Small businesses are the life blood of our economy, but there are significant challenges to small business owners and entrepreneurs when it comes to accessing capital, a key element for startups, for growing new businesses and for survival. Research shows that minority and women-owned businesses continue to face more barriers to access to capital than do businesses started by white males.
Some of the hurdles they face are lacking from the outset in many cases. The most common factors working against them include lack of access to funds outside of banks and lack of collateral required to secure bank loans. Being a startup often means they have no history to show they are reliable enough for the banks to take a risk, and, having few assets to begin with often compounds the difficulty.
Having startup capital is a strong predictor of success, but often minorities and women-owned startups have less cash and assets than do their white counterparts. Without cash on hand or other assets, such as home ownership as leverage, they don't attempt to enter the formal financing process. Additionally, minorities and women tend to have lower credit scores than do white males, which make them less likely to qualify for loans.
Home-based businesses tend to have less financial capital and, possibly, less collateral. Those who want to continue to pursue their entrepreneurship dreams are more likely to seek funds from family and friends or to self-finance their enterprises as best they can. In doing so, however, they tend to raise less capital to fund their businesses. In general, men tend to start their businesses with twice as much capital than do women.
Being naturally risk averse, banks curtail lending when confronting market uncertainties. They also view businesses that are incorporated as having less risk, which makes them more likely to be approved for loans, but many minority and women-owned startups aren't incorporated.
Moreover, as studies show, banks tend to turn down minority and female loan applicants more often or require them to pay loans at a higher interest. This is the case even when controlling for other factors such as credit worthiness, etc. These factors might contribute to the fear of being denied loans which is manifested in fewer women business owners seeking credit.
Factors that can contribute to gaining access to capital include:
• Knowledge of the loan application process. Women, more than men, fail to apply for loans due to fear of denial. This can be overcome by gaining a better understanding of the loan process and how to reapply if an application is denied. Banks can help by educating small business owners who are interested in the loan application process.
• There is strength in numbers. Startups comprised of a team or group of people are viewed more favorably by investors than are single owners.
• A solid credit score helps. Lending institutions associate high credit scores with less risk. Those who maintain a high credit score are more likely to experience success in the loan application process.
• Having previous startup experience, home ownership, having a number of employees, and/ or being incorporated are all considered benefits when it comes to getting access to capital.
• Employees count. Businesses that have at least five employees are considered as having high-growth potential and, thus, can be viewed more favorably by lending institutions. They also tend to be owned by a team of people.
• Education is important. Developing a pipeline of qualified talent is important for success in underrepresented groups. Minorities and women who have degrees in the STEM fields (science, technology, engineering, and math) and who enter the business world are more favorably viewed by lending institutions.
Clearly, some of the challenges facing minorities and women are systemic and will require changes in public policy. More outreach is needed as is increasing the numbers of minorities and women influential in investment networks, developing business programs and practices designed to facilitate access to capital for underrepresented groups, and overcoming stereotypical mindsets that remain prevalent in lending institutions.
Banks and other lending institutions can benefit by viewing the small business aspirations of minorities and women as opportunities to make inroads to underrepresented communities that have the potential to create wealth and to grow the nation's economy.