesspeople, these boomers are likely to take a look at the growing number of alternative funding offerings, such as micro-loan lenders and crowdfunding sources that utilize automated loan processing platforms to eliminate lengthy, onerous applications. Boomers may be swayed by such faster, easier sources of funding. In response, bank lenders would be wise to create small business offerings that reduce the “friction” in the lending process by reducing traditional document requirements as well as the time needed for manual underwriting reviews, multi-stage credit approvals, etc.
Mr. Stefanick is senior vice president, Commercial Analytical Services, with Atlanta-based Equifax Inc. He can be reached at Michael.Stefanick@equifax.com.