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Financing Profile: Women Entrepreneurs (October 2010)

Financing activities

Majority female-owned firms were just as likely to seek financing as majority male-owned firms in 2007

Considering the crucial role financing has in the capitalization of SMEs, it is imperative to identify if female business owners are facing unique obstacles with respect to accessing external financing. Previous research has suggested that majority female-owned firms are less likely to seek external financing than majority male-owned firms (Coleman 2002, Fabowale et al. 1995), but a study by Orser et al. (2006), which examined the financing activities of Canadian SMEs in 2001, suggests otherwise. Indeed, the evidence presented here reveals diminishing gender differences in financing activities.

Recent request rates by type of financing by gender are presented in Table 5. In 2004, request rates by majority male-owned firms were higher than majority female-owned firms at a statistically significant level for all categories except equity. In 2007, however, the percentage of SMEs that sought financing was identical for both gender groups (17 percent). In fact, request rates by majority female-owned and majority male-owned firms in 2007 were almost identical for each type of financing.

Majority female-owned firms were less likely to be approved for debt financing than majority male-owned firms

Approval rates by type of financing by gender are presented in Table 6. As shown in the table, majority female-owned firms generally had lower approval rates than majority male-owned firms in 2004. There is evidence, however, that the gap in approval rates had narrowed in some aspects in 2007. In 2004, the approval rate for debt financing among majority female-owned firms was 79 percent, a statistically significant lower rate than the 88 percent approval rate for majority male-owned firms. On the other hand, majority female-owned firms were very successful in receiving trade credit when requested in 2004, boosting the overall approval rate for financing of majority female-owned firms to 84 percent.^{Footnote 4}

In 2007, lending markets were very active, leading to large increases in approval rates for financing for both gender groups. The statistically significant discrepancy in approval rates for debt financing remained between the two gender groups; however, upon closer inspection, the approval rate for long-term debt financing (term loans and mortgages) for majority female-owned firms was a very healthy 95 percent, but the approval rate for short-term debt financing (credit cards and lines of credit) remained stagnant at 77 percent (compared with 94 percent for majority male-owned firms).^{Footnote 5} Note, however, that approval rates here do not distinguish between full and partial approvals,^{Footnote 6} nor do they consider scale effects.^{Footnote 7}

Majority female-owned firms typically received significantly smaller amounts of debt financing than majority male-owned firms

As the impact of financing requests that are not approved is often dependent on the amount of financing requested, it is important to investigate the amount of debt financing being requested by and approved for the two gender groups. Regardless of the type of debt financing requested, the average amount approved for majority female-owned firms was smaller than that approved for majority male-owned firms at a statistically significant level in 2007. As shown in Table 7, the average total debt financing approved for majority female-owned firms was $68 000 and $118 000 in 2004 and 2007 respectively. Both of these figures were less than half of the average amount approved for majority male-owned firms in each respective year.

Based upon these figures alone, it is not possible to determine if female applicants were more likely than male applicants to be fully or partially denied debt financing or if female applicants simply requested smaller amounts of debt financing. To find the answer, the ratio of the aggregated amount of approved debt financing to the aggregated amount of requested debt financing (i.e., the sum of all approved debt financing divided by the sum of all requested debt financing) was calculated for each gender group. As shown in Table 7, the ratio was very similar between the two gender groups in both 2004 and 2007, suggesting that female applicants indeed requested smaller amounts of debt financing than male applicants. Thus, in terms of this ratio there appears to be little difference between majority female-owned firms and majority male-owned firms with respect to accessing debt financing.

Overall, debt financing remains the dominant choice of external financing of both majority female-owned and majority male-owned firms. In 2007, the distribution of financing by type was very similar between the two gender groups, with at least 75 percent of the total amount of financing approved being in the form of debt financing (Figure 4).

Figure 4
Distribution of Approved Financing, 2007*

[Description of Figure 4]
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
* Sources of financing in the "Other" category include equity financing and government-sponsored programs.

Loan conditions were very similar between majority female-owned and majority male-owned firms

Previous research has suggested that female business owners were more likely to be asked for collateral as a condition for loan approval than male business owners (Coleman 2002, Riding and Swift 1990), but the data presented in Figure 5 suggest otherwise. In 2004, majority female-owned firms were significantly less likely to be asked for collateral than majority male-owned firms (43 percent versus 61 percent). In 2007, the demand for collateral was almost identical between the two gender groups.

Figure 5
Percentage of SMEs Asked for Collateral as a Condition for Loan Approval*

[Description of Figure 5]
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004 and 2007.
* Bold value denotes statistically significant gender difference at 5 percent.

In terms of interest rates, majority female-owned firms faced higher overall rates than majority male-owned firms in 2004, but in 2007 majority male-owned firms were charged higher overall rates (Table 8). Note, however, that the interest rate charged on long-term debt financing was very similar for both majority female-owned and majority male-owned firms in 2004 and 2007. Overall, there is no convincing evidence that female business owners faced less favourable loan conditions in terms of requests for collateral or interest rates.

Documentation requirements were higher for female business owners

The documentation required as part of the loan application process was greater for female business owners than for male business owners in 2007. As illustrated in Figure 6, female business owners were just as likely, if not more likely, as male business owners to be required to provide each type of documentation listed. In particular, female business owners were significantly more likely to be asked for personal financial statements, appraisals of assets to be financed and cash flow projections than male business owners.

Figure 6
Documentation Required During the Loan Application Process, 2007*

[Description of Figure 6]
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2007.
* Bold value denotes statistically significant gender difference at 5 percent.

Poor credit history and lack of collateral more likely to affect female business owners than male business owners

Previous research has suggested that a weaker credit history may be constraining access to credit among female business owners (Moore 2003). In 2004, 30 percent of female business owners who were denied credit indicated a poor credit history as the reason for being denied credit compared with only 10 percent of male business owners (Figure 7).^{Footnote 8} In addition, female business owners were more than twice as likely as male business owners to cite a lack of collateral as the reason for being denied credit.

Figure 7
Reasons for Denying Debt Financing, 2004*

[Description of Figure 7]
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
*Bold value denotes statistically significant gender difference at 5 percent.

Discouraged borrowers are business owners who require credit but do not apply for financing out of fear of being rejected. In 2004, the vast majority of female business owners who did not apply for credit did not apply because they were not in need of external financing;^{Footnote 9} however, as illustrated in Figure 8, about 5.4 percent of female business owners who did not apply for credit thought they would be denied financing, a slightly higher rate compared with male business owners (3.5 percent). On the other hand, the study by Orser et al. (2006), which employed 2001 Statistics Canada data, found no statistically significant gender difference in the likelihood of being a discouraged borrower. Indeed, recent research has revealed that when controlling for various firm, owner and market characteristics, female business owners were no more likely to be discouraged borrowers than male business owners (Cole and Mehran 2009).

Figure 8
Reasons for Not Applying for Debt Financing (excluding firms that did not require financing), 2004*

[Description of Figure 8]
Source: Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
* Bold value denotes statistically significant gender difference at 5 percent.

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