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Financing SMEs in Canada: Barriers Faced by Women, Youth, Aboriginal and Minority Entrepreneurs in Accessing Capital — Phase 2: Gap Analysis and Recommendations for Further Research

Research on SME Financing for Women

The chart below shows that over the past decade a fair bit of research has been conducted on the effects of gender on access to financing for SMEs. Several of these studies are Canadian, but this section has also been supplemented by drawing on a few key international studies and the substantial body of existing research from the United States. In spite of this, several authors of the following studies note the absence of rigorous research on issues related to gender and SME financing.

In terms of research gaps, there are both broad and specific gaps in the existing research. In the broader context, these studies do not differentiate or stratify data based on firm characteristics (e.g., size, age, sector) and as such, vital differences between different types of SME financing are masked. In addition, the methodology employed in these studies varies widely, as does the sample size and scope of research and type of financing examined, and all of these differences make it difficult to compare findings across studies to draw broad conclusions about the accessibility of SME funding for women in Canada. While one study (Greene et al., 2001) examined the intersection of female entrepreneurs and venture capital, other studies took a far more general approach.

Although all of these studies touch on issues related to financing for female-owned SMEs, in many cases the question of finance accessibility is not the central one, and as such, the issues are often addressed indirectly rather than directly. For example, studies conducted by the BDC (1997, 1999) focus more on characteristics of women entrepreneurs, and Cliff (1998) focuses on growth rates of women-owned firms. While both make reference to the accessibility of capital for these businesses, it is a secondary issue rather than a primary one. Although there initially appears to be a considerable body of research related to financing women-owned SMEs, if the scope were restricted to Canadian studies that directly examined the question of women's access to financing the actual number of useful studies would be much smaller.

In spite of lack of direct comparability of these studies, the overall conclusion reached (with the odd exception) is that there is no evidence to support the hypothesis that women face greater barriers in accessing SME financing because of their gender. Under this relatively straightforward conclusion, however, the research highlights notable differences in the way women approach and run their small and medium-sized businesses. Many of these are directly or indirectly related to SME financing and deserve further exploration in the context of SME financing for women. For example, Cliff (1998) and Coleman (2000) highlight different preferences of female entrepreneurs such as a tendency to be less likely to use external sources of credit, or to make deliberate choices to limit growth rates and size of their firms. However, both note no overt evidence of discrimination in access to financing, but rather that access is affected by choices made about firm characteristics, with financing being less accessible for smaller businesses than larger ones.

It is worth noting that the perception of bias towards women continues to exist in spite of lack of evidence for this bias in the research literature. With respect to debt financing, Fabowale et al. (1995) note that while their research showed no evidence of differential access to credit between male and female entrepreneurs, women were far more likely to report feelings of being treated disrespectfully by financial institutions. While several studies identified no differences in loan rates for comparably qualified male and female applicants, this begs the broader question as to whether women are able to compete equally with their male counterparts. Lack of access to debt financing is compounded by women-owned businesses having lower sales volumes, less capacity, less capital, less collateral and the owners have less business management experience than male-owned businesses (Fabowale et al., 1995).

For example, Haines, G.H. et al., (1999) note that female entrepreneurs are more likely than male entrepreneurs to be below the 'threshold of bankability' that lenders require, but argue that this in itself does not indicate gender discrimination. The OECD (2000) notes gender-based differences between male and female owned SMEs, with women tending to run small and micro-businesses, and to cluster in the service sector. The same study notes that women entering the SME sector tend to have less entrepreneurial experience than men, may be juggling the demands of their business with family responsibilities, and often have different cultural and social values, in addition to 'less conventional' thinking about small business. In terms of access to financing for women-owned SMEs, this raises broader (and thornier) questions as to 1) whether banks are basing access to financing on a model that is based on the assumption that women entrepreneurs will be very much like their male counterparts, and 2) whether a new model may be more relevant for evaluating finance needs for female entrepreneurs.

With respect to equity financing, an Industry Canada (1999) report notes that female entrepreneurs work most frequently in the service sector (61.5%), followed by retail and wholesale trade (17.5%), agriculture (9.5%) and finance/insurance (5%). As these tend not to be high-growth sectors, it is unlikely that these entrepreneurs will have much access to financing through venture capital or angel investments.

By comparison, Allen (1996) found that female entrepreneurs in high-growth industries are very similar to their male counterparts in these areas and are correspondingly likely to have more financing options open to them than women in low-growth sectors. In spite of this, Greene et al. (2001) found that less than 5% of U.S. venture capital was invested in firms owned by women. This likely reflects the fact that only a small percentage of women are starting businesses in high growth sectors that attract venture capital, the fact that women's entry into these sectors is relatively recent, and also the fact that they have a lack of access to networks that would provide access to venture capital.

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