Financial capability has profound implications on women’s financial well-being and their ability to prosper both personally and in their business.
There is a broad assumption that people have adequate financial capability to thrive, yet a survey by the Financial Consumer Agency of Canada highlights several challenges Canadians face.
Women face even greater headwinds in building financial wealth because the same challenges are exasperated by a wage gap, career breaks, longer life spans, and lower financial literacy.
What is financial capability and how is it different than financial literacy?
Financial experts and professors have progressively adopted the concept of “financial capability” rather than “financial literacy” in an effort to deploy better techniques to improve individuals’ financial well-being.
- Financial capability is more inclusive than financial literacy. While financial literacy or knowledge is a crucial component of financial capability, financial capability also includes skills, attitude, self-efficacy, access, and action.
- Financial knowledge is information acquired to raise one’s understanding of financial concepts to manage money, along with the products and services available to do that. Understanding debt, inflation, interest and risk, as well as knowing where to find solutions and advice are the keys of financial knowledge.
- Financial skill refers to the ability of an individual to apply relevant knowledge to manage financial risks and opportunities. It requires general skills such as literacy, numeracy, problem solving, communication and critical thinking, and is often developed through practice. It is illustrated by an individual’s ability to build good credit, budget, compare financial products and avoid financial scams.
- Financial attitude is about an individual’s mindset and opinions regarding finances, including their motivation to engage with their finances, impulsivity and their levels of stress associated with making financial decisions.
- Financial self-efficacy is one’s perception of their own abilities to make appropriate financial decisions, use financial products and services, and accomplish their financial goals. Do they have confidence to learn what’s necessary to managing their own finances?
- Financial access looks at the availability of accessible and affordable financial products and services so an individual as the ability to act. These include products such as bank accounts, credit cards, and loans from a financial institution.
- Finally, financial action is what the individual does with the knowledge. Are they using credit responsibly, managing a budget, and planning for long-term personal and business financial goals?
All six of these factors are necessary for financial security and success. If one doesn’t have self-confidence in their ability to acquire the knowledge or skills to be financially successful, it is unlikely they will take the necessary actions. If they are willing to act but don’t have the knowledge or skills, they are at risk of making costly mistakes.
What our research revealed about women entrepreneurs’ financial capability
WEOC’s Bootstrap or Borrow report looked at several areas of financial capability and found that 1 in 4 respondents struggled to understand business financial terminology (financial knowledge) and 1 in 6 had a negative mental model towards debt (financial attitude).
However, women entrepreneurs’ financial self-efficacy was very high and revealed there was a strong willingness to build the skills, relationships and knowledge to manage a growing business.
Of course, without reasonable access to financial solutions, literacy, confidence and skills are wasted. The report revealed a strong belief among women entrepreneurs that there was a lack of suitable funding options based on their personal and financial circumstances. Forty-one per cent of women said, “people like me are unlikely to receive bank loans.” That figure increased to 54% for racialized groups.
The most common complaints of newer, less experienced entrepreneurs was the uncertainty at the outset of the funding process. These include problems in obtaining clear, honest and transparent information regarding the existence of products suitable for their circumstances.
The Role of Funders
Funders play an important role in empowering women entrepreneurs. Providing timely and relevant financial knowledge, supporting the development of financial skills, and encouraging attitudes that align with her business goals, are vital for women entrepreneurs to make informed decisions about financial products in order to use them opportunistically.
Funders can use these questions to better understand the needs and goals of women entrepreneurs:
- Does she understand financial concepts to create, sustain and grow the business?
- Does she know what products and services are available to help her meet her goals? Does she know where to find them?
- Is she aware of her current financial situation?
- Can she evaluate the financial risks and opportunities when making decisions?
- Does she have the ability to deal with a changing financial and business landscape?
- How engaged is she in financial decisions?
- Is she motivated to learn what is needed to achieve her goals?
- How stressed does managing money make her?
- Does she feel confident in managing all key aspects of money?
- How persistent would she be in working through financial challenges?
- What solutions are available to meet her financial needs?
- How cost-effective and accessible are these solutions?
- What actions has she taken to improve her financial situation?
- What plans does she have in place to meet her financial goals?