REDESIGNING LENDING:

Improving Access to Capital for Women of Color Entrepreneurs

“My business would not be thriving without a CDFI loan”
-WOC Business Owner, Early Education

Introduction

Women of Color (WOC) are the fastest growing group of business owners, yet WOC-owned businesses receive fewer loans and experience limited access to institutional capital. While the number of total businesses increased in the U.S. by 9% from 2014 to 2019, women-owned businesses grew 21%, and businesses owned by women of color grew at a rate of 43% (1).

Despite this growth, average funding amounts for women-owned businesses ($48,341) were 31% less than male-owned businesses ($70,239) (2). Additionally, 40% of minority–owned firms received the full amount sought compared to 68% of non-minority–owned firms (3). These data highlight the need for additional studies focused on the intersectionality of race and gender.

The Wisdom Fund and CNote together with Impact Experience, spearheaded this research initiative to identify institutional and personal barriers in order to create solutions leading to greater access to capital for Women of Color business owners. By identifying policies that may reduce borrowing among Women of Color business owners, lending institutions can create more equitable business practices. The goal of this research initiative is to support Community Development Financial Institutions (CDFIs), capital providers, and intermediaries to co-create solutions with WOC business owners.

Impact Experience together with CDFIs within the Wisdom Fund collaborated to gather data and insights from Women of Color business owners on the challenges they face when accessing capital for their businesses. Human Centered Design (HCD) principles were employed to facilitate deeper engagement, empathy, and understanding between CDFIs and Women of Color borrowers leading to policies that improve access to capital and reduce biases in the deployment of capital. One of the key goals of this research engagement is to increase accessibility to capital and the broader network of monetary and non-monetary resources for Women of Color business owners.

RESEARCH METHODS

Business owners from urban, suburban, and rural cities across the U.S. who identify as Women of Color were invited to participate in this research initiative. 66.1% of respondents identified as Black or African-American, 28.6% identified as Latina, and 5.4% identified as Asian or Pacific Islander. A diverse set of industries were represented to include health and wellness, education, construction, beauty, business consulting, and more. Company size ranged from 0-250 employees.

The research study conducted by Impact Experience consisted of three phases including an initial demographic survey, personal interviews, and a 2-day Impact Experience convening:

Initial demographic survey (60 participants)
The initial survey gathered history around the businesses including location, industry, and size. While the majority of participants were sole owners of their businesses employing a median of 5.5 employees, the businesses sampled reported having up to 5 owners and up to 250 employees. The mean number of loan applications submitted per business was 3, with a max of 20 applications submitted.

Business owners represented both services and product based businesses within a myriad of industries including construction, caregiver facilities, business consulting, retail, and beauty. The research study also captured businesses at different stages from pre-revenue through $5M in gross income.

Personal interviews with business owners, capital providers, and intermediaries (45+ hours)
Pre-Impact Experience interviews with Women of Color business owners were held via zoom to dive deeper into personal and business financial narratives, experiences with lending institutions, and opportunities for improvement within the lending industry. Impact Experience also interviewed banks, credit unions, CDFIs, venture fund managers, academic institutions, and nonprofits to gather common challenges and industry best practices related to diversity, equity and inclusion (DEI).

Post- Impact Experience interviews were scheduled with lenders and intermediaries to determine best practices for implementation of the recommendations found in this study. The study highlighted the specific financial instruments and resources that Women of Color Business owners found most useful in growing and sustaining their businesses. To better characterize and overcome challenges related to designing new financial products, Impact Experience held a series of post-convening interviews to determine how stakeholders from the philanthropic and commercial sectors might work together to provide new financial tools.

RESEARCH INSIGHTS

Experiences of Bias lead to Debt Aversion

The data collected identify widespread, systemic policies leading to funding limitations for WOC business owners. 44% of respondents indicated a negative perception towards business debt. An overwhelming majority of women experienced bias during the lending process (71.5%), to include biases in lending policies as well as in interactions with individual loan officers and other banking relationships. 87.5% of respondents felt that race and gender contributed to being unfairly treated during the lending process.

“I participated in an Emerging leaders program with people who were all white emerging leaders...and Women in Ventures who were all white women. I sat with them for 9 months with the SBA emerging leaders and recently for 7 months with the Scale Up program and all I heard was them talking about access to capital. They had no problem getting it. Maybe our numbers are different. Clearly there are some things that are different And they were telling me to go to the banks that had previously denied me. I didn't even tell them my story because they were so confident that those banks would help me. Some of the issues I didn't even bring up because I felt like they wouldn't have been heard based on the way people were talking about having access to capital.

-WOC Business Owner, Health Industry

As stated above, women of color borrowers are often not only denied capital but silenced by the system, even in interventions like the SBA’s program. They are silenced not only by the denial but also peer groups that do not address barriers specific to their needs. This is part of the reason why the CNote Impact Experience was so important. WOC formed a peer group that could serve as inspiration, contextual recommendations of tactical actions and confidence.

Funding Types Matter

The majority of WOC business owners sought specific amounts of working capital to manage cash flow while awaiting payment from clients or during the COVID-19 pandemic. Loan amounts, however, were often based on the institution's lending limits or requirements for collateral rather than business needs. Low lending limits and high requirements for collateral led to underfunding of businesses.

Participants who required lending for working capital reported difficulty finding lenders offering lines of credit. Due to negative perceptions of debt, lines of credit were favored over long term lending so that business owners could borrow only what was required and remain debt-free once invoices were paid. Participants indicated that lines of credit would also reduce the significant administrative burden associated with initiating a new loan application.

“Not everyone has a property they can put a lien on. My experience with lending is that the lender expects you to work miracles with $5,000. That little money will not change lives. Following George Floyd's death, small amounts of money became more available for women of color. White males seem to get much bigger amounts and for longer times. We get 2-3 years and that is what probably cripples most people. We need patient money. We need Amazon money. The kind of money that allows you to build a multi-million dollar business. The kind of money that understands we may not be profitable for the first few years. We don't tend to get the "let me build a business" money. We get the "we feel bad for y’all, let me give you a little bit" money.”
-WOC Business Owner, Retail Cosmetics

Reimagining The User Experience in Lending

The lending process was perceived as time consuming and frustrating for business owners often resulting in a rejection letter with little explanation. The administrative burden and feeling that rejection was imminent led WOC business owners to stop applying for loans.

Women of Color business owners often applied for loans at large banks carrying their personal banking accounts and mortgages. Unfortunately, the longstanding transactional relationships did not confer the necessary business banking relationships. Numerous stories were shared describing loan officers who would not return phone calls, unrealistic deadlines for documents, lack of clarity around terms, and limited resources for assistance.

In contrast, WOC business owners shared heartfelt gratitude for CDFIs. loans from Wisdom Fund-affiliated lenders trended towards an increase in the total number of loan applications submitted and higher loan approval rates compared to business owners who did not borrow from Wisdom Fund-related lenders. The higher touch services provided by CDFIs cultivated personal relationships that conferred a sense of security. WOC felt comfortable sharing financial vulnerabilities and intimate details about their businesses. Increased communication and transparency during the application process could improve the lending experience across the industry.

Research Insights

*“I was denied for loans from several community banks and credit unions. I had credit cards with limits higher than the loans they were offering. When I asked them to tell me what I can do to get larger amounts of money. They said that wasn't their role.

I went to another bank and asked what I needed to do. They told me to open accounts so I opened an account and included a substantial deposit and just left it there. I got to sit down with the loan officer and the same thing happened. Denied with no explanation.

The bank manager said, “We are not able to give you clarity on what you need to do.”*
-WOC Business Owner, Healthcare Industry

Lack of transparency in the decision process prevents WOC business owners from preparing the best possible loan application while simultaneously perpetuating bias and discouraging applicants.

The way in which financial institutions determine creditworthiness must also be reassessed. Traditional FICO scores do not take into account daily habits such as paying rent and utilities. FICO scores also penalize entrepreneurs who bootstrap their businesses and therefore have no business credit history. The standard framework for assessing creditworthiness builds on historical disparities related to household wealth, household income, and access to early stage capital from friends and family.

The lending industry is built upon a paradox in which personal credit history and banking relationships do not assist applicants in obtaining business credit, however, personal assets are required as collateral to secure business loans. Many Women of Color business owners self-fund their businesses. Business owners are penalized for having little to no debt rather than rewarded for cash flow management and business solvency. Personal delinquencies may serve as a better indicator for creditworthiness than business credit history.
“Because I had paid for everything in cash, I didn’t have any credit. This was considered “bad credit” and I couldn’t get a loan”
-WOC Business Owner, Media Production

WOC business owners who bootstrap their businesses are often penalized for their good financial habits and lack of business debt.

RESEARCH INSIGHTS

A 2018 study commissioned by the credit monitoring service Experian found that 78% of lenders believe alternative credit data improves financial inclusion (4). The study found that 25% of Americans have fewer than 5 items in their credit history and are designated as “thin file” consumers. This lack of data may result in inaccurate determinations of creditworthiness. Furthermore, a 2015 study published by FICO revealed that 50 million Americans did not have a FICO score (5). The study segmented the data based on the underlying credit challenges providing opportunities for more nuanced strategies around credit assessment. Alternative models to assess credit worthiness would expand the market of potential consumers, increase the accuracy of credit determinations, and decrease the risk of default for lenders.

Running a successful, sustainable business requires more than capital. Business owners shared the types of services they found most useful in building and growing their businesses. Leadership development ranked highly as a useful resource for business owners. Business owners also indicated that financial management and accounting services were helpful in growing their businesses. These services allowed business owners to create the types of projections that banks are looking for, help business owners think strategically about capital management and cash flow, and confer confidence around the health of the business.

RESILIENCE AS A COMPETITIVE ADVANTAGE

Overall, resiliency was a common theme throughout the interviews and the Impact Experience convening. Resiliency is one of the primary reasons that Women of Color business owners are the fastest growing group of entrepreneurs despite being undercapitalized and underestimated. 93% of participants reported overcoming one or more significant business setbacks. This resiliency is driven by passion for their businesses as well as a sense of purpose. Many women cited a family event as the reason they became entrepreneurs including partner’s job loss, eldercare, or childcare. Women of Color businesses contributed to the resilience of their homes, their families, and their communities. Over 50% of participants indicated involvement in their communities from caregiving to volunteerism in schools and serving on boards. Therefore, investment into Women of Color businesses has the potential to extend far beyond the specific individuals and has a multiplier effect on the community and infrastructure of combating systemic racism.

RECOMMENDATIONS

1. Capital

• More options for lines of credit
• Higher loan limits
• Lower interest rates
• Access to credit building instruments
• Reduced collateral requirements
• Revenue sharing models

Because the need for assistance with cash flow management emerged as a common theme amongst the Women of Color business owners, creating opportunities for lines of credit would allow business owners with contracts and accounts receivable to manage payroll and stay current on business expenses. Many business owners work with state or federal governments that have a net 30 day payment schedule prior to first payment. Business owners absorb the majority of the costs of operations prior to payment, placing a strain on employee retention. Loan limits based on accounts receivable, contract sizes, or business needs would allow for greater flexibility and provide greater support.

Intermediaries, in collaboration with philanthropic organizations, have an opportunity to create credit building instruments which allow WOC business owners to take out loans at low rates and repay them over time as a way to build business credit. Philanthropic organizations would provide the reserves necessary to decrease risk for intermediaries and reduce interest rates or collateral requirements for borrowers.

2. Rethinking how we assess creditworthiness

There are additional elements that could be used to assess credit including:

• Rent payment
• Utilities
• Number of contracts
  Creditworthiness could be assessed based upon routine patterns including rent and utility payments, lack of delinquencies, time in business, and credit payment performance etc. Additionally, as noted above, lending needs often stem from payment delays or unexpected financial emergencies. WOC entrepreneurs often do not have insurance coverage to protect from these family, health catastrophes and/or other emergencies that disparity data shows they experience at higher rates than other communities.

3. Time and efficiency

The following recommendations could be implemented to reduce the time and administrative burden associated with loan applications the following :

• Improve consistency amongst loan applications
• Shorten the length of the application
• Promote greater transparency of documents
• Consider common applications for loans

For WOC business owners who have limited time and resources, the loan application should be as transparent and easily accessible as possible. Standardized applications and shared portals across multiple CDFIs and intermediaries would significantly reduce time spent completing applications. This would have the added benefit of increasing the applicant pool for lending institutions.

4. Additional Resources

• Financial coaching
• Accounting Resources
• Cash Flow management etc.

While lines of credit would assist the availability of working capital, financial coaches and accounting resources also assist WOC business owners with cash flow management, financial models, and future projects. Support resources could reduce the capital required for working capital allowing business owners to focus on growth and expansion efforts. Furthermore, cohort-based programming allows for peer-to-peer networking across industries and stages of business. By sharing relationships and resources that are least likely to discourage WOC business owners from seeking loans, WOC business owners have the opportunity to expand their networks of peers, mentors, and sponsors who will help to grow and scale their businesses.

As Women of Color continue to start and grow new businesses, capital providers and intermediaries who can support their economic growth and development will also benefit from this opportunity to align themselves with future business leaders. By reimagining the lending process through an equity lens, lenders can make decisions that yield economic returns and have a significant social impact. Investing in women of color run businesses is not only a moral imperative, but also a competitive advantage.