Mind the investment gap: improving access to funding for female founders
In times of economic uncertainty, female-led businesses can be particularly vulnerable. A lack of awareness of the funding options available and a reluctance to take on debt, coupled with the impact of the lending gap, makes it harder for female founders to secure funding to increase working capital or seek growth in turbulent times.
However, access to funding for female-led businesses is not a new problem, nor one that only occurs in an economic downturn. In 2021, only 13% of female-owned businesses applied for a loan, compared to 51% of male-owned companies.
Research shows that businesses with male founders or co-founders receive nearly seven times more funding than female-led companies. Furthermore, the share of total equity investment for all-female founder teams has remained stagnant - receiving just 2% of funding. As a result, there remains a vast gap to bridge between the volume and value of investment secured.
Why are female founders not accessing funding?
Only 19% of UK companies are led by women which naturally means that less female-led businesses will be applying for funding. Consequently, there’s work to be done to encourage more women to start their own business. Ensuring accessible funding for both starting and scaling businesses is pivotal for fostering a rise in the count of female entrepreneurs.
Gender bias in funding decisions
There are wide ranging reasons why female founders may not apply for or receive funding. One of these is that investment teams still tend to be male-dominated and gender biases, whether conscious or not, still exist in the decision-making process. This means that female-owned businesses can be overlooked in favour of male-led companies.
Lack of mentors and role models
Fewer female founders means that there are less role models and mentors for women to seek advice from. However, this is beginning to change and in recent years there has been a significant increase in the support mechanisms and networking opportunities available to help women to start and scale businesses. For example, the Investing in Women Code and AllBright.
Smaller business size
Female-led businesses are often smaller in size and are more common in industries which are not always considered to be high-growth. In fact, only 0.2% of female-led businesses in the UK qualify as high growth. On one hand, this means that they are less capital intensive but on the other hand, they are often less attractive to investors.
Low awareness of funding options
Research shows that women are less aware of the funding options available to them, which means that when female founders are seeking support to grow or boost capital, they may not look beyond traditional means of funding. This means that they could be missing out on funding opportunities with alternative lenders which have more flexible lending criteria than the banks. So how can access to funding be improved?
Female-focused networking and mentorship initiatives
To better meet the needs of female founders and enable female entrepreneurs to overcome the barriers to funding, there are several changes the industry can make. Encouragingly, there is positive change happening in some areas, including an increase in mentorship programmes, and networking opportunities, enabling women to learn from others leading businesses. This is key to increasing confidence levels of female founders, who are more likely to suffer from imposter syndrome, and thus less likely to believe their business is worthy of funding. Furthermore, an increase in female-focused networking opportunities enables women to meet with investors, seek advice and raise awareness of their businesses.
Increasing the diversity of investment teams
Increasing the diversity of investment teams backing funds will also help to level the playing field. Some initiatives are already in place to do this, such as the Women Backing Women campaign which aims to increase the number of female angel investors. However, female investors remain underrepresented in investment teams and on investment committees. The most recent Investing in Women Code report found a relationship between more diverse investment committees and successful pitches from all female and mixed gender-led businesses, so increasing diversity is a vital part of closing the investment gap.
Education on the funding options available
In order to broaden awareness of the options available, we need to better educate people on the varying routes to funding. Growth Lending’s Don’t Bank On It research found that female business leaders are less aware of every type of funding than their male counterparts and are also more averse to taking on debt, reflecting the lower amount of female-led businesses applying for funding. Increased awareness will equate to increased confidence among female entrepreneurs and ensure that they can pick the most suitable option for their business.
Moving away from traditional funding criteria
Finally, investors also need to look beyond traditional metrics when evaluating eligibility for funding. Instead of focusing on the age of the business or prior entrepreneurial experience of the founder, investors should pay attention to factors such as the strength of the business plan, potential for growth and the characteristics of the leadership team. Whilst traditional lenders, such as the banks, still have strict lending criteria, alternative lenders offer more flexible terms and focus on a wider variety of factors which indicate a successful business. As a result, female-led businesses which do not meet the criteria of the banks could increase likelihood of securing funding by exploring other available options supportive of businesses of all shapes and sizes.
A record 150,000 new all-women led companies were founded in 2022 highlighting a significant increase in the number of female entrepreneurs taking a leap and starting a business. However, a lack of funding continues to be one of the most significant barriers for female business leaders looking to scale their business.
Continued efforts to level the playing field and reduce the hurdles that female-led businesses face to securing funding will help to close the investment gap and provide assurance that businesses can access the means to thrive, even in turbulent times.