Why is business funding for women still an issue?
August 16, 2021
The past 10 years have seen a boom in business startups. Much of the growth has occurred within the last five years with female entrepreneurs at the forefront of this movement. Fundera reports that today there are 114% more female-led businesses than 20 years ago. Sadly, obtaining capital still remains harder for female founders than their male counterparts.
According to a report by Harvard Business Review, women-led startups received only 2.3% of V.C. fundingfootnote 1 in 2020. With almost 12M female-owned firms worldwide, it may come as a shock that a mere 25% of women entrepreneurs seek funding for their businesses.
Why does business funding remain a problem for women today?
Most of us have a hidden bias we fail to acknowledge. You may have heard that we're more likely to like and trust those similar to us. According to Forbes, 80% of venture capitalists (VCs) are malefootnote 2. Although not scientifically proven, it’s highly likely that gender bias plays a role in men funding other men, overlooking the female entrepreneurs who are also seeking business funding.
Alexandra Shadrow, co-founder and CEO of Relovv notes:
“The biases are palpable. Women need way more proof of concept and traction than their male counterparts in order to convince VCs to invest.”
There are a wide variety of alternative lending models available on the market, each with different pros and cons. Let’s take a look at some of these models so you can see which might best fit your business and risk tolerance level.
Peer-to-peer (P2P) lending
P2P lending, social sharing, and crowdlending are all ways of accessing funds from private investors rather than your typical suit-and-tie bank. Not to be confused with VC funders or angel investors (which we touch on later), businesses that use P2P models tend to take small amounts of capital from multiple peers, rather than work with one large sum from a single funder.
- Access funds, no matter your credit score.
- Bypass traditional banks.
- Avoid legislation and paperwork.
- To pay out profits to investors.
- Less cash to reinvest and scale.
- A raised risk of liability if you default on payments.
- An increased amount of record-keeping.
Crowdfunding and personal connections
You've probably heard of Kickstarter, GoFundMe, and Patreon—easy funding platforms that connect potential funders to different businesses and initiatives. These funds can come from people you know personally, as well as anonymous donors on the internet who believe in your cause.
- Get your funds through an easy-to-use platform.
- Keep any cash you raise without having to repay.
- Don’t have to worry about your credit score.
- Cannot alter your crowdfunding campaigns once launched.
- Get your earned profits taxed by the government as well as the crowdfunding platform.
- Open yourself to scams and fraud, which occur regularly in crowdfunding.
- Have to put yourself out there and ask for money.
One of the more traditional means of receiving funds is borrowing from a financial institution like a bank and repaying your loan with added interest. Bank loans can be either secured or unsecured. Secured loans require collateral (an asset, like your home) in the event that you don’t pay back your loan. With an unsecured loan, you don’t put up an asset if you default on payments. Just brace yourself for the sticker shock that comes with loan interest rates.
- Make predictable monthly repayments.
- Build a relationship and credit with your bank.
- Pay for whatever you’d like with the funds received.
- Impacts credit score if not repaid.
- Comes with a lengthy and drawn-out process full of paperwork and long wait times.
- Requires you prove business viability. For a new business owner, a pitch can be intimidating.
- Requires assets, collateral, or sky-high interest fees.
Venture capital (VC) or angel investors
VC firms are private organizations that give money to startups, small businesses, or entrepreneurs in exchange for equity in the startup, small business, or entrepreneur’s future ventures. It’s important to note that if you hand over a majority stake in your business to a VC firm, you lose control of your business.
Angel investors are high net-worth individuals, often entrepreneurs like yourself. They offer financial assistance and resources in exchange for equity but don't necessarily have to sit on your board of directors.
There are similarities to both, for instance, they look for competitive products with wide-ranging market potential. If you were to invest in someone else’s business, wouldn’t you want to make sure it’s highly profitable and scalable so you make more money back?
If you’re planning on taking the investor route, it’s imperative you have a convincing business pitch. While this may be a breeze for some, it can be especially difficult for founders who lack confidence or experience pitching.
- Investors take on any losses themselves.
- Paying back the loan isn’t required.
- Access to working capital could skyrocket your success.
- Network and meet with other high-level business people.
- Forfeit some control over your company.
- Need to pay out profits to investors.
- Have limits on the amount of cash you can reinvest in your business.
- Must pitch successfully. If you can't argue for your products and competitiveness, receiving funding will be an uphill battle.
Business line of credit or business credit cards
Both are refillable forms of capital for things like ads, inventory, and R&D, that allow you to scale and grow. A line of credit is a fixed amount of money that can be accessed as needed. Lines of credit tend to be used for short periods of time on large investments, whereas a business credit card has a fixed limit which is usually paid off and then used for ongoing purchases.
- Get a quick cash injection.
- Get credit more easily (as opposed to pitching investors or begging the bank).
- Can apply capital funds where you need it most in your business.
- Get to scale and grow your business quickly.
- Need to beware of hidden or high fees and charges.
- May have difficulty applying and getting funding, depending on your credit score.
- Are putting your credit score at risk, if repayment isn’t made.
One of the more common methods of building a new business is bootstrapping. Bootstrapping is when you pay for everything yourself with personal savings. It is a popular option for businesses that want to save money, so they can reinvest on cash saved for future purchases. A business that pursues bootstrapping will likely look for other means of cost savings like using free versions of software and delaying hiring talent.
- Are your own boss, with no one telling you what to do or how to make financial decisions.
- Own your business entirely.
- Can spend your money on whatever you'd like.
- Takes a lot of time, money, and energy.
- Can be easy to run out of funds in a short timeframe.
- Can easily lead to debt.
- Doesn’t come with someone to help guide or support your professional and financial decisions.
Inventory financing is refillable capital for your inventory spend so that you can keep your customers' orders fulfilled. It’s seen as an asset-based loan that can also be used for machinery, equipment, or paying invoices to suppliers.
- Is capital designed to boost your inventory levels.
- Allows you to expand your product offerings.
- Ensures you don’t run out of stock and miss out on sales.
- Keeps your customers satisfied and coming back for more.
- Not always necessary for all business types, like drop-shippers.
Grants for women-owned businesses
If venture capital is off the table, women can qualify for minority grants, although it depends on your current cash flow situation.
Minority businesses can be defined as any business primarily owned by a woman or member of a minority group like people of colour or the LGBTQ+ community. Women and other minority groups can qualify for loans through online lenders, banks, and non-traditional funding sources.
Government and nonprofit organizations can offer free assistance to female entrepreneurs in finding loans, mentorship, and grant opportunities. The Small Business Administration (SBA), in particular, offers microloans to both minorities and female-run businesses in low-income and rural communities.
- Amounts can range from microloans to large amounts of capital funding.
- Grants can help build awareness around your business.
- Generally speaking, they do not need to be repaid.
- Researching and applying for grants is a time-consuming process.
- You might need to hire someone familiar with writing grant requests.
- Competition can be fierce, while success rates are lowfootnote 3.
Clearco: A data-driven approach to funding female-led businesses
Today traditional business financing options remain an issue for female founders. Gender bias, confidence pitching, and being taken seriously, stand in the way of women receiving adequate funding opportunities to create what may be world-changing businesses.
For founders struggling to get capital, it's worth looking into alternative financing models as well as possibly leveraging more than one source of capital.
Clearco provides data-centered capital by analyzing your business performance metrics like your sales data and marketing spend. This model has allowed us to fund 8X more female-led businesses than traditional lending models.
Take two minutes to see if you qualify for a cash advance to fund explosive business growth. Connect your accounts to see if you qualify.
Thinking about taking equity-free funding for your business?
See how much you qualify for with no commitment.GET FUNDED TODAY
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