More than 11.6 million firms in the United States are owned by women. These firms employ nearly 9 million people and generated $1.7 trillion in sales in 2017, according to statistics from the American Express OPEN’s 2017 State of Women-Owned Businesses report. Women Business Owners (51 percent ownership stake or more) now account for nearly 40 percent of all privately held firms. Additionally, one in five firms with revenue of $1 million or more is owned be a female.
Among women business owners, women of color are a fast rising subset. Right now, women of color comprise 5.4 million of the 11.6 women-owned firms. These companies employ 2.1 million workers and generate $361 billion in revenues annually.
Despite this economic success, business loans for women are not always easy to secure. In a recent column for CNBC on the state of small business finance for women-owned firms, Biz2Credit co-founder and CEO Rohit Arora reported that women business owners get nearly 50 percent less in funding than their male counterparts.
In 2017, the average funded amount for female-owned firms was $57,097, compared to $103,604, the average size of a business loan for male-owned businesses. Without adequate startup capital and funding for expansion, launching and growing a successful business is daunting.
There are a number of factors that cause the disparity between men and women entrepreneurs. According to Biz2Credit’s research, the average age of women-owned businesses was 56 months, compared to 62 months for male-owned companies. While women have increasingly become entrepreneurial, their companies have shorter credit histories and lower scores than longer-established firms owned by men.
“It isn’t easy to get a small business loan for a startup. Once you have been in business for a year or two, depending on the industry, it makes sense to apply for capital,” said Elaine Pofeldt, author of The Million-Dollar, One-Person Business. “In the beginning, when you might have times when money isn’t coming in, a line of credit can help with cash flow situations. After a year or two, if there is enough history of success in the business, then it’s a good time to apply for a small business loan.”
Obtaining a small business loan is pivotal to most businesses’ success. The Small Business Administration (SBA) helps women obtain the resources necessary to get a company off the ground. SBA loans, including the popular 7(a) program, provide government guarantees that mitigate risk the SBA lending partners. The backing encourages banks and others to loan money to companies that might not otherwise qualify for funding.
Typically, a credit score of 600 or higher is necessary to secure a small business loan. The higher your credit score, the easier it will be to convince a bank that your company is solid and a good bet to repay the loan. For an SBA Loan application, lenders typically will look for a score or 650 or above. The higher your credit score, the less risky the loan appears to the lender. Lower risk often translates into better interest rates, longer terms for the borrower, and a greater chance of success in securing a small business loan.
Here are four tips for women business owners who want to raise their credit scores:
- Review your business credit reports for errors. Periodically examine your business credit history to make sure there are no errors. If you have paid off a tax lien against your business, make sure it is indicated on the report so that past shortcomings do not jeopardize your future. If you find an error, immediately contact the credit rating agency and report the discrepancy.
- Separate personal and business bank accounts. Separating accounts – especially if your personal credit history is less than stellar – is one way to ensure that your personal credit history does not jeopardize the capital needs of your firm. If your business establishes a track record of paying debts on time, you will find yourself in a better position to secure financing at attractive rates and terms – even if your personal credit score is lower than it should be.
- Open a business credit card and pay it on time. It seems that every day an offer comes in the mail from a credit card company. Women entrepreneurs can open a credit card like the Capital One® Quicksilver® Card, which is designed for small businesses. The limit on the card is relatively small, but that can be a good thing. Having a lower limit means you can avoid the temptation to charge too many items on the card. The most important part of this effort is to quickly establish a history of making prompt payments. If possible, pay each bill on time and in full over the first six months of having the card. Even if you have the money to pay cash, it is a good idea to charge items and pay them off monthly. You’ll build a history and not incur interest charges – as long as the card is paid off monthly.Business owners can also accumulate “rewards points” that can be cashed in for cash rebate of 1.5% on every purchase made. Quicksilver carries a 0% Intro APR for 15 months. However, the rate jumps to 16.24% or higher afterwards. That’s when it becomes critical to pay your business credit card on time and in full each month. Late payments will do more harm than good and will negatively impact the business credit history you are trying to build.
- Operate a lean business. Examine your cost structure and determine what you need to do to keep your business profitable in the long term. Keep inventory low, monitor staff hours closely, and reduce workers’ hours at times when business is slow. If you have great sales figures, but your costs are too high, take measures to address it.
Once you have taken the aforementioned steps to increasing your credit score, you’ll be ready to apply for funding. Pursuing a loan is more complicated than just filling out an application. Supporting documents are required. Without them, the chance of success drops significantly.
Preparing to Apply for a Small Business Loan
Knowing which documents will be required and getting that documentation in order before applying for a small business loan will both reduce stress and hasten the loan application process. Typically, lenders require the following financial documentation with a small business loan application:
- Several months of bank statements
- Corporate tax returns for the past 2-3 years
- Individual tax returns from the past 2-3 years
- Outstanding credit account statements
- Balance sheet and/or P&L statement
While it is not always a requirement, having a well written business plan that outlines what the business is, who will run it, and how it will make money, will be helpful for underwriters in the approval process.