Women Are Turning to Crowdfunding Because They’re Shut Out of Traditional Lending

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The gender pay gap is real, pervasive, and expansive, and it occurs across almost all industries and occupations. In fact, it isn’t just about traditional employment—even small business owners seeking financing face similar issues.  

Welcome to the funding gap.

According to data collected and analyzed by Fundera, female entrepreneurs receive fewer loans, of smaller amounts, and for higher interest rates than men. They get approved for shorter loans—which tend to be more expensive—more often than men as well.  

It’s yet another form of the pay gap, existing in part because of the lack of diversity and inherent biases of the people and institutions that extend loans, or agree to invest in new ventures.

Instead, more women have had to turn to crowdfunding in order to obtain the funds they need to seed or grow their businesses.

Crowdfunding levels the playing field, because while investors and lenders represent a narrow slice of the population (mainly white men), crowdfunding backers are made up of a more representative cross-section of society—including, of course, women.

What is the funding gap?

Before we can understand why women fare better in crowdfunding rounds, let’s look at the state of funding and gender. Fundera broke down the individual factors that culminate in women receiving less traditional funding, and at worse rates, than men. It’ll look familiar if you’ve been paying attention to the biases and barriers women face in the workplace:

  • Women ask for less moneyabout $35,000 less than men, on average.
  • Women-owned businesses receive more short-term loanswhich are typically the smallest loans, with the largest interest rates.  
  • Women pay higher interest rateson average, 13% higher interest rates for the same product that men receive.
  • Women have lower credit scoresthis is likely due to the wage gap and affects the kind of loans women are able to access.
  • Women have worse credit utilization ratesthis factor, the result of men having higher credit limits due to larger incomes, also affects the loan options available.   
  • Women tend to own younger businesseswhich, while it reflects recent excitement about female entrepreneurship, represents the barriers that stand in their way of their success.

When applying for funding using traditional lenders, women-owned businesses account for just 4.4% of all dollars lent to small businesses annually. Even from the SBA, which claims to prioritize lending to women- and minority-owned businesses, women receive 2.5 times less money than men do, according to the Fundera report.

The biases at work

The lending and finance world is increasingly driven by algorithms, which might look at a woman business owner’s application, see her lower credit utilization rate (as compared to a man who also applied recently), and deny approval without taking larger societal factors into account.

But even where humans are involved, the results aren’t pretty: Just 8% of the partners of the top 100 venture firms worldwide are women, and SBA research shows that the gender and racial makeup of investment boards impact the decisions those boards make.

A Babson College study also showed that women who “pitched like a man” were more successful than those who exhibited feminine behaviors, with the co-author quoted as saying, “There is such a dominant conception in the world of finance that the successful entrepreneur is a young white guy.” Investors tend to prefer pitches from male entrepreneurs over female entrepreneurs, even when the pitches are exactly the same.

If there was data showing that women, once they received money, crashed and burned more often than male business owners, this might make sense. However, according to the Kauffman Foundation, women are more capital-efficient than men, and Babson College’s Global Entrepreneurship Monitor says they run high-tech startups having lower failure rates than men. That means investing with women is a better bet.

Women business owners are suffering, whether the root of their denials comes from algorithms—which are designed by those not taking the full spectrum into account—or people, perhaps because there is so little female representation on the boards that disperse funds.

RELATED: Is Your Startup Ready for Equity Crowdfunding? 7 Questions to Ask

Why crowdfunding works better

So where can women turn to obtain the business funding they need?

A study conducted by consultancy firm PwC, together with The Crowdfunding Center, found that women are more successful than men at reaching their goals on fundraising sites like Kickstarter.

On crowdfunding platforms, women entrepreneurs are speaking directly to the market—including, broadly speaking, more women than they do when appealing for venture funding or loans. As a result, 22% of campaigns led by women reach their target, compared to 17% of those led by men.

While there may be, according to the study, an element of homophily—women tending to support other women due to being similar to them in socially significant ways—at the end of the day, crowdfunding is simply more diverse than traditional lenders and investment boards. (Despite recent gains, the VC industry is overwhelmingly white and male.)

According to the PwC study, female crowdfunders tend to use “more emotional and inclusive language” in their pitches on crowdfunding sites than men do. This language, correlated with fundraising success, is preferred by both male and female backers. Meanwhile, men tend to use more staid “business” language in their pitches, which is negatively correlated with raising money, regardless of what they’re pitching.

Essentially, crowdfunding lets women pitch to a more welcoming population, and they are good at it. As a woman business owner, why would you waste your time applying for a traditional loan you’re less likely to get, when you can turn to crowdfunding, which comes with fewer biases to avoid and hoops to jump through?

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Where do we go from here?

It may be easy to just say that women should turn away from loans and credit altogether and flock to crowdfunding for their capital needs. But while crowdfunding has its own perks, the amounts of money raised typically pale in comparison to traditional loans and investments.

Diversity (or a lack thereof) and consciousness of our biases (or a lack thereof) are two of the largest barriers to women receiving funding today. We therefore need to make lenders and investors more diverse and more aware of how their biases are failing women entrepreneurs, and our economy and society as a whole.

How do we do that?

One place to start is ensuring the Consumer Financial Protection Bureau moves ahead with asking small-business lenders for data on their borrowers. Parts of the Dodd-Frank Act relating to consumer loans have already been sidelined or repealed; the same should not happen to regulations that can track for patterns of discrimination by lenders.

Another tactic is to encourage diversity and transparency of investment boards and programs, such as Small Business Investment Companies (SBICs) or private lenders. Small-business owners and associations representing the interests of women should provide scorecards for the lenders that approve—or deny—loan applications by women business owners, incentivizing them to do better if they want the business of female entrepreneurs.  

All this being said, the types of moves needed to change traditional funding will take years. In the meantime, it’s important to consider the value crowdfunding platforms can have on business growth. Women can ask for substantially more money for their projects than they do right now, increasing their access to capital, and further stimulating their business’s growth. Lenders and investors who see this success will hopefully be more likely to reassess their practices in the future.

Looking ahead

Most of this information likely isn’t news to women business owners. They know that the deck is often stacked against them when it comes to a small business loans, much in the same way it’s against them getting a raise or a promotion ahead of their male colleagues.

Now that there is more data than ever coming to light to illustrate the issues women business owners face, perhaps there will be more movement to change the way we fund women-owned ventures.

RELATED: 10 Reasons Why Women Kick Butt in Business

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