After I wrote my first column about the challenges of women business owners in securing financing, I received a lot of feedback and questions on the topic. I decided to examine the issue more closely by analyzing 14,000 loan applications from all across the U.S. on the Biz2Credit platform during the past six months.
Not surprisingly, a gender gap in small business financing does exist. In fact, loan approval rates for women-owned companies are 15-20% lower than they are for male-owned companies. This result was not surprising, considering the following:
- Women-owned businesses averaged 15% lower annual revenue than male-owned companies.
- Women-owned businesses tended to have average operating expenses that were 21% higher than male-owned companies.
- Credit scores for women-owned businesses were 40 points lower than for male-owned companies.
Much of this is due to the types of businesses that women tend to go into. Retail operations, by nature, have higher operating costs, including inventory costs, than other types of businesses. Further, they tend to have lower margins. Given the up-and-down nature of retail in the post-Great Recession era, banks have been wary to fund retail businesses.
Nisha Khanna, the owner of a successful Sweet & Sassy franchise in Old Bridge, New Jersey, is a success story. Despite already owning her own successful company, having a professional business plan and obtaining a franchise in an area of New Jersey in which people have quite a bit of disposable income, she had difficulty obtaining the financing she needed to open.
Two things worked against her. One was timing, as she began her search in 2009 when the "credit crunch" was at its peak. Secondly, at the time, few people in the banking industry were familiar with Sweet & Sassy, a children's beauty salon/fashion accessories boutique that makes a great place for girls' birthday celebrations, "pajama jams" and other types of parties. Big banks were not willing to lend to her. However, I was able to connect Nisha with a regional bank that specialized in helping immigrant entrepreneurs. She received funding and now runs a thriving business.
Fortunately, things have improved for borrowers in search of capital in recent months. Big banks, such as Sovereign, are actively looking to build their small business portfolios. Since real estate lending has not fully rebounded, banks had to look at other areas of loan-making. Banks make money when they make loans. It's as simple as that. This explains the return of large institutions ($10 billion+ in assets) and small, regional banks.
Women are often much more detail-oriented than men. They can use this to their advantage by taking the time to comparison shop for loans. If the business requires $50,000 in funding or less, a microlender, such as ACCION, is one good option. The mission of microlenders is to help small businesses get started and grow. Further, minority women can take advantage of special funding programs offered by Community Development Financial Institution (CDFIs), which exist to provide credit to under-served communities.
Although female business owners face challenges, I predict gender will become less and less of a factor, particularly as record numbers of women pursue entrepreneurial ventures and as women in professional services, such as law, accounting, and healthcare expand their practices and thrive.
Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,100+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured $800 million in startup funding, small business loans and business lines of credit for entrepreneurs across the U.S.