Women are a powerhouse of American business. More than 11.6 million firms are owned by women, generating $1.7 trillion in sales, and employing nearly nine million people, according to the National Association of Women Business Owners. Yet, inequality and discrimination persist. History shows that women business owners have faced more and greater obstacles compared to men in their quest to obtain credit and secure investment.
But what if you could remove systemic discrimination. Imagine how much more women could contribute? Given the growth rate of women-owned businesses, removing biases against women could potentially mean a multi-trillion-dollar economic windfall.
The reality for female entrepreneurs
Discrimination takes many forms. As recently as the 1970s, banks could deny female entrepreneurs access to credit based solely on their marital status. Similarly, women could only receive a credit card if her husband was willing to sign for it.
Despite legislative changes, discrimination is a problem that’s morphed and persisted into the 21st century. Women business owners are still being denied credit in disproportionate numbers to their male counterparts.
One recent survey of tech startups revealed that 80 percent of founders used their own savings to launch their businesses. Yet, women are the world’s most responsible borrowers, paying back microloans at a 97 percent rate of return.
Why is access to credit so hard for women?
There are many factors which impede the success of women-owned businesses which we discuss in our latest report: What If – Designing Fair and Equal Financial Access for Women.
For example, women feel discouraged and fear being turned down when applying for credit. Or, their lending needs are much lower than the typical $100,000 minimum that traditional lenders offer. Furthermore, venture capital firms also heavily favor men: only 8 percent of investments go to women and 1 percent to African American women.
But perhaps most consequential is that the system of underwriting, which relies solely on credit scores to gauge a borrower’s financial health, is grounded in indicators such as how much an individual earns and their personal assets and collateral. This is problematic for women since the gender pay gap means they accumulate less assets than their male counterparts and are placed at a disadvantage when applying for a loan.
Where does all this lead? Data shows that women start their firms with a smaller pool of funding, averaging only 77 percent of the capital of similar ventures headed by men. Up to 64 percent experience a shortfall early, which discourages growth and dampens revenues.
Closing the gender credit gap: women helping women
This bias in the current financial system has not gone unnoticed. During a volunteer work expedition to Honduras, American entrepreneur and author, Wendy Diamond, witnessed firsthand how empowering women financially could transform a community. Already keenly aware of how women are underfunded and undervalued at home and abroad, Diamond was inspired to focus her efforts by founding the Women’s Entrepreneurship Day Organization (WEDO).
A non-governmental organization, WEDO works globally to empower women and girls to become active participants in the economy. WEDO is celebrated each year at the United Nations in New York City (this year’s date is November 19) and is streamed live to 144 countries worldwide. The event brings together business leaders, change makers, government officials, and more, to collaborate and find solutions to empower women in business.
WEDO’s achievements are significant. In the past year alone the organization has granted 500 microloans to impoverished women to start their own business and become strong leaders; sponsored 75 students from Black Girls Code, Girls Who Code, Lalela, Rethink Academy, The Young Women’s Leadership School in Astoria, Yale, George Washington University, and Northeastern University; funded 500 Syrian refugee girls to attend high school in Jordan; educated 1000 rural women in the Philippines with financial literacy; and more.
Financial services are changing
Women aren’t alone in taking steps to fuel systemic change. The financial services industry is already changing in a positive way.
With the advent of data in the cloud and machine learning, commercial financing firms (like Fundbox) are tackling the persistent problem of female entrepreneurs’ access to credit by expanding the criteria for which creditworthiness is determined beyond personal credit scores, debt to income ratios, and the ownership of assets and collateral.
This is especially important when it comes to women and other marginalized groups like immigrants, younger people, or anyone else with a thin credit file who might ordinarily be denied.
To date, there is some indication that Fundbox’s dynamic approach to providing credit access has moved the needle in closing the funding gap for women entrepreneurs.
Earlier this year, Fundbox initiated an internal research project to determine if the company provides greater access to credit for women business owners when compared with traditional commercial lending institutions. The sample size was 35,000 customers analyzed. This review of Fundbox data reflected no discernible approval gap between male and female applicants. It also showed no discernible gap in the amount of credit extended between male and female applicants.
We’re at a crossroads
Female business owners have every right to demand fair and equal access to credit. With the lending industry at a crossroads coupled with the initiatives of organizations like WEDO, women also have every reason to expect it.
Find out how you can participate in and benefit from Women’s Entrepreneurship Day today.
Learn more about how and why Fundbox is designing fair and equal financial access for women.