Women-Owned Businesses: A Mix of Progress and Paralysis

David NayorSmall Business

By: Campbell Sechrest

Women-Owned Business

Recent reports have shed light on the current state of women-owned businesses and the progress (or lack thereof) achieved by female entrepreneurs in the past few years. One such analysis was commissioned by American Express, which collated data from 1997-2013 and noted established trends. While there were some promising statistics described – and outside commentary on the report largely chose to focus on these – the bigger picture is far more ambiguous. Since 1997, the number of women-owned firms did grow by 59%, well above the national average and twice the rate of men-owned firms. As of 2013, women-owned businesses accounted for 29% of all enterprises.

Despite this growth, the report goes on to say that as of 2013, women-owned firms employed only 6% of the country’s workforce and contributed below 4% of total business revenues. Only 1.8% of these firms had achieved $1 million or more in revenue (the same as reported in 1997), whereas 6.3% of men-owned businesses had reached this mark. Additionally, the Small Business Administration (SBA) just released demographics on their approved loans to borrowers, demonstrating that a mere 16% of loans were approved for female entrepreneurs in the last year.

Where horizontal growth is abundant for women-owned businesses, vertical growth is clearly lacking. The American Express report called this phenomenon a “mix of progress and paralysis”. So wherein lies the disconnect? How is it that women own 29% of all businesses, but are only contributing 4% of the total revenue? And if women comprise almost a third of American entrepreneurs, why are they receiving such a low percentage of small business loans?

Choice of Industry

Among all women-owned businesses, the highest concentration was in two industries: Health Care & Social Assistance (15.7%) and Other Services, including beauty salons, dry cleaners, pet-sitting, and other personal services (16.1%). These businesses are inherently smaller by nature and generate relatively lower revenues. The lowest concentrations of all women-owned businesses are found in Finance & Insurance (2.6%) and Accommodation & Food Services (2.4%), which generally involve larger firms with higher revenues.

One could conclude that the low percentages of employment and revenues under women-owned firms are not necessarily due to lower performance, but instead due to the nature of different industries. However, a 2010 study by the U.S. Department of Commerce found that even within a particular industry, women-owned businesses produced a lower percentage of total industry revenue. Some of these numbers are quite staggering – for example, although women own 52% of businesses in the Health Care & Social Assistance industry, these firms only produce approximately 15% of the total revenues of the industry. In addition, a 2007 U.S Census survey to small business owners reported that of the 7.8 million women-owned firms at the time, 6.9 million had no paid employees. In other words, only 11.6% of female entrepreneurs were employers while 88.4% were the sole member of the company. In contrast, men-owned firms hired paid employees at twice the rate, 23.3%. While these statistics are indeed less drastic when one considers that only a small share of all privately-held businesses do have paid employees, it should also be noted that these multi-employee firms account for over 90% of sales in the private sector.

These vast discrepancies raise a variety of questions regarding women in the workforce. On one hand, we can infer that women are discouraged from entering into certain industries such as finance or restaurant ownership, and experience more barriers to entry than their male counterparts. Historically, stereotypical norms dictate that these are male-dominated industries and that the skills of women are better suited to personal service businesses. In today’s day and age, we know these stereotypes to be completely inaccurate, and yet these statistics seem to be falsely perpetuating their validity. On the other, it can also be inferred that women prefer to pursue smaller enterprises that require less time.

Incentive for Entrepreneurship

In past U.S. Census surveys examining the characteristics of business owners, men and women have cited very different reasons for pursuing self-employment. Men were more likely to start a business as a primary source of income, whereas women were more likely to do so as a source of secondary income. Moreover, while only 12 percent of female owners cited “meeting family responsibilities” as a reason for starting their business, twice as many male owners reported this as motivation. These responses imply that there may be stronger underlying incentive for men to grow their enterprises and generate higher income – not only to achieve career goals, but also to fulfill familial obligations.

It has additionally been reported that on average, self-employed women spend more time on childcare and household activities than both self-employed men and salary-earning women. Self-employed women spend 3.5 more hours on childcare and other household tasks than their salary-earning female counterparts, and 6 more hours on these activities than self-employed men. This finding supports the idea that female entrepreneurs may be incentivized, as well as limited, in their self-employment by responsibilities in a very different sense. Perhaps the pull of familial obligation for women business owners manifests as being a caretaker, rather than providing a steady primary income. Inevitably the more time spent on the family and household, the fewer available hours for business ventures.

These notions serve as a possible explanation for the finding that on average, self-employed men work substantially more hours than self-employed women: 46.2 hours and 40.1 hours, respectively. Given that both marital status and presence of children are reported in relatively equal ratios between self-employed men and self-employed women, these factors alone seem to have little effect. So it stands to reason that it is not the existence of these externalities, but instead their unintended effects that remain a potential cause for the discrepancy. Many self-employed women are splitting career focus with being a caretaker at much higher rates than self-employed men.

Source of Startup Capital

For any small business, the ability to and method of obtaining financing has proven to be a very influential factor in the firm’s survival and expansion. In the 2007 small business report, the U.S. Census Bureau reported that 11.4% of self-employed men received startup capital from a bank or financial institution, compared to only 5.5% of self-employed women. Meanwhile, the SBA reported that only 16% of small business loans are given to women-owned firms, almost half of the expectation considering that women own 29% of all businesses and are growing in number at an exceedingly high rate. Recent data has also revealed that on average, women start new businesses using just 64% of the capital levels of startups owned by men. While female business-owners have proven just as willing to take on personal/insider debt or equity (owner credit card use, personal loans, family investments, etc.) as their male counterparts, they are far less likely to acquire outside debt or equity (venture capital, institutional loans, etc.).

There are numerous factors that may potentially account for these figures. One explanation is that women are less likely to be approved for loans from outside financers, or are given loans on less favorable terms. This begs the question of whether there is a level of systemic discrimination against female business owners. Given that women and men on average have equally strong credit scores, any implication that loans to women are more risky is simply untrue. Another explanation is that women are disproportionately discouraged from applying for institutional loans in the first place, and so the female applicant pool is scarce. There is also a possible compounding variable – different industries require different levels of startup financing. As we have already seen, female entrepreneurs are concentrated in certain industries that often constitute inherently smaller businesses, which in turn may not necessitate or attract as much financing in comparison.

It is difficult to pin down precisely why such a low percentage of women are approved for small business loans, since there are no firm statistics detailing either the applicant or denial rates. Nor is there recent accessible data that compares the loan approval rates by gender within a particular industry, which could help to confirm or eliminate underlying externalities. Nonetheless – whether it is a result of discrimination, discouragement, or simple personal preference – there is a clear discrepancy between the rates at which men and women are acquiring business loans.

Legislative Obstacles

The SBA has spearheaded various programs to help ensure that 23% of prime federal contracts are awarded to small businesses, particularly for underrepresented or disadvantaged business owners such as women or veterans. The Women Owned Small Business Program (WOSB), otherwise known as Section 8(m) of the Small Business Act, is designed to help women reach entrepreneurial goals and ultimately allow for about 5% of federal contracts to be set aside for women-owned firms. Up until last year, there was a cap on the contract award size granted under this program for which WOSBs were able to compete. With removal of this limitation, the SBA has been able to achieve more extensive contracting opportunities for eligible businesses.

However, there are still provisions hindering the program from reaching its full potential. As current law dictates, federal contracts to WOSBs are only eligible if “the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by women will submit offers for the contract.” This past June, Senators Jeanne Shaheen (D-NH), Maria Cantwell (D-WA), and Kirsten Gillibrand (D-NY) introduced the “Women’s Small Business Procurement Parity Act.” The bill would amend 8(m) so that sole-source authority contracts may be granted to WOSBs in eligible situations within substantially underrepresented industries, without the necessity of identifying multiple WOSBs in that industry. All other small business contracting programs have this ability, so enacting the bill is simply rectifying this inequity.

Looking Ahead

Women-owned ventures are growing quickly in number, and yet something is stalling their expansion and earnings. Although there are many factors at work in this simultaneous “progress and paralysis,” one denominator truly stands out: familial responsibility. Self-employed women with dependents are often splitting their time, focus, and mentality. This crucial distinction helps to explain the concentration of women-owned firms in certain industries (those smaller and less-time consuming in nature), as well as the consistently lower revenues.  If any person is attempting the same career goals in half the amount of time, the business will inevitably suffer. As women continue to gain parity in the American workforce, these stereotypical roles are constantly challenged and disproved. Yet their existence may have more presence in the modern world than we like to think.

So where do we go from here? Fundamental changes in societal norms do not happen overnight. The stereotype of defining women as caretakers and men as breadwinners has been developed and nurtured for thousands of years. Business equality legislation is undoubtedly a step in the right direction, as well as many initiatives that exist nation-wide to promote female entrepreneurship. Yet the strongest part of this effort is the women leading by example, proving not only their capabilities but also their drive. This is not to say by any means that women should be faulted for dedicating time to family – quite the opposite. It is entirely one’s prerogative how their time is spent, as long as this decision is in fact a personal choice and not dictated by societal expectation. There is absolutely no reason for constraints to be placed on a woman’s potential in any sphere.

 

Works Cited

 

“State of Women-Owned Business Report: A Summary of Important Trends, 1997-2013.” American Express OPEN (March 2011).

 

“SBA – Business Loan Approval YTD Activity: 2012, 2013, 2014.” Small Business Association (June 1, 2014).

 

“Women-Owned Businesses in the 21st Century.” U.S. Department of Commerce (October 2010).

 

“2007 Survey of Business Owners.” U.S. Census Bureau (June 2011).

 

 Women’s Small Business Procurement Parity Act, S. 2481, 113d Cong. (2014).