There are a ton of articles regarding the inequity between women's salaries in the business world and men's. What about when it comes to business loan financing? An increasing number of businesses every year are being started by women entrepreneurs. In fact, in some sectors, the number of women-owned businesses overtakes those owned by men. And yet, women are still fighting roadblock after roadblock in terms of getting business loan financing.
As such, women are becoming increasingly hesitant to apply for business loans. One study suggests that the percentage of women-owned businesses that seek business loan financing stands at right around 25%, versus those owned by men—35%. And the amounts for which they qualify tend to be less overall than what their male counterparts receive.
What is therefore happening, is that women entrepreneurs instead are turning toward personal loans to bolster their business. That said, is this the smart move? While certainly, women do encounter obstacles to commercial funding, should they opt instead to go for a personal loan? Below are a few of the pros and cons of this approach.
The Pros:
Approval is easier
Especially for those women whose companies are relatively new, this might be the only option. Some lenders won't even consider an application from a company that is less than two years old. With a personal loan, the lending institution is looking only at your credit history and income primarily. They are not concerned with the business's finances per se. Additionally, you're not having to supply a ton of documentation that you might otherwise have to when it comes to business loan financing programs.
For many, they get funds faster
With those who've approached a traditional bank for a business loan, the process can seem tedious. It can take weeks just to get the application through, never mind seeing the actual money materialize. In some cases, personal loans can be distributed much quicker, and this is why so many women do go this route. Particularly now, when money is needed sooner rather than later as many businesses attempt to just stay afloat, personal loans for business purposes are becoming more prevalent.
You don't necessarily need collateral
Here is a bit of a catch for many businesses—not necessarily just those owned by women. A bank won't lend you money unless you have the collateral to back it up. But especially for early-stage firms, the collateral just isn't there. Their application is thus dead in the water almost instantly. Personal loans on the other hand don't always have to be secured with collateral. This is good too because if you somehow do default, while it will be a blow to your credit, your assets cannot be taken.
The Cons:
Your credit is at stake
What many women business owners have found in taking out a personal loan to help their business along is that they risk their credit. So if the business fails for instance—as we have sadly seen happen numerous times throughout the crisis—your credit score is damaged, probably significantly. This then turns into a vicious cycle as a low score and negative history can make it very difficult for a company owner to get business loan financing in the future.
Also keep in mind, that with a personal loan you are raising your debt to income ratio. Again, this makes qualifying for any type of financing, even for a car loan for instance, more difficult.
There is more of a limit in terms of the loan amount
Business loans are often much higher than what you can take out with just a personal loan. For example, with an SBA backed loan in some cases, borrowers are allowed as much as 5 million. Depending on the terms of a personal loan, the cap could be around 100k, and this may not be enough to meet your needs.
Interest rates might be pretty high
While there are numerous lenders out there touting "super low" rates, this can come with a catch. Such rates are generally reserved for clients with very high credit scores. So if yours is less than ideal, you could be facing sky-high interest rates attached to any personal loan. Some could be as high as 35% or more—this ends up being a very expensive way to go. Just do the math on that…Let's say your loan was for 25k at 35% over five years; when all is said and done, you would end up paying over 50k for that loan. Needless to say, probably not worth it.
Before taking out a personal loan for your business, you need to weigh all options first. While there may be some disparity still in terms of business loan financing for women versus men, that is shifting. And in this challenging climate, many lenders are looking at a variety of factors when issuing business loans—not simply credit score or number of years in business.
First Union Lending has worked with numerous women-owned businesses. Our goal is to see them grow and succeed. This is why we custom tailors our lending products specifically for your company. No one size fits all approach with us. With short term loans, SBA loans, merchant cash advances, and lines of credit, among other resources, we have a solution for you. And even if your credit score is lower than you'd like it to be, odds are pretty good that we can still help. We also don't restrict how you can use your funds. Whether you are looking to expand, hire on more staff, launch a new product, or just weather the current storm, the money is there for you—and often it will hit your account within two business days. We look forward to serving you. Call today and let's get started on this journey together!