Enterprise and Small Business Principles

The management and financing of female-owned businesses

In an attempt to refocus the research effort away from broad descriptions of the personal and business characteristics of female entrepreneurs, throughout the 1990s increasing attention was given to the attempt to understand the real nature of manage­ment differences in female-owned firms (Carter and Cannon, 1992; Rosa et al., 1996). More recent studies have continued to explore the issue of management of female - owned businesses, but the field of study has developed to encompass more sophisticated methodologies, larger-scale samples, and more robust sampling procedures, in particu­lar the use of both male and female samples. The focus of investigation has evolved to concentrate on the effect of gender on both the experience of self-employment and the relative performance of small businesses (Rosa and Hamilton, 1994; Rosa et al., 1996; Berg, 1997; Carter and Allen, 1997; Marlow, 1997; Marlow and Patton, 2005).

A recurrent theme throughout this body of research has been the focus on gender differences in the access to and usage of entrepreneurial finance. Following initial work by Buttner and Rosen (1989) and Riding and Swift (1990) in North America and Fay and Williams (1993a) in New Zealand, researchers have highlighted differences in the financing patterns of male-owned and female-owned businesses (Brush, 1992; Coleman, 2000; Brush et al., 2001). Women-owned businesses tend to start up with lower levels of overall capitalisation (Carter and Rosa, 1998), lower ratios of debt finance (Haines et al., 1999) and much less likelihood of using private equity or venture capital (Greene et al., 1999; Brush et al., 2001).

As the most commonly used form of external finance, research has focused more on debt rather than equity finance (Greene et al., 2001). Studies investigating gender-based differences in debt financing have focused on two related themes. First, researchers have sought to unravel the complex relationship between gender of entrepreneur and bank finance with regard to the volume of finance lent, the terms of credit negotiated and the perceived attitudes of bank lending officers to female entrepreneurs (Fay and Williams, 1993a; McKechnie et al., 1998; Haynes and Haynes, 1999; Coleman, 2000; Verheul and Thurik, 2000). Second, researchers have attempted to demonstrate whether gender-based differences are a consequence of supply-side discrimination by bank lenders, demand-side aversion to debt or risk by women entrepreneurs, or simply the result of the structural dissimilarities of male-owned and female-owned businesses (Buttner and Rosen, 1989; Orser and Foster, 1994; Fabowale et al., 1995; Read, 1998; Watson and Robinson, 2003).

Research has exposed gender-based differences in patterns of finance usage, with women-owned firms using less external finance in the form of bank debt and private equity (Greene et al., 1999; Brush et al., 2001). Over the past 15 years, a number of stud­ies have investigated the effect of gender on bank lending, though few have found any direct evidence of gender discrimination. Buttner and Rosen (1989: 256), for example, found ‘no evidence that lending decisions were significantly affected by entrepreneur’s gender’, results endorsed by a range of increasingly sophisticated later studies (Fabowale et al., 1995; McKechnie et al., 1998; Haines et al., 1999). Despite the weight of evid­ence pointing away from gender discrimination by bank loan officers, a number of studies suggest that the relationship between gender, entrepreneurship and bank lend­ing is complex and the question of why women-owned businesses fail to access and use external finance remains unresolved.

Several studies have attributed gender-based differences in finance usage to the ‘structural dissimilarities’ between male - and female-owned businesses (Read, 1998). In a large-scale survey analysing bank loan files, Haines et al. (1999) found initial dif­ferences between male and female entrepreneurs (lower sales levels and liabilities, lower levels of salary and drawings) to be a product of business size, age and sector. Fabowale et al. (1995), similarly, argued that structural factors accounted for differ­ences in rates of loan rejections between male and female entrepreneurs. Examining 282 matched pairs of male and female business owners, McKechnie et al. (1998) found few substantial differences once structural factors had been taken into account, but a greater dissatisfaction among women entrepreneurs with regard to their treatment by bank lenders. Evidence from other studies has been less conclusive. A survey of 2000 Dutch entrepreneurs (Verheul and Thurik, 2000) found that most differences in the use of starting capital by male and female entrepreneurs were explained by ‘indirect’ effects (size, age, sector); however, some ‘direct’ gender effects survived.

In the absence of direct evidence of gender discrimination, researchers have suggested that differences in patterns of finance usage may be explained by the practices of indi­vidual lending officers or through the use of application procedures that inadvertently disadvantage women business owners. Buttner and Rosen (1988: 249), for example, reported that perceptions held by bank loan officers of the characteristics of successful entrepreneurs were ‘more commonly ascribed to men than women.’ In a study notable for its use of experimental protocols, Fay and Williams (1993a) presented bank loan officers with an identical loan application from male and female applicants. Gender- based differences were found when the applicant was described as having high school education, but not when the applicant was university educated. They concluded that their study ‘demonstrate[d] experimentally that some loan officers do employ differing evaluative criteria for female and male applicants, and that these differences in evalu­ative criteria may act to female disadvantage’ (Fay and Williams, 1993a: 304). Orser and Foster (1994: 16) questioned the use of the standard 5Cs model of bank lending (character, capacity, capital, collateral and conditions), suggesting that supposedly ‘objective’ criteria were applied in a ‘subjective’ manner to the detriment of female entrepreneurs. Coleman’s (2000) analysis found women less likely to use bank debt, attributing this to the lower average size of women-owned businesses, a view endorsed by Mahot (1997). Rather than discriminating against women, Coleman (2000: 49) concluded that bankers ‘discriminate on the basis of firm size, preferring to lend to larger and, one would assume, more established firms. This preference may put women at a disadvantage given that they are half the size of men-owned firms on average.’

A focus on supply-side discrimination has been countered by evidence of demand - side risk and debt aversion. A lower preference for risk among women has been a recurrent finding of comparative analyses of male and female entrepreneurs (Sexton and Bowman-Upton, 1990; Watson and Robinson, 2003). The greater risk aversion of women is seen not only in their reluctance to assume the burden of business debt, but also within their reluctance to engage in fast-paced business growth (Cliff, 1998; Bird and Brush, 2002). Debt aversion among women entrepreneurs, often conceptualised as a quasi-psychological characteristic, is as likely to be rooted in socio-economic factors: women’s comparatively lower earnings in employment (Equal Opportunities Commis­sion, 2005) are reproduced among the self-employed (Marlow, 1997; Parker, 2004).

Overall, the weight of research evidence considering gender, entrepreneurship and bank lending suggests that while the bank financing profiles of male and female entre­preneurs are distinctly different, much - but not all - is attributable to structural dissim­ilarities. The research evidence also suggests that while women entrepreneurs perceive that they are treated differently by bank lending officers (Fabowale et al., 1995), there is almost no evidence of systematic gender discrimination by banks. Indeed, there is a growing recognition that women entrepreneurs constitute an important new market for banks, and it is difficult to argue that it is within the banks’ interest to deliberately, much less systematically, exclude this growing market. The debate has continued largely because of dissatisfaction with existing explanations, coupled with the methodological difficulties facing researchers in providing clear and unequivocal evidence (Mahot, 1997; Haines et al., 1999). While entrepreneurship researchers continue to debate the extent and causes of the gender, entrepreneurship and bank finance nexus, feminist analyses may provide new insights. In a review of the entrepreneurship research liter­ature, Mirchandani (1999) points to the essentialism inherent in the construction of the ‘female entrepreneur’ category and stresses that gender should not be seen simply as a characteristic of individuals, but as a process integral to business ownership, a critique developed by Ahl (2002) and Bird and Brush (2002). As Mirchandani (1999: 230) argued, the practice of statistically equalising structural dissimilarities between men and women in order to explain gender differences in bank borrowing suggests that ‘it is business structure rather than gender that is the prime determinant of access to credit’.