Women-Owned Businesses Short-Changed by Lenders

After years of giving women-owned businesses short shrift when it came to credit, lenders are beginning to recognize the importance of their economic contributions, to evaluate their credit flexibly and to offer.

Women own nearly 40 percent of all U.S. businesses, yet they receive a mere 12 percent of all small business loans. That's the usual bad news.

The good news is there are signs that the banking industry may be beginning to recognize women's major economic contributions and becoming more willing to offer loans and credit programs to meet their business needs.

Between October of 1999 and this June, only $1.57 billion of a total of $9.83 billion in Small Business Administration loans was parceled out to women, according to a report presented to Congress on Wednesday by the Milken Institute and the National Women's Business Council.

The report, “Economic Prosperity, Women and Access to Credit,” was released before an audience that included government officials, financial executives and officers of women's entrepreneurial organizations.

“The businesses seem to be growing more rapidly than the access to capital,” said Bruce Rosenthal, spokesman for the National Foundation for Women Business Owners. “But it is a two-way street. We have found that women are not asking for enough.”

Between 1986 and 1999, the report said, the number of women-owned companies increased by 103 percent, their workforce increased by 320 percent and sales grew by 435 percent. Women of color are starting businesses at three times the rate of all others, both all women and all men.

This means women-owned firms provided 27.5 million jobs and generated $3.6 trillion in sales. Women-owned businesses have staying power and are as likely to stay in business as the average firm, the report said, dismissing myths that women-owned businesses are not stable. Women also are more likely to have a homepage for their enterprises than those owned by men.

Stimulating business development, including women's businesses, is necessary to sustain growth, the report added.

“Aligning lending institutions with the realities of a broader domestic business environment requires breaking down both real and perceived barriers to credit and equity investment for women and an end to a one-size-fits-all approach to lending.”

The report criticized the one-dimensional lending mindset of old, which considered women-owned businesses a significant risk. That view of women as a credit risk has been fueled by enterprising women who were forced to finance their companies through non-traditional routes like family donations and credit cards. High credit card debt usually results in a poor credit score and thus women who have financed their businesses with such expensive credit could be denied access to lower-interest-rate debt.

But, it's getting better.

FleetBoston Financial recently set aside $2 billion for loans to women-owned businesses. Cited as a “best practices” example of progressive lending to women-owned businesses, the report noted that the bank has established durable relationships with businesswomen and looks beyond the traditional loan restrictions.

After surveying its own lending practices and its women business-owner clients, FleetBoston launched the Women Entrepreneurs' Connection, a small-business banking program that offers assistance in seeking funding, credit, information, advocacy and other resources.

FleetBoston decided that some women using credit cards when bank loans would have been a better financing choice had extremely promising businesses. The bank changed its credit-scoring to include business potential measured in other ways and it helps female clients to refinance their expensive debt.

FleetBoston also educates its lenders within the company on how to best serve female entrepreneurs and it has joined with outside resource providers, such as a business education center in Boston, the Center for Women and Enterprise.

The bank also offered business forums and networking events specifically aimed at attracting women of women of color.

FleetBoston is not alone in deliberately reaching out to the female entrepreneurial market. California's Wells Fargo is also taking steps to assist women seeking financing.

“Our research with Wells Fargo has shown that not only are the banks hanging out the sign to say, ‘Hey, we recognize you women as a market, come on in,' but they are not doing this for philanthropic reasons,” said Rosenthal. “They are training bank operators to understand the ways to deal with women business owners. It is the same loan criterion and the same dollars. It is a sound business deal.”

Other initiatives helping women include the Small Business Administration's New Markets Initiative, which makes loans to companies that previously had credit problems in order to foster economic growth and jobs in underdeveloped communities, the report said.

Also, Count-Me-In For Women's Economic Independence, an online micro-loan and educational organization for women business owners, is developing a “woman-appropriate” credit scoring technique to evaluate woman's work, personal experience and business development potential.

The report recommends the following, in order to make it easier for women entrepreneurs to secure loans:

  • Congress should amend Federal Reserve Regulation B, which prohibits lenders from collecting data on the race or gender of an applicant.
  • New credit scoring models should be used so that women business owners can be evaluated fairly by banks.
  • A National Capital Access Program should provide an insurance pool to cushion banks from risk and allow them to make riskier loans to worthy businesses.
  • Financial institutions should generate liquid capital by bundling standardized small-business loans and selling them as securities to institutional investors.
  • The Census Bureau should institutionalize business sector surveys, such as the Survey of Women-Owned Business Enterprises, that are included in the economic census taken every five years. These surveys produce a wealth of information about women-owned businesses and their economic impact that can shape new practices and new access for women to capital and credit.

Elizabeth Randolph is a journalist based in New York.

For the complete report, visit The Milken Institute: https://www.milkeninstitute.org/