Women-owned small businesses are less likely to be “credit constrained” than small businesses owned by men, according to research by the New York Federal Reserve Bank. The research reveals a few important lessons for female entrepreneurs.
Rebel Cole and Hamid Mehran studied data from the Federal Reserve’s Surveys of
Small Business Finances (SSBFs) for the years 1987 – 2003 and published their findings in an August 2009 study titled, “Gender and the Availability of Credit to Privately Held Firms: Evidence from the Surveys of Small Business Finances.”
What they found was that female-owned firms are:
1) much smaller than male-owned firms, in terms of sales, assets, and employment;
2) younger, both in terms of the age of the firm, as well as in terms of the age of the owners;
3) less likely to be incorporated;
4) likely to have fewer and shorter banking relationships, and
5) “more likely to be discouraged from applying for credit, though not more likely to be denied credit when they do apply.”
It’s this last point that most interested me. Is this one of those “Women just don’t ask” issues? Credit discrimination? Or something else? First, I’d like to point out a couple of other relevant findings:
- When it comes to the use of business credit cards, the researchers didn’t find significant differences, and in some cases men put business expenses on their credit cards more often than women.
- While the survey found that the number of small businesses headed by women doubled during the survey period, on average these firms were about half the size of their male-run counterparts, and they declined in size over the period of the study.
It’s not that women-owned firms don’t need credit. In fact, a much larger percentage of these firms reported they needed credit, but were afraid to apply for fear of being turned down. (These are characterized as “discouraged” firms.) “Our…analysis reveals that female-owned firms are consistently and significantly more likely to be discouraged than male-owned firms: a difference ranging from 6 to 17 percentage points.” While women were more likely to get a loan application rejected than men, in only one year was the difference statistically significant.
In fact, the researchers come to the conclusion that if you control for other factors, the differences in securing credit by women-owned firms disappear.
So what’s the lesson here for women who run their own businesses?
The first is that it can pay to set up your business properly. The fact that a significant percentage of female owned firms operate as sole proprietors is one clue that something is amiss. You cannot get true business credit if you have not set up a corporate structure. As a sole proprietor, you may be able to get a credit card with the business name on it, but your business and personal credit are one and the same. So even if you don’t need credit yet, look forward when choosing your business structure. Though you may be a small firm today, what structure best meets your future goals for growth?