By many measures, the U.S. economy is doing well. The stock markets have continuously hit record highs this year, unemployment has been at or near historic lows, fuel prices are low, and small business owners generally are optimistic.
Credit markets are responding also. Banks are more willing to lend because of recent interest rate hikes and signals that they may climb again. Higher rates makes lending more profitable. Big banks are approving about a quarter of the loan requests they receive, and small banks, which make a lot of SBA loans backed by the government, approve about half of the applications made to them.
SBA loans have been incredibly helpful to women. In fact, on October 13, 2017, the agency announced its fiscal year 2017 lending numbers and reported increasing levels in small business lending through the popular 7(a) and 504 loan programs, as well as increases in business loans for women, veterans and emerging communities. Overall, the SBA approved over 68,000 loans totaling more than $30 billion in the 7(a) and 504 loan programs in FY17.
Women business owners have played a big role in the growth of the economy. In fact, according to the 2016 State of Women-Owned Businesses Report, women-owned companies grew at a rate five times the national average over the past decade. Further, a study by the Institute of Women’s Policy Research found that 29 percent of U.S. business owners are female, an increase of 26 percent in the past 20 years.
Biz2Credit recently analyzed 25,000 small businesses that applied for funding in the past year and found that women are closing the gender gap, but still lag behind their male counterparts in key financial categories that impact their ability to secure funding.
In 2016, average annual revenues of female-owned companies jumped 47 percent, to $210,000, in a year-to-year comparison. However, they still trail the average revenues ($363,414) of male-owned firms. Meanwhile, women-owned companies’ average annual earnings stood at $117,064, a 61 percent increase. However, male-owned companies averaged $195,574 in earnings. The $78,510 difference is substantial.
Thus, men-owned businesses had about a 25 percent better chance of securing funding than women-owned firms. The lower loan-approval rates for women entrepreneurs be attributed to a four-point drop in credit scores, to 595 (from 599 the year before), which was 17 points lower than the score of their male counterparts. The 595 figure is a bit below the traditional benchmark score of 600 that mainstream lenders (banks) look for.
How can women-owned businesses improve their credit scores and get better lending rates?
- Separate business and personal accounts
An important step to building a strong business credit history is to separate your business and personal accounts. Set up a company bank account and keep it separate from your personal assets. If and when you incorporate your business, having separate accounts helps keep the corporate veil intact.
- Incorporate your business
Establishing a formal business structure – LLC, C-Corp, or S-Corp – makes a solo entrepreneur’s company seem more serious. Once the company is established, set up bill accounts using the company’s formal name. Setting up accounts with vendors (utility companies, suppliers, etc.) will give lenders a better sense that the company is legitimate and will be able to pay its bills. Further, incorporating sets up a legal entity for which business creditors can pursue (instead of being able to go after your personal assets).
- Review your business credit reports
Banks and other lenders use business credit scores are predictors of the ability to repay small business loans. Credit rating agencies, such as Equifax and D&B, look at the following factors:
- business structure
- age of business
- industry risk
- outstanding balances
- public records (judgments, liens, bankruptcies).
- payment promptness
- credit utilization (percentage of your credit limit currently in use).
Check your business credit report quarterly to determine if there are errors. You don't want your company’s credit rating to fall because of a judgment settled years ago or because of an error made by a bank.
- Establish a business credit card and pay it promptly
Obtaining a business credit card is fairly painless. Most people receive frequently receive credit card offers in the mail or via email. Establishing a business credit card and paying off purchases promptly and in full is a great way to build a sold credit history. Even if you have the cash to pay for supplies, charge them and pay them off in order to build a positive payment history. Additionally, many business credit cards offer “rewards points” that can be used towards prizes or “cash back” as benefits of setting up the account.
Avoid late payments – especially if you have the money to make payments. Late payments will negatively impact your credit rating and thus are counterproductive.
- Run a lean business
Monitor your cost structure. Do not over staff; be sure to manage workers’ hours closely and reduce staffing during slow periods. Continuously monitor your inventory and don’t over-order your supplies. Naturally, you want to have enough inventory on hand so that you don’t run out of anything. Inventory is an asset, but you don’t want it to hurt your cash flow. Minding your cost structure is part of “Business 101.” Keeping costs low is a vital part of profitability, and eventually, creditworthiness.
These tips will help women-owned businesses (and male-owned businesses, too) in developing a better credit rating, which is important when applying for start-up or expansion funding.
