Addressing the Problem of Access to Capital for Women Business Owners

Small business loans for female entrepreneurs in California dropped 70% since 2007. Here are strategies women business owners can use access the working capital needed to start or grow their organizations.

Women Business Owners Have Low Loan Approval Rates

Overall, banks are approving small business loans at a rate roughly half as often as before the Great Recession, but approval rates for women-owned businesses may be far lower. Let’s take a closer look at the problem of access to capital for women business owners. Earlier this week we shared data from reports on the current outlook and challenges for women business owners, including a NWBC (National Women’s Business Council) report which listed improving access to capital among the four pillars of their recommendations.

The Problems Women Business Owners Experience from Lack of Capital

Many small businesses find that they do not have adequate working capital. For a small business, lack of capital is a common cash flow challenge that can make it difficult to operate day to day, let alone grow. Lack of working capital can make it hard – if not impossible – to:

• Execute the small business marketing plan
• Make needed repairs or renovations
• Expand or add new locations
• Hire and retain the best staff
• Add (or even replenish) inventory
• Meet operating expenses or payroll during slow months or cyclical downturns
• Add new product lines or services needed to generate new revenue streams
• Take on big orders or large customer accounts

Without working capital, small businesses – including women-owned businesses – may find it difficult to compete with larger counterparts. They may have to turn down large orders or new opportunities while waiting for accounts receivables to turn or net receipts to grow.

Last year in the U.S. saw the first gains in rates of approval for small business loans by banks since the onset of the Great Recession; although it’s worth noting that December 2013’s 17.6% approval rate for small business loans by banks is still only about half the rate of approval from pre-recession figures. Furthermore, the 17.6% approval rate still means that fewer than 1 in 5 small business loan applications are receiving approval.

Small Business Loans for Women Business Owners Lagging Behind

We were most intrigued by a businessnewsdaily.com report citing the California Reinvestment Coalition’s study which determined that small business loans given to women-owned businesses dropped a whopping 70% since 2007 (at least in California).

Making the Women-Owned Business More Attractive to Business Financing Companies

There are many ways that a women-owned business can better position itself to attract not only lenders but investors. In many instances, these same strategies represent best practices that can also improve its ability to attract and retain customers and quality employees as well!

•  Have a Plan

When approaching any type of business lender or business financing company, it’s important to have a business plan that includes a snapshot of the business’s history, where it is now, where it wants to grow, and what strategies it will put in place to make that happen.

Investors usually want to know exactly how the money will be spent and how the business will be able to repay the loan or advance amount. Specifically, you will want to have these types of documents ready when you apply for business financing:

• Bank statements for both the owner and the organization
• Business and marketing plan
• Cash flow projection (projection of income and expenses)
• Tax returns and all related documents for both the owner and the organization
• Detailed breakdown of existing capital and collateral*

*Proof of collateral is not usually required for merchant cash advance business financing

•  Offer Proof

In addition to the business plan and projections, including case studies of similar organizations that found success using the same strategies you plan to employ could also be persuasive to prospective investors or lenders.

Your business plan should also include important demographics relative to your customer base and target markets that demonstrate the potential for your plans to succeed.

Customer, vendor and even peer testimonials and recommendations and showing how your business has paid off debt in the past can also help to reassure lenders that investing in your business is a good idea.

•  Show Off Your Responsible Track Record

Be sure that your financial information and corporate financial statements are complete, honest and ready for presentation when approaching any type of business financing company. This can speed your application process and makes it far more likely that your application will be considered. In addition, make sure you are paying vendors, suppliers and other creditors on time.

•  Do Your Research

Explore whether there are financing options available for your business specific to women-owned or women-led businesses. Take advantage of government programs, resources or consulting services. Research financial institutions to see what their appetite for lending to small businesses or women-owned businesses is prior to applying for funding.

•  Explore Alternatives

SBA and bank loans are just the tip of the iceberg when it comes to financing options for women-owned businesses. You should also look at short-term merchant cash advances (women-owned businesses that sell directly to consumers) and invoice factoring (for women-owned businesses that sell B2B and invoice clients using accounts receivable invoices).

Alternative business financing companies may well have much higher approval rates for financing for female entrepreneurs than their traditional counterparts, and their requirements are generally not as stringent.

•  Solidify Your Network

Networking, participating in civic and charitable organizations and being a member of your local Chamber of Commerce or other merchants groups can lay the groundwork for approaching local lenders and business financing companies. Furthermore, networking can make you aware of more local resources and options when it comes to carving out more working capital or improving cash flow for your organization.

Invoice Factoring for Women Owned B2B Organizations

Firms that sell to other organizations and wait on payments may benefit from invoice factoring. When a women-owned business factors invoices  they can receive an advance on a customer’s invoice of up to 98% of the invoice amount right away – without having to wait for the customer to pay.

With factoring rates as low as 1% for women-owned businesses, having immediate access to capital allows for faster reinvestment into the business and may enable the female entrepreneur to take on new customers more quickly, take on larger orders or bigger customer accounts or invest in strategic marketing campaigns in order to grow. Invoice factoring has another benefit in that it can be used to expedite cash flow from the first sale a B2B company makes.

Merchant Cash Advances for Female Entrepreneurs or Women-Owned Businesses

A second financing tool for women owned businesses are cash advances. These come in two forms, business cash advances repaid via ACH and merchant cash advances repaid from daily credit and debit card transactions. Cash advances are available to businesses that sell direct to consumers or other businesses. While they are not a startup financing option (since calculating the advance amount is based on recent sales history) for female entrepreneurs, they can be a great short-term financing program for women-owned businesses.

Merchant cash advance amounts are determined based on the amount of credit and debit card transactions the business has over the past 6 months, so a low credit score or lack of credit history is not necessarily a deterrent to approval for this type of business financing.

Repayment is usually made over the course of 6 to 12 months, so it is also a type of financing that can be quickly paid off; whereas traditional loans are often repaid over the course of several years. Plus, while bank loans can take weeks to process, merchant cash advance applications can be processed in a day or two, enabling funding in as little as a week from application. This fast cash infusion into a business can provide financing needed to meet unexpected expenses, make repairs or replace broken equipment quickly, so that the business is not negatively impacted in the interim. Like invoice factoring, merchant cash advances can be used to execute a wide variety of business growth strategies at the business owner’s discretion (vs. a traditional loan, which will often come with restrictions attached).

Business Line of Credit for Female-Owned Businesses

A business line of credit can also be an ideal tool for financing women-owned businesses. For starters, online business line of credit decisions can be made in just a few minutes, giving you instant access to capital when approved. Flexible programs are available that let you decide how the money will be used. With a business line of credit, you pay only on the money that you draw against the line and save when you pay the amount back more quickly.

We would be happy to tell you more about financing tools available to women business owners. Request a free, no-risk quote using the form below.