Women and ethnic minority entrepreneurs run out of loans

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More women in the UK are starting more companies than ever before in 2022, and the proportion of companies run by ethnic minorities has also grown. However, research continues to show that women entrepreneurs and ethnic minorities disproportionately struggle to access finance.

More than 150,000 women-run businesses were founded last year, according to government-commissioned research. rose reviewwhich is now in its third year and is led by NatWest CEO Alison Rose.

Meanwhile, between 5% and 8% of smaller companies are run by an individual or team who identifies as belonging to an ethnic minority, above ???.

An estimated 250,000 Ethnic Minority Businesses (EMBs) contribute around £25 billion a year to the UK economy. According to the Time to change According to the report, EMBs have high ambition to grow, are disproportionately involved in export activity, and EMBs are more likely to engage in various forms of innovation.

This is also reflected in the year? Survey of Small Businesses carried out by the former Department of Commercial, Energy and Industrial Strategy. It found that ethnic minorities in the UK are more entrepreneurial than the white population, but are less likely to run older, more established businesses that generate stable income.

Until recently, a lack of data and analysis on women entrepreneurs and ethnic minorities had held back the goal of increasing their numbers in the UK economy. That is slowly changing as more data is collected by different UK organizations.

Inequalities hamper growth

One of the biggest challenges for women and ethnic minority entrepreneurs is the ability to grow and scale their businesses. This is related to difficulties in accessing finance, social capital, deprivation and household income. Another factor is the underrepresentation of certain ethnic groups among managers, directors and officers in the workplace, which reduces the opportunity to develop business-relevant skills, knowledge and networks.

Women-led businesses tend to be more likely in the retail, hospitality, business/support services, health/social work, education, arts/entertainment and other service sectors, according to the British Business Bank. Small Business Financial Markets Report 2023.

Meanwhile, EMBs often operate in a comparatively narrow range of traditional sectors, such as restaurant and retail, and, in many cases, within highly saturated and competitive co-ethnic markets, limiting their growth potential, according to the report. Time to Change report.

Financial services, particularly lending, have traditionally been dominated by white men, and many underrepresented businesspeople anecdotally suggest that lenders often have little understanding of or interest in their products, markets, or business models.

From a funding perspective, last year European Women in Venture Capital Report found that 85% of total venture capital assets in Europe are managed by men and only 15% by women. These figures are similar, if not worse, in other jurisdictions.

waiting rejection

Other research from the British Business Bank suggests that women entrepreneurs and other underrepresented groups may be more risk averse when it comes to borrowing.

In its Small Business Financial Markets Report 2023says the expectation of rejection and concerns about the cost of financing prevent some businesses run by ethnic minorities and women from coming forward.

“Women-led companies are just as ambitious as men-led companies, but they are slightly less prepared to take risks and less willing to use external financing to help grow their business. This may reflect concerns about uncertainty and affordability: more women-led businesses agreed they were being cautious with business plans because the future seemed uncertain,” the report says.

In contrast, however, the report also says that Black, Asian and other CMBs are more prepared to take risks and have higher growth ambitions than white-led companies. Asian EMBs and others are more willing to use financing to achieve this growth.

And yet, the research also finds that in the 10 quarters through the second quarter of 2022, OGEs were more likely to be turned down for funding, a continuation of the trend highlighted in the 2021 Small Business Financial Markets report. /22.

Differences in application results have persisted over time. EMBs were significantly more likely to report that their application was rejected in the last 10 years. More OGEs reported being turned away due to poor credit rating (51% vs. 23% of other companies) or insufficient security (45% vs. 18% of other companies). Some EMBs lacked the collateral required for guaranteed loans or other types of financing.

Side effects of EMBs that do not secure the necessary funding for cash flow include late payments to vendors or increased use of existing credit cards or overdrafts.

EMBs that were unable to access funding or were discouraged from applying were more likely to highlight the consequences of this unmet demand in terms of investment, working capital, marketing, and staff recruitment and development. Businesses run by women were more likely to highlight the implications for other investments in their businesses.

When the intersectionality of certain characteristics, such as being a black or Asian businesswoman, is taken into account, lending outcomes are even worse.

The change is in course

For women entrepreneurs, Rose Review’s aim to shed light on women’s difficulties in accessing finance and growing their businesses is helping drive change.

Signatories to the Investing in Women Code (IiWC) have grown to 190, up from 134 last year, an increase of more than 41%. IiWC partners include the UK Business Angels Association, the British Private Equity and Venture Capital Association, UK Finance and the British Business Bank. The sponsors of the Code represent over £1 trillion in assets under management.

The signatories have launched a variety of initiatives to open up more diverse and accessible avenues of financing at every stage of the business journey, including through early-stage angel investment, venture capital, and bank lending.

The newly founded Women Backing Women campaign through the Women Angel Investment Taskforce engaged thousands of new and potential angel investors to help unlock new sources of seed funding for founders across the UK.

UK Finance highlights other initiatives by financial institutions, such as Santander Women Business Leaders Mentoring Programwhich will run through November 2023, while Metro Bank has made its support and resources for women entrepreneurs more visible and accessible both online and at local community branches.

There is still much left to do

However, progress appears to be less positive for ethnic minority entrepreneurs. The Center for Research on Ethnic Minority Entrepreneurship (CREME) partnered with NatWest last year for the Time to change reportwhich sets out 10 evidence-based recommendations to promote greater success and inclusion of EMBs in financial and business support in the UK.

According to the report, the implementation of these recommendations could help to overcome the multiple barriers that EMBs face, in particular in accessing quality finance, markets and business support, and could increase their gross value added contribution of the 25,000 current £100 billion per year to £100 billion. highlighting the significant potential of EMBs for the UK economy.

Recommendations include collecting better data on business diversity, developing a UK-wide policy on inclusive entrepreneurship and tracking engagement with various vendors to facilitate EMB access to recruitment opportunities. , among other.

The report also calls for central government and local decision makers to develop clear objectives for inclusive entrepreneurship, informed by evidence to ensure that EMBs can access quality business support to help them grow.

Dr Eva Kašperová, a researcher at CREME, said in the report: “The current lack of an explicit UK-wide policy on inclusive entrepreneurship could mean that some parts of the country lag behind in terms of addressing structural inequalities. and enable entrepreneurs from ethnic minority communities and other underrepresented or disadvantaged groups to access financing, broader markets, and quality business support.

“If past experience is any guide, ensuring commitment from key stakeholders may be the biggest challenge.”

Andrew Harrison, Head of Business Banking at NatWest Group, said: “That’s why we aim to have at least 20% of the seats in our 13 nationwide accelerator centers go to ethnic minority entrepreneurs. In 2021, 26% of the companies in our centers were OGEs”.

This year and next are likely to be challenging for all businesses due to high energy prices and high inflation, regardless of racial or gender disparities in the business. However, it is clear that until racial and gender inequalities, as well as social and employment imbalances, are evened out, genuine progress will not come to businesses run by women and ethnic minorities.

If the UK government wants to achieve long-term economic growth for the British economy, the focus and support for these businesses will surely improve their chances of prosperity for all.