Reading: Why Women-Owned Businesses (Like YOURS!) Missed Out on COVID-19 Stimulus

“The Paycheck Protection Program loan process was a microcosm of the gender funding gap,” is one of several depressing conclusions of a nationwide survey of female small business owners following the first round of the US government’s PPP program that provides funding for small businesses during the COVID-19 crisis. The survey was conducted by Builders and Backers and Her Corner, along with Springboard Enterprises and Hello Alice, following the first PPP round from the Small Business Administration (SBA) launched on April 3 that provided $349 billion in forgivable loans. These four organizations, dedicated in part to helping female entrepreneurs, undertook the study after PPP funds ran out and learning from female business owners that the process did not go well. Over 100,000 women-owned businesses along with networking organizations and communities received a link to the questionnaire and the conclusions were based on answers from 347 respondents. 

“When women did successfully apply [for PPP], they asked for and received less money than national averages despite evidence that women-owned companies are better investments for financial backers,” the study noted.

But that’s a big “when.” Nationally, 15.5 million businesses (72% of total) successfully submitted applications in the first PPP phase, according to the SBA, of which roughly 11% received loans averaging $206,000. Women own 42.6% of all small businesses in the US, accounting for $1.9 trillion in revenues. The survey found that roughly 23% of these female business owners didn’t get a shot at the first round of PPP loans. Those who applied requested only $127,985. The government launched a second wave of funding on April 27th with an additional $310 billion, and by May 3rd $500 billion in loans had been distributed in the PPP program overall.

There are many reasons for the low percentage loan rate and smaller loan amounts to women, according to the study. For one, the application process — from knowing exactly what has to be submitted for loan qualification to which lenders would expedite the process — is challenging. Then, there are more sociological impediments to the process, including how banks tend to favor financing men-owned businesses over women-owned businesses, and how many women are ambivalent about even asking for funding. There’s also the issue that small businesses ended up competing with larger companies, some publicly traded, which were after big loans, and lenders, critics say, were happy to oblige because the larger the loan, the larger the fees the banks collected. Since the public uproar over the latter, all loans over $2 million will be audited and all noncompliant loans (such as the $4.6 million loan to the Los Angeles Lakers which has already been given back) were to be returned by May 7th. 

Donna Harris, founder of Builders and Backers, and Frédérique Irwin, founder and CEO of Her Corner, spoke with TheCovey about how women have fared in the PPP program and raising capital before and during the pandemic. It’s clear there’s work to be done. 

THECOVEY: In general, pre-COVID, where did women-owned businesses stand in terms of raising money via all available revenue streams from venture capital to bank lines of credit? 

DONNA HARRIS: For Pre-COVID / Pre-PPP, the historical data [is] not great for women. In terms of raising equity funding, less than 3% of all venture capital dollars went to women-owned businesses in 2019. Not only do fewer women get approved for debt funding than their male counterparts, but they are also likely to get less funding and pay higher rates. When women apply for loans they are significantly less likely to be approved (47% vs. 61% of men-owned firms); when approved, less likely to receive all the funds they request (48% received all funds vs. 57% of similarly positioned men-owned firms). 

THECOVEY: Why do female business owners have trouble asking for money in general? The study discusses how many women simply did not apply for funding, believing that the loans should go to someone who really “needed” the money. 

DONNA HARRIS: We see a couple of issues. First, there is a negatively reinforcing cycle. Low success rates in raising money reinforces women choosing not to try to raise money. In venture, because the percentage of VC dollars that go to women is so abysmal, many women conclude that it’s not even worth pursuing and they would prefer to grow their businesses through retained earnings or with debt financing.

In 2019 only 2.8% of all venture capital investment in the US went to women-owned firms. This was touted a success, as it was up from the previous year of 2.2%! On the debt side, women opt not to apply for financing for fear of being turned down (22% vs. 15% of men-owned firms).

Second, there [are few] positive forces working to break this cycle. Women are more likely to be discouraged from applying by investors, advisors, mentors and banking personnel. And when they do, they are asked dramatically different questions than men and it negatively impacts their ability to successfully raise capital. In essence, investors tend to ask men questions about the potential for gains and women about the potential for losses. 

Many women tend to operate their businesses more conservatively. And while that results in them often producing higher return on capital invested (women-led private technology companies achieve 35% higher return on investment, and, when venture-backed, bring in 12% higher revenue than male-owned tech companies), it also overshadows their ability to actually secure that capital. All of the factors above reinforce [women’s] aversion to risk taking.

Finally, on the PPP application, applicants were asked to certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification made [women] hesitate and not apply. Several [respondents] shared that they believed that the loan wasn’t absolutely necessary, although it could help them continue business operations. But once again, they told themselves they might be able to just tighten their belts or bootstrap the next few months. Better to let the PPP money go to businesses that needed it more … 

THECOVEY: The survey reports that of those women who applied for PPP, nearly 15% were turned away, and some women simply gave up trying to get a loan. What happened? 

FRÉDÉRIQUE IRWIN: Nearly 15% were never able to apply: their banks didn’t get back to them, their banks didn’t open up the application process in time, their banks told them because they didn’t have a business line of credit or loan in place they couldn’t help them. This 15% either gave up, or was in the process of finding another solution when the first round of funds ran out. Another 10% decided not to apply at all. We actually think there is a [higher] percentage of women who opted not to apply at all and didn’t take our survey. 

THECOVEY: Why didn’t the applicants surveyed ask for the maximum amount of funds allowed? 

DONNA HARRIS: Many women asked for what they [were allowed], which was 2.5 times payroll costs. This [amount] would have been less than national averages because women-owned firms are more likely to stay small — only 22% had at least $1 million in annual revenues in 2016, compared to 36% of men-owned firms.

However some women may have asked for less than the 2.5x payroll because they had already let some people go, or downsized their business — for example in the case of yoga studios or events companies. In [such] cases, they didn’t ask for the previous fully loaded payroll amounts, but rather what they were still carrying to keep the doors open. 

There was also great confusion about whether only W-2 employees counted or whether 1099 workers could also be counted. Women have a higher tendency to run non-employer firms: women own 40% of US small businesses but run 52% of sole proprietorships. Guidance for independent contractors and solo practitioner applicants was not even issued until just 48 hours before the [PPP] funds ran out. 

THECOVEY: Why did big banks fail women in PPP? And why did women seem to overlook smaller banks as potential lenders?

DONNA HARRIS: Big banks such as Bank of America, Chase, Capital One, WellsFargo failed women because they either had a delayed opening for PPP applications or in some cases, such as Capital One, they never even started to accept applications until it was too late — the money had already run out! 

Women initially overlooked smaller banks because historically they have preferred to “bank big” rather than small (49% vs. 40%) and have been lured into thinking their business and their money is safer with big banks. However, after the PPP program, we have seen a number of women business owners leave their big banks and open accounts with the smaller banks. 

THECOVEY: What have been the three biggest obstacles women have faced for PPP? 

FRÉDÉRIQUE IRWIN: Speed: Women had to be able to apply quickly to get in line, in both rounds. That meant knowing they could apply, getting over any trepidation about applying, deciding to apply, having already chosen “the right bank” so they could apply, and having all their documents ready to go — and advisors on the line helping to make sure that was the case  and activating their networks to help increase their odds of success. 

Relationships: Women had to have good relationships and communication with their bankers in order to get the right advice as to whether or not to apply, how, and when. [Those] women with large banks struggled to get anyone to help them — even when they walked into a branch. Again, this applies to both rounds. 

Networks: Women needed to have support networks of fellow business owners to collaborate with on this process. Lessons learned circulated very quickly. Businesses that could quickly move to a new and more nimble bank successfully applied for the programs, while others sat and waited for their banks to come through for them — something that didn’t often happen. 

THECOVEY:  Is the Small Business Administration doing anything to facilitate the process for women in this second phase of PPP?

DONNA HARRIS: While we have not seen any guidance from the SBA — and we asked — for women specifically to have an easier time in round two, it seems that the SBA is putting out new guidelines daily on which companies should and should not apply, and enforcing the message about which kinds of companies the program was designed for. 

The SBA allowed a one-time opportunity for small banks — with asset sizes less than $1 billion — to access the PPP loan program exclusively between 4 PM and midnight on Monday April 29. 

While this is laudable, it’s potentially problematic for women. It’s not big banks per se that were the challenge. It’s that big banks prioritized bigger “small” businesses. This unintentionally penalized women-owned companies, as they’re smaller and they rely on big banks more than small ones. In addition to having been a lower priority for their bank, their applications are sitting with big banks that now have limits being placed on them. It’s this sort of unintended consequence that needs to be fully understood before new rules or guidelines are issued. 

THECOVEY:  Where should female business owners be looking for financing outside PPP during the pandemic and when states begin to open while the economy is tanked? What are your most important recommendations for seeking additional funding?

FRÉDÉRIQUE IRWIN: Relationships are key, and in some cases critical. Banks may not be processing traditional loans or lines of credit right now. The banks that are, will do so based on prior relationships with a business owner. The same will apply for equity investing. Now is the time to be building relationships with bankers and [to be] getting very good at researching grants and financial opportunities. In addition, there are multiple organizations that are aggregating resources for women-owned businesses. For example, the Her Corner resources page that is updated on a regular basis is located here. Experience and personal reputation will be more important than ever. 

The ability to sell [is also key]. A business owner has to be able to articulate what they need. That skill set will be more important than ever in terms of seeking funding. A great sales book is The Science of Selling and it walks you through six “whys” a business owner has to articulate when seeking funding.