There are more than 11 million women-owned businesses in the U.S. and female entrepreneurs make up 38 percent of the business population. Those businesses generate $1.6 trillion in revenue annually and employ more than 9 million people.
When you look at the numbers, it’s clear that women entrepreneurs are a force to be reckoned with, however, they’re facing some unique challenges to get their business ventures off the ground. One of the most difficult aspects centers on finding the money they need to get started.
Women receive just 7 percent of venture capital funding, 16 percent of conventional loan funding and 17 percent of Small Business Administration loan funding, despite accounting for more than one-third of the overall small business market. For some female business owners, a personal loan may be the answer when other financing doors are closed.
One of the things that makes personal loans an attractive option for women entrepreneurs is the fact that it’s possible to get funding without having to put up any collateral. If, for example, you’re just starting out and you haven’t accumulated any business assets yet, that could be a barrier for getting a traditional small business loan. Before going this route, however, there are a few important things to keep in mind.
Good Credit Matters
Any time you apply for a personal loan, whether it’s through a bank or an online lender, your credit history is going to come under the microscope. Lenders are looking at your credit report and score to see how responsible you are when it comes to borrowing money. While that’s par for the course, women are automatically at a disadvantage where credit is concerned.
On average, women have credit scores that are nine points lower than men. That sounds like a relatively small gap, but it can make a significant difference in terms of whether you’re able to get approved for a personal loan. If you haven’t reviewed your credit recently, taking a look at your free credit report card can give you an idea of how likely you are to qualify.
Borrowing Limits May Be Lower While Interest Is Higher
One of the biggest differences between a personal loan and a small business loan is how much you can borrow. If you’re going through an online lender for a personal loan, for instance, the maximum loan amount may be capped at $100,000 or less. With a 7(a) loan from the Small Business Administration, you can borrow up to $5 million. When you need to borrow a substantial amount of capital, a personal loan may not be enough to cover the gap.
The other potential downside is that you might pay more in interest for a personal loan. Rates can go as high as 36 percent with some lenders, based on your creditworthiness. If you’ve got a lower credit score, taking out a personal loan could be a more expensive way to fund your business if you’re stuck with a higher APR.
Personal Loans Tend to Have Shorter Repayment Periods
One final consideration for women entrepreneurs is how much their monthly payment would be with a personal loan. Unlike a term loan, which can be stretched over seven to 10 years, personal loans typically need to be repaid within five years or less. If you’re borrowing a larger amount, that means a higher monthly payment.
For example, let’s say you take out a $100,000 loan with a five-year term. Because your credit score isn’t the best, the lender offers you a 15 percent interest rate, putting your monthly payments at $2,379. If your business has a healthy revenue stream, that may not be an issue but if not, a personal loan could create a serious cash crunch.
On average, women-owned businesses generate $143,000 in revenue annually. Among minority women, however, that number drops to $69,000. Taking on a personal loan to try and grow your business could actually hinder growth if the payments are sucking up a big part of your bottom line.
Shop Around for the Best Personal Loan Rate
With so many potential obstacles involved in securing a personal loan, women entrepreneurs have to be diligent about finding the best deal possible. Taking the time to compare the rates and terms personal loan lenders are offering can help to keep the cost as low as possible.
Working on improving your personal credit is another smart move. If your score could stand a boost, simple things like paying down your existing debt balances, making monthly payments on time and limiting your applications for new credit can all have a positive impact on your credit rating.