In the past year, women’s empowerment has moved to the forefront of America’s cultural trends. TIME named The Silence Breakers as “Person of the Year,” for challenging the status quo with regards to sexual harassment, and the powerful movement has caused the mighty to fall — from Hollywood mogul Harvey Weinstein to former USA Gymnastics doctor Larry Nassar. Women are increasingly pushing for change.
Change is also needed in small business finance. Women-owned businesses in the U.S. generate over $1.7 trillion in revenues and employ millions of workers. Although last year was a good year in small business financing, it could be even better. Women business owners still experience a funding gap in loan approvals. Fortunately, to overcome systemic social and financial challenges while starting a business, there are numerous organizations dedicated to helping women entrepreneurs succeed.
Women business owners have a harder time securing startup capital and loans to pay off high interest debt, expand their companies, purchase equipment, and meet seasonal challenges than their male counterparts do.
Small business loan approval rates for women-owned companies were 15-20 percent lower than they were for businesses owned by men in 2016. Additionally, revenue and credit scores are lower and operating costs are higher for women-owned firms. These realities make it more challenging for female entrepreneurs to secure capital.
Fortunately, there are numerous forms of financing for female entrepreneurs. These range from microloans from non-profit lenders for amounts under $50,000 to SBA loans of up to $5 million. Various types of financing address different needs. For instance, a line of credit can help a company, such as an ice cream store or landscaping business, overcome the challenges of seasonality. Equipment loans, which use the machinery as collateral, can help women-owned companies upgrade their facilities.
Thirty-six percent of the small businesses in America are women-owned, and the figure has risen substantially over the past decade. According to loan applications submitted to Biz2Credit, the states with the highest numbers of women-owned firms are: California, Texas, Florida, New York, and Georgia. The following cities, in particular, are the top metropolitan areas by number of women-owned firms: New York, Los Angeles, Miami, Chicago and Atlanta.
In these places, and across the country, the top sources of funding for women-owned businesses are:
Small Business Administration (SBA) Loans
Through its partner lenders, Small Business Administration offers government-guarantees that minimize risk for SBA-approved banks and other financial institutions. The agency does not directly make loans to small business owners. Because the government backs up to 75 percent of the amount borrowed, SBA lenders have incentive to approve women-owned businesses for funding.
The benefits for women are that they are able to secure funding at a low cost of capital and pay it off over longer periods of time.
Term loans, which are really just traditional small business loans from banks–but without the government guarantees–are the most common form of small business funding. It’s what most people understand: the borrower receives a large amount of cash that gets paid back with interest, over a fixed amount of time. Big banks currently are approving about one-quarter of the funding requests they receive. Regional and community banks grant roughly one-half of applications for financing.
Business Lines of Credit
Many women business who need assistance with working capital, seasonality challenges, and unexpected expenses are able to secure business lines of credit. Essentially, it’s a debit account available to the business owner. Interest is paid only on the amount of money borrowed from the account. Entrepreneurs enjoy the flexibility of this type of funding.
Microloans are a good solution for women owners who need a small amount of capital to get up and running. Usually, the funding comes with a short repayment window and slightly higher interest rates than SBA loans, term loans or small business lines of credit.
While a lending gap still exists, each year it gets narrower.
As women business owners gain more experience and become more successful, they will likely encounter fewer and fewer gender-based challenges to securing financing. Thus, the social/cultural trend of women’s empowerment will also begin impacting the world of business and finance, as well.
With a robust economy and business optimism abound, women are starting and growing businesses at unprecedented levels. In order for them to succeed, they must have a fair shot at securing financing.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.