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There’s no denying it: Women have a significantly harder time accessing small business loans than men. A glance at the application and approval rates for female business owners suggests that the business financing industry is stuck in the past. Both figures should be much higher when you consider the rapidly growing amount of female business owners in the US. More than 12 million American businesses are run by women, and women make up more than 40% of the country’s new entrepreneurs.

Access to small business loans for women should have logistically improved by now but this is not the case, at least for the business financing industry as a whole. Thankfully, a handful of business financing companies have made it their personal mission to allow more female business owners to access various types of small business loans.

In this guide, we’ll lay out these business financing options and explain why they are so advantageous for female-owned businesses. But before moving forward, we must understand what has traditionally prevented women from accessing business funding in the first place:

Common Reasons For Rejection

  1. Less Working Capital

When it comes to traditional business financing institutions like banks, a mandatory requirement for approval is plenty of working capital. Banks are notorious for only approving applicants who don’t really need the money. Such applicants have so much money in the bank that in the event of their business going under, they would still be able to pay off the loan. Female business owners, however, typically start their businesses with less working capital than men. They have a lower net worth and less personal funds at their disposal. Unlike the bank’s ideal applicant, women business owners might struggle to make payments should their investment not go as planned.

  1. Industry

Another tendency of traditional business financing institutions is discrimination against certain industries. Most of these industries tend to be dominated by women, like retail or hospitality. Banks prefer to lend to businesses that are not historically stereotyped as “risky” or “low growth.” Retail -oriented businesses are naturally prone to occasional or seasonal dips in revenue, as opposed to perfectly consistent cash flow all throughout the year. And because women start out with less working capital, their businesses are usually of the smaller variety. Banks have always favored larger businesses in highly profitable industries.

  1. Credit Score

According to recent data, the average women’s personal credit score is 20 points lower than the average man. That might not seem like a big difference but anyone who has applied for a bank loan knows that banks want their borrowers to have absolutely flawless credit. An extensive credit history is required as well. This is less common with female business owners, who are more likely to start their businesses without the use of borrowed funds. The size of their businesses also prevents them from taking on substantial debt early on.

  1. Hesitation

Women are reportedly more hesitant to ask for as much money as they need than men. This is likely due to the social double standard concerning gender and negotiation tactics. A man who rigorously strives to negotiate a deal in his favor is traditionally viewed as a “shark” or simply a “good business man.” But when a woman tries the same thing, she is more likely to be viewed as “difficult” or “spoiled.”

Best Types Of Small Business Loans For Women

Since women have traditionally struggled to access bank loans, their best option might be an online lender or an alternative business financing company. Flawless personal credit and significant capitalization are not required for approval, and they offer numerous programs that can accommodate the cash flow difficulties associated with female-owned businesses.

Here are those programs:

  1. Short-Term Business Loans: This is essentially a business term loan with much shorter terms, like 3-18 months, and a lower borrowing amount.
  2. Business Line of Credit: You are given a revolving credit limit that you can borrow from at any time. Payments are only made when you borrow. This option is particularly advantageous for retail-oriented businesses because circumstances like changes in demand or seasonality can compromise revenue. A business line of credit can act as a cushion for covering business expenses or ordering inventory following these inevitable misfortunes. The “revolving” function denotes that your credit limit replenishes when the total amount you owe for that month is paid back. You can essentially borrow the same amount every month as long as you pay it back the month after. And when you pay off your total balance, you get the same amount back with the same terms and interest rate.
  3. Merchant Cash Advance (Credit Card Factoring): You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales. Many retail businesses take out merchant cash advances when business is slow and pay back the majority of the debt during an upcoming busy period. A slow month just means a smaller payment, as opposed to an increased interest rate. Two popular functions of a merchant cash advance are ordering bulk inventory when it is cheapest and hiring additional staff so they are fully trained by the time demand picks up.
  4. Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.

Where To Find These Business Loans

Here are a few online business financing institutions that offer these four programs along with their general requirements:

Kabbage: Kabbage offers just one program, a business line of credit. A minimum personal credit score is not required, but a score of at least 500 is preferred. Borrowers must be in business for at least one year and have an annual revenue of at least $50,000.

OnDeck: Ondeck has business term loans and lines of credit. They require $100,000+ in annual revenue, and a credit score of 600+ for lines of credit (Most borrowers have 660 or higher). No personal bankruptcies in past two years.

Square Capital: Square Capital offers one program as well: the Square Capital “Flex Loan.” It is nearly identical to a merchant cash advance, so a minimum personal credit score is not required. Annual revenue must exceed $100,000, and your transaction history must denote that you can pay off the loan in full within 18 months.

United Capital Source: United Capital Source offers all of the programs listed in the previous section. For all four, borrowers must be in business for at least six months and earn $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, and revenue based business loans.

Exploring Other Options

Another funding option for female business owners is a business grant. There are three kinds: Federal, State, and Private Grants. Unlike a loan, you don’t have to pay the money back. But obtaining a grant isn’t as simple as fulfilling a short list of general requirements. You must be involved in a certain industry, and substantial paperwork is required for the application. That includes the composition of a formal grant, which the average business leader has likely never done before.

Here’s the most restrictive requirements for each type of grant:

Federal Grants: Most recipients are in science or research-based industry like medicine or technology.

State Grants: Many more industries are eligible but the list is still fairly limited to things like technology, public infrastructure and daycare. Several states also reportedly offer grants for businesses that have a direct impact on the local economy or businesses located in certain cities.

Private Grants: Private grants are more accessible than the previous two but this has resulted in a massive increase in competition. Some of them require a certain amount of time in business, a location in a low-income area, or involvement in a female-dominated industry (retail, jewelry, food service etc). For others, you just have to write a compelling essay and prove that you are promoting gender equality.

Even if you believe you may be eligible, the chances of obtaining a small business loan with advantageous terms are much higher than receiving a grant. Since luck seems like a bigger factor than, say, cash flow, you probably shouldn’t count on a grant to finance your next big investment or growth strategy.

Why You Should Choose Business Loans For Women

Yes, the interest rates for the previously mentioned business loans are typically higher than what you’d see at a bank. But if you work with a company that prioritizes long-term partnerships, your first loan won’t have restrictive terms and paying it back on time will likely make you eligible for additional rounds of funding with increasingly convenient rates. Your payment history will dramatically raise your credit score as well.

These companies not only strive to empower female entrepreneurs but any new business leader without flawless credit or significant personal funds to rely on. They understand that debt financing is a vital skill that should be learned as quickly as possible, as opposed to being reserved for the largest or wealthiest businesses.

Paying back a small to medium-sized loan is a much faster and safer way to become eligible for substantial funding than making risky investments with your own money or waiting until you fulfill the bank’s capitalization requirements. There are many advantageous financing options available for female entrepreneurs today. You just have to know where to find them.

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