The availability of capital is crucial for the start-up, survival and growth of small businesses. One of my recent studies investigated how young small firms were financed during the financial environment of the Great Recession, especially high-tech firms and firms owned by women and minorities.
The major constraint limiting the growth, expansion and creation of small firms — especially women- and minority-owned businesses — is inadequate capital. These small firms typically have almost no access to funds from public markets and are bank-dependent. Though they may have high growth potential, they have little or no collateral andlack an extensive history from which future firm or management performance can be surmised. Bank lending is also limited by regulatory changes that tighten capital requirements and bank capital crunches.
Women entrepreneurs have even less access to financial capital — or make less use of it — than male entrepreneurs . The characteristics of women-owned firms may help explain why women obtain smaller loans, pay higher interest rates, must put up higher collateral and are dissatisfied with the bank loan process. For instance, banks don’t favor younger and smaller businesses, as women-owned businesses typically are.
On the equity side, women typically have limited social interaction with venture capital firms and are under-represented among fast-growth and high-tech businesses. They also rely more on informal funding methods and self-financing.
For many minorities, starting out at lower wealth levels also acts as a barrier to entrepreneurship.
Women and minority entrepreneurs can improve their companies’ economic performance, however. From a policy standpoint, targeted initiatives that provide skill development and training, encourage enrollment in science, technology, engineering and math disciplines, and develop and expand networks can help them access resources.
Our research showed that high-tech firms attracted higher levels of financial capital. They depended more on formal debt financing than similar, non-high-tech firms did.
Businesses owned by women, African-Americans and Hispanics showed similar disparities in their capital structure as opposed to firms owned by men and non-minorities. They used a different mix of equity and debt capital and relied more on owner-equity investments. The average woman- or minority-owned business operated with much less financial capital, even after controlling for other factors including credit score.
During the financial crisis, women and minority start-up entrepreneurs were less likely to apply for loans, fearing denial. The research controlled for some characteristics that likely affected bank borrowing, such as credit score and business type. The evidence showed that, compared with non-minority owners, minority owners of young firms were significantly less likely to have their loan applications approved.
Our study used data from the Kauffman Firm Survey, a cohort of businesses that began operations in 2004 and were followed through 2010. View the report at http://1.usa.gov/YVn0k4.
Alicia Robb is a senior fellow at the Ewing Marion Kauffman Foundation.