International Journal of Gender and Entrepreneurship [606746]

International Journal of Gender and Entrepreneurship
Gender and the SME “finance gap”
John Watson, Rick Newby, Annie Mahuka,
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John Watson, Rick Newby, Annie Mahuka, (2009) "Gender and the SME “finance gap”", International
Journal of Gender and Entrepreneurship, Vol. 1 Issue: 1, pp.42-56, doi: 10.1108/17566260910942336
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Gender and the SME
“finance gap”
John Watson and Rick Newby
Department of Accounting and Finance,
The University of Western Australia, Crawley, Australia, and
Annie Mahuka
Mandurah, Australia
Abstract
Purpose – While some previous research supports the existence of a finance gap within the small
and medium enterprise (SME) sector, particularly for female owned SMEs, the evidence is hardlyunequivocal. Further, much of the prior research has focused on supply- rather than demand-sideissues. Hence, the purpose of this paper is to investigate both supply- and demand-side issues forfemale and male SME owners.
Design/methodology/approach – From the results of three focus groups and a review of the
literature eight hypotheses were formulated for testing with a mail survey sent to 534 SME owners.
Findings – Based on 123 responses, the findings provide no evidence to suggest that a supply-side
finance gap exists within the Australian SME sector. There is also no evidence that Australian SMEowners (particularly female owners) are being discouraged from applying for loans from a financialinstitution because they believe their application will be rejected. The results suggest that otherdemand-side issues (particularly risk-taking propensity and desire to maintain control) play a more
important role in the capital structure decision making of SME owners.
Research limitations/implications – This study’s major limitations are its reliance on a sample
of solely Western Australian businesses that were not representative of the population of
Western Australian SMEs and its relatively small sample size.
Practical implications – Financial advisers need to be sensitive to various demand-side issues
when advising SME owners about the merits of applying for external funding.
Originality/value – This study adds to the limited available evidence concerning the importance of
various demand-side issues to SME owners considering accessing external funding.
Keywords Gender, Small to medium-sized enterprises, Finance, Australia
Paper type Research paper
1. Introduction
Given that small and medium enterprises (SMEs) are responsible for significant levels of
employment, innovation and productivity, it is important that policy makers and advisers
are well informed about the determinants of SME growth and, in particular, the various
supply- and demand-side issues surrounding the provision of growth funding for
this sector (Becchetti and Trovato, 2002). Winborg and Landstrom (2001) argue thatfinancial problems (lack of funds) constrain the development and growth of SMEs because
many SMEs are unable to access the same kinds of growth funding often available to
large businesses. For example, Carpenter and Petersen (2002) examined more thanThe current issue and full text archive of this journal is available at
www.emeraldinsight.com/1756-6266.htm
The authors would like to acknowledge the generous support of CPA Australia in providing the
funding for this research project.IJGE
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International Journal of Gender and
EntrepreneurshipVol. 1 No. 1, 2009pp. 42-56qEmerald Group Publishing Limited
1756-6266DOI 10.1108/17566260910942336
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1,600 US small manufacturing firms and found that the growth of these firms appeared to
be constrained by a lack of (internal) finance. Similarly, Bruno and Tyebjee (1985)
found that ventures that had received external capital achieved statistically significantlyhigher sales and employment growth (compared to ventures without external capital).
With respect to women-owned businesses, Carter and Allen (1997) noted that the
availability of financial resources was the major influence on their growth.
Clearly the literature suggests a strong link between the availability of finance and
SME growth, leading to the notion of a finance gap implying “there may be major
‘barriers’ preventing an owner-manager’s access to equity” (Hutchinson, 1995, p. 231).It has also been suggested the “barriers” to finance might be more acute for
female-owned SMEs as there is a perception that financial institutions discriminate
against female business owners (Riding and Swift, 1990; Breen et al. , 1995; Brush et al. ,
2001). While some previous research supports the notion of a finance gap, the evidence
is hardly unequivocal. For example, in his review of 15 years of research, Curran (1986)was unable to determine if there truly was a shortage of finance for typical SMEs;
similarly, Gibb (2000, p. 24) noted that research had much difficulty in proving “a gap
in bank finance for SMEs” or “acute unmet demand” for other sources of finance; whileTucker and Lean (2003, p. 59) found that “for the great majority of firms there appear[s]
to be no debt finance gap”.
However, Kon and Storey (2003) note that many SME owners could be discouraged
from applying for funding from a financial institution because they believe their
application will be rejected. For example, while Table I in Levenson and Willard (2000)
indicates that some 10 percent of US firms had their funding applications rejected,
Levenson and Willard (2000) estimate that about twice as many firms were discouraged
from applying for funding because they expected their request would be turned down.Similarly, while Fraser (2006) reported a rejection rate of 11 percent in the UK he also
found that about 8 percent of UK SMEs needing new finance had been discouraged from
applying for funds because they expected their request would be rejected.
It is also possible that many SME owners might consciously (or unconsciously)
decide they do not want to access external funding given the risks involved and/or the
potential for them to lose control of their firms (Barton and Matthews, 1989; Cressy, 1995;Hamilton and Fox, 1998; Gibb, 2000; Fraser, 2006)[1]. With the majority of prior research
concerned with the financing of SMEs concentrating on supply-side issues, Barrett
(2006) recommends future research focuses on demand-side issues where the available
evidence is far more limited. Put another way, Hamilton and Fox (1998, p. 246) argue that
debt levels in small firms “reflect a demand-side preference ordering and are not just themanifestation of supply-side deficiencies.” This suggests that observed variations in the
levels of external funding across SMEs might be driven by differences in the personal
characteristics of the SME owners concerned (that is, by demand-side issues) rather thanby shortcomings in financial markets (supply-side issues). Continued ignorance of these
demand-side issues might, therefore, cause the finance gap (bank lending) myth to be
perpetuated (Gibb, 2000). Hence, this study was designed to investigate both supply- anddemand-side issues for female and male SME owners.
Given the view that multiple research methodologies might allow a more complete
understanding of the processes that determine SME performance (Cooper, 1993),
we began our study with a series of focus groups designed to help us better understand
the key issues relating to the financing of SMEs. The results of our focus groupGender and
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discussions are summarized in the following section. Based on the focus group results
and a review of the literature we then formulated a number of hypotheses (as discussed
in Section 3) for subsequent examination with a mail survey of SME owners
(as reported in Section 4). We conclude with a summary of our findings andsuggestions for future research.
2. Focus group results
Focus groups are a popular way to elicit views and perceptions from a potentially
diverse group of individuals. There is no “ideal size” for a focus group, but it is generally
accepted that eight to twelve is an effective number (Fern, 1982). Blackburn and Stokes
(2000) note that focus groups can be used in any situation where people’s perceptions, or
views, are of interest. One of the primary benefits attributed to focus groups is theadditional insights that can be gained from the interaction of group members (Newby
et al. , 2003a). It has also been suggested that participants might feel more comfortable
about sharing their feelings and experiences within a group of peers than in a one-on-oneinterview with a researcher (Blackburn and Stokes, 2000).
A market research company was used to recruit a sample of 30 Western Australian
metropolitan SME owners who had considered (within the prior two to five years) a
major expansion of their business that required significant external funding[2].
Initially, we planned to run three separate (roughly equally-sized) focus groups. Thefirst focus group was to comprise SME owners who had successfully applied for
external funding; the second was to comprise SME owners who had unsuccessfully
applied for external funding; and the third was to comprise SME owners who had been
discouraged from seeking external funding[3]. However, the market research company
had great difficulty recruiting unsuccessful participants and, therefore, our secondfocus group ended up with a mix of successful and unsuccessful applicants. The total
number of participants was 26, comprising eight discouraged borrowers, two
unsuccessful applicants and 16 successful applicants.
A number of key findings emerged from those focus group sessions (for more detail
concerning the focus groups results see Watson et al. , 2006). First, consistent with
Rouse and Jayawarna (2006), we found that our successful applicants were able to
identify proportionately more sources of external funding than the discouraged
borrowers. Second, the majority of SME owners were acutely aware of the variousrisks associated with business ownership and, therefore, this was foremost in their
minds when they considered the merits of seeking external funding. Third (and related
to the notion of risk) was the issue of control, another major theme that seemed to be at
the “top of the mind” of virtually all our focus group participants. It seems, from the
results of our focus group discussions, that many SME owners are unlikely to considerexternal funding if there is a reasonable likelihood they could lose control of their
business. Fourth, the focus group results suggested that female SME owners are likely
to be more risk-averse and less inclined to access external sources of funds (comparedto male SME owners). Also, where female SME owners had accessed funding from a
financial institution our focus group discussion suggested they were inclined to repay
it earlier than their male counterparts. The results of our focus group discussions
together with the difficulty we encountered finding unsuccessful applicants to take
part in our focus groups, suggests that the so-called finance gap (believed by many tobe a major barrier inhibiting SME growth) might indeed be more “myth” than “reality”.IJGE
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3. Hypotheses
In developing the hypotheses to be tested with our subsequent mail survey of SME
owners, we separately examine both supply- and demand-side issues, generating four
supply-side and four demand-side hypotheses.
3.1 Supply side
Although research findings in Europe appear to support the existence of a finance gap
(Pissarides, 1999; Becchetti and Trovato, 2002), findings from the USA and UK are lesscompelling (Levenson and Willard, 2000; Carter et al. , 2003; Tucker and Lean, 2003;
Fraser, 2006; Harding and Cowling, 2006). It should also be noted that bank and other
types of lending must be subject to some form of rationing (Hamilton and Fox, 1998) and,
therefore, arguments suggesting the existence of an overall (or sex-based) finance gap
should not focus simply on the rate of loan application rejections but should consider thereasons for those rejections. For example, in his study of 2,500 UK SMEs, Fraser (2006)
found that where a loan application was rejected it was normally because the applicant
had no security and/or no track record and/or a poor credit history. Fraser (2006, p. 24)
also reported that, although 11 percent of firms have their loan applications rejected (and
8 percent are discouraged from applying for bank funding), “Access to (and cost of)finance poses one of the least problems for businesses.” Further, there was nothing in our
focus group discussions to suggest that obtaining external funding was a major problem
for SME owners and, therefore, our first supply-side hypothesis is as follows:
S1. SME owners are generally able to obtain sufficient and appropriate debt
funding from financial institutions (that is, no finance gap exists).
Our remaining supply-side hypotheses derive from the perception that financial
institutions discriminate against female business owners, as evidenced by the findingsof Riding and Swift (1990) and Breen et al. (1995), among others. However, more recent
evidence suggests that while banks may have discriminated against women in the
past, this is no longer the case. For example, Carter et al. ’s (2007, p. 438) study of loan
officer lending decisions found that “while there is a great deal of diversity in the
criteria used to assess loan applications, for the most part, these do not vary by the sexof the loan applicant.” Similarly, Fraser (2006) found no significant differences between
male- and female-owned businesses in the UK in terms of: their use of external finance;
the likelihood that new finance had been sought in the prior three years; and loan
rejection or discouragement rates. Using US data, Vos et al. (2007) came to a similar
conclusion, with sex of the owner being insignificant in explaining whether firms
would: apply for loans; have their applications approved; or have their applications
denied. Similarly, Treichel and Scott (2006) reported no significant difference in therejection rates for female- and male-owned SMEs in the USA. In Australia, based on a
longitudinal study of 2,367 SMEs, Watson (2006) reported that differences between
female- and male-owned SMEs in terms of their relative (rather than absolute) levels of
external funding could potentially be better explained by pecking order theory than by
bank discrimination. On the basis of this more recent evidence, therefore, our next threehypotheses are as follows:
S2. Female SME owners do not differ from male SME owners in their ability to
obtain sufficient and appropriate debt funding from financial institutions
(that is, there is no sex-based finance gap).Gender and
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S3. Female SME owners are no more discouraged from applying for external
funding than their male counterparts.
S4. There are no significant differences between female and male SME owners in
terms of the conditions attaching to their loans.
3.2 Demand side
Turning now to demand-side issues, we start by considering how risk aversion and
desire to maintain control might impact a SME owner’s decision to apply for funding
from a financial institution. These two issues were clearly very important to our focus
group participants and, similarly, Fraser (2006, p. 30) reported that one in three of hisUK sample “started in business, principally, to satisfy a desire for independence.”
Treichel and Scott (2006) also speculated that concerns about maintaining control
might cause women to limit the frequency and size of their loan applications. The basic
premise here is that individuals with high-risk aversion and/or desire to maintain
control might deliberately choose not to seek external funding (or, at least, to limit the
amounts borrowed), even if this means they are unable to grow their businesses as fast
as they might otherwise be able to if they had access to additional funding.
In terms of risk aversion, it is well-established that women are more risk averse than
men (Powell and Ansic, 1997; Jianakoplos and Bernasek, 1998; Byrnes et al. , 1999;
Olsen and Cox, 2001; Verheul and Thurik, 2001; Eckel and Grossman, 2002; Watson
and Newby, 2005). Similarly, we felt that SME owners who had not applied for external
funding during the last three years were likely to be more risk averse than those SME
owners who had applied for external funding. Therefore, our first two demand-side
hypotheses are as follows:
D1. Female SME owners will display higher levels of risk aversion than male
SME owners.
D2. Owners who have not applied for external funding during the last three years
will display higher levels of risk aversion than owners who have applied for
external funding during the last three years.
With respect to control, Mukhtar (2002) reported that, in terms of their management
styles, women had a significantly greater need (compared to men) to be in control of all
aspects of their business. Similarly, given Cressy’s (1995) observation that monitoring
activities imposed on a firm by a financial institution can cause owners to experience a
loss of control, we felt that SME owners who had not applied for external fundingduring the last three years were more likely to have a greater desire to maintain control
than those SME owners who had applied for external funding[4]. Therefore, our third
and fourth demand-side hypotheses are as follows:
D3. Female SME owners will attach more importance to the desire to maintain
control than male SME owners.
D4. Owners who have not applied for external funding during the last three years
will attach more importance to the desire to maintain control than owners who
have applied for external funding during the last three years.IJGE
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4. Survey results
Based on a review of the literature and the results of our focus group discussions, a
survey instrument was designed to test the various supply- and demand-sidehypotheses generated in the previous section with a sample of Western Australian
SME owners[5]. A market research company was used to obtain the names and
addresses of a random sample of Western Australian businesses. In all, 534questionnaires were mailed and 123 usable responses were returned; excluding the 69
“dead letters” that were returned “address unknown”, this represents a response rate
in excess of 25 percent. This is a good response rate for a target group of this type(given the length of the questionnaire – 16 pages) and, no doubt, was aided by the offer
of a $30 payment in return for a completed questionnaire (Newby et al. , 2003b).
Table I presents the owner and firm demographic details for our sample of 123 firms
compared to Western Australian data derived from two Australian Bureau of Statistics
(ABS, 2002, 2004) publications. Table I indicates that the sample used in this study isrepresentative in terms of industry, but not in terms of the sex and age of the owner,
nor the number of years the owner had operated the business. Compared to the ABS
estimates for Western Australia, our sample has disproportionately fewer: femaleowners; owners less than 50 years old; and owners who have operated their business
for less than five years. Given that a market research firm was the source of the
sampling frame for this project, this result is not surprising. It is reasonable to expectthat older, more established, firms have a greater likelihood of being included in such a
database. Therefore, it is also reasonable to expect that the age of the owners in this
study will be higher than that of the population of Western Australian SME owners.
Similarly, given that female-owned businesses are typically younger than male-owned
businesses, it is also reasonable to expect our sample to have proportionately fewerfemale-owned SMEs. Nevertheless, the fact that our sample does not appear to be
representative of the population of Western Australian SMEs must be acknowledged
as a potential limitation.
As a first step in addressing our various supply-side hypotheses, Table II presents
the results to the following two questions for both the female and male SME owners in
our sample: with respect to your business, have you sought additional funding/creditfrom a financial institution at any time during the past three years?[6]; and was your
request for funding approved?
The results in Table II indicate that a little over 50 percent of the SME owners in our
sample had applied for funding in the last three years, with the application rates about
the same for both females and males. This finding suggests that female SME ownersare not being discouraged from applying for bank funding by perceptions of bank
discrimination against women. Further, the results indicate that about 12 percent of
SME owners have their applications for funding denied; again with no significantdifference between the female and male SME owners. The fact there was no significant
difference in the rejection rates for the female and male SME owners suggests that the
banking sector does not routinely discriminate against women. It should be noted thatthe 12 percent rejection rate for our sample is similar to the 10 percent reported by
Levenson and Willard (2000) for the USA, and the 11 percent reported by Fraser (2006)
for the UK. Given that Levenson and Willard (2000, p. 83) conclude the “extent of true
credit rationing appears quite small” and Fraser (2006, p. 123) concludes “that most
SMEs are getting the finance they want” suggests it is also unlikely (given the similarGender and
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rejection rates) that any substantial supply-side finance gap exists in Australia.
Therefore, the results in Table II provide initial support for S1,S2andS3; that is, no
finance gap (general or sex-based) exists in Australia and female SME owners are nomore discouraged from applying for external funding than their male counterparts.
To further explore this issue, Table III sets out the mean responses to a number of
questions designed to find out the reasons why external (debt) funding had not been
sought during the last three years. The respondents who had not applied for fundingduring the last three years were given a list of items and asked to rate each using a
seven-point scale ranging from “strongly disagree” (1) to “strongly agree” (7). The
results suggest two primary reasons why SME owners do not apply for funding fromfinancial institutions: first, because they have access to sufficient funding under theirOwner and firm demographics Sample firms PercentageABS estimatesa
(%)
Sex of owner
Female 24 20 35Male 98 80 65
122b
Pearson x2¼12.159, p-value¼0.000
Age of ownerLess than 30 years 6 5 930-49 years 61 50 6150 years and over 56 45 30
123
Pearson
x2¼13.784, p-value¼0.001
Years owner operated current businessLess than five years 26 21 48Five to less than ten years 37 31 19Ten years or more 58 48 33
121
b
Pearson x2¼34.612, p-value¼0.000
IndustryManufacturing 13 11 8Construction 13 11 21Wholesale trade 8 7 5Retail trade 17 15 14Accommodation, cafes and restaurants 5 4 3Transport and storage, finance and insurance,communication, property and business services 34 29 30Education, health and community services 16 14 9Cultural and recreational services 4 4 3
All other industries 6 5 7
116
b
Pearson x2¼10.804, p-value¼0.237
Notes:aSex of the owner, age of the owner and years owner operated current business were taken
from ABS (2004). Industry comparisons were taken from ABS (2002);bthere were one, two and three
missing observations, respectively, for sex of the owner, the number of years the owner had operatedthe current business, and industry. Also for industry, four agricultural firms were removed fromTable I (but not from the study) to be consistent with the comparative ABS (2002) data, which does not
include agricultural concernsTable I.
SamplerepresentativenessIJGE
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current arrangements; and second, because they do not require additional funding.
These results are consistent with Fraser’s (2006) finding that 95 percent of businessesthat had not sought new finance reported they did not need additional funding.
Interestingly, the results presented in Table III suggest that, compared to the male
SME owners, the female SME owners were more likely to believe they already hadsufficient funds under existing arrangements and, therefore, had no need to apply for
additional external funding. Interestingly, also were the responses to the last two items
in Table III which indicated that the females strongly disagreed with the premise thatthe reason they had not applied for external funding in the last three years was becausethey had been rejected previously or because they were unlikely to get the full amount
requested. Taken together, and consistent with Fraser’s (2006) finding in the UK, these
results strongly suggest that female SME owners are not discriminated against byAustralian financial institutions and, therefore, they are not discouraged from
applying for external funding because of any perceptions of bias against them. They
might, however, be less inclined to access external funding for other reasons such as adesire to maintain control and/or to minimize the risks to which they are exposed.
With the preliminary results provided so far (in Tables II and III) suggesting that
financial institutions in Australia do not discriminate against female SME owners, andSeven point scale: 1 – strongly disagree to Mean scores for
7 – strongly agree Females Males Two-tailed ( p-valuea)
The firm had sufficient funds under its existing
arrangements 6.75 5.77 0.082
The firm did not need additional funds 6.10 5.73 0.480Procedures to obtain funding from a financialinstitution are too complicated 2.38 3.82 0.106Interest rates were too high 1.50 2.87 0.012
It was unlikely the institution would provide the fullamount 1.00 2.53 0.000
A previous loan application was rejected 1.00 1.42 0.412
Notes:
aNote in this table (and all subsequent tables) that significant p-values have been italicized and
the significance test is based on the t-statistic (provided the variable of interest is normally distributed,
otherwise the Mann-Whitney U test has been used)Table III.
Reasons for not applying
for funding from a
financial institution in the
last three yearsSex of owner
Female Percentage Male Percentage
Applied for funding in last three years? Yes 13 54 55 56
No 11 46 43 44
24 98
Pearson x2¼0.030, p-value¼0.863
Application for funding successful? Yes 11 85 46 88
No 2 15 6 12
13 52a
Pearson x2¼0.143, p-value¼0.706
Note:aThree male applicants did not indicate whether their application was successfulTable II.
Application rate and
success of application by
sex of ownerGender and
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female SME owners are not more likely to be discouraged from applying for external
funding than their male counterparts, Tables IV-VI present further evidence to support
hypotheses S3andS4.
For the female and male SME owners in our sample, Table IV provides a
comparison of the: time taken to approve a loan; duration of loans; and interest ratescharged. As can be seen from the results, there are no significant differences between
the female and male SME owners with respect to either the average time taken to
approve a loan, or the length (term) of the loan, or the interest rate charged. Thisprovides further evidence that Australian financial institutions do not routinelydiscriminate against female SME owners.
Table V provides a comparison of the levels of satisfaction experienced by both the
females and males in our sample with respect to their lending institution in terms of issues
such as time taken to process an application and the interest rate charged. As can be seenfrom the results, there are again no significant differences in the average satisfaction
Mean scores for Two-tailed
Females Males ( p-value)
How long did it take the financial institution
to approve the loan (days) 19 21 0.849Term that applied to funding (months) 119 56 0.220Interest rate at inception (per annum) 7.41 (percent) 8.35 (percent) 0.499Interest rate currently (per annum) 8.88 (percent) 8.50 (percent) 0.756Table IV.
Funding terms
Seven point scale: 1 – totally dissatisfied to Mean scores for7 – totally satisfied Females Males Two-tailed ( p-value)
The amount granted by the institution relative to the
amount requested 6.64 6.48 0.968The time taken to process the application 5.00 4.96 0.947The guarantees required 5.00 4.16 0.193The security required 4.82 4.15 0.312Customer service 4.73 5.22 0.413The interest rate charged 4.55 4.60 0.938The service fees charged 3.82 4.04 0.717Table V.
Level of satisfaction withlending institution
Seven point scale: 1 – strongly disagree to Mean scores for7 – strongly agree Females Males Two-tailed ( p-value)
Male applicants are more likely to have their
application approved 3.83 3.84 0.988Female applicants are more likely to have to providesecurity 3.46 3.72 0.578Female applicants are more likely to need loanguarantors 3.33 3.66 0.484Female applicants are more likely to incur higherinterests rates 2.50 2.91 0.249Table VI.
SME owner’s perceptionsof discrimination byfinancial institutionsIJGE
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levels for the female and male SME owners, and for all but the last item (the service fees
charged) the female and male SME owners in our sample rated their level of satisfaction
above the mid-point on the scale. This again suggests that financial institutions do not
routinely discriminate against female SME owners and that the majority of SME owners
(both female and male) are reasonably satisfied with their financial institution.
Finally, Table VI provides a comparison of the responses given by both the female
and male SME owners to a number of questions concerning their views on potential
differences in the treatment men and women might receive when applying for funding
from a financial institution. The responses presented in Table VI suggest that neither our
female nor our male respondents believe women suffer any systematic discrimination
when applying for bank funding. The mean response for both the females and males in
our sample was close to the mid-point for all statements except the last, where there was
general disagreement (from both the female and male SME owners) with the statement
that females are more likely to incur higher interest rates (than males).
With the results so far providing strong support for our supply-side hypotheses
(and against the existence of any finance gap), we now turn to various demand-side
issues explored in hypotheses D1-D4to see if they might provide a better explanation
for any observed differences in the level of external funding across SMEs. As noted
earlier, it has been argued that any variation in the level of external funding across
SMEs is likely to be driven by differences in the personal characteristics of the
individuals concerned (that is, by demand-side issues) rather than by shortcomings in
financial markets (that is, by supply-side issues). To test this proposition, Table VIIsummarizes the mean scores for a number of items (questions) designed to capture a
SME owner’s risk aversion and desire to maintain control. Table VII compares the
results for females and males and for owners who had not/had applied for external
funding during the last three years (non-applicants/applicants).
Consistent with D1andD2, the results presented in Table VII suggest that both
female SME owners and non-applicants have lower levels of risk-taking propensity
compared to male SME owners and applicants. This result suggests that any difference
in the levels of external funding across SMEs is more likely to be a function of
individual owner differences (demand-side issues) rather than shortcomings in
financial markets (supply-side issues). In terms of desire to maintain control, however,
the findings reported in Table VII do not support either D3orD4in that there was no
significant difference for either females/males or non-applicants/applicants in terms of
their internal locus of control scores.
To further explore both these issues (risk aversion and desire to maintain control), our
respondents were asked to assess how relevant various factors might be in potentially
Mean scores for
Seven point scale: 1 – low to 7 – highFemales
(non-applicants)Males
(applicants)Two-tailed
(p-value)
Risk-taking propensity (average of 10 items)a2.85 (3.00) 3.37 (3.47) 0.011 (0.003 )
Internal locus of control (average of 8 items)b5.01 (5.08) 5.15 (5.16) 0.473 (0.598)
Notes:aRisk-taking propensity was assessed using statements taken from the risk sub-scale of the
Jackson Personality Inventory (Jackson, 1976);bInternal locus of control was assessed using
statements taken from Levenson (1974)Table VII.
Comparing personal
characteristics of
applicants/
non-applicants and
males/ femalesGender and
the SME
“finance gap”
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discouraging them from applying for external funding in the future. From the results
presented in Table VIII it seems that for all groups of SME owners (that is, females,males, non-applicants and applicants) the prospect of unreasonable terms and conditionsis likely to be the most relevant factor deterring them from applying for external fundingin the future. The second most relevant factor for all groups was the risk of not being ableto repay the loan; with the non-applicants ranking the relevance of this factor
significantly higher than the applicants. The potential to lose control of their business
was the third most important factor for the females and non-applicants, and the fourthmost important factor for the males and applicants. Interestingly, the females ranked thisconcern significantly higher than their male counterparts suggesting, contrary to ourinternal locus of control results reported in Table VII, that female SME owners might
indeed have a greater desire to maintain control than their male counterparts.
It should also be noted in Table VIII that the two least relevant factors likely to
discourage SME owners from applying for external funding in the future were theprobability of not getting the loan and apprehension over having their loan application
rejected. These two factors were rated as the least relevant for all four groups. In
summary, the evidence provided in Tables VII and VIII supports the proposition thatindividual owner characteristics (such as desire to maintain control and risk takingpropensity) are more likely to explain variations in the level of external funding acrossSMEs rather than these variations being the result of systematic discrimination byfinancial institutions.
Finally, Table IX provides the mean scores given by the SME owners (female/male
and non-applicants/applicants) when asked how they would most likely use any
surplus funds generated by their business. As can be seen from the table, the
repayment of debt was the priority for all owners, and particularly for the female
Mean scores for
Seven point scale: 1 – not relevant to7 – very relevantFemales
(non-applicants)Males
(applicants)Two-tailed
(p-value)
The likelihood of unreasonable terms and conditions 5.13 (5.42) 5.40 (5.28) 0.537 (0.702)
The risk of not being able to repay the loan 5.08 (4.87) 4.39 (4.08) 0.119 ( 0.040 )
The potential to lose control of the business 4.65 (4.15) 3.75 (3.60) 0.071 (0.174)
The amount of documentation required 3.96 (3.97) 4.18 (4.34) 0.615 (0.283)The probability of not getting the loan 3.13 (2.93) 2.56 (2.30) 0.193 ( 0.071 )
Apprehension over having the loan applicationrejected 2.91 (2.46) 2.05 (1.89) 0.015 (0.046 )Table VIII.
Factors discouraging
SME owners fromapplying for funding inthe future
Mean scores for
Seven point scale: 1 – highly unlikely to7 – highly likelyFemales
(non-applicants)Males
(applicants)Two-tailed
(p-value)
Repay debt 5.88 (5.71) 5.20 (4.89) 0.053 (0.028 )
Grow the current business 4.71 (5.09) 4.60 (4.06) 0.805 ( 0.002 )
To improve lifestyle 4.67 (4.16) 4.13 (4.34) 0.227 (0.626)Invest in other ventures 4.17 (4.45) 4.36 (4.15) 0.698 (0.440)Table IX.
Most likely use of surplusfundsIJGE
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owners (as suggested by Watson, 2006) and the non-applicants. This further indicates
that, consistent with Myers’ (1984) “pecking order theory”, SME owners have an
aversion to borrowing funds from financial institutions (presumably because of the
perceived risks involved and/or the potential to lose control of their businesses) and,given the opportunity, would prefer to repay debt rather than use surplus funds forother purposes.
5. Conclusions
There are a number of interesting observations that can be drawn from the results
presented in the above analysis of the responses from 123 SME owners to variousquestions concerned with accessing funds from financial institutions. First, there is no
evidence to suggest that a supply-side finance gap exists within the Australian SME
sector. The 12 percent rejection rate for our sample is similar to the 10 percent reportedby Levenson and Willard (2000) for the USA and the 11 percent reported by Fraser(2006) for the UK. Second, there is little evidence that Australian SME owners
(particularly female owners) are being discouraged from applying for loans from a
financial institution because they believe their application will be rejected. UnlikeTreichel and Scott (2006), but consistent with Fraser (2006), our results found no
evidence that female SME owners were less likely to apply for bank funding than their
male counterparts. Our results suggest that other demand-side issues (such asrisk-taking propensity) play a more important role in the capital structure decision
making of SME owners than any concerns about their loan application being rejected.
Third, this study also failed to find any evidence of actual discrimination by
financial institutions against female SME owners in terms of either: the average time
taken to approve a loan; the length (term) of the loan; or the interest rate charged. The
results also failed to uncover any perceptions of discrimination by financial institutionsagainst female SME owners. This finding is consistent with recent studies in both the
UK (Fraser, 2006) and USA (Treichel and Scott, 2006) that reported no difference in
bank loan rejection rates by gender.
While this study has a number of limitations, the most significant limitations relate
to: the reliance on a sample of solely Western Australian businesses that were not
representative of the population of Western Australian SMEs; and the relatively smallsample size (particularly for the female SME owners). To determine the robustness of
the findings reported in this study (and to provide more confidence in the results), it
would be beneficial if the study could be replicated with a significantly largerAustralia-wide sample.
Notes
1. Note that Cressy (1995) argued that for owners to experience a loss of control does not
require the bank to have an equity stake in the firm but might, for example, take the form ofmonitoring activities imposed on the firm.
2. We did not specify the amount of funding that we would consider significant – this was left
up to the SME owners.
3. Note that our definition of a “discouraged” borrower is wider than that proposed by Kon and
Storey (2003). Our definition includes not only SME owners who might believe they would beturned down by a bank, but also SME owners who decide not to seek external funds for otherGender and
the SME
“finance gap”
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more “internal” reasons, such as: the risk of losing control of their business; or the extra work
that might be involved in running a larger business.
4. Of course, it might simply be the case that SME owners who have not applied for external
funding do not need additional funding.
5. A copy of the questionnaire can be obtained from the authors.6. If more than one application had been made in the last three years the respondent was asked
to refer to their most recent significant application.
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Ricciardi, V. (2008), The Financial Psychology of Worry and Women , School of Business,
Kentucky State University, Frankfort, KY.
About the authors
John Watson is a Professor in the Department of Accounting & Finance at The University ofWestern Australia. His research interests are primarily in SME performance evaluationand measurement. John Watson is the corresponding author and can be contacted at:
John.Watson@uwa.edu.au
Rick Newby is a Senior Lecturer in the Department of Accounting & Finance at
The University of Western Australia. His research interests centre on KPIs and performance
measurement in SMEs, not-for-profit organizations and the government sector.
Annie Mahuka is a former Master’s student now working in the private sector.IJGE
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