A Lack of Small Business Financing Options for Women…

A Lack of Small Business Financing Options for Women is not Preventing Rapid Growth

Private investors for small business are providing loans to improve operating working capital for male-run businesses more readily than to women and government small business financing initiatives are failing to give female entrepreneurs the capital they need.

This problem was highlighted by Senator Maria Cantwell in a report on the state of small business lending to women that was published in July this year. The results of the study showed a considerable disparity between small business loans issued to men and women, and legislation has rapidly been tabled to correct this clear gender gap. The senator is now pushing to get that legislation – the first specifically introduced to improve lending to small businesses run by women – passed before the end of the year.

Although women are failing to receive their fair share of small business financing, female entrepreneurs are not letting that deter them from creating their own companies. What’s more, their companies are proving to be highly successful according to a recent study conducted by the National Women’s Business Council. The study shows that even though female entrepreneurs struggle to obtain the volume of loans that their male equivalents manage to obtain, they are able to generate new jobs faster.
Without access to the level of small business financing as men, it is no surprise that small business expansion is slower initially, yet small businesses created by women gather considerable momentum and experience rapid growth. When faced with the difficulties in obtaining operating working capital to get their start-ups going, some female entrepreneurs seek private investors for small business. However, the majority of women have to rely on their own funds and those of family members to get started. They certainly appear to be more than willing to commit their savings to get their new ventures of the ground according to the study.
On average, a new female-owned business starts up with $75,000 in operating working capital, whereas male start-ups have an initial start-up fund of $135,000 on average. This difference in funding can be explained by the comparative ease of obtaining new business loans and generating private business capital. Men are three times more likely than women to seek funding from venture capitalists and private investors for a startup. Consequently, with the cash in place, men have greater expectations for growth and their business expansion predictions are therefore higher.

Without such a large pot of start-up cash, female entrepreneurs have much lower expectations for expansion and growth and expect to build up the number of employees much more gradually. In practice however, female owned start-up businesses grow at a faster rate and actually create employment opportunities quicker.

The latest study demonstrated that over the three years from 2008 to 2011, a quarter of male startup companies expected growth over this period to hit 30%. For female entrepreneurs, only 16% expected initial growth to be this high. Nearly four out of ten women predicted the first three years of growth to be around 5% per annum. Actual small business expansion over this period showed that female-run business had the upper hand, with 58% achieving 30% growth compared to just 53% of male businesses.

Part of the reason for this is that initially female entrepreneurs are more likely to keep operating costs at the minimum level, and tend to do more of the work themselves rather than employing staff. With low costs the companies are kept flexible, and since personal funds are invested rather than other people’s money, failure is simply is not an option.

If the new legislation is passed and access to both SBA funds and private business capital for female entrepreneurs improves it will be interesting to see whether the rate of small business expansion changes. With Maria Cantwell pushing to get the new legislation passed by congress before the year end, the National Women’s Business Council may not have to wait long to find out if improved access to small business financing will see female startup businesses expand even faster than at current levels.