How banks systematically undercut women entrepreneurs

Are banks sticking to bad habits?

Money doesn’t care who spends it — but, apparently, many banks do. In 2014, banks awarded only 4.0 percent of commercial loans to women entrepreneurs.

The previous year, financial institutions gave the green light to less than one-third of loan applications from women-owned businesses. That’s 15 to 20 percent lower than for male applicants.

What gives? Banks are concerned that women-led companies typically have lower annual earnings, higher operating expenses, and lower credit scores. While that’s often true, it’s not because women are inferior managers. There’s no sex-related chromosome that gives males a more savvy business sense. The truth is that women are more likely to head up retail enterprises, which are simply more expensive to run.

Banks also believe that women are less likely to take business risks, so their growth potential is limited. But a two-year 2016 Canadian research study headed by Carleton University reports that women business owners aren’t afraid to speculate in order to help their businesses grow.

Banks have some erroneous ideas about female entrepreneurs. If banks examine their preconceptions, maybe they’ll make some changes. Not just for the sake of women, but for the benefit of the whole economy.

The uphill battle

Many banks have deep-rooted assumptions about what constitutes a “good risk.” Unfortunately, because of the nature of many womens’ businesses, they don’t traditionally fit into that category:

• Collateral: Banks are big on collateral. You need some form of security to back up that loan. The trouble is, small businesses often don’t have much in the way of collateral, and women run about 30 percent of small and mid-sized companies. Many of these are e-commerce operations, so they don’t have real estate investments to put on the line. However, certain lending institutions let small business owners use personal property for collateral.
• Comparatively low earnings: Over 65 percent of female-led businesses bring in less than $25,000 annually. Banks are concerned that companies with such modest revenues will be unable to pay back their loans. But there’s a reason why the word “small” is in the phrase “small business loan.” Income is somewhat limited, but the requested loan is generally proportional.
• Unfinished homework: Some lenders are under the impression that women aren’t fully prepared for loan meetings. Paperwork is missing — so is confidence — and their monetary needs are not well reasoned. Certainly, some women fall into this category, but so do some men. Banks shouldn’t get caught generalizing again. Lack of readiness isn’t a gender-linked trait.

The Battleground

In order to build good relationships with women entrepreneurs, banks must recognize what these business owners bring to the table. These features are not insignificant:

• Women typically have a different approach to risk-taking. When assessing opportunities and dangers, many components influence women, including economic factors, social success, external support, self-confidence and professional networks. Women consider multiple factors when making decisions about advancing their businesses. Growth is generally a long-term project, not a short-term goal.
• Women are open to taking business risks. However, many banks have the opposite perception, and this impacts their lending process. But simply starting a business is a gamble. Between 1997 and 2015, the number of American female-owned businesses increased almost 75 percent. They popped up faster than new businesses operated by men. Who’s the risk-taker now?
• Women are innovators. The Carleton study determined that between 2008 and 2011, female- and male-led businesses introduced innovations at about the same rate. These included new products, processes, marketing strategies and organization. The result of this cutting-edge work? Many women-run businesses noted that these changes increased their market shares significantly.

The road to victory

Currently, a lot of women forego attempts at traditional loans. Though sometimes they avoid banks because of prior negative ­— even humiliating — experiences, many women are unaware of potential funding opportunities that are available at lending institutions.

Women often start their businesses with personal funds or loans from family members and friends. Women want to retain control of their operations, so they often avoid investors and venture capitalists. However, hands-on, involved partners bring both expertise and money to the business.

Once banks understand that women are capable — yet sometimes different — business owners, the two groups might improve and expand their relationship. The loan process should be more accessible for small business owners who may have limited commercial experience. The end goal is an alliance where the bank is not simply a moneylender but an entity that works to help the business succeed.

Most women are committed to their businesses for the long haul and seek sustained growth rather than quick profits.

Women’s businesses bring in more than $1 trillion each year. When compared to all businesses, they’re expanding one and a half times faster. With that track record, banks, as well as venture capital funds, angel investors and small lending institutions, should rethink their positions. Imagine it: a future where funding women entrepreneurs is the norm rather than the exception.

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