SME Financing in Canada, 2002 — Part II: B - Demographic Factors

Female Entrepreneurs: Business Characteristics

Sector of Operations

As seen earlier (see Figure 30), 45 percent of all SMEs have at least one female owner. For 34 percent of all SMEs, women hold 50 percent ownership or more. Figure 31 focusses on the sectors in which these businesses operate, where they account for the following percentages of all SMEs:

• Wholesale/retail: 43 percent (of which 20 percent are half-owned by women)
  
  
• Professional Services: 38 percent (of which 16 percent are half-owned by women)
  
  
• Agriculture: 37 percent (of which 32 percent are half-owned by women)
  
  
• Manufacturing: 31 percent (of which 18 percent are half-owned by women)
  
  
• KBIs: 31 percent (of which 20 percent are half-owned by women)
  
  
• Other sectors: 31 percent (of which 17 percent are half-owned by women)
  
  
• Primary Industries: 23 percent (of which 19 percent are half-owned by women)
  
  

Figure 31 – Gender Distribution of SME Ownership Across Industry Sectors

As will be seen later in this section, earlier research found that these factors appear to be significant in determining whether businesses owned by female (or male) entrepreneurs are successful in accessing financing. However, recent research suggests that size of business and sector of operations tend to be stronger determinants than gender when it comes to success in accessing financing.

Size of Business

Majority female-owned businesses tend to have fewer employees, accounting for 16 percent of SMEs with fewer than 5 employees, and 4 percent of SMEs with more than 100 employees.

Structure of Firms

• 44 percent of majority female-owned SMEs are incorporated, compared with 55 percent for majority male-owned SMEs. This likely reflects the fact that SMEs owned by women tend to be smaller. The smaller the firm the more likely it is to be unincorporated, irrespective of the gender of the business owner. Over 90 percent of firms with more than 100 employees are incorporated, whereas only 58 percent of firms with fewer than five employees are incorporated.
  
  
• 51 percent of female-owned businesses operate sole proprietorships. Again this is a characteristic of the size of the business – the smaller the business the more likely it is to operate as a sole proprietorship (nearly 50 percent of firms with no employees are sole proprietorships, compared with only 3 percent of firms with over 100 employees).
  
  
• 5 percent are partnerships. Again, gender does not appear to be a determining factor, since only 8 percent of majority male-owned SMEs are partnerships. Rather, this ownership structure is more often found in certain industry sectors. Partnerships are most often found in the agricultural sector (25 percent) and in the wholesale/retail sector (27 percent).

Table 20 – Stage of Reported Business Development by Gender of Owner in 2000

	Majority Male Ownership	Majority Female Ownership
Start-up	5%	4%
Slow Growth	49%	58%
Fast Growth	14%	9%
Maturity	23%	18%
Decline	9%	10%

Source: The Research Institute for SMEs, Université du Québec à Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002.

Stage of Development

• 58 percent of SMEs that are majority-owned by female entrepreneurs are in a slow-growth stage of development.
• 9 percent of SMEs with majority female ownership report being in fast growth – significantly fewer than those majority-owned by males.

Compared to male owners, fewer female owners reported being in the fast growth stage of development or having attained maturity. These findings are indicative of the sectors in which women operate (wholesale/retail), the lower average age of female owners (43 vs. 49 for men), and the lower age of their firms relative to those owned by men. Taken as a whole, these elements have a profound effect on the development of female-owned firms.

Age of Businesses Owner

It is far from clear how the age of the business owner has a bearing on the prospects of a firm's accessing financing; however, as illustrated in the following section, it may be a consideration in the financing decision when it comes to non-collateralized "character" lending or investing. Female business owners are, on average, 6 years younger than their male counterparts (43 years of age vs. 49).^{Footnote 49} More research will be needed to determine whether this difference is a significant factor in accessing financing.

Years in Operation
Comparing firms majority-owned by males and females:

• 76 percent of the females have more than 9 years of experience in the industries in which they operate; and
• 87 percent of the males have that level of experience.

The experience of the principal business owner may have an impact on the perception of riskiness of her/his promise to repay a debt or on the projections of returns an investor might expect from the firm. Further research will be required to determine whether this experience factor has a significant impact on firms' access to financing.

Regional Perspective

There are few regional variations in women's entrepreneurship, except that the Prairie provinces have slightly fewer women-owned SMEs than the national average. More research and analysis may reveal that this is due to the relatively high proportion of family farms, where ownership is often shared, compared to the overall business population in this region.

Exports

Findings indicate that 8 percent of majority women-owned SMEs export, compared with 11 percent of majority male-owned SMEs. This variation is within the margin of error of the survey; however, there may be a positive correlation between exporting and the two variables of business size and industry sector (see Table 15). Larger SMEs tend to be more export oriented, whereas smaller firms, which tend to be female-owned, are less likely to export. Given their concentration in the retail sector and since only 14 percent of wholesale/retail firms export (a sector where women play a significant role), it is not surprising that female-owned SMEs are less likely to export. These findings correspond to the 1998 Thompson Lightstone & Company study, which found that male ownership is significantly more common among SMEs that export. The findings indicate that 55 percent of Canadian SMEs that export are exclusively male-owned, whereas 47 percent of the entire SME population is majority male-owned.^{Footnote 50}

Financing Female-Owned SMEs

Requests by Gender

In 2000, SMEs owned by women made fewer requests for debt and leasing than SMEs owned by men.

Figure 32 – Requests for Financing by Gender in 2000

As seen in Figure 32, only 17 percent of firms that were majority female-owned requested debt in 2000. This finding is not surprising given that a large number of female entrepreneurs own smaller businesses and often operate in the professional services industries. Both of these characteristics show lower than average request rates for debt. As shown in Table 5, 19 percent of SMEs with 0 employees requested debt in 2000 and only 13 percent of firms in the professional services sought debt.

Requests for Lease Financing

The slightly lower demand for lease financing by majority female-owned SMEs is sector related, given that the wholesale/retail sector is the least likely to use this form of financing, and this is the sector in which the most majority female-owned SMEs operate. Given the relatively small numbers of businesses reporting the use of leases, this variation may be within the statistical margin of error of the survey and thus may not be significant.

Requests for Equity (Risk Capital) Financing

Given that the numbers of requests for such financing are small, the variation for firms that are owned 50/50 by men and women is not statistically significant.

Debt Approval Rates by Gender in 2000

The gender of the business owner did not have a significant impact on debt approval rates for SMEs. As illustrated in Table 21(see below), there was no difference in the rates of approval between majority female-owned SMEs and SMEs overall in 2000. More data may reveal whether or not the slightly higher approval rates for firms owned equally by men and women is statistically significant. It is possible that the survey results were heavily influenced by the joint ownership of many family farms. Thirty-two percent of agricultural businesses have this ownership structure – the highest of any sector – and agricultural SMEs have also reported the highest rates of request and approval for debt financing. Given these factors, it is likely that sectoral considerations have more of an influence than ownership structure per se.

Table 21 – Debt Financing Approval Rates by Gender in 2000

Ownership	Approval Rate
Majority Male-owned	80%
Majority Female-owned	82%
50% Female-owned	87%
All SMEs	82%

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2000

Debt Financing – Suppliers

There was also little variation between men and women in the type of lender they approached for debt financing, with the exception of Crown corporations and government institutions. Of the women entrepreneurs who made requests for debt in 2000, only 4 percent approached Crown corporations or other government lending institutions, compared to 8 percent of SMEs overall, despite the presence of some government financing programs targeting women. Given the small numbers involved, this may not be a statistically significant observation, but it merits further research.

Figure 33 – Finance Suppliers Where Majority Female-owned SMEs Requested Debt in 2000

Figure 34 – Finance Suppliers Where Majority Male-owned SMEs Requested Debt in 2000

Financing Application Process

Perceptions: The Survey on Financing of Small and Medium-sized Enterprises, 2000 found that women SME owners who required financing but did not apply often claimed that the difficulty surrounding the application process, and the likelihood of not being authorized, made them reluctant to request any form of financing.

Experience: In contrast to these perceptions, women who did apply for debt financing were not required to provide any more documentation to credit suppliers than were SME owners in general. In fact, 23 percent of SMEs owned by women that applied for debt in 2000 were not required to provide any documentation – compared to 16 percent of male-owned SMEs.

Collateral Requirements for Debt Financing

Collateral requirements appear to be similar for men and women. There was no difference reported between SMEs owned by women and SMEs owned by men concerning the use of personal assets of the owner as collateral for credit. Rather, the industry in which owners operate appears to be a much stronger determinant of this requirement. For example, 46 percent of firms in the wholesale/retail sector – a sector in which many women entrepreneurs operate – were required to use personal assets as collateral, compared to 39 percent for all sectors.

Use of business assets to secure debt also seems to be based more on industry sector than gender. Business assets are used to a greater extent in male-dominated industry sectors, such as agriculture, manufacturing and the primary sectors. Accordingly, SMEs owned by men used business assets as collateral 40 percent of the time, compared to only 35 percent for SMEs owned by women.

Debate on Financing of SMEs owned by Women Entrepreneurs

Much of the recent debate about the financing experiences of particular population groups of entrepreneurs has centred on women entrepreneurs. In a 1995 study comparing SMEs owned by women with similar businesses owned by men, the Canadian Federation of Independent Business suggested that there is a "financing double standard" within the Canadian financing market.^{Footnote 51} According to this study, SMEs owned by women were 20 percent more likely to be turned down for financing by a bank than similar firms owned by men.

Other research, including some conducted by Statistics Canada,^{Footnote 52} found that women entrepreneurs operated more small service or retail establishments than male entrepreneurs. These types of establishments and sectors, regardless of the gender of the owner, are often identified by financial institutions as slow growth, low profitability and high risk. It has been suggested that these characteristics of the service and retail sectors, rather than the gender of the business owner, are the underlying causes of financing differences. In fact, women in high-risk, low-margin sectors appear to face no more of a financing barrier than do their male counterparts in these sectors.^{Footnote 53}

The findings outlined above would appear to support the general observation that it is the sector in which a business operates and its size, and not the gender of the business owner, that are the key determinants of access to financing. Women tend to own firms in slower growth, higher risk sectors, such as wholesale/retail, in which access to financing is relatively more challenging than for other, less risky industries. In 2000, out of 23 percent of wholesale/retail firms that requested debt financing, 74 percent were approved, one of the lowest approval rates among the industries studied. Furthermore, there is a clear correlation between access to financing and size of business operations. Smaller firms, in which a higher concentration of female owners can be found, had lower approval rates in 2000 than firms with 20 or more employees. These two factors C sector and size V while perhaps not revealing the complete financing picture facing women entrepreneurs in Canada, are certainly contributing factors.

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49. The Research Institute for SMEs, Université du Québec à Trois-Rivières, Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, commissioned by Industry Canada, 2002.

50. Thompson Lightstone & Company Ltd., Small and Medium-sized Businesses in Canada: An Ongoing Perspective of their Needs, Expectations and Satisfaction with Financial Institutions, 1998.

51. Martine Marleau, Double Standard: Financing Problems Faced by Women Business Owners, Canadian Federation of Independent Business, March 1995.

52. Statistics Canada, National Survey on Financing of SMEs, 1995.

53. G.H. Haines, B.J. Orser and A.L. Riding, "Myths and Realities: An Empirical Study of Banks and the Gender of Small Business Clients," Canadian Journal of Administrative Sciences, vol. 16(4), 1999.