Earlier this year, news stories spread about Witchsy, a successful online startup that sells whimsical accessories, and its founding team: Penelope Gazin, Kate Dwyer, and “Keith,” the male cofounder they made up to be taken seriously. It’s no surprise the duo felt pressured to concoct Keith.
A new report (pdf) from the Federal Reserve Banks of Kansas and New York shows it’s astonishingly hard to create and fund a small business in the US if you’re a female entrepreneur. While small businesses where 51% or more of the business is run by women have bloomed in the US—today, one in five small-employer firms are led by women—their ability to stay afloat is pretty dire for some key reasons.
Women-owned firms dominate few industries compared to those run by men: healthcare and education, retail, and hospitality. Healthcare has trouble attracting funding because venture capitalists who invest in biotech often have to wait a decade (paywall) to see if its approved for use, while VCs in tech usually get back their money within two to three years. Few investors are also familiar with the healthcare industry, making it an unpopular investment. Education, especially public education, is also grossly underfunded (paywall).
Forty-three percent of female-run firms applied for credit in 2015, about the same share of male-owned firms. But they were more likely to experience a funding gap—either receive no funding at all, or only a partial amount. What’s more, close to half of female owners approached a large bank for funding (49%), but were more likely to be approved at small banks (67%) than large ones (50%). Even among low credit-risk firms, only 48% of women-owned firms received full financing in 2015—while close to 60% of low-risk, male-owned firms did.
The gap in funding between female and male-run small businesses is likely even higher. Women were more often discouraged from applying for credit because they worried they would be rejected, they told the authors of the report. Of both men and women owners who worried about this, women were more likely to have a low credit score.
If you’re lucky enough to receive a loan, the best way to secure it is with a slice of your business, so that if it fails or you can’t make a payment, your personal financial security isn’t in jeopardy. The very worst thing you can do is take on unsecured debt, where your lender has a general claim to any and all of your assets.
Turns out, female-owned business are more likely to take on that much riskier form of debt, and less likely to use personal guarantees or business assets as collateral. This persists for even high-revenue firms: women-owned firms with $1 million or more in annual revenue were still less likely to pledge business assets as collateral than similarly wealthy firms run by men.
This couples with the fact that women-owned firms are more likely to ask for less—close to half of male-owned firms have more than $100,000 in debt, while two-thirds of female-run firms were loaned less.
While female-run firms face similar financial challenges as male-owned firms—lack of credit, steep operating costs, or failure to make debt repayments—the majority of women-owned firms plug such gaps with their own money. This not only puts their own financial stability at risk, but rigs the game in favor of wealthier female owners.
Male-owned firms were more likely to make at least $1 million in revenue in 2015, and to run a company with 50 to 500 employees. Close to a third of women-owned firms, meanwhile, reported $100,000 or less in revenue, and posted a loss.
The dark irony is that female-run firms are actually more optimistic about future revenue. Seventy percent of female-owned firms believe they’ll raise more revenue by the end of the 2017.