State of Small Business Lending: Is the Gender Gap in Funding Closing? (Q2 2019)

Women entrepreneurs are making waves in the small business world. According to historical and projected data from the U.S. Census Bureau, the number of women-owned businesses increased by 58% between 2007 and 2018, at a rate nearly five times higher than the overall average. During this time period, women-owned businesses also displayed growth in hiring and revenue.

Despite this progress, women entrepreneurs still face obstacles when starting a small business. Clients and vendors often don’t take female business leaders as seriously as their male peers. Women have more pressure to balance family and business obligations. They also face more challenges in accessing funding. In this State of Small Business Lending report, we sought to dig deeper into the availability and cost of small business loans for women-owned businesses.  

At Fundera, we’ve looked at this topic in previous years. In our very first report on women and small business lending, which covered data spanning from February 2014 to June 2016, we found that women business owners requested less funding, got approved less often, received smaller loan amounts, and paid more for financing than men. In the next report, covering June 2016 to September 2017, some statistics had improved in favor of women. In certain product categories, women entrepreneurs received similar loan amounts and lower interest rates than men.

This time, we took a more nuanced look at female entrepreneurship, focusing on 1,158 small business owners who successfully secured funding through Fundera’s marketplace in the second quarter of 2019. The results show continued gains for women entrepreneurs in terms of loan amounts and cost of financing, this time across all of Fundera’s loan categories. That said, there are still specific areas that call for improvement, including women’s access to funding.

Key takeaways from this year’s report include:

• The gender gap in funding amounts and cost is closing. In the second quarter of 2019, both men and women received an average loan size of approximately $42,000, despite women requesting less funding. Across all loan categories, women business owners received interest rates on average three percentage points lower than men. 
• Women still have less access to funding and report lower financials. Despite the fact that women secured similar funding amounts as men, men entrepreneurs were 20% more likely to receive a loan. Women entrepreneurs also reported lower business revenues and profits compared to men. 
• Women and men use funding for different purposes. Women were more likely to use financing for debt refinancing/consolidation and business expansion, whereas men were more likely to finance the purchase of equipment. Female loan recipients were more active in industries that have lower profit margins.

Read the full report to learn exactly how men and women entrepreneurs fared in the second quarter of 2019. Plus, hear from real female business owners who successfully obtained funding through the Fundera marketplace this past quarter.

Takeaway #1: Women Received Similar Funding Amounts as Men, and Better Interest Rates

The most positive trend for women business owners from this past quarter is the ability to obtain equal funding as men at a lower cost, across all loan categories. Women entrepreneurs requested just 65% of what men requested, but in the end, both genders received similar amounts of financing. Women entrepreneurs who successfully obtained a loan through Fundera were approved on average for $42,423 in financing. Male loan recipients were approved for an average of $42,818. This means women and men, if creditworthy enough to obtain a loan, are on roughly equal ground in terms of their ability to scale and catalyze business growth.

Women entrepreneurs also enjoyed a lower cost of financing compared to their male peers. After controlling for SBA loans, which go only to a handful of the most creditworthy business owners, women received an average annual percentage rate (APR) of 46%, compared to a 48% average APR for men. When including SBA loans, women edged out men by an extra percentage point—43% APR for women, compared to 46% APR for men. A lower cost of financing means that women entrepreneurs can put more cash flow toward growth-producing business activities rather than passive loan payments.

For Anita Varadaraju, a Fundera customer and co-founder of engineering consulting firm MindMesh, access to sufficient funding at a low cost was the recipe for business success. Varadaraju initially used her personal savings to launch the business, and followed this up with credit cards and a bank term loan to grow the business and recruit staff. That’s when she learned of an opportunity for an SBA loan through Fundera. SBA loans are government-guaranteed loans with low interest rates and long repayment terms. According to Varadaraju, “The SBA loan was truly a game changer. We’ve been using the funds for marketing efforts to scale the business and to build awareness in our industry. The funds also helped us consolidate the existing loan and credit card debt, and saved us nearly $2,000 in monthly loan payments.”

Similar Credentials Led to Similar Loan Amounts and Cost 

Men and women entrepreneurs obtained almost the same amount of funding because of similar performance on key loan application metrics. Men had just slightly higher personal credit scores than women. Women’s TransUnion personal credit scores averaged 684, compared to 691 for men. Despite slightly lower personal credit scores, women had better business credit scores. Equifax business credit scores averaged 447 for women loan recipients, versus 439 for men. Lenders often look both at an applicant’s personal credit history and a company’s business credit history when determining loan approval and cost. 

Although lenders place most emphasis on credit scores, they also look at business age, business size, and revenue and profit numbers. With the exception of revenue and profit, which we’ll look at in more detail next, women business owners were on par with men. Both men and women loan recipients employed an average of seven people. Women-owned businesses had an average age of seven years, compared to 7.70 years for men-owned businesses (generally, lenders place a business that’s more than three years old into the same credit box). 

In some scenarios, women-owned companies are worse off getting financing even if they perform just as well as men-owned businesses. For example, a study by the SBA Office of Advocacy found that, even after controlling for factors like creditworthiness, women-owned startups receive less funding.^[1] This is where a platform like Fundera can help level the playing field and close the gender gap in funding. In contrast to a face-to-face interaction at a bank, Fundera’s marketplace offers much more anonymity, reducing the likelihood that bias will seep into underwriting decisions.

Anita Varadaraju, co-founder of engineering consulting firm MindMesh

Takeaway #2: Women Entrepreneurs Had Lower Approval Rates, Revenue, and Profit 

Women entrepreneurs who successfully obtained a loan enjoyed pretty favorable terms during the past quarter. However, women applicants still had lower approval numbers than men. For starters, the male applicant pool was double the size of women, indicating that men are much more likely to request funding from third-party lenders. On top of that, post-application, men business owners were 20% more likely than women to actually get approved for a loan and receive funding. 

One reason women were less successful in qualifying for a loan is because of lower business financials. Women business owners lagged behind their male peers in terms of business revenue and profit. Women reported an average of $813,852 in annual revenue, whereas men reported $1,229,325. Women reported $83,554 of average yearly profit, and men reported $123,730. Part of this is because more women operate in industries with lower net profit margins, such as healthcare support services, general retail, and recreation. 

Lower Approval Rates and Poorer Financials Might Stem From Lack of Awareness and Industry Choice

Women are less likely to seek out and apply for funding, particularly at the early stages of business, which can lead to slower revenue and profit growth down the line. Amy Mayer is a Fundera customer and owner of friEdTechnology, which helps educators integrate technology into the classroom. Mayer, a former public school teacher, kept her day job while running her business for 10 years. “That’s how I funded the business. I kept working. I probably should have sought outside funding which would have allowed me to make the leap to full-time entrepreneurship sooner, but I didn’t think that I would be eligible for funding. I thought everyone wanted you to have a successful business already.”

Amy Mayer, owner of friEdTechnology, which teaches educators how to integrate technology into the classroom.

Women entrepreneurs also tend to be most active in industries that have lower profit margins. The average profit margin across all industries is 8.01%, according to a database from New York University’s Stern School of Business.^[2] Using this margin as a benchmark, here’s how profit margins stacked up for the industries that women and men loan recipients were most active in during the past quarter:

Women Business Loan Recipients—Most Popular Industries With Profit Margins

Men Business Loan Recipients—Most Popular Industries With Profit Margins

*We chose the industries from NYU’s list that best matched up with our own industry names.

Lenders look closely at business revenue and profit as part of a business loan application. In fact, many lenders have strict revenue cutoffs to even consider someone for a loan. Other lenders require profitability as a qualifying criterion. By securing funding at early growth stages and diversifying into a wider variety of industries, women can make more progress in these areas. 

Takeaway #3: Women and Men Business Owners Used Funding for Different Purposes

The last finding of our quarterly report is that women and men entrepreneurs are using debt financing in different ways. They’re qualifying for different types of loans and putting the money toward different uses. Among both men and women, a need for working capital was the number one reason for seeking funding, followed by expansion. After that, loan purpose diverged for men and women business owners. 

Women were nearly twice as likely this past quarter to seek a loan for refinancing or debt consolidation. They were also more likely to use loan funds for business expansion. Men more frequently indicated marketing and advertising needs.

Business Loan Purpose by Gender

Compared to men, women qualified for less expensive types of financing with more attractive repayment terms. Short-term financing was the most common among both genders. However, a larger percentage of funded women secured medium-term loans and SBA loans. These loans spread repayment over several years, so the business owner has a small monthly payment. Since less of the business’s cash flow goes to service debt, the business owner can better plan to invest profits in other areas. Longer-term loans have lower interest rates, making them more suitable for refinancing and debt consolidation. Finally, these loans help the business owner build credit and qualify for more financing in the future. 

Business Loan Type by Gender

Women’s Chosen Loan Purposes and Loan Types Suggest a Planning Mindset

The loan purposes and loan types most common among funded women entrepreneurs suggest a tendency to plan more carefully. Women are more cautious in requesting funding. When they do access funding, they’re more likely than men to put the money toward large business investments or long-term business investments. 

Take Fundera customer Alex Ingalls as an example. Ingalls is the founder of Pilot Kombucha, a craft kombucha brewery in Brooklyn. She says, “I started this business with $2,000 that my mom invested, and every single batch of kombucha we sold, we used the money to buy more jars. I’ve mainly used business loans only for large equipment purchases, such as buying my delivery van, or to stabilize cash flow.”

 

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State of Small Business Lending Methodology (Q2 2019)

Unless stated otherwise, all of the data for this report on the State of Small Business Lending comes from Fundera. We analyzed a sample of 1,158 small business owners who received financing through the Fundera marketplace between April 1, 2019 and June 30, 2019. To determine loan approval rates, we used a larger sample set of all small business owners who applied for funding on Fundera between April 1, 2019 and June 30, 2019. 

We ran the names of small business owners through gender analysis software which assigns the likelihood of someone’s gender based on their first name. We threw out records for which the software’s gender assignment had a lower than 91% probability of accuracy.

Women and Small Business Lending: Where Do We Go From Here? 

This State of Small Business Lending report brings good news for current and prospective women small business owners. Women who are approved for funding receive similar funding amounts as men and lower interest rates. They also qualify in larger percentages than men for loans with longer repayment terms. That said, women still report lower business revenue and profit, and the biggest obstacle of all continues to be access to funding. Fewer women apply for funding, women ask for less money, and men are 20% more likely to be approved for a loan than women. 

Fortunately, there are clear ways to increase funding access for women entrepreneurs. Women should try to secure funding at the earliest possible moments for their business, in order to jumpstart growth. They can also diversify into industries with higher revenue and profit margins. They should stay focused on building and retaining good credit. And in-person lenders, particularly banks, can do a better job of protecting loan approval and underwriting processes from bias.

MindMesh co-founder Varadaraju gives some good parting advice for women entrepreneurs, encouraging them to proceed with caution, but to utilize all available resources: “It is well known that some industries still have a gender imbalance. However, there are various, resourceful tools available for aspiring women entrepreneurs to flourish. As a woman, there are tough obstacles that I face that are subtle enough to seem inconsequential. But that does not and should not stop me. That’s where, using industry specific and general resources that are available, has helped me in being objective and keeping my sight on the next goal.” 

Article Sources:

1. SBA.gov. “Access to Capital Among Young Firms, Minority-Owned Firms, Women-Owned Firms, and High-Tech Firms“
2. Stern.NYU,edu. “Margins by Sector“