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Why Secured Credit Cards Are the Solution to the New Majority Funding Gap

Why Secured Credit Cards Are the Solution to the New Majority Funding Gap

Why Secured Credit Cards Are the Solution to the New Majority Funding GapBy Elizabeth Gore, co-founder and president, Hello Alice

Ask any entrepreneur about their greatest business challenge, and the answer will be access to capital or cash flow. I know this from experience. Quarter after quarter, and year after year, surveys conducted by my company, Hello Alice, reveal that lack of funding is a key barrier to smooth operations and a bottleneck to future growth. We also know that these funding challenges are particularly acute for New Majority entrepreneurs, a group that includes women, people of color, veterans, people with disabilities, and the LGBTQ+ community. In fact, based on the Federal Reserve’s annual credit survey, we estimate there is $1 trillion in unmet financing demand among U.S.-based employer firms overall, and a $40 billion gap among BIPOC-owned firms specifically — an underrepresented but rapidly growing segment.

Exactly why this gap exists is complicated, but credit plays an outsized role. According to the same Federal Reserve survey, low credit scores, insufficient credit history, and too much debt are key reasons borrowers did not expect to be approved for business financing. An entrepreneur’s credit score must be good to qualify for most credit cards and excellent to secure a business loan. For the 45 million Americans deemed “credit invisible,” no credit history can be just as bad as bad credit history.

Unfortunately, the current system is stacked against the most credit-challenged individuals, limiting their access to crucial business financing and contributing to funding gaps for women, the BIPOC community, veterans, and other demographics.

To tackle funding for these vital groups, we first need to acknowledge the current landscape that disproportionately underestimates all New Majority entrepreneurs. With that understanding, I believe leadership and innovation in the world of secured credit cards can make significant progress toward equitable access to capital for all.

Acknowledging Barriers to Business Financing

Our current financial system was designed for a narrow range of clients, which is why different demographics experience different outcomes.

Take women, for example. As women disproportionately left the workforce to assume roles as caregivers during the pandemic, we’ve observed a corresponding rise in the number of “necessity entrepreneurs” who start a business as their best (or only) alternative to traditional employment. In theory, we all support this new crop of entrepreneurs, but data shows that they start a business with, on average, half as much capital as men. With limited access to financing, data shows that most women-owned companies are small, nonemployer firms operating in low-growth industries.

Among BIPOC entrepreneurs, credit access is also a notoriously uphill battle. Hello Alice research found that Black entrepreneurs are much more likely to lack a credit card (31%) compared to their white counterparts (12%), and Black founders also have a much higher denial rate.

As for U.S. veterans and military spouses, widespread lack of credit history, stable employment, and other factors make them less attractive lending candidates.

Yet despite these challenges, there remains a strong demand for credit access across New Majority demographics, and these entrepreneurs are willing to work for it. A recent Hello Alice survey found that 90 percent of entrepreneurs believe a business credit card would impact their business in a positive way. In addition, 88 percent of small business owners want to improve their credit scores, and 70 percent are interested in educational content on the topic. These numbers point to a clear opportunity for financial leaders to introduce new, innovative credit solutions that address this significant consumer demand. So, what could those solutions look like?

How Secured Credit Products Create Equitable Access

Currently an obscure offering in the world of business financing, secured credit cards have the potential to be one of the most effective and long-lasting ways to move the needle on funding gaps.

With a secured credit card, even the most credit-challenged entrepreneur has the opportunity to put down a security deposit that serves as collateral for a credit line of equal value. Responsible spending habits and payment history are reported to credit bureaus, which, over time, can improve a credit score. In theory, this allows the cardholder to eventually qualify for unsecured credit cards, business loans, and other financing options of increasing size. Such a gradual, low-risk process addresses the common “need-credit-to-get-credit” paradox with a solution that fulfills entrepreneurs’ need for capital while de-risking an untapped segment of potential customers for financial institutions.

That said, card issuers will need to lay some groundwork for secured card offerings to achieve this lofty goal. Hello Alice recently launched its own secured business credit card and quickly learned that entrepreneurs see the deposit as a significant roadblock to adoption. Unsurprisingly, the most credit-challenged individuals who stand to benefit from secured cards are often the ones least able to afford the deposit. If this deposit cannot shrink or even disappear, it will be difficult to achieve a critical mass of secured card adoption.

I see grants as the way to address this issue. By raising a nonprofit fund to cover secured card deposits, business leaders could eliminate a significant barrier to credit usage, transforming the secured card industry and realizing entrepreneurs’ enormous potential that benefits the entire economy.

Over the long term, grant-sponsored secured cards could ensure that every small business owner has access to traditional credit to build their business. Entrepreneurs of all demographics would unlock billions of dollars in flexible capital to pursue innovation, create jobs, and reinvest back into their communities — a scenario that could unleash an untold multiplier effect.

To be sure, secured credit cards might not solve the funding gap for the caregiver, BIPOC, veteran, and other New Majority communities completely, but I’m totally confident that such an untapped, straightforward solution is a great place to start.

Global Banking & Finance Review


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