Small Business Owners Sit for a Portrait

Small businesses are no strangers to credit checks; they do them all the time. Now database and credit scoring giant Experian has produced the first snapshot of the credit life of the small business owners in its lists. The results, published in January as “The Face of Today’s Small Business Owner”, suggest that business owners are generally more affluent than the average population; their family structures are more traditional; and their household finances more directly tied to the business cycle.

Denise Hopkins, Experian’s director of marketing for business information solutions, says the company assembled the profile by bumping the information held by its B-to-B division up against existing data in its InSource consumer demographics division. The company selected a random sample of 1 million small business owners from its Business Owner Link records, choosing only non-publicly traded companies with 25 employees or fewer, and zeroing in on the titles that suggested ownership: owner, principal partner, CEO, etc. That random list of owners was then cross-referenced against Experian’s 250 million InSource consumer records to see how they compared to the general U.S. population.

What Experian found, Hopkins says, is that small business owners typically enjoy a higher income than most Americans—about 21% higher. The average small business owner’s annual household income is $71,690, compared to a nationwide average of $59,378.

If America’s personal wealth is divided into ten segments from lowest to highest, small business owners are 45% more likely than the national average to be found in that top tenth.

In terms of household makeup, the perception that small business owners are a group of cutting-edge, non-traditional, entrepreneurial iconoclasts doesn’t stand up to the facts. In reality, Hopkins says, they are 42% more likely than the average American to be married, 25% more likely to have children, and 20% more likely to live in a family with a male head of the household present. Three-quarters of them own a high-value home worth $500,000 or more, and they’ve lived in those homes longer than the typical citizen.

And those residences are more likely than the national average to be found in the western states. Like the general U.S. population, most small business owners in the Experian study live on Eastern Time (40%). But in terms of their representation within each region, Experian found that small business owners are 53% more likely than average to live and work in the western quarter of the country, and 16% more likely to live in the Mountain time zone. They’re 20% less likely than the typical American to live in the East.

In terms of their consumer behavior, the study found that small business owners are 20% more likely than the general population to buy items via mail order, either for their businesses or for their personal use. “They are 50% more likely than average to purchase goods or services from the categories of upscale [retail], do-it-yourself supplies, or news and financial categories,” Hopkins says. Taking an industry look at these small owners’ mail-order buying habits, Experian found that the heads of finance, insurance and real estate businesses most likely to purchase through the mails in lots of categories: upscale products, male products, do-it-yourself items, news and finance, food and vitamins, business supplies and gift items.

Next most likely to shop mail order were those owners in the farming, forestry and fishing industries. They were more likely than average to buy male and child products, DIY stuff, crafts and hobby products, athletic equipment, furnishings and linens and garden supplies.

One interesting factlet: Small business owners in the retail trade were less likely to be mail-order buyers than almost any other industry category except for transportation. “Our interpretation is that those owners probably tend to be more loyal than other categories to traditional bricks-and-mortar retail shopping,” Hopkins says.

But mail isn’t the only way to reach these small business owners. Experian found that in general, the group is 54% more likely to be receptive to e-mail than the overall U.S. population, with highest receptivity among services (a category that takes in medical, consultants, and ad agencies), finance, insurance and real estate business owners. Not surprisingly, those in farming, fishing and forestry were 24% less likely to be reachable by e-mail than the typical American. “Farmers don’t spend a lot of time at their computers,” Hopkins explains.

Finally, Experian correlated commercial credit scores for small businesses with the consumer credit scores for 1,000 small business owners taken from the random sample used in the study. That process revealed that over a 24-month period, business credit scores were much more changeable and dynamic than the consumer numbers. For example, 61% of the consumer scores were considered “stable”, compared to 53% of business credit scores; also, 24% of the commercial scores declined over time, versus 16% of consumer indices. This step in the study also uncovered a positive correlation between the commercial and consumer credit scores: that if one goes up or down over time, the other will too, albeit at a different rate. In other words, when business turns bad or good, eventually the small business owner’s household finances will follow. And anyone looking to sell to those owners should take note of the fact.

“Overall, this finding basically tells us that the most predictive way to look at the credit risk of a small business is to blend the data, to bring both the consumer and the commercial information together into a total score,” Hopkins says. “Small business owners in particular tend to use both traditional commercial financing and personal financing to supply their businesses. To get a real predictive view of the risk of a given small business, you need to look at the blended data.”

That gets to the heart of the motive behind the Experian small business survey. The company’s B-to-B division sells both lists and credit scores for the commercial market, while its consumer division does the same for individuals. A study such as this one underpins the belief that customers for those services who either sell to the small business segment as a whole or have dealings with individual small business owners will do best by looking not just at one score or the other but at a blend of the two.

“When you’re dealing with small business owners, combining the commercial and consumer scores will give you a more accurate, more comprehensive view of whom you’re doing business with,” Hopkins says.