Taking Credit: New Methods To Close Gender Gap in Funding
The robot may know best. In paths to close the gender funding gap in entrepreneurship, artificial intelligence may be key.
In a new study of 35,000 credit applicants, Fintech leader Fundbox data shows “no discernible approval gap between male and female applicants and no discernible gap in the amount of credit extended between male and female applicants,” using AI models and other data.
“The combination of data and AI is working to provide more fair and equal access to credit,” is the summary of the latest “What If” report that chronicles women entrepreneurs and their journey for fair and equal access to credit. The study examines methods of underwriting credit to women-led businesses.
“It is important to get a grip on not just history but the status quo,” says Irena Malatesta, one of the authors of the report and head of content strategy at Fundbox, that has served more than 100,000 small businesses with access to credit from $2,000 to $100,000.
“We have facilitated across to hundreds of millions of dollars worth of credit,” she says.
According to the most recent U. S. Census data, “the number of women-owned firms rose 26.8 percent from 2007 to 2012, from 78 million to 99 million businesses. The number of all firms increased 2 percent during the same period, from 27.1 million to 27.6 million.”
A 2017 report by the New York Federal Reserve shows that “among firms that recently applied for credit, women-owned firms applied for business loans at a similar rate as men-owned firms, but were significantly less likely to receive financing (47 percent success compared to 61 percent).”
In 2017, there were an estimated 11.6 million women-owned businesses, employing nearly 9 million people, and generating $1.7 trillion in revenues.
According to the Fundbox report, “History shows that women business owners have faced more and greater obstacles compared to men in their quest to obtain credit and secure investment These obstacles exist because of systemic and individual discrimination, both legacies of the unequal legal standing women had in the past. Inequities in today’s financial landscape remain and are often exacerbated by financial institutions in their methods for determining creditworthiness.”
A 2014 study and report produced by U.S. Senator Maria Cantwell reported that 44 percent of female entrepreneurs use private sources, such as personal savings, or loans from family and friends, while 11 percent use personal bank loans, according to the report.
The report also shows, “Lower wages ultimately lead to women accumulating fewer assets, and could be a reason for displaying more debt avoidance, as we discuss below. These factors plus historic and current wage disparities could affect personal credit scores, making borrowing difficult.”
Credit scores are also discriminating based on gender.
“In 2016, credit score and analysis firm Credit Sesame reviewed a subset of the company’s 7 million members and concluded that men continue to have higher credit scores than women overall,” Fundbox reports. “The company listed several factors that continue to influence women’s lower credit scores including the persistent gender pay gap and the fact that men carry more revolving credit debt than women. The same survey also noted that, on average, men’s credit limits are higher.”
Women may be more debt averse than men, and this presents a paradox. Avoiding debt may not be a good thing when applying for credit.
“Women-owned firms have smaller amounts of debt than men-owned firms, even when controlling for the revenue size of firms. Similar percentages of women- and men-owned firms hold debt in the $100k to $250k range, yet above that range, women-owners hold significantly less debt,” according to Fundbox.
Minimizing or erasing gender biases in lending and funding may be more difficult, Malatesta says technology may be the answer to leveling the credit playing field.
“Social change can’t come from just one place, but technologies can help address the bias,” she says. “We can look at how FinTech can address these problems.”
Malatesta offers several strategies for women business owners and entrepreneurs looking for lines of credit for funding for their businesses. Acknowledging that a funding gap early on in the life of a business “reverberates” for years, Malatesta says facing obstacles head on in the process can help.
Don’t be discouraged. “Female entrepreneurs report they feel discouraged from applying for credit,” Malatesta says. “They need to feel confident and look at all options of loans, credit cards, crowd funding and other ways to get working capital.”
Overcome the fear of debt. “Women business owners are noticeably discouraged from applying for credit. Women-owned firms report having decided not to apply for financing in the past, for fear of being turned down, at a higher rate than men (22 percent vs 15 percent),” according to the report. “Without credit, women business owners are at a disadvantage.”
Keep trying and know your options. “You don’t have just one shot,” Maltesta says. After establishing a history of repayments, then try again for credit.
Research women-centric funding sources. “There are alternatives to venture capital firms specifically seeking minority and women-led businesses,” Malatesta says. “That is because more diverse founders are a good business bet.”
Find allies beyond family and friends. “Most business owners are not able to get funding in traditional ways so they rely on private sources of funding,” says Malatesta. “But it can be both private and public with stronger interpersonal relationships beyond the community.”
The good news to close the finding gap, in addition to these tips and seeking funding from sources that use data and AI to minimize gender discrimination is that funding women-led businesses is worth it.
“Companies are starting to understand and buy into the business case for gender equality,” Malatesta says.
About the Author
Michele Weldon is editorial director of Take The Lead, an award-winning author, journalist, emerita faculty in journalism at Northwestern University and a senior leader with The OpEd Project. @micheleweldonwww.micheleweldon.com