Self-employment, gender, financial knowledge, and high-cost borrowing

Poor financial decisions are a primary cause of small firm failure. This research therefore reports on an examination of antecedents behind questionable financial borrowing practices among self-employed individuals. Poor financial decisions are proxied as the use of high-cost short-term payday loans, check-cashing services, and the like (collectively, alternative financial services, AFS). More than 20 percent of self-employed individuals in the United States reported having borrowed from AFS providers, a practice that is arguably symptomatic of the poor financial decisions that could lead to business failure. Self-employed individuals, particularly those with high levels of financial self-efficacy (an attribute important to entrepreneurship) are particularly likely to employ AFS borrowing. Overconfident individuals, including self-employed individuals, comprise a disproportionate fraction of AFS users. This work also found that financial knowledge among self-employed people is, on average, no higher than that among employees, and low financial knowledge is also associated with AFS usage. Women, even though generally less financially knowledgeable than men, are relatively less likely than men to use AFS borrowing.