This guest article was written by Meredith Wood, the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans.
It’s a sad truth that when it comes to small business financing, like with so many other things, women are at a serious disadvantage.
As we know, access to credit helps businesses grow. And when women, who make up half of the population and a third of all entrepreneurs, don’t have equal access to credit, what does that mean for our economy as a whole?
Let’s take a closer look at where we can find these disadvantages and what could be causing them.
Where Are Women Entrepreneurs Hurt the Most?
While women entrepreneurs encounter many disadvantages, let’s point out three that have to do with small business loans.
1. Women are less likely to receive a loan.
This is the most basic way to measure equality… or inequality.
Simply put, women receive significantly fewer business loans than men do.
Here are a few staggering numbers. Women entrepreneurs are 5 percentage points less likely to receive a loan and, in fact, only receive 16% of all conventional business loans made in the U.S. each year. And when it comes to alternative online lending—an industry that’s supposed to help out the underserved using unbiased technology—women still receive loans less often.
Even when it comes to SBA loans, which are large and affordable government-backed loans meant to level the playing field for entrepreneurs, women receive just half the number of loans that men do.
2. Women get smaller loans.
Securing a loan isn’t the end of a woman entrepreneur’s challenges, however. Women only receive 80% of the capital men do: that’s 20% less they can spend on making new products, hiring employees, or expanding their operations.
And while we talked about how women only receive 16% of all conventional loans, that 16% actually only makes up 4.4% of all dollars lent to small businesses each year. That’s right—half of the population and a third of our country’s entrepreneurs receive less than 1/20th of the funds.
Sadly, women receive smaller loans across every type of loan, from personal and short-term loans to SBA loans .
3. Women get charged more.
The hits just keep on coming. Not only do women get fewer, smaller loans, they also get more expensive ones.
Our data shows that women pay higher APRs—annual percentage rates, which are a way to compare loans apples-to-apples—across almost every type of loan.
The one exception? SBA loans. Even then, women pay around 1% less than men do… but they receive fewer, smaller SBA loans.
Why Does This Happen?
There are 3 main reasons that women entrepreneurs receive fewer loans for less money and higher rates.
1. Women have lower credit scores.
The average credit scores for men and women, respectively, are 630 and 621. This is due to a variety of reasons—like income inequality—but the difference in credit scores between men and women entrepreneurs is even bigger.
Roughly one-fifth of male entrepreneurs have credit scores below 620—while almost one-third of female business owners fall into that bucket. On average for small business owners, men and women have credit scores of 645 and 629, respectively.
And since credit score is a major factor behind loan availability and cost, you can be sure this is a big reason why the credit gap exists.
2. Women make less revenue.
Woman-owned businesses, on average, make 30% less in annual revenue than male-owned businesses.
This difference gets bigger and bigger as we look at more successful companies: men-owned businesses making $1 million or more are nearly double women-owned businesses making the same.
This could be a chicken-and-egg situation—with less business financing, women-owned businesses can’t grow as much or as fast.
3. Women own younger businesses.
When it comes to underwriting a loan, many lenders care about business age. The longer you’ve been in business, the more storms you’ve weathered—and the more likely it is that you’ll pay back your loan.
Although the difference isn’t that big between genders, women do lean slightly more towards younger businesses. This isn’t surprising, though, since women entrepreneurs are starting businesses at almost 15 times the overall rate.
The Underlying Cause
These 'whys' might feel a bit unsatisfying—that’s because they don’t go far enough. Women don’t have lower credit scores because they’re worse borrowers: they most likely have lower scores because they receive lower salaries, due to workplace discrimination, taking time off for maternal leave, asking for fewer raises, and so on.
In other words, this issue is complicated and difficult to solve. The unequal access to business financing is the effect of other, deeper problems.
Our hope is that a technology-forward alternative online lending industry can help buck this trend. It’ll take lenders, business owners, policy-makers, and people of all kinds to make these changes happen… but this work needs to be done.
