While women have come a long way in terms of financial freedom and gender equality in business, the gender gap still exists and women have a relatively short history of being able to participate in lending.

Until 1988, women entrepreneurs were required to have a male cosigner to take out business loans. Today, women own 49 percent of all businesses in the U.S., but women business owners only accounted for 27 percent of business loan applications in 2020. Women-owned businesses also tend to receive smaller loans than male-owned businesses, and their businesses tend to bring in less revenue overall.

This gender gap in lending can be attributed to a variety of factors. Factors include differing economic circumstances, labor market experiences, attitudes toward lending and differing treatment by lenders and financial institutions.

Despite the challenges that women entrepreneurs face in the financial marketplace, women-owned businesses are on the rise, and there are lending options out there for small women-owned businesses that may have trouble qualifying for a traditional business loan.

Fast facts: women and business loans

  • Men and women today have nearly identical average FICO credit scores
  • The average credit score for women business owners increased from 590 to 597 in 2020.
  • 72 percent of business loan applications are submitted by men, while only 27 percent are submitted by women.
  • Women-owned businesses earned $421,928 less on average than male-owned businesses in 2020.
  • The average loan amount for women-owned businesses was 33 percent lower than male-owned businesses in 2020.
  • The number of women-owned businesses grew 21 percent from 2014 to 2019.
  • Businesses owned by women of color grew 43 percent from 2014 to 2019.
  • In 2019, businesses owned by women of color accounted for 50 percent of all women-owned businesses
  • Women of color accounted for only 23 percent of total revenue created by women-owned businesses in 2019.

Why it may be more difficult for women to get business loans

Women may have a harder time getting business loans than men for several reasons, including challenges in building credit, industry and investor bias. Women-owned businesses also tend to be smaller businesses since women have only recently had access to the marketplace.

Building credit

Up until 2020, on average, men always had higher credit score averages than women. According to 2020 FICO data, men and women now have nearly identical average credit scores. However, men have historically dominated when it comes to creditworthiness, even when men and women shared comparable demographic characteristics.

One major roadblock for women trying to build credit and access better loan rates is the gender pay gap. According to Bureau of Labor Statistics (BLS) 2020 data, white women earn $0.82 for every $1 earned by white men. This inequity is even worse for women of color. The BLS data asserts that Black women make $0.67 for every $1 earned by white men, while Hispanic/Latinx women earn $0.62.

While women’s earnings have increased considerably in recent years, the wage gap still exists, regardless of decreasing wage inequality. It’s likely that this, combined with women’s relatively short lending history, can take a toll on their ability to build credit.

Industry-specific challenges

According to the 2020 Annual Report from the National Women’s Business Council, almost half of all women-owned businesses are in low-growth industries. These are industries that may have less opportunity for expansion and economic growth over time.

The industries with the most women-owned businesses include child daycare services, beauty salons, knitting fabric/apparel and home healthcare services. While businesses in these industries certainly have opportunities for economic growth, they are service-focused businesses. They often take more time to grow than businesses in information technology, for example.

On the other hand, women who operate in male-dominated industries like IT, STEM and construction are often the targets of discrimination. The National Women’s Business Council held a Women in STEM roundtable in July of 2020. It found that women innovators had to do more to prove themselves in the industry than their male counterparts. The council also found that women in STEM, particularly minority women, had trouble accessing capital for their ideas and were generally undervalued by the industry at large.

Investor bias

While gender bias in the financial world has improved significantly over the years, there is still a pattern of lender bias toward women applying for loans. This is due, in part, to the relatively short history of women being able to take out loans at all. The Equal Credit Opportunity Act of 1974 allowed women to apply for personal and home loans without a male cosigner for the first time. It wasn’t until 1988 that women could take out business loans without a male cosigner.

The ECOA also prohibits using demographic information like gender in underwriting, pricing, reporting and scoring. Information on credit history and demographic information is limited. This makes it much more difficult to evaluate gender disparities in this market or otherwise identify gender-related differences. It is difficult to make progress toward ending gender discrimination in lending without being able to pinpoint why it is happening.

In 2019, women made up only 20 percent of executive committees globally. Financial institutions looking to improve their company’s overall gender equity should consider diversity across their organization and whether improvements need to be made.

Most common small business loans for women

Small business loans tend to fit into one of several broader categories.

SBA loans

Small Business Administration (SBA) loans are loans specifically designed for smaller, newer businesses. These loans typically have longer repayment terms and lower interest rates than traditional business loans. SBA loans come from a bank but are backed by the SBA loan guarantee program, meaning the SBA will buy back a portion of your loan from the bank if you are unable to pay it back.

You cannot apply for an SBA loan if you qualify for a regular loan, and your business must meet qualifications such as good credit management history. The most common SBA loan is the SBA 7(a) loan program, which is only available to established businesses with a solid financial foundation. Borrowers can take out an SBA 7(a) loan of up to $5 million.

SBA microloans

The SBA also offers microloans up to $50,000. These loans are more flexible and less restrictive than regular SBA loans. These loans are intended to help small businesses grow and cannot be used to purchase real estate or pay off existing debt.

Newer small businesses that have not had a chance to build a solid foundation yet could benefit from this type of loan.

Bank loans

Traditional brick-and-mortar banks offer business term loans and business lines of credit. Term loans are repaid in regular payments over a set period of time, meaning that you will always know when and how much you have to pay.

A business line of credit is a more flexible option that allows you to take out money as you need it, like a credit card. Instead of paying interest on the whole loan, you only pay interest on the money you take out.

If you are a small business owner and you have a relationship with a bank that offers these types of loans, a bank may be a favorable option. However, traditional bank loans have stricter requirements and may be difficult to get if you are just starting out or have less than stellar credit.

Asset-based financing

Asset-based financing is the process of securing a loan with some form of collateral. This can include inventory, equipment or any other balance-sheet assets.

These loans are best suited for businesses that have assets but need cash for expansion or a cash-flow emergency. While these loans offer greater flexibility, you run the risk of losing your assets if you are unable to pay back the loan.

Merchant cash advances

A merchant cash advance is a form of lending where a company gives you cash up front. You repay it using a percentage of your credit or debit card sales, as well as a fee. While merchant cash advances are easy to get, they carry interest rates in the triple digits. This type of lending also tends to put borrowers in an endless cycle of debt.

Merchant cash advances should be a last resort for business owners. If you do find yourself looking for a merchant cash advance, make sure to do your research and find a reputable company that offers the lowest rates possible.

Microloans for women

Microloans allow small businesses to take out smaller loans at lower interest rates and are generally easier to qualify for than traditional business loans.

Rhett Doolittle, CEO of Business Warrior, has found that microloans are crucial for small businesses that may not qualify for funding elsewhere. Business Warrior is an open-source technology company that provides marketing solutions for small businesses. Its mission is to help under-resourced and under-funded businesses succeed. They have recently launched Business Warrior Funding, a lending platform that offers microloans from $5,000 to $100,000.

“The great thing about microloans is they’re a lot easier to get,” says Doolittle. “If you go to your bank, you have to have your books completely clean, you have to have a profit and loss statement, you have to have a balance sheet, you have to have good credit, good historical credit- you have to have all this stuff in order, and if you want money or you need it quickly, it could take 120 days at least. Most small businesses, especially in the first few years, don’t have that stuff in order because they’re owner-operators. They’re ordering their own products, they’re the salesperson, they’re the marketer. These small businesses, they’re doing everything. So, is everything completely in order and organized? Usually not.”

Microloans can also benefit women-owned businesses specifically, especially since there are lenders out there that want to lend to more women and minority-owned businesses. Since the launch of Business Warrior Funding, they have found that women-owned businesses that apply for these loans have a higher likelihood of succeeding and paying back their loans than male-owned businesses.

“Historically, we know that women have in the past taken fewer risks than men, but when they do, it usually means that they’re more confident and there’s a higher chance they’re going to succeed,” says Doolittle.

Lending to women and minority-owned businesses is a priority for Business Warrior Funding, according to Rhett Doolittle. “We want to lend out more money to women and minorities,” he says. “We just don’t see as many applications, which is unfortunate. We also know there are a lot less women-owned businesses, so we would love to see more because our feeling is that they’re actually gonna have a much higher likelihood of paying back their bills and paying back the loans we give them. So we’re trying to coordinate our marketing efforts to attract that.”

While microloans are a great option for business owners who need cash quickly and may not qualify for traditional bank loans, interest rates do tend to be higher. “Our percentage rates are from 7 to 20 percent,” says Doolittle. “Because of all the benefits of microloans, we can’t provide as low rates as a bank. So if you are a small business and you have all those things in order and you’re not in a rush for capital, people should go to their local bank because you can get a rate from 3 to 6 percent. But we know most small businesses don’t have those things.”

Doolittle recommends that small businesses, particularly women-owned businesses, take a chance on growing their business rather than getting comfortable once they’re cash-flow positive.

“The key is, if you’re cash flow positive, the nice thing about taking out a loan is you don’t have to pay taxes on debt, and in fact, the interest you pay is an expense, which reduces your taxes. So, a lot of people have this fear about borrowing money but if you take that money and really use it to grow your business, people should. Hire an extra employee. If you’re cash flow positive today, I wouldn’t stay that way. It’s using that money to then grow by 10, 20, 30 percent in the next month.”

How to choose and obtain a business loan as a woman

When choosing and applying for a business loan, women-owned businesses should consider the requirements for each type of loan, as well as the benefits and drawbacks of each. Before submitting an application, borrowers should know what interest and fees the lender will charge and calculate how much their monthly payments will be. Some additional factors to consider include:

  • Lender reputation and offerings: Once you have decided what type of loan to get, you should research lenders. Some lenders offer better interest rates and repayment plans than others. Some may even offer special promotional deals. One way to evaluate a lender’s reputation is by reading through reviews and complaints from previous customers.
  • Qualifications and requirements: It is crucial to make sure you meet a lender’s specific requirements before submitting an application. Make sure to check out the lender’s website, call, or visit a branch to find out exactly what you need to qualify.
  • Available loan amounts and rates: Various lenders offer different loan amounts and interest rates. Make sure the lender you choose offers the loan amount and rate you are looking for. Remember that people with excellent credit qualify for a lender’s lowest interest rates.
  • Additional costs: Make sure that you are aware of any added fees the company charges. These can include late payment fees, origination fees and prepayment penalties.
  • Underwriting and funding speed: Traditional business loans can take anywhere from 60 to 120 days for the review and approval process. Online lenders and lenders that offer microloans tend to be much faster, making these better options for borrowers who need cash quickly.

Choosing and obtaining a business grant as a woman

Grants are sums of money, usually granted by government entities, nonprofits or corporations, that do not have to be paid back.

Business grants are sometimes available through state and local governments. These types of grants can be found by looking at your state’s small business office. The federal government also offers small business grants, but these tend to be highly restrictive and only fund research and development that could be beneficial to the country at large.

There are also SBA-backed programs such as the Small Business Innovation Research (SBIR) Program and the Small Business Investment Company (SBIC) Program that work with private investment funds to help small businesses get funding.

When looking for a business grant as a woman entrepreneur, it is important to utilize resources like Women’s Business Centers, which often either lend money directly to businesses or help match businesses with grants. You can also find available federal grants at Grants.gov.

Once you have chosen a grant, understand the eligibility requirements before applying. While these funds do not have to be paid back, they often come with specific rules and qualifications.

The bottom line

While women entrepreneurs do face gender-based challenges, female business owners can do things to overcome these obstacles, including building good credit and seeking out unique funding opportunities. Resources such as the Women’s Venture Fund, specifically intended to advise women entrepreneurs, can help. The SBA also offers access to mentorship for women business owners through Women’s Business Centers, SCORE and Small Business Development Centers.

If you are a woman entrepreneur looking to grow your business with a business loan, compare all of your options before deciding on a specific type of loan and lender.