Why Do Women-Owned Businesses Still Face a Funding Gap?

4 min read • Oct 18, 2021 • Lendio

Whether you’re a female business owner or you work for a woman-owned business, you are officially in the minority among U.S. businesses. According to the U.S. Census Bureau, only about 20% of employers are owned by women, although the number is on the rise—up a whopping 0.6% between 2017 and 2018, the most recent year available. 

In terms of funding, however, a recent Congressional report finds that women owned businesses accounted for only 4.4% of total dollars loaned through traditional small business loans. That means that for every $23 borrowed by small businesses, only $1 goes to a female-owned and operated business.

In 1972, there were a little over 400,000 businesses owned by women in America, and women were getting loans only with permission from their fathers, husbands, and sons. Now, there are more than 13 million women-owned businesses and counting. Women are responsible for starting 1,817 new U.S. businesses each day.

Source: Association for Enterprise Opportunity (AEO)

It’s not just the dollar amount that’s lacking: women-owned businesses receive only about 16% of all small business loans and 17% of Small Business Administration loans (SBA loans). “​​Their loan applications are more likely to be rejected than those from businesses owned by men, and the loans they get are likely to have more stringent terms,” noted the report, which also found that only 7% of funding from venture capitalists backs businesses owned by women.

Will the Funding Gap for Women-Owned Businesses Narrow?

The funding gap for women-owned businesses was evident in the Payment Protection Program (PPP) loans, which were made available to businesses in the wake of the COVID-19 crisis. Between April of 2020 and January of 2021, roughly 193,000 PPP loans were approved for women-owned businesses compared to almost 534,000 approved for male-owned ones. The average size of the PPP loans was smaller, too. The average PPP loan approved for male-owned businesses was $66,739, while it was just $45,822 for female-owned organizations.

So why aren’t women getting a fair share of the lending pie? Are women-owned businesses  “riskier” ventures for lenders? Do lenders reject female borrowers or put more onerous repayment terms on them because businesses owned by women are generally less profitable or more likely to shut down? If you look at the data, the answer to all of these is a firm “no.”

A 2019 report from the JPMorgan Chase Institute found that businesses owned by women and businesses owned by men had equal survivability rates based on an analysis of 138,000 companies founded within the decade prior.  Even more eye-opening is the fact that female-owned businesses generally have lower revenues, grow slower, and receive less external financing but are still able to keep the lights on just as well as companies owned by men.

Perhaps some of the data about the revenue issues faced by female-owned businesses is skewed by the types of industries dominated by female-led firms. Women make up 90% or more of the companies in industries like child day care services, domestic services, and beauty salons, according to data from the National Women’s Business Council (NWBC). While these businesses can definitely be long-lasting and profitable, the profit margins can be very thin depending on the area. NWBC says that 44% of women entrepreneurs operate in low-growth industries.

Women-owned business by industry from Census.gov

Even still, American women-owned businesses employ over 9 million people and generate $1.9 trillion in annual revenue, according to the SBA. These businesses are essential to the economy. And while the daycare industry might not be a headline-grabbing field with major profits, any working parent will tell you how essential that industry is to their day-to-day lives.

Childcare, home healthcare, retail – these types of businesses are necessary for the American economy to function and for the American lifestyle to continue. It should be noted that women entrepreneurs are moving into many different industries, though. Behind healthcare and social assistance, the largest sector for female-owned businesses is professional, scientific, and technical services, the NWBC explains.

The Best Way for a Woman-Owned Business to Secure Financing? Apply!

Still, the stats shouldn’t discourage women business owners from applying for loans or other financing. The American business landscape has made progress for women entrepreneurs. Before federal legislation was passed in 1988 (if you’re counting, that’s just 33 years ago), women business owners needed a male co-signer to apply for a loan. While lenders need to understand that women-owned businesses are as safe an investment as male-owned businesses, female entrepreneurs should also take the steps to apply for capital, particularly when that capital can be used to help grow the business

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