Small Business

The Capital Gender Gap


Although they have made tremendous progress over the past decade, female entrepreneurs continue to lag behind in a key area: raising capital. While businesses owned by women have made gains in both credit and equity financing, they still use less commercial credit than their male-owned counterparts, and rely more on business earnings as their primary funding source, according to "Access to Capital: Where We've Been, Where We're Going," a study from the Center for Women's Business Research in Washington, D.C.

Smart Answers columnist Karen E. Klein recently spoke with Rebecca Macieira-Kaufmann, executive vice-president of the small business segment at Wells Fargo (WFC), which underwrote the study. Edited excerpts of their conversation follow.

Q: What exactly did this study measure?

A: Key trends in business financing, capital availability, and equity capital for women business owners over the past decade.

Q: The study showed that 20% of female business owners used commercial credit in 1996. By 2003, that figure was up to 34%. How far have female entrepreneurs come in that time?

A: In 1995, when Wells Fargo made a formal commitment to female entrepreneurs, there were some states where women still had to have their husbands sign for them if they wanted to get bank loans. A lot has changed over that time. We've seen 50% growth in the number of women getting loans over nine years. That's good growth. What surprises me is that the [34%] figure is not higher.

Q: Why has that number remained low?

A: Actually, that 34% is for all women business owners. When we break down the figures to show the data for slightly larger small businesses -- those earning $1 million and more annually -- we found they are borrowing at a higher rate: 56%. So, we might imagine that the smaller companies, bringing in less than $1 million in annual revenue, are still in startup mode and/or don't need loans yet.

Q: As of 2004, women control about half of the 20 million privately held businesses nationwide, and the number of women-owned businesses is growing twice as fast as the number of male-owned businesses. When did female business ownership start growing so dramatically?

A: Well, we've always had women who owned businesses and were senior executives in larger companies. But I believe it was in the late 1980s that female entrepreneurship really started to take off, and it started to become widely noticed by the early 1990s. Around that time, a female senior executive at Wells was talking to the leadership at the National Association of Women Business Owners. Those conversations led to our goal in 1995 to lend $1 billion to women business owners over the next decade. But we surpassed that goal so quickly we had to restate it in 1996, to $10 billion. By 2002, we had already lent more than $16 billion. Now, the goal is to lend $20 billion over the next 10 years. So we keep shattering our own glass ceilings.

Q: With all the progress that's being made, why do female entrepreneurs still lag behind men?

A: I think it's all a function of time and experience in their industries. At a certain point, you get critical mass. Women are rising up and owning larger companies, but they still do not have parity with men. They are still coming up the curve. Women business owners as a whole are not as comfortable going to traditional sources for capital, and many of them still use their own savings, vendor financing, and friends and family for funding. This is why research like we're doing is so valuable. This study tells me that we still need to get the word out to the smaller firms that capital truly is available for female entrepreneurs.

Q: Between 1990 and 2000, the percentage of Small Business Administration-backed loans going to women increased from 13%, to 21%, and the total number of loans almost quadrupled, from 2,530, to 9,216. However, momentum seems to have slowed. In 2004, the number of loans to female-owned businesses increased to 17,680, but the share of total loans remained virtually unchanged since 2000, at 22%. What's behind that finding?

A: That was a surprise to me. I'm going to share those findings with my counterpart at the SBA. I wonder, with so many funding cuts at the SBA, if that data is even statistically significant. It's not that the number of loans has dropped, just that the growth has flattened. Overall, nongovernment-backed loans dwarf the government-backed loans, so that tells me we are getting credit out to women, but not necessarily in the form of government-backed loans.

Q: The center's research showed that in 2003 only 4% of the female owners of businesses with revenues of $1 million or more obtained, or intended to seek, equity investment, compared with 11% of comparable male-owned firms. What does that tell us?

A: I think it shows that there hasn't been a lot of progress in venture-capital funding for women. In the 10 years that I've been doing this, I've noticed that women are becoming increasingly sophisticated. It used to be that women were so new in the game that they were asking questions about how to write a business plan and how to get their resources together. Now, a lot of these same business owners are entering into the areas of wealth management, equity financing, and building their businesses for growth. So we should be starting to see that happen, but we're not quite there yet.

Also, I should say that venture capital represents a very tiny proportion of where most small businesses wind up. It's for those who are going to grow into large businesses, and the reality is that most small businesses stay small.

Q: What more needs to be done in order for female business owners to continue to catch up in the marketplace?

A: What we tell all small business owners, and particularly women, is that you have to have a business plan, you have to be profitable, you need cash flow, education, training, and networking. We also encourage them to become more comfortable working with their bankers to get consultation and advice before they go in for credit.

At each stage of your company's growth, your banker, attorney, and accountant can advise you on things that will help you succeed, from the right line of credit to equipment financing. Young small businesses should become more and more financially literate, and they should establish good vendor credit by paying within a 30- to 60-day window so they can borrow more going forward.

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