Although 40 percent of small businesses in the United States are owned by women and women account for the fastest-growing segment of entrepreneurs, they still lag behind male-owned businesses in their ability to access borrowed money to fuel growth and fund working capital. “In 2014 the Subcommittee on Small Businesses and Entrepreneurism published a report that said only 4% of the total dollar amount of business loans go to women- owned businesses,” said Peter Bolin, Experian Director of Consulting and Analytics. “After hearing of this report, Experian Decision Sciences decided to conduct a study of women business owners to see how they were doing.”
I recently spoke with Bolin, who shared some insight into potentially why there’s a difference between the approval rates for women and men with many small business lenders.
Experian recently conducted a study of male-owned businesses and female-owned businesses to compare how they manage their personal and business credit to see if there were significant differences. I had the opportunity to dive a little deeper with Bolin to discuss two interesting infographics they’ve published on the results, one for male-owned businesses and another for women-owned businesses.
Ty Kiisel: Why is it more difficult for women-owned businesses to access small business financing?
Peter Bolin: It’s less about gender bias and more about the type of businesses women start and how they access credit in the beginning. Women tend to leave the workforce to stay at home and start a business that can be run out of a spare room or the garage—like a salon, an Ebay distribution business, or some other personal services business. Men, on the other hand, are more likely to start businesses in construction, real estate, restaurants, or retail businesses that take them out of the home.
Ty: How does that impact their ability to access credit?
Peter: The businesses men engage in often require more capital to get started than women-owned businesses do for starters; and those suppliers are used to asking new business owners if they’re interested in establishing credit when they purchase supplies. For example, if I own a construction company and go to the local lumberyard to get materials for a new project, at the counter they’re likely to ask me if I would like to set up a credit account. That’s not a common practice for many personal service type businesses.
Ty: Don’t the suppliers that support these women-owned businesses offer vendor credit?
Peter: Yes, many of them do. But women tend to leverage their personal credit more than men do to get things started—which puts them at a disadvantage when they really need business financing down the road to grow. By avoiding potential vendor financing opportunities early on, they don’t build any kind of business credit profile, which makes it more difficult to get a small business loan.
Ty: Why do you think women are more likely to use their personal credit than men when starting a new business?
Peter: It’s easier for starters. It’s also quick and it’s already available to them. It’s relatively easy to pull $5,000 or $7,000 out of a personal credit card. It’s also likely that the lower cost to enter the businesses women tend to choose doesn’t compel them to look for more traditional business financing options early on.
Ty: Doesn’t using personal credit hurt their personal credit score?
Peter: Yes it does. Their higher utilization of personal credit to the credit available to them pulls down their personal scores.
Ty: What advice would you offer to women business owners?
Peter: Once you open the doors, start looking for places where you can establish business credit accounts rather than relying on your personal credit. Even though some of the vendors that support the businesses men typically gravitate to are more likely to offer vendor credit than those women gravitate to, that doesn’t mean they don’t. Ask your vendors if they offer credit terms.
Ty: Do you have anything else to add?
Peter: Understanding your business credit is probably number one. Find out what your business credit profile looks like and how it’s created.
The second thing you should do is negotiate with your suppliers and the bank. If your suppliers have never considered these kind of trade relationships before, push them to do so. Don’t be afraid to talk about terms that would be more favorable to your business.
In 2014 the Senate Small Business Committee reported that only four percent of the total value of small business loans went to women-owned businesses. Experian’s research suggests that while women-owned businesses tend to be smaller cottage industries, they otherwise don’t look much different than their male-owned counterparts. If this research does nothing else, it suggests the financing challenges for women-owned business owners are a little more complicated that what some might otherwise expect.