Although women small business owners are still outnumbered by men, the growth rate of women owners has been steadily growing over the past decades. This growth has prompted research about gender differences among business owners, especially the issue of credit rationing.

To examine this issue further, Naranchimeg Mijid, PhD, professor of economics at Central Connecticut State University, and Alexandra Bernasek, PhD, professor of economics at Colorado State University, conducted a study to determine if women business owners were given the same access to credit lines as their male counterparts.

“One of the most pressing issues for small businesses is access to bank credit,” the authors wrote in the study, which was published in The Social Science Journal. “Given evidence that women are more likely to be denied access to credit, it is important to know if this has to do with relevant characteristics of the firm, such as the industry they operate in, the size of the firm, the performance of the firm and the creditworthiness of the owner, or if it has to do with gender of the owner.”

Discouraged borrowers

According to the study, research has shown that women-owned businesses do not have the same access to credit as men-owned businesses. Furthermore, they experience higher loan application rates and loan denial rates ,and if approved for a loan, receive smaller amounts than men.

“Such observations raise the question of whether or not lack of access to credit is a factor in the relative underperformance of women-owned firms,” the authors wrote.

To analyze this, the researchers used data from the 2003 Survey of Small Business Finances, a study conducted by the Federal Reserve Board of businesses that employ fewer than 500 people. The sample included 2,820 firms in which one owner had the majority of shares. Women-owned firms were 24% of the sample. The sample also included discouraged borrowers — those who did not apply for a loan because of fear of rejection, who are not typically included in studies about credit rationing.

The researchers used a theoretical model to test the effect of the predicted probability of denial on a firm’s decision to apply for loan. The analysis was conducted in two stages. First, the researchers estimated for firms that applied for a loan and calculated the probability of denial including applicants who actually applied and discouraged applicants. In the second stage, probabilities of denial were estimated.

They then tested these results against five hypotheses to determine any systematic differences between women- and men-owned firms: women-owned firms have the same average probability of denial as men-owned firms; banks use the same criteria to evaluate loan applications for women- and men-owned firms; the size of the coefficients of the control variables on the probability of denial for women-owned firms does not differ from their men-owned counterparts; women-owned firms apply for credit at the same rate as men-owned firms, and; the probability of denial does not negatively affect the owner’s probability of applying for a loan regardless of the gender of the business owner.

Higher denial rates

The researchers found that women-owned firms had higher loan denial rates than their male counterparts, suggesting that credit rationing is not gender neutral. However, these loan denial rates were related to business characteristics, because women-owned businesses tend to be smaller and more heavily concentrated in the service and retail industries. They also found that women lack confidence in their ability to secure a loan, so they don’t apply.

“Results suggest that credit rationing for women-owned businesses has more to do with business characteristics rather than the result of discriminatory lending on the part of banks,” the authors wrote. “Furthermore, women’s lower loan application rates persist even in circumstances where loan denial rates are similar to men’s suggesting that women ration themselves. These results are consistent with the studies that do not find evidence of discrimination in lending to women-owned firms.”