Small Business Loans Women Should Consider
Before we talk about small business loans women should consider, let’s address the elephant in the room. Men tend to have an advantage when it comes to business financing. Their approval rate is higher, they walk away with more funds, and are more likely to receive venture capital investments. On top of all that, they tend to receive better terms. It can make competing more difficult for women. Today, we look at the lending opportunities available that can help women even the playing field.
Obtaining a traditional loan from the bank can sometimes be difficult. They often have stringent requirements and sometimes with good reasons. Business loans are riskier than other types of loans, such as a mortgage or car note. To decrease the risks involved with business loans, it may seem like you’re forced to jump through a million hoops. Being that women often have lower credit scores and smaller incomes, it can make lending less opportunist to banks than lending to our male counterparts.
The SBA helps ease the banks’ fears a bit by guaranteeing a portion of a business loan. What do I mean by guarantee? This means that in case of a default (you don’t repay your loan), the SBA will come to the rescue and repay a portion of the loan back for you. From the bank’s perspective, that can be a pretty sweet deal.
Keep in mind, you’ll still have to qualify and meet the bank’s lending requirement. However, they may be more willing to lend to the right borrower when paired with an SBA Loan. In terms of small business loans, women might consider, I’m a huge advocate of supplementing an SBA loan.
Lines of Credit
Lines of credit (LOC) can be another viable option for obtaining the money you need for your business. Before I go into a LOC, let’s talk about a traditional loan to give you a comparison. Traditional business loans are term loans. What that means is you receive a bulk amount of funds and repay the loan over a fixed time. Typically the payments are all equal amounts. Sometimes you might repay equal payments for a set amount of time and then have a sizable balloon (final) payment at the end.
Lines of credit work differently. Rather than getting a lump sum of money, the lender will extend a certain amount of credit which you withdraw from as needed. It works kind of like a credit card, but generally with better terms. Lines of credit can be great options for working capital.
A word of caution. Lines of credit are short-term strategies. I mention working capital specifically because working capital is a short-term expense. It’s extremely important to use short-term debt to finance short-term expenses and assets ONLY. For example, you might use your LOC to buy inventory or supplies. In contrast, use long-term debt to finance long-term assets, like vehicles or buildings.
I’ll mention one final type of small business loan women might consider these today, and that’s peer-to-peer lending. Peer-to-Peer lending is fairly new. It’s only been around for a little over a decade in the United States. However, it offers wonderful opportunities to individuals, which previously had been denied in the traditional lending arena.
Rather than borrowing money from the bank, peer-to-peer lending allows individuals to borrow funds from the fellow community. They’re considered personal loans and unsecured. This means you don’t have to back your loan with assets, as you’d normally do with the bank.
In most cases, peer-to-peer lending is short-term (3 years or less). As such, you’ll want to use it for short-term assets, like office equipment or marketing. Also be wary of interest rates. Peer-to-peer lending can be competitive with bank lending. However, borrowers with poor credit can see interest rates running at 30% or higher. Can we say ouch?
One type of lending many women turn to when starting a business is credit cards. I didn’t mention this as small business loans women should consider for good reason. Credit cards tend to have high-interest rates and poorer terms than the methods mentioned above. Also, the use of credit cards can lower your credit rating, as you exceed 30% or more of the credit line. As credit score is one of the reasons women tend to fare worse when it comes to lending, you’ll want to protect it as much as possible.