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Female and ethnic minority entrepreneurs miss out on lending

Author: ICAEW Insights

Published: 22 May 2023

Access to funding and support for women and under-represented entrepreneurs is improving, however they continue to feel estranged from the wider enterprise ecosystem.

More women in the UK founded more businesses than ever before in 2022, and the proportion of ethnic minority-led companies also grew. Yet research continues to show that female and ethnic minority entrepreneurs struggle disproportionately to access financing.

More than 150,000 all-women-led companies were founded last year, according to government-commissioned inquiry the Rose Review, which is now in its third year and led by NatWest CEO Alison Rose.

Meanwhile, between 5-8% of smaller businesses are led by an individual or team identifying as being from an ethnic minority background. 

An estimated 250,000 ethnic minority businesses (EMBs) contribute some £25bn a year to the UK economy. According to the Time to Change report, EMBs have a strong ambition to grow, are disproportionately involved in export activity and are more likely than non-EMBs to engage in various forms of innovation. 

This is also reflected in the Small Business Survey conducted by the former Department for Business, Energy and Industrial Strategy. It found ethnic minorities in the UK are more entrepreneurial than the white population, but are less likely to run older, established firms that generate stable income.

Until recently, a lack of data and analysis on female entrepreneurs and those from ethnic minorities had held back the goal of boosting their numbers in the UK economy. That is changing slowly as more data is gathered by different UK organisations. 

Inequalities stymie growth

One of the biggest challenges for female entrepreneurs and those from ethnic minorities is the ability to grow and scale their businesses. This links back to difficulties in accessing finance, social capital, deprivation and household income. Another factor is the under-representation of certain ethnic groups among managers, directors and officials in the workplace, which reduces the opportunity to develop business-relevant skills, knowledge and networks.

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

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

Traditionally, financial services – particularly lending – have been dominated by white men, with many under-represented entrepreneurs anecdotally suggesting that lenders often have little understanding or interest in their products, markets or business models.

From a funding perspective, last year’s European Women in VC report found that 85% of the total venture capital assets in Europe are managed by men and just 15% managed by women. These figures are similar, if not worse, in other jurisdictions.

Expecting rejection

Other research by the British Business Bank suggests that female entrepreneurs and other under-represented groups may be more risk-averse when it comes to borrowing.

In its Small Business Finance Markets Report 2023, it says that expectation of rejection and concerns over cost of finance prevent some ethnic minority-led and female-led businesses from applying.

“Female-led businesses are as ambitious as male-led businesses, but are slightly less prepared to take risks and less willing to use external finance to help grow their business. This may reflect concerns over uncertainty and affordability: more female-led businesses agreed they were being cautious with business plans because the future felt uncertain,” the report says. 

Contrastingly though, the report also says that Black, Asian and other EMBs are more prepared to take risks and have stronger growth ambitions than White-led businesses. Asian and other EMBs are more willing to use finance to achieve this growth. 

And yet the research also finds that in the 10 quarters to Q2 2022, EMBs were more likely to be turned down for finance, a continuation of the trend highlighted in 2021/22’s Small Business Finance Markets report. 

Differences in application outcomes have persisted over time. EMBs were significantly more likely to report having their application rejected over the past 10 years. More EMBs reported being rejected due to low credit rating (51% compared with 23% of other businesses) or insufficient security (45% compared with 18% of other businesses). Some EMBs lacked the collateral required for secured lending or other types of finance .

The knock-on effects of EMBs not securing necessary finance for cash flow include delays to suppliers payments or increases in use of existing credit cards or overdrafts.

EMBs that were unable to access finance or were discouraged from applying were more likely to highlight consequences of this unmet demand in terms of investment, working capital, marketing and staff recruitment and development. Female-led businesses were more likely to highlight implications for other investment in their business. 

When the intersectionality of certain characteristics such as being a female black or Asian entrepreneur is factored in, then lending outcomes are even worse.

Change is afoot

For female entrepreneurs, the Rose Review’s goal of shining a light on the difficulties of women accessing funding and growing their businesses is helping to drive change.

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

Signatories have launched a range of initiatives to open up more diverse and accessible funding avenues at every stage of the business journey, including through early-stage angel investing, venture capital and bank loans.

The newly-founded Women Backing Women campaign via the Women Angel Investment Taskforce engaged thousands of new and prospective female angel investors to help unlock new sources of early-stage funding for founders across the UK.

UK Finance highlights other initiatives from financial institutions, such as Santander’s Women Business Leaders’ Mentoring Programme, which will run until November 2023, while Metro Bank has made its support and resources for female entrepreneurs more visible and accessible both online and in local community branches.

Still much to do

Progress appears to be less positive for ethnic minority entrepreneurs, though. The Centre for Research in Ethnic Minority Entrepreneurship (CREME) partnered with NatWest last year for the Time to Change report, which set 10 evidence-based recommendations to promote greater success and inclusion of EMBs in finance and business support in the UK.

According to the report, the implementation of these recommendations could help tackle the multiple barriers faced by EMBs, particularly in accessing finance, markets and quality business support, and could increase their gross value added contribution from the current £25bn a year to £100bn, highlighting the significant potential of EMBs to the UK economy.

Among the recommendations are gathering better data on entrepreneurial diversity, developing a UK-wide policy on inclusive entrepreneurship and monitoring engagement with diverse suppliers to ease EMBs’ access to procurement opportunities, among others.

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 that helps them grow.

Dr Eva Kašperová, a research fellow 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 are left behind in terms of tackling structural inequalities and enabling entrepreneurs from ethnic minority communities and other under-represented or disadvantaged groups to access finance, wider markets and quality business support.

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

Andrew Harrison, Head of Business Banking at NatWest Group, said: “This is why we aim for at least 20% of the places on our 13 nationwide accelerator hubs to be for ethnic minority entrepreneurs. In 2021, 26% of businesses in our hubs were EMBs.”

This year and next are likely to prove challenging for all businesses due to high energy prices and high inflation, irrespective of racial or gender inequalities in enterprise. However, it’s clear that until the racial and gender inequalities as well as social and employment imbalances are levelled up, genuine progress will not reach female-led and ethnic minority-led businesses. 

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

Insights Special: Access to finance

ICAEW Insights examines the finance options and support available to businesses, as well as the challenges they face in obtaining it.

Access to finance: supporting small businesses

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