Credit-Challenged Small Businesses Have A New Source Of Capital

With pandemic government stimulus money and grant opportunities winding down, what’s a woman-owned business to do? Know your financing options!

A new option increases the likelihood of young businesses or businesses whose owners have low or no credit scores getting financing. The Equitable Access Fund relies on proven underwriting practices—paired with technical assistance—that have worked for Small Business Administration (SBA) loan programs and Community Development Financial Institutions (CDFIs) but are now applied to small business credit cards.

By subsidizing the additional costs and risks with philanthropic capital, mission-driven lenders—such as The Equitable Access Fund and its financing-provider partners—can meet the needs of underserved women entrepreneurs, especially women of color, with small business credit cards.

Leveraging Philanthropic Capital To Provide Credit To Women Entrepreneurs

Hello Alice, in partnership with the Global Entrepreneurship Network (GEN)—the fund manager—launched a $70 million fund backed by Wells Fargo to improve access to credit and capital for underserved entrepreneurs, including women. Other partners include the Kauffman Foundation and Mastercard.

“If you look at just the BIPOC small business owner community, there’s $40 billion in unmet demand for financing, based on how much they apply for and don’t receive, [according to the Small Business Credit Survey conducted by the Federal Reserve Banks],” said Matt Brewster, Capital Access Strategy for Hello Alice. “The unmet financing demand is three to four times higher for BIPOC-owned small businesses than white-owned small businesses.” The number for women-owned businesses is not available.

The Equitable Access Fund is designed to serve women-owned businesses and other high-potential small businesses facing barriers to adequate financing. Underwriting standards are more flexible and consider the entrepreneurs’ short- and long-term plans, their track record of meeting stated commitments and objectives, and their completion of learning modules on the Hello Alice platform. The fund will support access to the Hello Alice Small Business Mastercard and select loan products from Hello Alice Financing Marketplace partners. First National Bank of Omaha (FNBO) is Hello Alice’s credit card issuer.

The fund uniquely uses philanthropic capital to unlock access to capital for small businesses. It accomplishes this by providing “credit enhancements” to partners providing financing offering the small business credit card.

Credit enhancement includes loan guarantees, loan loss reserves, and cash collateral deposits to financing partners. These give financing institutions some loss protection on their deals and enable them to increase their risk tolerance reasonably. Increased risk tolerance helps unlock credit access for underserved, high-potential, credit-challenged or early-stage small business owners.

“A general rule of thumb is that you can get at least 10x leverage from a guarantee, unlocking credit access greater than the guarantee amount or from borrowers subsequently accessing other capital that they wouldn’t have been able to otherwise,” said Brewster.

“[Through] research that the Wells Fargo Foundation collaborated on with the Nasdaq Entrepreneurial Center (NEC), we learned that undercapitalization happens because women-owned businesses tend to get valuated at 30% less than similarly situated male-owned businesses,” said Jenny Flores, head of Small Business Growth Philanthropy at Wells Fargo. “This means that women-owned businesses will receive less financing. This [disparity] is compounded for women of color because it increases the wealth gap and suppresses their ability to scale.”

How It Works

Hello Alice’s data finds only 25% of small business owners have applied for a business credit card, and 85% of those applications were denied due to low or no credit score. Yet, 90% of business owners without business credit believe getting a business card would be beneficial.

Based on what Wells Fargo has learned from its “Open for Business Fund”—a $420 million effort focused on serving diverse small businesses across the U.S.—and insights from Hello Alice’s customers, Wells Fargo calibrated exactly where the interventions can be made to increase the success ratio for high-potential entrepreneurs. These insights and Hello Alice’s technology enables this solution to scale.

Through financing-provider partners, such as FNBO, Stearns Bank, and CDFIs, such as ACCION, Opportunity Fund, and Certified Development Company (CDC), women entrepreneurs can apply for a small business credit card and are more likely to be approved because The Equitable Access Fund enables financing-provider partners to have more flexible underwriting criteria and entrepreneurs do not have to put up the security.

It’s not just about the credit amount through the card. It’s about the additional credit, such as loans, that women-owned businesses can access once they have a track record of repayment. “We think the $70 million fund will unlock at least a billion in credit over the next five years,” said Brewster. It’s an innovative approach that Hello Alice hopes others will replicate.

As part of the program, entrepreneurs receive credit-building education and technical assistance through an assessment tool called the Business Health Score. The score gives an overview of a business’s financial health. It allows women entrepreneurs to make informed decisions about improving their financial performance. Financing partners use the score as an additional criterion in judging an applicant’s creditworthiness.

“To effectively meet the needs of women-owned businesses, particularly women of color (WOC), our financing models need to flex to ensure we meet entrepreneurs where they are,” said Flores. “In addition, when we pair capital with relevant education and mentorship, the success rate of women-owned businesses increases exponentially.” Hello Alice provides digital educational content and tools. Hello Alice Small Business Mastercard holders also get free 1-on-1 access to business coaches with expertise in strategy, finance, and sales and marketing.

How A Struggling Industry Benefits

“My greatest concern right now is women in the care economy,” said Elizabeth Gore, president and cofounder at Hello Alice. Women with small child- or elder-care companies had difficulty surviving the pandemic. Demand for their services declined sharply. If they reopened after lockdowns, they had to implement costly new safety protocols. Demand has returned, and there is a significant unmet need for services for affordable, high-quality care.

As small businesses, they were less likely to have cash reserves and more vulnerable to permanent closures. Rebuilding or starting new firms requires capital. Through The Equitable Access Fund’s financing partners, small child- or elder-care companies are more likely to get credit.

How are you building your credit score?