The rate of small business loans being made by big banks still hasn’t recovered from the Great Recession. The ten largest banks lent $44.7 billion in 2014, from a high of $72.5 billion in 2006. If you’re a small business owner who has looked for a loan in the last seven years or so, this probably isn’t news. In a November 2015 Wall Street Journal report, a regulatory filings analyst claimed that the biggest banks “have essentially abandoned the small business market.”
Since the recession, many small businesses have been forced to find other, and more costly, sources of capital to grow their businesses. The precipitous drop in bank loans had the effect of more than doubling nonbank lenders’ market share. This type of funding, including online lenders like Kabbage, Funding Circle, and OnDeck, typically offers short-term loans at six or seven times the interest of a bank loan. Unable to find traditional bank loans, small businesses also nearly doubled the amount of money they charged on credit cards. (In a sort of compromise between credit cards and bank loans, last year, Bank of America began offering small businesses lines of credit from $10,000 to $100,00.)
The good news is that, according to the September 2016 Biz2Credit Small Business Lending Index, small business loan approval rates have “improved for the seventh time in the last eight months,” to 23.4 percent, a post-recession high.
If you’re a minority or woman business owner, however, your odds of getting a traditional bank loan are still pretty slim, because, as challenging as the financial environment has been for small businesses, those owned by women and people of color have faced additional funding obstacles created by conscious or unconscious (institutional) bias.
Both women small business owners and small business owners of color are turned down for loans more often, and when they do get loans, those loans tend to be for less—sometimes significantly less—money, and come with a higher interest rate.
Access to capital for women entrepreneurs
According to a recent study by Fundera, “women who are successful in getting approved for debt financing end up receiving more shorter-term funding, which represents the smallest loan sizes and most expensive interest rates on offer to any small business borrower.” Indeed, the Fundera report found that “women entrepreneurs get offered smaller loans across every product, from the same groups of online lenders, with no exception, and pay significantly higher rates than men do.”
The picture for women entrepreneurs looking for venture capital is equally grim. In the U.S., a mere seven percent of venture capital went to women-owned businessesbetween 2010 and 2015, according to research published in 2013.
A variety of factors likely account for these discrepancies. Women ask for less funding—on average $35,000 less—than men do, undervaluing their businesses, just as fewer women ask for raises. (Four times as many men ask for raises as women do.) Women entrepreneurs are likely to have lower credit scores and make 30 percent less annual revenue. The Fundera report speculated that lower credit scores were “likely related in some ways to the gender wage gap,” a problem which likely contributes to a less favorable debt-to-income ratio and disproportionate credit use among women business owners. And because access to credit helps determine a business’s annual revenue the gender wage gap not only puts women business owners at a disadvantage but may trap them “in a cycle of more difficult growth.”
Access to capital for business owners of color
Small business owners of color face similar obstacles in accessing credit. They are more likely than other small business owners to be refused credit. In fact, loan denial rates for minority firms with gross receipts under $500,000 were a shocking three times higher than those of non-minority firms.
Like women-owned businesses, minority-owned businesses pay higher interest rates on smaller loans than those received by non-minority-owned businesses. The average loan for high sales non-minority firms was twice as much as for high sales minority-owned firms. And on that 50 percent smaller loan, business owners of color are paying 1.4 percent more interest than non-minority business owners.
Not surprisingly, business owners of color are less likely to apply for loans in the first place.
Business owners of color face looking for other types of funding have similar trouble. Average equity investment in minority-owned firms is only 43 percent of that in non-minority firms.
Taking care of business
Despite these obstacles to their success, women entrepreneurs and entrepreneurs of color often do better than entrepreneurs as a whole in some important categories.
For example, the growth rate of women-owned businesses outstrips all other types of firms, having risen by 20 percent between 2002 and 2007. While all other types of firms lost jobs between 1997 and 2007, women-owned businesses added about half a million jobs. Nonetheless, the Fundera report notes, “women-owned businesses are only four percent of the national revenue,” a disparity likely related to…you guessed it, the difficulty they have accessing capital.
According to the U.S. Chamber of Commerce’s Minority Business Development Agency, “Minority-owned firms outpaced the growth of non-minority firms in several business measures.” Young minority firms create jobs at “rates similar to non-minority over the first four years,” despite having smaller gross receipts and payroll, and fewer employees. Yet the disparity in access to capital only seems to get more pronounced the longer the business is in operation.
As small business loan rates continue to creep back up to pre-recession levels, small business owners can take some steps to increase their chances of getting the best available funding. Make sure that when you apply for funding—be it from a traditional bank loan, an SBA-guaranteed loan, a loan from a Community Development Financial Institution (CDFI), or a an organization like Kiva—you’re really ready.
Any reputable lender will want to know:
- what you need the money for
- how much money you need—which should never be “as much as possible”
- how long you’ll need the money for
- how you plan to pay back the loan
So, you should have at least provisional answers to these questions before asking for any sort of loan. Check out more information on answering these questions and finding the right funding.