With a successful business, a solid credit history and equity in a house she had purchased years before, Julie Mitchell thought she’d have no problem borrowing money to buy a building in which to house her growing graphic design company.
So the president of Parcel Design Inc. in Toronto was surprised when the bank representatives she met with said her best shot at getting a bank loan was through Canada Small Business Financing, a program under which the federal government would cover 85 per cent of the bank’s costs were Ms. Mitchell to default on the loan.
“I found it quite insulting because it felt like, really, they were saying no,” recalls Ms. Mitchell, who had a silent partner willing to pay for half of the building. “So I had to find another way to get the money.”
Being able to secure financing is critical to any business, whether it’s a startup seeking venture capital or a mid-sized firm that needs more cash to grow.
But while it has become easier in recent years for businesses to borrow money, there still appears to be a gap when it comes to finding financing between female and male entrepreneurs.
An October 2010 report by the SME Financing Data Initiative – a joint project by Industry Canada, Statistics Canada and Finance Canada to gather information on financing for small and medium-sized enterprises – found that, in 2007, 85 per cent of female-owned small businesses that applied for a loan were approved.
By comparison, the approval rate for male-owned small businesses was 96 per cent.
Female-owned businesses also got less money, receiving an average amount of $118,000, compared with $284,000 for the companies owned by men.
At the same time, female entrepreneurs had to provide lenders with more documentation – such as personal financial statements, appraisals of assets and cash flow projections – than male entrepreneurs, the report found.
While the report underlines the gender gap in business financing, it also shows that female entrepreneurs' chances of borrowing money have improved over the years; between 2004 and 2007, for instance, the debt-financing approval rate for women-owned businesses increased by six percentage points to 85 per cent from 79 per cent.
Still, Jacoline Loewen, a partner at Loewen & Partners Inc., a Toronto-based firm that matches businesses with investors, and a lecturer in the “ Next Steps” program for female entrepreneurs at the University of Toronto’s Rotman School of Management, says she has heard a few program participants complain about not getting financing “maybe because I am a woman.”
Yet, while she knows many women may disagree with her, she doesn’t believe gender is an issue. “Most finance people see numbers, not gender, and if you have a fundamentally good business and you know how to make money for an investor, then you will get money.”
Natalie Townsend, managing partner at NorthRock Capital Partners, a private equity investment firm in Toronto that provides expansion capital of $5-million to $25- million, says gender is definitely not factored into her company’s decisions to fund or not to fund.
“If a woman could come to the table with the same success factors that have existed for all successful CEOs – male or female – then gender is not an issue,” she says. “And don’t forget that it’s typically a team that leads an organization, so if she’s a great CEO with a good team and she can show us that they can manage and grow the business, then we would welcome the opportunity.”
And while in the old days of community lending, decisions were sometimes influenced by a bank manager’s personal opinion of a borrower, today most banks have standardized criteria for approving loans, points out Alec Morley, senior vice-president of small business banking at TD Canada Trust in Toronto.
“What has happened in the area of approving loans is that we have moved to a very standardized risk model, like a grid, where you look at a standard set of factors like credit rating, debt service coverage, and the value of any security a borrower is providing,” he says. “So the human element has been removed and, along with that, the risk for gender bias has been removed.”
So why do the numbers and some anecdotal evidence suggest that female entrepreneurs still get less favourable treatment from lenders and investors?
The SME Financing Data Initiative report points to poor credit history among some female business owners. In 2004, the latest year figures were available, 30 per cent of female business owners said that they were denied financing because of a poor credit rating.
The report also notes that female business owners tend to be younger than male ones, and have less experience managing or owning a company. The latter, Ms. Townsend says, is an important deciding factor for investors, who want to make sure they're handing their money over to those who know their business and industry.
Women may also be behind men in the funding department because they’re less likely to go looking for money from external sources, she adds. Of all the deals she’s looked at over the years, only about 5 per cent involved a female chief executive officer, she notes.
Moreover, at one point, she recalls, she cold-called a list of 50 top female entrepreneurs to see if any would be interested in getting funding from her company.
“I didn’t get very many callbacks, so none of those turned into a deal,” she says. “But then people aren't going to respond if they don’t think they have a need for capital.”
Barbara Orser, a professor at the University of Ottawa’s Telfer School of Management and the author of several studies about female entrepreneurs, agrees with Ms. Townsend’s observations.
“A lot of women business owners actually don’t think they need to borrow money,” she says. “So I think there needs to be more education around the cost of their business not growing because it’s undercapitalized.”
Even if they really don’t need to borrow money, Dr. Orser adds, “it’s a good idea to ask for money when you don’t need it and not when you do.”
David Berge, senior vice-president of community investments at Vancouver City Savings Credit Union in Vancouver, says it is increasing its lending to female-owned businesses.
“We feel that the growth in female entrepreneurship is going to make a massive difference in our community,” he says. “So we intend to do what we can to support this growth.”
For Ms. Mitchell, the best source of money for her company’s new building turned out to be another female entrepreneur who had heard her story about her unsuccessful meeting with the bank.
“She called me and said ‘I know you and I know your business and I’m happy to give you a hand,’” Ms. Mitchell recalls. “So that’s how I got the money to pay for my share of the building.”
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