The Women's Freedom Network Newsletter September/October, 2000, Vol. 7, Number 5. Lending Practices to Women-Owned Business: A Vital Component to Economic Stability Adapted from: "Economic Prosperity, Women and Access to Credit-- Best Practices in the Financial Markets." Research Report.

O n October 4, 2000 the Milken Institute, along with the National Women's Business Council (NWBC) published a report on female economic prosperity and access to credit. The Milken Institute is an independent economic think tank that was founded in 1991 in Santa Monica, California. It is a resource for economic and public policy research and analysis, and a center for advancing discussion about economic, financial, social and policy issues. The NWBC was created by Congress to serve as an independent source of advice and counsel to the President and Congress on issues of importance to women entrepreneurs. It represents women at the policy-making table, and addresses current issues of access to capital and access to markets that have posed the greatest challenge to women seeking to launch and grow their businesses.

Together, the Milken Institute and the NWBC (the authors) examined financing strategies that have successfully increased access to capital for women starting or building service, technology and other noncollateral-based businesses. The report identifies programs that merit replication to dramatically expand access to capital and credit for women business owners, and presents recommendations to the financial community based on the work of these innovative programs and other research. The primary goal of the Research Report is to equip new-economy businesses with knowledge on how to secure capital flow to establish and maintain an economic infrastructure that will withstand major market adjustments.

Over the past 30 years, the U.S. has experienced its greatest period of economic expansion. During this time period, women-owned businesses have greatly increased in number and productivity. The authors cite several statistics to support this point: (also see tables below.)

• In 1972, women owned less than 5 % of all businesses producing less than 1% of total sales. By 1992, women-owned businesses accounted for 34% of all businesses and produced almost 20% of total sales.

• Since 1987, the number of women-owned firms has doubled, employment has increased 4 times, and revenues have quintupled.

• Women today own 9.1 million of the roughly 24 million small businesses in the U.S. This represents 38% of the small businesses operating in the U.S. These firms employ about 52% of the private sector workforce and generate 51% of the private sector output.

• Women-owned businesses provide 27.5 million jobs to the U.S. economy and generate over $3.6 trillion in sales.

Because women are entering the business community in ever greater numbers and significantly contributing to the nation's economic wellbeing, support systems must be in place to help perpetuate their success in all types of economies. Financial institutions are re-examining traditional lending practices, and expanding those practices to include financial support to new-economy businesses which include women-owned companies. Traditionally, lending institutions shied away from supporting women-owned businesses, and these same women felt inadequate to apply for the help. Some of the reasons given are:

1) Women tend to establish small, local, low-collateral enterprises in the service and retail sectors and thus have difficulty gathering startup capital.

2) Women tend to apply for smaller loans of the type considered by banks to be money-losers.

3) Women are often unaware of the credit sources and information networks available to them.

4) Occupational segregation has left women entrepreneurs less experienced professionally, particularly in management, supervision and access to finance.

However, because financial institutions have the resources to reach out beyond their traditional "safe" clientele to new-economies, vision-oriented financial institutions are repackaging their lending programs to end the onesize-fits-all approach to lending. Many of these programs were revamped with the particular needs of women in mind, and with the desire to successfully expand the lending base to include them. The authors cite several elements that financial institutions have undertaken to make funds more accessible to women. They include:

* Combining financial and managerial or technical assistance to maximize the development and success potential of new-markets businesses.

* Mitigating risk for financial institutions through appropriate new-markets lending policies and procedures.

* Streamlining and expediting loan process and approval procedures specifically developed to serve women-owned businesses.

* Promoting community-lender partnerships and community-govemment partnerships.

Among the most noteworthy programs around the country that have successfully applied the elements identified above are:

FleetBoston Financial's Women's Entrepreneurs' Connection. This program helps startups and established businesses gain access to capital, information, advocacy and other resources. The program matches the women-owned business with the financing best suited to its stage in the business cycle.

The Wisconsin Women's Business Initiative Corporation. The program offers access to capital combined with high quality business education, business assistance programs, one-on-one mentoring, and other financial services.

The Small Business Administration Community Express Loan Program, along with the National Community Reinvestment Coalition. This program's goal is to spur economic development and job creation in underserved communities through lending to small businesses that have difficulty obtaining traditional loans. Loans are combined with technical and management assistance in budgeting, marketing, and management both before and after the loan is made. Hands-on training and management support are part of each borrower's loan conditions.

Count-Me-In for Women's Economic Independence. This is an innovative on-line "lending and learning" microloan organization dedicated to strengthening the position of women in the economy. This national nonprofit organization provides small loans to women who are not qualified, or fear applying, for traditional bank loans.

Capital Across America. This program targets women-owned businesses with revenue in excess of $1 million. Its objective is to create access to capital for women-owned businesses previously ignored by equity investors.

Banker's Community Development Corporation Loan Program. This program is a consortium of San Diego banks that pools funds to provide financing to small businesses. Its mission is to supply capital to businesses that do not qualify for traditional bank financing for business growth so that they may enventually qualify for conventional bank financing.

However, this type of support is not universal. While the number of women-owned businesses has greatly increased, the amount of financial support channeled to these women has not increased at a comparable rate. The authors found that the primary source of financial support for women-owned businesses continues to be family and friends, not financial institutions. Serious gaps between current demand and lending practices remain. For example, the authors state that women receive only 12% of all credit provided to small businesses in the U.S. economy though they own close to 40% of all businesses in the U.S.

Along with the lessons that can be learned from the noteworthy programs above, the authors report several recommendations to help close the gap between demand and lending practices. The report recommendations are:

1) Amend Federal Reserve Regulation B - Equal Credit Opportunity Act. In an effort to promote fairness, Regulation B prohibits lenders from collecting demographic data on applicants. The consequence has been to mask actual lending practices with regard to women and women-owned businesses- The collection of demographic data will allow banks to operate more effectively in the women's business lending market as they have in the home mortgage market. The data will open up lending to under-served communities.

2) Create new credit scoring models. If Regulation B is amended as suggested above, and credit scoring models are revamped to incorporate data relevant to women, this would generate new growth opportunities. Lenders will benefit from models that more accurately address lending risks associated with women-owned businesses by producing a better understanding of their market.

3) Implement a national capital access program. This program would create a reserve insurance pool that will allow banks to make loans that would not otherwise be made, thereby creating new financing opportunities for thousands of businesses.

4) Exploit securitization. This recommendation suggests that financial institutions could pool standardized small-business loans and sell them as securities to institutional investors thus enabling banks to increase liquidity, lower transaction costs, and increase their ability to make additional loans.

5) Institutionalize the economic census, the survey of women-owned business enterprises, the survey of minority owned business enterprises, the characteristics of business owners survey, and the survey of small business financing. Policymaking agendas of the federal government use such survey data especially in monitoring economic activity and providing assistance to businesses. However, the funding for these surveys are at the mercy of Congress. Congress should support these special census programs and include them when considering budget allocations.

The lack of credit extended to women-owned businesses will have a negative impact on our macro-economy and impede the prospects for continued economic growth as a whole, With increased awareness of women's vital contribution to the marketplace, a fundamental change in financial institutions' lending practices is likely to increase. Lenders and investment communities, in conjunction with government, are initiating programs across the nation to serve this powerful. yet underserved, emerging domestic market. According to the authors, failure to do so is not only a great opportunity lost, but also detrimental to the stability of the U.S. economy.

TABLES:

Table 1.

Growth of Women-Owned Businesses 1982 - 1999

Table 2.

Number of Women-Owned Firm by Industry in 1992

Table 3.

Fastest Growing Women-Owned Firms by Industry, 1987 - 1992