Access to Capital and Terms of Credit: A Comparison of Men- and Women- Owned Small Businesses

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This article compares access to capital for men- and women-owned small businesses using data from the 1993 National Survey of Small Business Finances. Findings reveal that women-owned firms are less likely to use external financing as a source of capital. It does not appear, however, that lenders discriminate against women on the basis of gender in terms of access to capital. A second part of this study examines the terms under which women obtain credit to determine whether they are at a relative disadvantage from that perspective. Findings reveal that women-owned firms paid higher interest rates than men for their most recent loans. In addition, women-owned service firms were more likely to put up collateral than men-owned service firms.

Small businesses are an important source of economic growth and job creation. According to the U.S. Small Business Administration, there were over 22 million small businesses in 1994 employing 53 percent of the workforce (Facts About Small Business 1997). Small firms account for 50 percent of the gross domestic product and the majority of new jobs created. In terms of innovation, it is estimated that small firms produce twice as many product innovations per employee as large firms, creating new products, services, lines of business, and industries.

Access to capital is a critical issue for small businesses. Without sufficient capital, small firms are unable to develop new products and services or grow to meet demand. Insufficient liquidity is a frequently cited cause of small business failure. Unlike larger publicly held firms, small firms typically cannot access the traditional capital markets (Ang 1991; Weinberg 1994). Instead, small firms are heavily dependent on bank loans, trade credit, and "informal" sources of financing such as personal savings, credit cards, home equity loans, and loans from family and friends (Ang 1992; Ang, Lin, and Tyler 1995; Berger and Udell 1995; Binks and Ennew 1996; Cole and Wolken 1996; Petersen and Rajan 1994).

Small businesses owned by women represent an increasingly important part of the small business sector. The National Women's Business Council (1996) estimates that women-owned businesses represent one-third of all businesses, and that the number of women-owned firms is growing twice as fast as firms in total. The same study estimates that women-owned businesses employ almost six million people and are adding jobs much more rapidly than firms on average. A number of researchers have found that acquiring capital and dealing with financial institutions is particularly difficult for women business owners. Reasons cited include the small size of most women-owned firms (Coleman and Carsky 1997; Fabowale, Orser, and Riding 1995; Riding and Swift 1990); lack of financial sophistication (Brophy 1989; Brush 1992; Hisrich and Brush 1984; Loscocco and Robinson 1991); risk aversion (Chaganti 1986; Olsen and Currie 1992); and possible discrimination (Brush 1992; Neider 1987).

This study had three goals. First, it compared men and women-owned businesses in terms of their usage of various external credit products. Second, it identified firm characteristics or variables, including gender, that predict the likelihood of a firm using these same external credit products. Finally it examined terms of credit, including interest rate and collateral requirements, to determine whether lending conditions imposed on women business owners are more stringent than those imposed on men. The study also explored how the length of the relationship a firm has with a financial institution impacts on terms of credit.

The value of this study is that it uses a large national sample of both women and men-owned small businesses to explore differences between the two. Although a number of prior studies have been done on women-owned firms and their access to capital, most of the studies have been based on small samples or samples of women-owned firms only. …