Who are the lowest risks for banks? Women entrepreneurs, new research reveals. If only we were getting credit for it. (And yes, I mean that in both senses of the word.)
Knowing that women receive less than 5 percent of small business loans, CNote partnered with ICA Fund Good Jobs, an Oakland, California–based community development financial institution that invests in high-potential businesses, to find out if women are riskier borrowers. ICA analyzed 10 years of loan repayment data from six CDFIs (community development financial institutions) participating in the Wisdom Fund, evaluating risk based on three factors: the probability of default, the likelihood of delinquency, and expected losses. It then applied a statistical model to predict how likely different groups of borrowers are to default on their loans.
Making the case for lending to women entrepreneurs
Three data points from ICA’s preliminary analysis stand out:
On average, women are a lower credit risk than men. ICA found that women are 2 to 4.5 percent less likely to default on loans than men.
Women of color are not riskier than other demographics. Breaking down the gender data, ICA found no statistically significant difference between women of color and other groups of borrowers in terms of default and delinquency rates.
Women entrepreneurs get smaller loans and may pay more for them. Despite their low risk profile, the study found that women typically get smaller loans than men—even when controlling for factors like industry, loan type, and loan purpose. Women also paid higher average interest rates over the study period.
These findings are particularly striking given that CDFIs primarily serve people and communities that are underserved by mainstream financial institutions, including women and people of color. We can only imagine the gap between credit and creditworthiness at traditional financial institutions, which can’t collect data on loan applicants that is unrelated to assessing their creditworthiness.
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