13 Sep 2004  Research & Ideas

Cash and the Woman-Owned Business

Female entrepreneurs often lack start-up cash. This excerpt from the book Clearing the Hurdles, co-authored by HBS professor Myra M. Hart, explains what women can do about it.


Building sufficient cash reserves to launch a business and managing subsequent fundraising are challenges for every entrepreneur, but they are particularly daunting tasks for women. Women often come up short of cash at start-up and, when they are ready to grow their businesses, they find that many would-be partners are not convinced that women have the necessary financial skills and management savvy. These assumptions are based on several different, but closely related, stereotypes about women, money, and financial management capabilities. They fall into three general categories:

1. Women do not invest sufficient capital in their own businesses. Either:
a) They can't.
b) They won't.

2. Women lack fundamental business skills and experience:
a) They do not have strong math skills.
b) They have little or no relevant financial experience.

3. Women are bad business risks because:
a) They are risk-averse.
b) They can't make tough decisions.

Whether or not they are true, these assumptions create significant barriers to success for women entrepreneurs who want to build large enterprises. If true, they might reflect fundamental problems in the educational and employment infrastructures rather than problems with women's capabilities and commitment. The following sections explore these widely held beliefs about women's investment in, commitment to, and capability to run substantial businesses of their own.

Do women underinvest in their businesses?

Personal savings and family assistance fund the launch of nearly all start-ups. The founders' current income, cash reserves, credit card capacity, and "mortgagable" assets account for most of the early stage capital in the United States.2 Other forms of non-cash entrepreneurial investments include assignment of patent rights (and any associated licensing revenue) to the company and forgoing salary.

There is a perception that women entrepreneurs do not invest sufficient start-up capital in their enterprises. If there is any truth to that, the important question is "Why?" Do women lack a fundamental understanding of what it takes to launch the business? Do women invest less because they lack confidence in their businesses or the size of the opportunities? Do they have reservations about their ability to see the venture through hard times? Is their level of investment simply a function of their personal financial circumstances?

Women have made extraordinary progress, but they still have much to learn.

Our research indicates that women invest in their enterprises at a lower rate than men do, not because they do not believe in their ventures, but because they simply do not have the same level of financial resources available. In spite of improving conditions, a wage gap has persisted for more than thirty years. Professional women currently earn approximately 73 percent of what their male counterparts are paid for the same work at commensurate levels of responsibility.3 This gap means that on average, in 2000, women working full time received $9,984 less in gross earnings than did men.4 In 2001, median weekly earnings of full-time female college graduates were 72.5 percent that of male college graduates and women with master's degrees earned 72.2 percent of what their male counterparts did.5 A particularly large gender disparity was reported between male and female executives. For example, in 1999, only 5 percent of women executives were then earning $80,000 or more, but 23 percent of male executives were in the $80,000 bracket.6

This well-documented earnings gap between working men and men is exacerbated by several other important factors.

  • Women in business and financial industries tend to move up the managerial ladder at a slower pace, so they stay in lower paying positions much longer.
  • Women often choose "female" industries (health care, education, nonprofit) in which compensation is lower across the board.
  • Very few women are serial entrepreneurs. Consequently, they are not in a position to stake their new ventures with the rich rewards that might come from selling an enterprise.
  • Many women choose entrepreneurship after having been out of the paid workforce for several years, tending to the needs of a young family.

As a result of some or all of these factors, women continue to lag in building the substantial cash reserves necessary to stake a young venture. The wage gap is closing but it continues to be a challenge for women, even after they exit the paid workforce to become entrepreneurs.

A lower level of personal investment is only one of many reasons that investors question whether women entrepreneurs are truly committed to their business. People often conclude that women start new businesses not because they are pulled toward a great opportunity, but because they are responding to personal life changes; for example, their children are now all in school or they have recently experienced divorce or widowhood. These circumstances reinforce the belief that women entrepreneurs are reactive rather than proactive in envisioning and building new ventures. The net effect is that women are viewed as being less driven by the concept and, consequently, less serious about their commitment to the enterprise. We know that the caregiving responsibilities of parenthood fall more heavily on women's shoulders. If a woman has been out of the paid workforce for several years while raising children, she bears negative consequences in the entrepreneurial world: Not only does she have reduced cash reserves to invest, but also her business skills might be somewhat rusty, and she might be out of touch with important business networks.

That's the bad news. However, there is also considerable good news. More women are on career paths with high earnings potential today than ever before.7 They have yet to close the earnings gap completely, but their increasing capacity to create wealth allows them greater opportunities to accumulate resources for a business start-up. Furthermore, most women have learned that they need help to create and build their businesses. They are assembling multi-talented entrepreneurial teams that bring a broad base of resources—including initial financial investment money.

Outside sources of financing for early-stage businesses are also becoming more accessible. Financing through government-sponsored lending programs such as the 7(a) General Business Loan Guaranty program, the Certified Development Company (504) loan program, and the Microloan program provided funds to more than 76,000 U.S. companies in fiscal year 2003.8 These loan programs, readily available credit cards, and equal opportunity lending have improved women's options dramatically over the past thirty years and have brought early-stage financing within closer reach for women entrepreneurs.

These programs have the added benefit of giving women entrepreneurs experience in understanding and meeting loan requirements, negotiating terms, and operating under covenants. In 1998, women who achieved high growth in their businesses had an average of 4.2 different sources of capital, including business earnings, personal and business credit cards, private sources, and bank loans.9

Women have made extraordinary progress, but they still have much to learn. In spite of narrowing the debt-financing gap over the past decade, women continue to rely too heavily on personal credit cards, which carry a higher rate of interest, to finance their businesses.10 Women business owners, even those who declared high-growth goals from the start, still lag men in their willingness to seek bank financing for their enterprises. In 2000, women-owned businesses claimed only 21 percent of the total SBA loans,11 which generally provide much better terms than do personal credit cards.

In 1998, only 52 percent of women business owners had some form of bank credit, whereas 59 percent of men business owners did so and those women who did seek commercial credit did not aim as high.12 Only 34 percent of those women had secured credit commitments of $50,000 or more, as compared to 58 percent of their male counterparts.13 However, when women choose to seek debt capital, there appears to be no systematic gender bias. Instead, the owner's age, the size of the firm, credit history, and the ability to provide collateral and guarantees are much more reliable predictors of success in securing loans than is gender.14

The personal financial resources that entrepreneurs invest really "stake" the business. They not only provide the funds to rent space, get a computer and software, file a patent application, or get on a plane to meet with potential customers and suppliers; they also provide an important buffer against revenue fluctuations in times when the business meets bumps in the road. Your entrepreneurial investment helps the business get some breathing space while it builds a solid operating record and establishes a credit history. It also signals to outside investors that you have "skin in the game," that your own resources are on the line to sustain the enterprise. Your level of investment determines how long the business can function on its own, how much research and development can be completed, and how much space can be leased or inventory purchased before outside investors or bankers must be brought into the deal.

Of course, the more fully developed your business is when you begin looking for outside investors, the more clearly you can demonstrate "proof of concept" and the easier it will be to sell investors on the business vision. This means that the up-front investment is a critical factor, not only in early-stage success, but also in subsequent financing rounds. It is very instrumental in building a business that has traction.

Yes, it's a fact! Women generally have less cash to "seed" fund their own ventures. They must rely on founding partners, family, and friends to help launch their businesses. With lower founding investments, they must turn to outside investors much earlier in the new venture's life, which might disadvantage them in attracting capital to the enterprise and in negotiating favorable terms. However, the level of their investment does not tell the whole story. It does not support a conclusion that women lack commitment to the enterprise and its success. In fact, those who do start businesses do very well. Business ownership is one of the most effective means of improving women's economic well-being. In 1998, women householders who had founded a business had an average income level 2.5 times that of those women who were wage earners, and their net worth was more than 6 times greater than that of those without a business.15


2. Federal Reserve Board. 1999, March 9. Remarks by Alan Greenspan: Changes in Small Business Finance. Federal Reserve System Research Conference on Business Access to Capital and Credit, Arlington, VA.

3. Harris, S. 2000, January 31. Taking aim at the male/female wage gap. Christian Science Monitor. csmonitor.com

4. National Committee on Pay Equity. The Wage Gap Over Time: In Real Dollars, Women See a Continuing Gap. www.feminist.com/fairpay.

5. Ibid.

6. U.S. Small Business Administration Office of Advocacy. 2001. Women Owned Businesses, 2001.

7. The Glass Ceiling Commission. 1995, March. Good for Business: Making Full Use of the Nation's Human Capital.

8. Small Business Administration press release. 2003, October 10. SBA Sets 50-Year Record in Loans to Small Businesses, Registers 29% Increase in FY 2003; Loans to Minorities Up 38%. www.sba.gov.

9. Center for Women's Business Research. 2001. A Compendium of National Statistics on Women-Owned Businesses in the U. S.

10. Center for Women's Business Research. 2001. Entrepreneurial Vision in Action: Exploring Growth Among Women and Men-Owned Firms. Washington, DC: Center for Women's Business Research.

11. www.sba.gov.

12. Center for Women's Business Research. 1998. Capital, Credit and Financing: An Update Comparing Women and Men Business Owners' Sources and Uses of Capital. Washington, DC: Center for Women's Business Research

13. Ibid.

14. Coleman, S. 2002. Constraints faced by women small business owners: Evidence from the data. Journal of Developmental Entrepreneurship. 7(2): 151-173.

15. U.S. Small Business Administration. 2001. Report on Women in Business, 2001, p.4. www.sba.gov.

About the authors

Candida Brush is Associate Professor in the Strategy and Policy Department, Boston University School of Management.

Nancy M. Carter is the Richard M. Schulze Chair in Entrepreneurship at the University of St. Thomas, Minneapolis, MN, and is Leverhulme Visiting Professor at the London Business School.

Elizabeth J. Gatewood is the Jack M. Gill Chair of Entrepreneurship and Director of The Johnson Center for Entrepreneurship & Innovation at Indiana University.

Patricia G. Greene is Dean of the Undergraduate School at Babson College.

Excerpted with permission from Clearing the Hurdles: Women Building High-Growth Businesses, by Candida Brush, Nancy M. Carter, Elizabeth Gatewood, Patricia G. Greene, and Myra M. Hart. Published by FT/Prentice Hall, 2004. Copyright 2004 Pearson Education, Inc.

[ Buy this book ]