Bad Business: Gender Discrimination in Small Business Loans

On Behalf of | September 1, 2014 | Gender Discrimination, Harassment

Many of my clients are highly educated, experienced professionals at the top of their industries who have prioritized and sacrificed for their careers—they’re hard workers and they’re really good at what they do.  Still, when gender discrimination in the workplace forces them out of the positions they’ve worked so hard to attain, one of the more immediately pressing questions they face is: what now?  How do I support myself and my family?  While these accomplished women seem well-positioned for a lateral move, with widespread gender discrimination (especially within high-paying, male-dominated industries), transitioning to a competitor is often a move from the frying pan to the fire—particularly unappealing to someone who’s already been burned.

Striking out on one’s own appears an attractive alternative, but absent considerable personal assets or private investment (only 7 percent of venture capital funding goes to women-owned businesses—more on this to come), you generally need to borrow money to start a business.  Unfortunately, this too is more difficult for women than it is for men.

According to a report by Democratic staffers of the Senate Small Business & Entrepreneurship Committee, businesses owned by women account for 30 percent of small companies but receive only 4.4 percent of the total dollars in conventional small-business loans.  Put another way, women receive $1 for every $23 loaned.  It’s not just that women don’t ask: women’s loan applications are more likely to be rejected than men’s, and the loans they do get are subject to harsher terms.  (This discrimination is not limited to women, of course—Hispanic and black entrepreneurs are less likely to be approved for loans than whites, even when controlling for factors like credit history and business type, and minority business owners pay, on average, 32 percent higher interest rates than what their white counterparts.)

One possible explanation is the perception, on the part of male lenders, that women-owned companies deal in women-specific products—products men do not understand.  This could not be further from the truth.  Women don’t just make scented candles and jewelry organizers, they own construction companies and technology firms.  Women-owned businesses constitute a majority of the businesses in the social and healthcare assistance arena.  In fact, more than 8.6 million U.S. businesses are owned by women, and these businesses generate more than $1.3 trillion in revenues and employ nearly 7.8 million people.

A more likely reason for the gender gap in business loans is antiquated, baseless paternalism.  It was only in 1988 that the Women’s Business Ownership Act put an end to state laws that required women to have a male relative sign business loans.  To illustrate how absurd these kinds of laws were, one female business owner at the time who didn’t have a husband or father to co-sign her loan had to ask her 17-year-old son to co-sign with her —he couldn’t even vote.

The gender gap in small business loans to women-owned businesses has actually increased since 1988.

Maxine Sweet, vice president of public education at Experian, the credit rating agency, explains that though numerous data sources show that women working full-time earn about 23 percent less income than men, a study the company conducted in loan repayment by gender indicates that, “women are taking steps to manage their finances better than men. The most notable difference is that men are carrying bigger individual mortgage loans than women, and appear to have more difficulty making those payments on time.”

That women have proven to be a better credit risk for lenders is an accepted fact among microfinance institutions. Women continue to make up seventy-five percent of all microcredit recipients worldwide, and many organizations have chosen to loan exclusively to women, in part due to their higher repayment rates.  Opportunity International, a non-profit supporting local microfinance organization in 22 countries makes nearly 93 percent of its loans to women.  Of the more than $515 million in its loan portfolio, the repayment rate is 98%.  And lenders aren’t the only ones seeing a return on investment in women: women are more likely than men to devote resources to their families and their communities and so loans to women mean reinvestment in things like healthcare and education. Despite this striking evidence, studies have shown that around the world, men tend to secure funding during pitching events more often than women because they are perceived as more credible.

Gender discrimination in small business loans is irrational and unjustifiable.  Beyond its cost to those women who face higher interest rates or who are denied loans outright, discrimination has clear costs to society and to lenders themselves—women have proven to be a safer bet.  More frustrating still, discrimination against female entrepreneurs serves to prolong and exacerbate the effects of gender discrimination by employers by making it harder for women to mitigate their damages.  And for those who believe that, “the best hope for improving the lot of all women… is to close the leadership gap,” discrimination in small business loans not only makes it more difficult for women to be their own boss, it also makes it more difficult for them to help even the playing field for those who come after.