Does Madison’s good financial health translate to entrepreneurship?

Madison is used to ranking at or near the top in national surveys, so it shouldn’t come as a shock that NerdWallet recently named the city the second best metro area nationally at managing credit, dealing with debt, and budgeting for housing.

The financial education website analyzed the 100 most populous U.S. metro areas looking at things like credit scores, debt and delinquency, household income, individual income, and homeownership costs to arrive at its rankings.

Madison was joined in the top 10 by three other Midwestern metro areas — Grand Rapids-Wyoming, Mich. (5), Minneapolis-St. Paul-Bloomington, Minn.-Wis. (6), and Des Moines-West Des Moines, Iowa (9). The only metro that topped Madison was San Jose-Sunnyvale-Santa Clara, Calif.

Some key findings from the NerdWallet study:

  • Credit cards: Median credit card debt is 2% of the median income in Madison.
  • Individual debt: In Madison, median consumer debt makes up 32% of median consumer income.
  • Housing: Madison has a median household income of $60,903 and a median homeowner cost of 32%.

According to Courtney Miller, a data analyst with NerdWallet and coauthor of the study, Midwestern cities tend to perform well in these kinds of studies due to fairly strong local economies, a low cost of living, and a tendency among residents to manage credit and debt well. Madison is no exception.

Madison had the highest median VantageScore among the 100 largest U.S. metros. Like the better-known FICO, VantageScore ranks creditworthiness on a 300–850 scale, with higher scores representing better credit.
Madison’s median VantageScore topped the nation at 761, compared to a median score of 727 for all 100 metro areas’ studied. Madison was also near the bottom of metro areas with the lowest percentages of balances 60 days or more past due at 0.95%; of the 100 metro areas analyzed, the median percentage of balances 60 days or more past due was 2.16%.

Miller says for small business owners, especially someone who is just starting a small business, his or her personal credit score is particularly important.

“Building credit for a business follows a lot of the same advice I’d give to anyone about building their personal credit score,” Miller explains. “So, things like keeping their utilization rate low and keeping up on payments — that’s a huge part of having a strong credit score, not having delinquencies and not missing payments. When I talk about keeping your utilization rate low that means if you have credit cards that have a limit up to $10,000, you really don’t want to use over 30% of that. It’s kind of a signal to issuers that you might be under some sort of financial stress. And diversifying the types of credit that you have, so having a credit card, along with a mortgage and maybe an auto loan with installment payments to show a different kind of responsibility.

“The reason for that is when a business is starting out if you’re looking to get a business loan or a business credit card, typically issuers are going to look at the proprietor of the business’ personal credit score since the business at the time has no credit,” continues Miller. “So if you’re looking to start a small business, although you eventually want to establish credit for that business, it’s going to be your own personal credit that gets you the first business credit card or first business loan.”

“Clearly, Madison’s well-educated populace learned their money-managing basics in addition to their formal schooling,” adds Sean McQuay, NerdWallet’s credit cards expert. “We can all take a lesson here: High credit scores unlock savings on loans, as well as job and housing opportunities.”

Turning Midwestern money sense into entrepreneurship?

As good as Madisonians may be at managing their money, those skills might also be holding back the regions true entrepreneurial potential, at least in part.

Nathan Brinkman, a financial advisor at Triumph Wealth Management in Madison, notes the Midwest is generally very conservative when it comes to launching and financing a new business.

“Going back again to what NerdWallet is saying, there are a couple things that make Madison a unique place,” Brinkman explains. “One is the consistency of our economy, so having the university and seat of state government here — and therefore job security — I think makes a big difference compared to what we see happening across the country. With that stability comes very low unemployment, so again when people have a job they tend to keep up with their finances better than not having a job, obviously. Then the education side. Madison is a very highly educated environment and generally people gravitate toward wanting to stay here.”

That all works in Madison’s favor for being a great place to live, but Brinkman notes when he does business with people in other parts of the country, especially on the coasts, those individuals are far more aggressive with business deals than businesspeople in Madison.

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“Particularly in California, which I would say is a hotbed for entrepreneurship, there are just people who take a tremendous amount of risk that I don’t think you see as often, particularly in Madison, but more specifically in the Midwest,” Brinkman states.

He cites Midwest values — not liking a lot of debt, not leveraging as hard, not buying huge houses you can’t afford, not living on a thread — as something that distinguishes the mindset of potential entrepreneurs locally from those on the coasts.

Generally being in good personal financial shape means an individual will tend to be in good business financial shape, Brinkman says, but it can also be a double-edged sword.

“There are people who are really conservative who can find it very difficult to jump into the pool of entrepreneurship because it’s very high risk,” notes Brinkman. “If you have to put your own dollars against a business idea, and if it doesn’t work you just destroyed your balance sheet, those people don’t launch as quickly. Yes, more conservative money managing can be a good thing but it can also be a bad thing where people stay with their consistent job because they’re too afraid to dip their toe in the water and risk it all.”

Brinkman thinks this is one reason why Madison has lagged behind other metro areas in entrepreneurship.

“For a number of years we just really struggled finding venture capital, mezzanine financing, or any of those other things that you find in bigger cities or on the coasts where there’s just more of a appetite for risk. That is part of it, but a lot of it has just been the access to capital. You know, a lot of the businesses that traditionally launch [in the Madison area] just do conventional financing, which means it’s got to pass the smell test of a bank. Whereas many small companies that are launched [elsewhere] have some private or venture capital to them that just has more of an appetite for risk.”

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