SME Financing in Canada, 2003 — Part II: Financial Structure of Canadian SMEs

5. Women Entrepreneurs

Characteristics of an average woman-owned SME in 2000: Share of Business Population: 15 percent of the 1.4 million SMEs Years in Business: 72 percent of women-owned SMEs were older than five years (compared with 77 percent for men-owned SMEs) Fixed Assets: averaged $152 000 (compared with $337 000 for men-owned SMEs) Total Debt Outstanding: averaged $152 000 (compared with $351 500 for men-owned SMEs) Profitability: averaged $34 000 net income before taxes (compared with $65 000 for men-owned SMEs) (see insert) Total Equity: averaged $117 000 (compared with $235 500 for men-owned SMEs) Long-Term Debt-To-Equity Ratio: 0.80 (compared with 0.77 for men-owned SMEs) Demand for Financing: 17 percent of women-owned SMEs requested debt, 82 percent were approved (compared with 23-percent request for debt and 80-percent approval for men-owned SMEs)

The financing structure of Canadian SMEs has thus far been examined by stage of business development, industrial sector and size of business. These characteristics exert a strong influence on SMEs' financing structure. This section examines the financial structure of SMEs by gender of ownership.⁴⁷

Over the last decade, research has explored the existence of gender discrimination in access to financing, with mixed findings.⁴⁸ Generally, difficulties in access to financing are related to size, sector and age of the business, rather than to the gender of the owner.⁴⁹

Formal versus informal types of financing

Formal Types of Financing in 2000

• 42 percent of women-owned SMEs used commercial loans and lines of credit (compared with 50 percent among SMEs owned by men)
• 23 percent used commercial credit cards (compared with 27 percent)
• 3 percent used government loans or grants (compared with 6 percent)

Informal Types of Financing in 2000

• 35 percent used the personal credit cards of the owner(s) (compared with 32 percent)
• 30 percent used trade credit from suppliers (compared with 41 percent)

Key findings for women entrepreneurs Women entrepreneurs relied less on formal financing than men entrepreneurs (42 percent of women used commercial debt versus 50 percent of men) Informal financial instruments were more popular among women-owned SMEs (40 percent of women used their personal savings versus 34 percent of men; 35 percent of women used personal credit cards versus 32 percent for men) Most of the equity in women-owned SMEs was held by the business owner/operator (90 percent), compared with 85 percent of male-owned SMEs Sector, business size, age and firm performance are stronger indicators of access to financing than the gender of the owner

Figure 27 shows the distribution of financial instruments by the gender of the SME's majority owner in 2000. Women entrepreneurs had slightly higher usage rates of informal financing instruments (e.g. owner's personal savings, personal credit cards, etc.), whereas SMEs owned by men tended to use more formal types of financing (e.g. commercial loans and lines of credit, trade credit from suppliers, etc.). However, women- and men-owned SMEs had similar rates of debt owed to suppliers of formal debt (see Figure 28), 31 percent to chartered banks (compared with 30 percent of debt owed by men), and 6 percent to credit unions/caisses populaires (compared with 5 percent).

Women-owned SMEs' high use informal types of financing is linked to several factors.

Sectors and business size:

• Women entrepreneurs are concentrated in the professional services and wholesale/retail sectors (23 percent and 19 percent of SMEs in these sectors).⁵⁰ These sectors, particularly wholesale/ retail, tend to have higher than average use of the personal savings of the owner(s) (see Figure 23). The fact that women are more concentrated in service sectors may also mean that their businesses have fewer assets to pledge as security for formal debt
• More than 87 percent of women-owned SMEs are micro businesses, compared with only 80 percent of male-owned SMEs.⁵¹ As discussed, the use of informal types of financing is positively correlated with smaller business sizes and service sectors firms

Firm performance: In 2000, majority women-owned SMEs averaged, across all sectors and sizes, annual net incomes of $33 834, compared with $64 809 for men. After sector is taken into account, nearly a 50 percent income gap in gender remains, and this gap is particularly acute in the professional services and manufacturing sectors (see Table 16). Women-owned firms also tended to be more highly leveraged than SMEs owned by men (0.80 debt-to-equity ratio for women-owned SMEs, compared to 0.77 for men). Lower net income levels combined with more leveraged equity in the business may impair access to formal types of financing.

Age of business and stage of development: Twenty-eight percent of women-owned SMEs were established within the last five years. For many newer firms, formal types of financing may not be the most appropriate financing strategy to grow and develop the business. As will be discussed in Part IV, personal financing (e.g. savings or love money) or other forms of early-stage equity financing are often more suitable to start-up firms.

From one observation it is not possible to discern which of these factors (or others) influence the financial structure of firms owned by women, or if these findings indicate a gap in the formal financing market for women. However, these findings are consistent with those from SME Financing in Canada, 2002 — factors other than the gender of the business owner appear to be the strongest determinants of access to financing.⁵²

Figure 27
Types of Financial Instruments in Use by SMEs in 2000, by Gender of Owner*

SME Ownership Capital in 2000

• $58 000 in average owner's equity in women-owned SMEs (compared with $142 000 among SMEs owned by men)
• 90 percent was owned by the business owner/operator (compared with 85 percent owned by men)
• 6 percent was owned by friends or relatives of the owner(s) (compared with 3 percent owned by men)

Figure 28
Average Distribution (%) of SME Debt Outstanding in 2000, by Supplier and Gender of Owner

Women operate smaller and younger businesses, and the capital structure of these firms reflects the size, sector and age of their businesses. For example, a similar ownership structure was found in wholesale/retail SMEs, in which many women concentrate, in Section 3.2.2 of Part II. Less reliance on equity sources likely contributed to the higher long-term debt-to-equity ratio found among women-owned SMEs (0.80), compared with men-owned firms (0.77).

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47. Women entrepreneurs, or women-owned SMEs, are defined in this section as those businesses with female majority ownership – over 51 percent. Shown in the insert, these majority women-owned SMEs represented 15 percent of Canada's SME population in 2000. When all other degrees of ownership (i.e. minority ownership, partnership, etc.) are factored in, however, 45 percent of Canada's SME population have at least one female owner.

48. Allan Riding, Financing Entrepreneurial Firms: Legal and Regulatory Issues (1998). Research Paper prepared for the Task Force on the Future of the Canadian Financial Services Sector, page 27 (Gender and SME Lending).

49. Industry Canada, Small and Medium-sized Enterprise (SME) Financing in Canada, 2002.

50. Industry Canada, Small and Medium-sized Enterprise (SME) Financing in Canada, 2002.

51. The Research Institute for SMEs, Université du Québec à Trois-Rivières (2002) Financing SMEs: Satisfaction, Access, Knowledge and Needs, 2001, a report prepared for Industry Canada, annex C.

52. Industry Canada, Small and Medium-sized Enterprise (SME) Financing in Canada, 2002.