The Definitive Guide to Small Business Loans for Women

Any small business owner faces plenty of hurdles when first starting out. Some of those challenges might be compounded if the entrepreneur in question is a woman, which is why we’ve put this guide to securing small business loans for women entrepreneurs. While women own 30% of small companies, only 16% of the total of conventional small-business loans that are approved actually go to female business owners. And just 4.4% of the total value of loans for all sources go to women, who, ultimately, receive fewer loan approvals and for less funding than males. A 2017 Biz2Credit study revealed that small business loan approval rates are 15 to 20% lower for female-owned firms than for companies owned by males.  Studies have revealed that companies owned by females earn less revenue than male-owned businesses, and women business owners tend to have lower credit scores than men business owners. So, with personal credit scores playing such a large part in the loan application process, this could be a factor in why women have lower approval rates overall. But women also say they have experienced gender bias in their careers, and more than 30% of women business owners polled say that it has affected their financing. So, there’s no question that loan approvals for the purpose of working capital for a small company are a challenge and are likely a bigger challenge for a woman. But there are lenders who offer financing opportunities for women entrepreneurs. What are some of the types of financing options a female entrepreneur could consider seeking?

SBA Loans

Financing a startup through the Small Business Administration (SBA) usually means a larger selection of loan sizes, longer repayment terms, and lower interest rates that are not exorbitant. Other means of short-term funding usually don’t offer annual percentage rates as low as SBA loans. Approval will also depend heavily on the applicant’s business history and credit score. But if you are willing to deal with all the red tape that goes into applying for an SBA loan, the upside is markedly lower financing rates and less stringent lengths of time to repay the loan than is the case with some other loan options. According to data from the federal agency, SBA loans are most frequently approved for the following types of businesses:

• Restaurants (full and limited service)
• Medical offices
• Beauty salons
• Gas stations (with convenience stores)
• General contractors
• Landscaping services
• Trucking/logistics

Term Loans

When a bank or online lender approves a borrower for an up-front single payment with the understanding that the borrower will repay the total amount of the loan, along with interest and other fees, via monthly installments, that is what is known as a term loan. The amount of the loan is repaid over a period that is established at the time of the finance agreement. Banks and online lenders can both provide loan programs for business financing, but term loans can be a challenge to secure. They may involve a lengthy, arduous application process without a high rate of approval. Applying for a term loan in the online marketplace rather than in person at a bank is another option the female business owner might consider. Like SBA loans, term loans are also desirable products. You’ll want to come in with a strong personal and business credit history to improve your chances for approval and a lower interest rate on any term loan. A term loan requires collateral and a demanding approval process to reduce the risk to the lender that the borrower may default on the loan or fail to make payments. Term loans usually do not carry any penalties provided they are paid off ahead of schedule.

Microloans

Alternative lenders might be a worthwhile option for women entrepreneurs to consider. Small loans that come from individual lenders, not from a bank or a credit union, microloans can be issued by an individual or they can be assembled from several lenders each contributing a given amount until the necessary funding total is achieved. With a microloan, the lender gets interest on the loan and repayment of principal after the loan has reached its full term. Microloans come with interest rates that are above market, so, some investors may be attracted by that aspect of them.

Business Lines of Credit

When a lender provides pre-approved funding with a maximum credit limit, that is known as a business line of credit. If the borrower–in this case, the woman business owner–is approved for this line of credit, funds can be accessed whenever they are needed until the established credit limit has been reached. Because the borrower is only paying interest on the loan amounts that he or she withdraws, a business line of credit can be an advantage for business owners who are uncertain of the amount of funding they will require, or when they might need it. The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other types of loans. How costly that might turn out to be is heavily dependent on the amount of funds the entrepreneur ends up using. If a female entrepreneur needs to establish a favorable credit history, a business line of credit could help her do that.

Invoice factoring

Invoice factoring is a financing method where you sell your accounts receivable at a discount for a lump sum cash amount. A method of securing working capital that is somewhat different than applying for a loan, invoice factoring is the process of selling invoices at a discounted rate to a factoring company and receiving in return a lump sum of cash that can immediately be used as working capital. After assessing the risk of financing the business owner’s invoice, the factoring company collects payments from the business’ customers over a span of between one and three months. If a company sells something to a customer, but that customer cannot pay off the invoice right away, there’s a gap of time that could create a shortfall for the business owner. The lump sum that the business would receive by undertaking the process of invoice factoring would cover the shortfall and solve the problem of cash on hand. The business will sell the invoice to the factoring company at a 3 percent discount, to account for the factoring fee. This method of securing working capital enables a business to work around the obstacle of a slow-paying customer. Some factoring companies will supply the cash needed for working capital in as little as 24 hours. Some of the drawbacks to invoice financing for business funding include surrendering control, taking on the potential stigma associated with factoring (which some observers could interpret as a sign that one’s business is struggling), and the cost (when factoring companies manage the process of collections and the control of credit, it is more costly and the business’ profit margin takes a hit as a result).

Other ideas for funding a small business

Personal loans

Someone who might not have the required prerequisites to qualify for a business loan from a bank still might be able to secure approval for a personal loan. Personal loans are typically unsecured, so collateral is not required of the applicant. In this case, if you are approved for a loan, you are required to repay the loan in monthly installments. Find out if the lender places any restrictions on the uses for a personal loan. If there are no restrictions on its uses, a personal loan can be used for a number of business needs, from purchasing equipment to marketing your company to paying suppliers. A new company that has a business plan, but does not have much credit history, or one that needs a quick decision on a loan, might be especially interested in seeking a personal loan. Business loans typically require a longer company history than personal loans, which makes a personal loan more attractive for someone who has just recently launched a business—which many people did during the last couple of years when the COVID pandemic changed the business world.

Crowdfunding 

A small business owner might want to consider raising working capital with a little help from some friends. Crowdfunding is a way to do just that. Tapping into the combined resources and contributions of friends, customers, family, and potential individual investors by using social media and online platforms for this specific purpose is called crowdfunding. The process of crowdfunding entails collecting small amounts of capital from a large base of contributors, accessing a potential pool of resources that may be sizable. Crowdfunding is open to anyone. The business owner who seeks to raise capital through crowdfunding is essentially turning over the process of an application to a large group of people, rather than depending on the decision of an individual lender. The advantages of crowdfunding to raise working capital include its broad reach, the ability to present one’s business in a positive light to potential investors, the marketing the business will receive from a crowdfunding platform. Crowdfunding helps a business streamline its fundraising efforts with a single profile that is comprehensive and will enable the entrepreneur to funnel all prospects and potential investors. Presenting one’s business to a large audience at one time eliminates the inefficiencies associated with printing documents and other manual tasks. Crowdfunding can be based on donations, rewards, or equity. A funding effort that is based on donations comes with the understanding that there is no financial reward to the donor to a crowdfunding campaign. A campaign based on rewards would give something back to the contributor, such as a product or a service provided by the business that is seeking the funding. Equity-based funding campaigns invite contributors to become part-owners of the business by exchanging capital for equity shares. As equity owners, the company’s contributors hope to receive a financial return on their investment and also a share of the profits in the form of a dividend or distribution.

Angel investors

A private investor willing to come through with seed money for a small business startup is known as an “angel investor.” The funding sourced from an angel investor often comes in exchange for a stake in the business. Angel investors frequently are either friends or relatives of the entrepreneur, and the funds they provide may either be a one-time investment when the company is just starting up or part of an ongoing arrangement to infuse the business with more funding down the road. An angel investor often is someone who has a lot of money to spend and risk capital to spare. But taking on an angel investor could cut into your potential annual revenue since said investor will be due his or her own cut of the profits.

Venture capital

Venture capital is a source of equity funding that is usually generated by a company, rather than an individual, such as a personal associate of the entrepreneur. Venture capital firms are companies that specialize in investing in new businesses, and they will take chances on new companies that they believe possess substantial potential for long-term growth and big profits. Sometimes the assistance provided by a venture capital firm does not come in the form of money, but rather in the form of counseling and expertise. Similar to angel investors, venture capitalists have a stake of some kind in the business, and therefore have a say in the decisions that are made within the company.

Grants

Can’t get approval for a small business loan? Another solution might be a grant. Small business grants are usually earned on merit by impressing people. They are able to help by offering funding that does not require business owners to pay back the money. A free sum of money that provides financial assistance for ventures to grow, a grant highly competitive and as difficult to locate as they are sought-after in the business world. But if a business owner can secure one, it’s funding that doesn’t add to one’s debt.  Grant sources can either be governmental or private. A percentage of the government budget is reserved each year for business grants. Types of government grants include those from the SBA, the National Endowment of the Arts (NEA), and the Department of States. Private businesses and organizations also give out grants, including corporations, nonprofits, schools, and private banks.  Private grants are for businesses that share a common mission or vision with the provider of the grant.  Grants for women-owned businesses include Smart Women Grants, FedEx Small Business Center Grants, and Eileen Fisher Women-Owned Business Grants. Be warned, though, the scarcity of available business grants can be frustrating. They are available only to specific industries, and the process of applying for a business grant can be cumbersome, involving lots of paperwork. Skilled grant writers are in heavy demand—letters used to apply for grants must be well-written and persuasive in order to compel their target audience that your business is worth backing with grant money. Additionally, applicants for many private women’s business grants are required to be involved in an industry specifically catering to or dominated by females, and often they must be located in economically disadvantaged areas.   The funding environment for the female business owner is not an easy one, but it’s also not impossible. Smart planning, careful research, and well-considered decisions on seeking financing can help the prepared woman entrepreneur achieve success in abundance.