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Entrepreneurs Are More Financially Conservative Than You Think

By Caitlin Elsaesser

They're known for borrowing large sums of money to start businesses that may or may not survive. But does that mean entrepreneurs are really bigger financial risk takers than the average Joe?

Hardly, according to a recent report from the Kauffman Foundation.

To compile the report, Dr. Tami Gurley-Calvez, a professor at West Virginia University who specializes in the economics of entrepreneurship, drew on nearly 20 years of data from the Federal Reserve Board Survey of Consumer Finances.

The first part of her findings would seem to confirm some of the stereotypes about entrepreneurs as bet-the-farm types:

  • 84% of business owners have applied for a loan in the last five years--compared 64% of non-business owners.
  • They're more comfortable with risk to achieve financial gain -- in fact, they're twice as likely to believe that taking an above-average financial risk will lead to substantial returns.
But according to the report, that's only part of the story. Willingness to take a so-called financial risk does not a risk taker make; it all depends on what kind of risk. When that's the criteria, business owners tend to be more careful than non-owners. More business owners will shop around for the best investment or borrowing opportunity. And when it comes to borrowing, owners are more conservative than the non-owners: only 47% would borrow money for living expenses, versus 52% of non-business owners.

Gurley-Calvez says that these investment trends qualify the kinds of risks owners are willing to take. "What appears to be risky behavior may not be risky from their point of view," she says, "because business owners may have collected more information about these choices."

The report also indicates that business owners have a strong safety net:

  • More than 80% of owners say they can borrow $3,000 from family or friends, compared to 64% of non-owners.
  • 45% of owners are likely to report that retirement savings are important, compared to just 32% of those who don't own a business.
"We found that attitudes among businessmen about borrowing and savings were more conservative than the general population," said Gurley-Calvez.

What can business owners take from these studies? Careful prioritization of savings, combined with well-researched risk, may be a winning strategy: Of the 12% of the population that owns a business, the median household income is $87,000 -- compared to $42,000 for households that don't own a business. And business owners have higher assets and net worth than the general population: $497,000 compared to $94,000 for non- owners.

But don't get too excited about that last data point, says Gurley-Calvez. "We know business owners make financial choices that help them make more money over time -- but from this report we can't say whether this is causal."

Photo: Wickimedia Commons photo courtesy of 2bgr8, CC 3.0.