Historically, female entrepreneurs have had a harder time accessing capital and financing options for their businesses than their male counterparts. 

However, they carry a lower credit risk than men, according to a recent study by ICA and CNote. ICA, a Bay Area-based company, provides mentoring and investments for businesses to close the racial and gender wealth gap. In addition to organizations like ICA, Community Development Financial Institutions (CDFI) can help with their financial needs.

“Women entrepreneurs, particularly women of color, face many challenges trying to raise capital for their businesses,” wrote Paula Ochiel, data analyst and impact associate at ICA, in the report.  

“One of the barriers to raising capital that women experience is being perceived as riskier investees,” she explained. “Women tend to start smaller businesses in industry sectors characterized by smaller firms with lower sales and require less start-up and operating capital.”

The study focused on analyzing whether women were riskier borrowers. ICA and CNote used historical lending data from six CDFIs to evaluate whether and how the borrowers met the terms of their loans. It specifically focused on three factors: the probability of default, the likelihood of delinquency, and expected losses.

The results showed that women had lower credit risk than men overall. The probability of defaulting and delinquency was 2% to 4.5% lower for women vs. men. Also, women of color were not riskier borrowers than other groups.

The study also highlighted the discrepancies in women’s access to financing. Women received lower loan amounts yet paid higher interest rates than men. Men received an average of $110,000, while women received only $86,000. Meanwhile, women paid a whole 1% more annual interest rates on their loans than men.

So, where can women business owners (and other disadvantaged communities) turn when they need a loan for their business?

CDFI’s are an option. They help low-income communities get access to funding and other financial services. They can assist families with getting a loan for their first home or starting a business. They can also invest in local health centers, schools, and community centers via private or public funding. 

There are over 1,000 CDFI’s in the U.S., composed of credit unions, banks, loan funds, microloan funds, and venture capital firms.

Together, they form their sector within the financial services industry. They are linked together via the CDFI Fund, established in 1994 to provide federal funding and assistance to CDFIs for their community development programs.

Among the incentives, the CDFI Fund provides grants to CDFIs to help with the disproportionate economic impact of the Covid-19 pandemic in disadvantaged communities. It also invests in building out the capacity of CDFIs to help revitalize neighborhoods. There are also federal tax credits and access to alternatives for high-cost small-dollar loans.

For example, the LiftFund, a CDFI in San Antonio, Texas, received an award from the CDFI Program. It provided financing to entrepreneurs in underserved and underbanked communities in Corpus Christi, Texas. Those included minority, veteran, and women-run businesses that couldn’t receive loans via traditional means.

Jennifer Reid is an entrepreneur that opened a used-clothing store thanks to financing provided by LiftFund. She was able to use the funds to remodel her business and hire additional staff. She also received a second loan from LiftFund and expanded her business further by opening a Threads Kids store.

In 2021, amid the Covid-19 pandemic, Homestead Community Development Corporation, a Certified Native CDFI, helped Hawaiian families cope with the challenges of social distancing. 

Their multi-generational family units were able to obtain a loan to construct separate small dwelling structures (ohanas) to lodge vulnerable family members, thereby protecting them from the spread of the virus.

“Because they are placed in relative proximity to a main house and provide a place for the most vulnerable to socially distance or quarantine while still receiving family support, ohana units have taken on added importance and functionality during the pandemic,” stated an impact story of the CDFI Fund. “Over a nine-month period, from 2020 into 2021, HCDC provided over $102,000 in financing to construct roughly 20 ohana units.”