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July 11th, 2019

improve business lending for women

Closing the Gender Lending Gap

Women continue to increase their participation in the business world. Everyday female entrepreneurs launch new businesses and many of them continue to thrive. Many of these early stage companies require additional working capital to fund their continued growth. Unfortunately most of these women entrepreneurs or business owners are realizing how difficult it is to find a lender willing to fund their business. Now although recent data suggest that the gap between male and female lending is shrinking, there is still much more that can be done.

What is the Lending Gap?

The lending gap, a term thrown around in the capital markets, refers to the gap between the amount of capital and the number of loans obtained by women-led versus male-dominated companies. Women have a harder time getting approved for loans and when approved, receive fewer funds, which has resulted in a significant disparity between the two genders access to capital.

Historically, men have dominated the business world and had more access to capital than women. This gap has persisted, with major implications for women-owned businesses. To fix the lending gap, one must first understand it and the state of women-owned small businesses.

Female Entrepreneurs and Small Business Owners

Women are starting small businesses and launching their own companies in record numbers. On average, during the years 1997-2017 women added 849 new businesses to the economy on a daily basis.

Women-owned businesses employ over 8.4 million workers and have a payroll of $264 billion. But almost 100% of their companies are considered to be “small” businesses, which is defined by less than 500 employees. Their businesses generate $2.5 trillion in sales and account for 12% of all sales.

The growth rate for minority-owned businesses, 9%, has exceeded that of businesses owned by non-minorities. African-American, women-owned firms generated $56 billion in revenues in 2017. These businesses are growing and profitable.

And they are hiring, with 27% of their businesses adding employees in 2017 and 34% of them expanding their business.  Women-owned businesses have a higher success rate than male-owned and reach their sales goals more often than men. Because they prefer slow and steady growth to speedy growth, they avoid riskier growth strategies and produce methodical, rather than astronomical, and sustainable growth. These make them an excellent risk for lenders.

Given all this, why has it been harder for women to obtain business loans to grow and support their businesses? To answer that question, we have to delve into the history of women and money in the United States.

The History of Women and Money in the United States

Women only started receiving equal treatment in the U.S. banking system in the current century, and as little as 31 years ago. While they now have equal access to all banking products, the legacy of the past has been it difficult for them to catch up to men.

Up until the 1960s, women couldn’t open bank accounts by themselves. They had to have a husband or father as a co-owner. It was not until the Equal Credit Opportunity Act, passed in 1974 that they could apply for a credit card. Given that over half of small businesses use credit cards to finance their operations, this alone prevented many women from starting and running businesses.

Lastly, it wasn’t until 1988 that a woman could take out a small business loan without being required to have a male co-signer. Their business opportunities, both the ability to start a business or to grow a business, were always under the control and dependent on a man. Women started out behind men in the world of small business lending, and this has continued to have an impact.

When banks make a lending decision, their underwriter looks at both the borrower’s credit history but also the history of defaults within their demographic. If business owners of a particular gender, industry, or location have historically defaulted more on their loans than banks either will not lend to them or will charge higher interest rates. However, when women could finally borrow on their own, banks did not have historical information on which to lend.

Without facts upon which to base their underwriting decisions underwriters only extended credit to the most qualified and least risky women. They continued to lend less to women, in general, which had the side effect of creating a smaller pool of borrowers from which underwriters could analyze the data and draw conclusions. Women have continued to feel the impact of being denied access to the lending market until decades after men.

Alternative lenders did not enter the lending marketplace until after the banking crisis of 2008. There has never been a time that they could have, even had they wanted to, discriminated against female borrowers. They have been lending to women since the beginning, and have a better knowledge of lending and default behaviors for this demographic than many large banks.

For this reason, alternative lenders are seen as part of the solution to closing the lending gap.

The Lending Gap Today

Efforts have been made to close the lending gap, but it remains a multi-faceted problem for many female entrepreneurs and small business owners. Because even if women can obtain capital, they might not be able to borrow enough to meet their business’ needs.

There is more to the lending gap than access to funds. Even if a woman can obtain capital, an additional component is the amount of money she can borrow. Research has shown that more women are applying for funding, an increase of 13% in 2018, but that the loans they received were on average 31% less than those given to male-owned businesses.

Both access to capital and the amount they can borrow play a part in the lending gap. If female business owners cannot obtain access to enough capital to support their goals they might have to engage in the sometimes risky business of loan stacking. Since borrowing capital is one of the main methods companies use to grow, the lending gap also hurts female business owners growth opportunities.

The average business loan extended to women-owned companies was only $57,097 in 2017, down over $40,000 from the previous year. This is despite the fact that women-owned businesses have increased by 114% in the past 20 years.

Gender does play a role in the difficulty that female small business owners have in obtaining capital, but one must also consider the general problems that small business owners have obtaining capital from banks. Large banks approve just 56% of loan applications, and small banks approve only 68%, in comparison to a 75% approval rate with alternative lenders.

Traditional lenders have the most rigorous borrowing requirements. Borrowers must have great to extremely good credit scores, typically above 650. Their business must also have been in operation for two years or longer and have regular, increasing cash flow. Research suggests that women only receive 16% of conventional business loans. What is more, the average loan size granted by large banks was $493,000, which is far more than most small business owners may need.

The industries in which women open businesses also play a role in the lending gap. In one survey of women-owned businesses who applied for loans, 21.9% were in service businesses, 18.4% were in retail, 12.4%, and were in food and hospitality. Unfortunately, these are sectors of the economy which can often be hurt by downturns and recessions. Banks are often reluctant to lend to businesses in these industries, so the lending gap continues.

Lastly, because women entered the small business world at a later date than men, not all of their businesses have been operating the required length of time to qualify for bank loans. With so many women launching start-ups and becoming entrepreneurs, their businesses have been operating for less time than male-owned businesses. Banks and other lenders claim that these shorter times in operation have partially contributed to the gap in funding women-owned businesses.

It is difficult for small businesses to obtain funding from banks, period. But when looking at the overall approval rates, loan size, borrower requirements, and a history of discrimination against women that can be found in traditional banks, it is no surprise that the lending gap still exists.

The Lending Gap and Start-Ups

It is important to examine the lending gap’s impact on female-founded start-ups, not just female-owned businesses. The lending gap prevents women from even launching their businesses to begin with, let alone needing capital down the road.

While women are the fastest growing group of entrepreneurs and outperform men in many VC portfolios, female founders received just 2.2% of venture capital funding in 2018. The reasons for this are complex;

Less than 10% of venture capital firms have a female-founder, with less than 1% have a Black or Latinx founder. Study after study has shown that gender and racial bias in lending exists. According to one study, when paired with a loan officer of the opposite sex borrowers in one study paid up to 28 basis points higher on their loan. Another study changed the race and gender of loan applicants to determine that both have a significant impact on lending decisions.

What this means is that, with so few female and people of color leading venture capital firms, one can draw the likely conclusion that this lack of diversity is impacting investment decisions in start-ups. Part of the reason that female-founded companies receive such a low percent of venture capital investment is due to the gender of those making investment decisions.

Why does the Lending Gap Matter?

Women own over 11.6 million companies in the United States and employ almost 9 million people.  Obtaining the capital to grow and support those businesses will keep people employed, put more money back into the economy, and drive economic growth. Simply put, closing the lending gap is good for the economy.

Women control 70% of consumer spending, start more businesses than men, and are more cautious about taking on debt. Over the past 20 years, the revenue of women-owned businesses has grown by 103%. A Harvard Business Review study found that firms that had more women in the C-Suite were more profitable, and adding just one woman to corporate leadership translated to a 1% increase in net margin.

If the U.S. raised female participation in the workforce to the level of men, it would increase the GDP by 5%, and many women cite work-life balance and the ability to parent and work as the reason they start their own businesses. Making it easier for them to obtain capital and, thus, enter or re-enter the workforce, would grow the country’s GDP.

Small businesses, more and more of which are run by women, create two of every three new jobs in the U.S. Women are a huge engine of growth in the U.S. economy, and gender equality in all areas increases a country’s well-being.

Closing the Lending Gap

Everyone from the IMF to Forbes knows that closing the lending gap will have a huge impact on the worldwide economy. It is being hailed as the solution to slowing global growth and stalled economic movement. But the answers on how to do it have varied.

In recent years, several organizations have announced the launch of venture capital funds specifically targeted at investing in women. Halogen Ventures in California invests in female-founded consumer technologies, while Brilliant Ventures invests based on diversity. Forerunner Ventures invests in industry disrupters. All of these venture capital firms were founded and are run by women, and seek to make it easier for female-founded start-ups to receive needed funding.

Forbes and others have urged banks and alternative lenders to become active in closing the gap. Many of their suggestions align perfectly with the alternative lending model.

To make capital easily accessible, they urge lenders to put the loan application online. Not only does this save the borrower time, but it also makes the applications color-blind. Lenders do not yet, but should, also make them gender-blind. Online applications remove unconscious bias.

Consumer education is also key, as many small business owners are unaware of the options available to them. Taking the time to explain loan products, either in person or through a robust corporate blog, helps borrowers make better informed decisions. It also keeps them from wasting their time applying with lenders where they would not be approved.

Alternative Lending and Closing the Lending Gap

Some experts think that making it even easier for alternative lenders and payment service providers to operate levels the playing field, reduces costs, and increases efficiency. Alternative lenders can turn around a business loan application in as little as 24 hours, and disburse funds in several hours or a few days depending on the borrower. The speed of business funding makes them ideally suited to borrowers who need cash in a hurry.

They are willing to work with companies who have been in operation as little as two months as long as they have sufficient revenues. If a small business has just $8,000 a month in sales, they could get a business loan. Alternative lenders also lend in much smaller amounts than traditional banks, which might suit some businesses better.

Alternative lenders are ahead of many traditional banks when it comes to technology and algorithms which help them underwrite loans. Their loan pools and data have always included women, so they have built underwriting that never discriminated between the sexes.  Their higher approval rate overall makes it easier for female small business owners to obtain financing.

The interest rate charged by a lender reflects their risk in lending. If you have a lower credit score, you will pay more on your loan. Many alternative lenders’ rates start at 12%, which is lower than a credit card. It would be a mistake to assume you would pay more to borrow from non-bank sources, particularly if you have a good credit score.

Women have made great strides in the business world since first being able to borrow back in the 1980s. Closing the lending gap and ensuring that all worthwhile and successful borrowers have access to the capital their businesses need will both improve the economy and the lives of female entrepreneurs everywhere.

Sam Baitz

CEO at Shield Funding
Sam is an expert in small business financing and has been CEO at Shield Funding for more than a decade. The company has funded more than 1000 small businesses and has been a significant contributor to the phenomenal growth that many of those companies have experienced.
Sam Baitz