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Credit and Capital Formation
a report to the President's
Interagency Task Force

on

Women

Business

Owners

The Treasury Department Study Team
April

1978

r 'J'

c

Credit and Capital Formation
a report to the President's

Interagency Task Force

on

Women

Business

Owners

LIBRARY
**B

1

7

1981

Treasury Department Study

Team

April

1978

TABLE

Preface

CONTENTS

OF

v

vii

Acknowledgements

1

INTRODUCTION

2

MARKET

ENTRY

Socialization,
Education,

5

6

Work Choice,

7

Women and Wealth,

10

Entrepreneurship,

11

Starting

a

Business,

Financial Planning,
Insurance,

3

13
14

19

CAPITAL FORMATION

27
Availability of Capital,
Regulation A and Other Stock Issues,

Venture Capital Firms,

in

42

25

34

CREDIT AND
BUSINESS

THE

WOMAN-OWNED

si

Equal Access to Credit,
54
Women's Banks,

51

Accessibility of Credit,

55

Business Owners and Commercial Banks,
58
Commercial Banks and the Small Business
72
Administration,
Factoring and Finance Companies,

5

SMALL
TAXATION
THE

79

BUSINESS

AND

85

Forms of Organization and Type of

Business,
86
Tax Provisions Governing Small

Business,

97

Taxes Related to Business Operations,
Taxation to Encourage Venture Capital,
Notes,

117

Bibliography,
Appendix,

133

145

IV

99

109

PREFACE
The Interagency Task Force on Women Business Owners was
established by President Jimmy Carter on August 4, 1977. The
Task Force was given a four-fold mandate:
1.

To identify primary practices or conditions

which discourage women from becoming entrepreneurs or which have the effect of discriminating against women entrepreneurs or place
them at a competitive disadvantage in the
marketplace;
2.

To identify and appraise existing data, the
adequacy of information and the methods for
collecting additional data;

3.

To assess Federal programs and practices that
may adversely affect the initiatives of women

business owners or may discriminate against
them or which mitigate discriminatory practices and conditions; and
4.

Based on their findings to propose changes in
Federal laws, regulations, and practices and
to advise on the budgetary impact of these
proposals.

The Task Force efforts concentrated on small business
because the majority of women-owned businesses are small
businesses.
The Treasury Department Study Team was made
responsible for the section of the report on credit and
capital formation as well as other financially related issues
such as insurance, bonding, and taxation.

Other major areas of the Task Force effort and the
agencies responsible for developing sections of the final
report were:

v

--

Education and Management Training -- Department of Health, Education and Welfare;
Marketing and Procurement -- Department of
Defense and General Services Administration;

Legislation and Regulation Problems -- Federal
Trade Commission;

Assessment of Overall Data on Women Business
Owners -- Department of Labor;
Assessment of Federal Programs Currently or
Potentially Impacting Women Business Owners -Small Business Administration; and
The Department of Commerce chaired the Task
Force.

Central to the issue of credit and capital formation was
the role first of the private sector, mainly commercial
banks, and, to a lesser extent, finance companies and venture
capital firms; and second the role of the public sector,
particularly the various loan programs of the Small Business
Administration and the thrust of the Office of Minority
Business Enterprise (OMBE)
Department of Commerce. The
Study Team found that not one law, regulation, or program
specifically and explicitly assists women business owners.
,

Another vital issue was that of taxation.
Since tax
laws are sex neutral, the Study Team presented those key tax
provisions impacting upon small business and recommended
support of the Carter Administration proposals relating to
small business.
In addition, we recommended a new jobs
employment credit and simpler forms for payroll taxes and
retirement plans.
Finally, the Equal Credit Opportunity Act (ECOA) and
Regulation B, which enforces the Act, were analyzed and
evaluated and, in conjunction with a thorough analysis by the
Federal Trade Commission, recommendations were made by the
Study Team to make several changes in Regulation B so that it
will protect women business owners seeking commercial credit.

Although this study concentrates on the barriers to
women business owners and the needs of women business owners,
we hope it will have a broader use.
We believe our study is
the first government survey which presents so many aspects of
credit and capital formation as it relates to small business.

VI

.

,

ACKNOWLEDGE

T S

This study is th e product of the efforts of a great many
people brought togeth er to try to accomplish a herculean task
in an impossibly shor t period of time.
The core of the Study
Team was made up of J ean LaForce from the private sector,
Abby Gilbert from the Office of Economic Pol icy--Treasury
Department, and Rosem ary Lynch from the Export-Import Bank,
Other direct contribu tions to the report came from Margaret
Fowler, Alison Ruml
and Ron Torrence.
Research assistance
was provided by three of my students from the American
University, Ferris Br own, Brenda Barbuto, and Larry Manley.
Carol Oman, a banker from the private sector, coordinated our
efforts with the rest of the Task Force and also gave us
valuable advice and a ssistance.
A great debt is owed to Lois
Holland and Janet Pal uck, our secretaries, for the tireless
and efficient assista nee they rendered throughout the study
and report writing.
Hattie Dorman of the Internal Revenue
Service and her round table of minority women entrepreneurs
provided us with valu able insights.

Several hundred persons were interviewed in person and
by telephone during the course of the study, some several
times.
I thank
them all for the valuable information.
Also,
I would like to express appreciation to my advisors on the
study, Patricia M. Harvey, Deputy Assistant Secretary
(Administration) of the Treasury, and J. Elton Greenlee,
Director of the Office of Management and Organization, who so
graciously arranged interviews with former top policy-makers
of the Department and gave such good advice.
This has been
the word.
much and,

a collaboration in the fullest sense of
All of us who worked on the project contributed
I'm sure, learned a great deal.

I hope our excitement and some measure of our new
knowledge and understanding is conveyed to the readers of our
report

Theodora K. Watts
Study Director
Washington, D.C,
June 1978

vii

I

N T

R

D U C T

I

The basic assumption underlying the Credit and Capital
Formation Study was that obtaining sufficient funds to start
or run a business is a major problem for women business
owners.
This is not to say that men do not experience the
same obstacles, nor that women's problems are a direct manifestation of overt discrimination. We assumed that women
entrepreneurs suffer from the same shortcomings as all small
business owners; that is, lack of management experience,
marketing expertise, financial planning ability, and knowledge of the money and banking systems in the United States.
The study effort was designed to meet two rather different needs.
First, the report contains information needed
by the Task Force to formulate policy recommendations related
to women in business.
Second, we hope the report provides
information needed by women who have or are interested in
owning businesses.
In our data gathering we attempted to
restrict ourselves to the financial aspects of the womanowned business, primarily capital formation and credit, and,
secondarily, other financially related operational areas such
as accounting, insurance, bonding, financial planning, cash
flow management, and taxation.
In attempting to assess problems women entrepreneurs
might have in obtaining credit and in capital formation, a
The
two-pronged approach to data gathering was designed.
first gathered information from women business owners, or
This was done primarily
potential owners, themselves.
through the Task Force questionnaire which was mailed out to
Additional input was gleaned from
30,000 individuals (1
roundtable discussions held in six major U.S. cities with
banking and entrepreneurial participants, both men and women.
These roundtables brought together officers from banks who
are involved in making small business loans or who have some
knowledge of women who apply for loans, and women business
owners, themselves.
.

)

In addition, a series of interviews was conducted with
banking officials in the same cities as the roundtables:
Atlanta, Chicago, Dallas, Los Angeles, New York, and
Washington, D.C.
These officers were policy-level persons in
charge of commercial lending or with a direct knowledge of
commercial loan policies and practices, as well as individual
commercial loan officers. All these were structured interviews designed to obtain such basic information as:
how
women business owners or potential owners are being perceived
by the banks; what factors influence loan officers' decisions; and the level of commercial loan activity the banks
are engaged in with respect to small business in general.

We found that loan decisions are made on the basis of:

Relative risk of nonrepayment.
Banks loan
their depositors' money.
They do not make
high-risk loans.
Small businesses are by
nature high-risk for a variety of reasons.
Relative credit-worthiness of the individual
applicant is another measure of risk.
Relative return on the money.
One large loan
costs far less to administer than many smaller
loans.
Loans under $50,000 are not cost beneficial to administer for many banks, especially the larger ones.

Availability of bank funds.
Is their money
available to make this type of small business
loan, or are the funds better used elsewhere
e.g.
loans to larger corporations)?
In
tight money situations, existing customers are
serviced first.
(

,

The second phase of the data gathering was an assessment
of the investment climate in the United States, including
business and economic trends for the past three years.
On
this basis we offer a tactical economic investment outlook.
By definition, a strategic economic assessment is not within
the scope or capacity of this study.

Specifically, this phase of the study is composed of
interviews with venture capital/investment banking firms,
including small business investment companies, brokerage
houses, commercial firms, and insurance and surety bonding
companies. Within each of these areas, interviews, both in

person and by telephone, were conducted after research and
analysis of published materials. The trade associations were
also interviewed for data which they had generated on women
and credit.
An in-depth literature search and contact with the
Federal Reserve System for books, journal articles, reports
and data completed the information gathering for this section
of the report.

The study is divided into four parts discussing financial aspects of pre-entry to business ownership and actual
market entry; capital formation; credit; and taxation issues.
Each of the sections will discuss the financial needs and
requirements of women business owners, barriers to meeting
these needs, existing programs and legislation, and recommendations for action. The barrier discussions include an
assessment of existing data and results of surveys conducted
by, or in conjunction with, the Task Force.

Initially, much of the information gathered in the
interviews, the roundtables, and the Task Force questionnaire
On the one hand, we heard horror
seemed to be contradictory.
stories of the difficulties women were having obtaining
On the other hand, some women
credit and building capital.
entrepreneurs and financial officers were saying that women
are not treated significantly different from men -- the only
qualification being that women had to work harder and be
tougher because they received so little support from society,
that is, they are not allowed the luxury of mediocrity.
One banker, toward the very end of the data gathering
exercise, put his finger on what we had been hearing.
He
said he had found that women seeking commercial credit fall
into one of two general groups.
The one group seems to be
interested in going into business as an outlet for the individual.
These women are looking for a way to make their
hobbies pay off.
They often want to work out of their homes
with their "business" more a sideline.
Most often they plan
to do some kind of small-scale retail selling or offer a
service such as child-care or catering.
Seldom would the
loan requested be more than $10,000 for the home-based
activity or $25,000 for the boutique-type of operation.
The other group of women is interested in a true entrepreneurial venture. Their ideas concern more substantive
activities such as manufacturing a hard product or selling a
professional, usually high technology, service.
Such activities would have the potential, at least, of producing a
more meaningful overall impact in an economic sense, such as

creating more jobs or paying taxes.
The banker's question
was, should the Government be involved in facilitating entry
into business ownership for the first group?

Within this second group of women are two major subgroups.
The established business owner and the potential
business owner.
(The first group is, by and large, made up
of potential business owners.)
We found that the problems of
these two subgroups are quite different and our report
attempts to deal with issues that are important to both.
In analyzing the written materials and the data
collected in our field study we can state only that our
findings are inconclusive. We found little or no direct
evidence that women have unique problems in obtaining
business credit all other things being equal
.

We found what appears to be what might be termed an
entrepreneurial sequence operating.
A person obtains
training of some kind, works in a position for a number of
years, then makes the decision that he or she wants to own
the business.
Not all people are willing to take the risk or
put in the work effort that business ownership requires.
Women are now entering this pipeline in increasing numbers.
They have invaded the corporate hierarchy, but relatively few
seem to be ready (or willing) to take that risk at this point
in time.
There is, however, a high degree of agreement among
the people we talked to that there will be major changes in
the patterns we now see over the next ten years.
The numbers
of women interested in business ownership are increasing
dramatically.

2

MARKET

ENTRY

In recent years the expectations of many women regarding
their place in society have changed rapidly and dramatically. (2)
But one expectation that has not changed among women
is the belief that they cannot or should not become businesswomen.
Economic independence for women is seldom expressed
The American dream that a
in terms of entrepreneurship.
person can start a small firm and by hard work see it grow
into a large business is part of only a very few women's
dreams. Women have had a negative perception of business and
The question we will explore in this secmaking profits. (3)
tion of our paper is whether socialization has affected
woman's image of herself, her educational choices and her
occupational path to such an extent that her ability to obtain the capital and credit necessary to begin her own busi-

ness is hampered.

Socialization
Women are brought up with exposure to very limited role
models; there have been few highly successful women in the
business world.
This is one of the greatest barriers to
their becoming businesswomen.
Very few women are able to
visualize themselves as entrepreneurs. Women have been
taught to be dependent and to be "feminine;" thus, the values
and varieties of behavior among women are shaped and modeled
by their situation within society.
Psychologically female
financial ambition and the need for economic self-sufficiency
is at odds with the role learning and role acceptance which
Traditionally women have been
begins almost at birth.
socialized to achieve in directions other than owning and
Society still seems to
managing their own businesses.
believe that women are not as serious as men about handling
financial and business matters.

Socialization thus has left an impact on woman's conception of herself as a potential businesswoman, and shaped her
educational and occupational choices.

Education
In part due to socialization, women have not, in the
past, pursued educational choices that would lead to the
higher earning jobs in business and management.
This
decision can become extremely important at a later time, for
with higher earnings a woman would have greater savings and a
larger equity base from which to borrow additional funds to
form a business.
Until very recently women's own socialized
inclinations were reinforced by real sex bias in the educational opportunities open to them and the degree to which
they were steered away from traditionally "masculine" fields.

Understanding the impact of socialization on income is
important.
Level of education is directly related to the
level of work force participation; better education means
better jobs, e.g.
women with college degrees are more likely
to hold managerial and professional jobs than women without
college degrees.
But there has been a reluctance on the part
of women entering college to seek a business degree.
Prompted by a family environment into an assumed "proper female
role" of passivity, and reinforced by educational and counseling experiences, women tend to exclude preparation for the
business world. They stay, consequently, a step behind men
and are ill-prepared to parallel the advances made by their
male counterparts in the economy.
They are not as knowledgeable as men about the financial and banking systems, especially how to obtain business credit and how to establish a
good credit history, and, perhaps even more important, they
have no knowledge of or experience with the financial community.
Women also lack vital empirical knowledge of how the
business world operates. (4)
,

More and more women are obtaining college degrees, but a
large number of these women lack professional preparation in
the field of business.
Until very recently statistics and
research show that few women entered what are considered either masculine fields or nontr ad itional subject areas; namely, mathematics, economics, finance, and business.
Most
women have not been sufficiently prepared in high school to
take these courses.
They then do not feel ready to pursue
such courses in college; and those women who do, do not take
enough courses to prepare them for occupations in the business world which are related to these fields.
Though girls

will begin in first grade with better marks in arithmetic
than boys, and in all of elementary school boys and girls
seem to like math equally well, somewhere along the line
girls apparently lose interest and demonstrate less profiThis situation becomes more serious as allied
ciency.
business fields of economics, finance, and accounting become
increasingly quantitative and analytical (5)
.

In one famous study of women who had achieved high-level
managerial positions, many of the women in the sample who
attended college in the 1930s took nontr ad it ional or male
oriented courses, but only one-quarter of this group took
business and economics and under ten percent chose math. (6)
In 1976, a similar survey showed only a slight increase, with
32.5 percent of all women receiving degrees in nontraditional
fields; 6.7 percent took degrees in business and management;
and mathematics declined to 1.5 percent.

At the graduate level there is evidence that more women
are now beginning to chose the kind of education that has
This is signifihelped pave the way for men in business.
cant, since education beyond the undergraduate degree appears
to be the most important factor in the employment status of
women and attainment of the managerial level of responsibiThe percentage enrollment in graduate schools of
lity.
business is rising; the number of women taking the admissions
tests to these schools has risen from 3.3 percent in 1966-67
academic year to 8.0 percent in the 1971-1972 academic year.
Between 1972 and 1973 women enrolled at Harvard Business
School, which did not admit women to its MBA program until
1963, rose from four percent to seven percent in one year.
And at Columbia University's Graduate School of Business,
which has always been open to women, enrollment jumped from
five percent in 1968 to 21 percent in 1973; while Stanford's
Business School saw enrollment skyrocket from 1.6 percent in
1970 to 18 percent four years later.

female enrollment in prestigious business
Unfortunately, this does
schools has shot up dramatically.
not tell the whole story, for women graduating from these
programs are trained to fit into a corporate environment, not
to own their own businesses; these courses of study are often
found to be of little help to the entrepreneur (7)
In summary,

.

Work Choice

Socialization and sex stereotyping have affected the
quality of women's work experiences.
Such discrimination has
repercussions for women-owned businesses in two ways:
(1)

CHART

1

Representation of

Women

in

in Male
Occupations

Women in Male
Occupations as

as Percent of

Percent of Total

Women
All

Working

Employment

Male-Intensive Occupations

Women

as Percent
Labor
Force

of Total

Male-Intensive

Occupations as
Percent of

All

Female-Intensive
Occupations as
Percent of All

Employment

Employment

Categories

in

Categories

those Occupations

SOURCES: Reubens and Reubens. American Women Workers in a Full Employment Economy, A Compendium of Papers, Joint Economic Committee, 1977,

p. 108.

Bergmann and Adelman, The American Economic Review,
(September

1963), 511.

LXIII

the types of businesses women own, and (2) the capital needs
The occupational concentration and job
of those businesses.
segregation of women into traditional "female" jobs closely
parallels the concentration of women-owned businesses in
services and small retail establishments. This has contributed to the low earnings of women in the job market, and
having lower earnings reduces women's ability to build
Lack of sufficient personal
sizeable personal savings.
restricts, if it does not prohibit, women from
savings
acquiring pools of capital on which they can leverage
Low income is thus a barrier to business
additional funds.

ownership.
The persistence of occupational segregation by sex in
the labor market is the major obstacle to the attainment of
Occupational segregation by sex
economic equality for women.
The
pervasive now as it was years ago.
appears to be as
distribution and status and pay of women within
occupational
each occupation has not changed significantly since 1940.
While women have gained much more access to market employment
they have not gained full equality in the choice of jobs and
opportunity for advancement. Women still remain in traditional sectors and female jobs such as clerical-sales,
In 1977, 34.7
professional-technical, and operatives. (8)
percent of all women workers were in clerical jobs compared
with six percent of all men; 1.6 percent were in crafts and
11.8 percent in operative jobs compared with 21 percent and
for men; and one in every 20 women
18 percent, respectively
in a managerial or administrative occupation compared
was
with one in every seven men. (9)
,

Are women moving into nontraditional male-dominated
occupational fields, and, if so, what are the implications
Tradifor women-owned businesses and for women's earnings?
tional and nontraditional jobs which women hold are not a
A traditionfixed category but vary over time and industry.
al job is defined as one where women appear in considerably
larger proportion than their incidence in the total work
force.
A nontraditional job has the opposite characterisChart 1 shows that the proportion of women in
tics. (10)
male-intensive jobs has changed little; however, during the
1960s there was a very small increase of women entering
traditionally male-dominated jobs, such as skilled trades and
the professions and managerial positions.
,

Women are beginning to move into management positions,
This step is important
many are now at the middle level.
since one major barrier to business ownership among women is
These management
their lack of experience in management.
jobs will give women knowledge about business practices and

experience and exposure to the available sources of credit
and financing.
Management jobs will give many women the same
experience as men, experience which weighs heavily in the
granting of credit. More important, it has been suggested
that as more women move into management, they are more likely
to assume the r isks of entrepreneur ship. (11)

Women are not only heavily concentrated in a few
occupational categories, they are at a lower level of all
categories of employment and they have little vertical
mobility and opportunity to move into the top levels of a
given occupation.
Discrimination against women in maledominated occupations (12) concentration in a few "female"
occupations, and relegation to the lower ranks of all
occupations have been the major reasons for the enormous pay
differential between men and women. Women earned 57 percent
of what men earned in 1974, compared to 64 percent in 1955.
Low earnings are the greatest single barrier that women have
in building up their own capital and obtaining bank
credit. (13)
,

Recent research has shown that there is a lessening of
the pay dif f erential (14
When occupation groups and other
job factors are sufficiently disaggregated and changing
social attitudes are taken into account, the long-run prospects for women's earnings are favorable.
Other studies have
shown that women who moved from female- to male-intensive
jobs made the largest percentage gains in hourly wage
rates. (15)
.

)

Women and Wealth
There is a persistent myth in America; many people
believe that women control the nation's wealth.
There is
some truth to this statement, women own almost half of the
nation's wealth
47 percent in 1975.(16)
Their ownership
of common stock has fluctuated from over half of all shares
in 1965 to slightly less than half in 1975.(17)
Most women
who become wealthy do so through inheritance from their
fathers or husbands.
These women are usually in their sixties, 54 percent of them are over 65 years old.
Rarely does
any woman achieve affluence on her own. (18)
But there is a
great difference between ownership and control of wealth.

—

Women control very few economic decisions (19)
The
wealth women inherit is controlled and managed by large banks
and trust companies, by large corporations, by accounting and
legal firms, and by governments issuing bonds -- all organizations where women have little ability to control decisions.
.

10

.

individually held shares in corporations do not
enable women to influence business policies because the
shares are too widely distributed and women shareholders have
shown neither the inclination nor the ability to organize in
Women
order to collectively influence corporate decisions.
do not control wealth as investors; they do not control their
money; and they rarely make decisions on the buying, selling
or trading of the stocks and bonds they own. (20)
For example,

Women's ownership of securities has implications that
could have an impact on the American economy if women begin
to exert control of their wealth; for women have been shown
They look for
to be more conservative investors than men.
blue-chip stocks,
safety and security and feel safer with
bank time certificates of deposit, and corporate bonds.
Women strongly prefer companies making consumer products,
especially goods they themselves use, and avoid heavy
As more and more women-owned wealth is
industry issues. (21)
controlled by conservative trust officers and banks, and the
female penchant for investments in bonds, high grade stocks,
and cash reserves is thus fortified, the percentage of wealth
No
available for high-risk venture capital shrinks. (22)
evidence could be found by the Study Team of the investment
of women-owned wealth in businesses owned by other women,
through mechanisms such as capital pools for
e.g.
investment.
,

Entrepreneur ship
Women have not developed a sense of their own potential
From our
as entrepreneurs; their aspirations are too low.
colonial times, women have owned businesses but the womanowned business has always been small. (23)
Some have termed
businesses "micro-enterprises." A very few but
women-owned
significant sociological studies have looked at the female
entrepreneur.
Their results indicate that women have the
same entrepreneurial personality characteristics -- riskThus,
taking, independence, high achievement -- as men. (24)
a tentative conclusion may be drawn that it is the socialization process that limits a woman's view of herself as an
entrepreneur
What is an entrepreneur? An individual who builds a
business that did not exist, who stands to gain significant
financial rewards or suffer large financial losses, and who
has operational freedom and decides upon alternatives is an
entrepreneur.
An entrepreneur and a manager are usually not
the same person.
Though hard work and dedication may be
common characteristics, the drive to succeed in one area does
11

.

not necessarily mean that the drive will bring success in the

other

The crucial factor of willingness to take risks is
similar in both male and female entrepreneurs, and entrepreneurs are rated as moderate to high risk takers.
Entrepreneurs do not seem to see failure as a real possibility.
However, men and women perceive risk differently.
Thus,
while male and female entrepreneurs may have the same risktaking characteristics, the perception of risk seems to
determine whether an individual will become an entrepreneur.
Men see risk as either positive or negative, loss or gain,
danger or opportunity.
Women see risk only as negative. Men
see risk as affecting the future; women see risk as impacting
upon the present.
It appears there is a difference in response because of a difference in perception, and a difference
in behavior as a consequence of both.
Most women appear to
have seen the risks of business ownership as being too costly
to attempt to surmount the barriers to success. (26)

Women entrepreneurs and managers have been found to be
different from other women.
Early on they worked hard, set
goals, established priorities, and rejected women's traditional social goals.
Female entrepreneurs were found in one
study to be special people:
they worked, achieved, fought
for their judgments, and sacrificed private time and emotional energy.
They also had a high sense of self-worth;
they never felt they could not do something just because they
were women.
Being a businesswoman did not seem to affect
their perception of themselves as women; they maintained
strong feelings about that role and only a minority felt they
sacrificed their femininity in order to establish their
businesses. (27)
The Credit and Capital Formation Study Team found
considerable evidence in their field study to support these

12

:

viewpoints from the literature, and these will be discussed
throughout the remainder of this report.
Starting

a

Business

A woman must have three things before she can start
business
(1)
(2)
(3)

a

She must have a marketable idea.
She must have management ability.
And she must have the funds needed to finance
her business for at a least a year.

These same requirements are imposed on all small business owners; women, however, have not generally shown an
For example,
understanding of what these requirements mean.
Women business owners have
one must have a marketable idea.
traditionally been clustered in small retail selling, the
boutique is most often cited, and in supplying services.
Paradoxically, these types of businesses have the lowest
return on investment and the highest failure rates.

Management ability is the second prerequisite. Our
research shows that education and work experience are used by
lending institutions as indicators of sufficient management
skill.
Women have not until recently pursued careers or
academic degrees in management.

Simply stated, the financial needs of a business are
capital and credit.
These two terms convey two entirely
different concepts which should not be confused.
Capital are
those monies (or other tangible assets) invested in the firm
by the owner (s) for use in conducting the business; capital
cannot be withdrawn except through dissolution of the existing business entity.
Credit, on the other hand, is the
ability to obtain goods, services, or money in exchange for a
promise to pay in the future.
For the small business, credit
usually takes the form of either short-term financing from
banks (or finance companies) or trade credit.
Thus, sources
of funds, aside from family or friends, are commercial banks,
commercial finance companies, venture capital firms, and, to
a very limited extent, savings and loan associations and
credit unions.

13

.

Many fledging entrepreneurs operate under the misconception that the primary function of a commercial bank is to
loan money.
This is not so.
Because so many new businesses
fail, banks do not usually lend money to start a business,
except for small, often installment payment loans (up to
$15,000), which must be personally secured by the borrower.
The primary function of a commercial bank is to provide a
return on investment to the bank's shareholders.
The mechanism by which the bank provides this return is through
charging for its services, such as making loans and charging
interest.
Commercial banking lending practices to new businesses will be addressed in a separate section of this study,
Like banks finance companies bridge short-term finanneeds.
Ho wever, finance companies will lend to riskier
proposals and accordingly charge significantly more in interccordingly
s
est fees than the commercial bank.
he
,

:ial

Venture capital firms make long-term equity (or capital)
investments in businesses.
These firms appear to play a very
small role in the financing of new or existing women-owned
businesses. Venture capital firms finance companies through
any one of five stages of development (start-up, first
through third stage financing, bridge financing and buy-out,
or acquisition, financing)
The Study Team surveyed venture
capital firms for their experiences with women-owned businesses, the results of which are addressed later in this
report
.

Loans from savings and loan associations for commercial
purposes (other than refinancing one's house to pull equity
out for reinvestment elsewhere) are limited to certain real
estate and/or construction applications.
Also authorized are
loans secured by savings deposits or certificates at the
association of an equal or greater amount.
These share loans
are also available at credit unions.
They can be used to
raise business capital, while permitting investors to earn
interest on their existing savings. (28)
Thus, in addition to the entrepreneur's idea for a
product or service, many other factors must be considered if
this "idea" is to come to fruition.

Financial Planning
What are the barriers which women encounter in market
entry? Whatever avenue of approach an entrepreneur takes,
whether she perceives a need for a product or service which

14

.

)

she feels she can provide or simply wants the pleasure of
expanding her hobby into a small boutique, the objective must
necessarily be to make a profit. Yet thousands of new businesses fail every year due to poor management and lack of
adequate financing. The basic requirements of a successful
start up in business are frequently the very ones which women
basic financial planning, managerial
These are:
still lack.
expertise, and access to sufficient capital and credit.
Managerial expertise and full access to capital and credit
markets are discussed elsewhere in this paper; let us examine
here basic financial planning and loan applications.

Market entry necessarily assumes a small firm with all
the concomitant riskiness inherent in small business finance.
First, many
This financial risk falls into three main areas.
capital markets are not available to small firms simply beHence, small new firms must
cause of diseconomies of scale.
rely to a greater extent on internally generated funds.
(This point is addressed in the section of the report entitled "Availability of Capital.")
Second, working capital
Funds are generally very
management is of vital importance.
limited, trade credit is expensive and rapid expansion of
scale can lead to a cash flow crisis and insolvency instead
Third,
of the rising net income the business owner expected.
because the business is generally trying to establish a niche
for itself in an already on-going industry, it must have
financial management which is not only competitive with but
superior to that of other market participants -- it cannot
permit itself to fall below industry standards and expect to
survive
As noted in Dun's Review
"a great number of companies
have managed to overcome the handicaps of size and operate
successfully among the giants. Most of them have one thing
in common:
a carefully planned strategy ." (29
,

The Business Plan
Few women business owners who were
contacted by the Study Team had ever made the first essential
step in successful market entry, that is, a detailed business
By this we mean beginning with an analysis of what
plan.
business the firm is in and continuing on to encompass all
aspects of strategic planning by relating objectives, goals,
and resources, both financial and personal, to the environment.
The following is a list of business plan components
which should be included:
:

description of the business(30)
anticipated market
competition
location of the business

15

management resources
personnel resources
how credit will be used and the
expected effect of any loans
summary
If the small business is going to be engaged in more
than one activity, the central activity should be defined and
All too many businesses have ended in
committed to paper.
bankruptcy proceedings because of confusion as to the main
purpose of existence and the diversion of funds to a secondThe entreprenuer s entire planning effort must
ary endeavor.
be based on her perception of the specific business she wants
'

to be

in.

It requires
Developing a business plan is not easy.
management time, and it requires the use of financial techniThe
ques which may be unfamiliar to many entrepreneurs.
return is great for those who can develop sound financial
plans, however, as such planning greatly extends the entreThe marketing and
prenuer's control over her business.
financial analyses are instrumental in determining the amount
and type of financing which is needed, and the planning
framework leads to a long-term program of financing, including helping to build a good "teamwork" relationship with a
bank.
According to the bankers we interviewed, incomplete or
ineffective financial management is the major flaw in a large
percentage of otherwise well-run small businesses in the
country today.

Professional assistance in developing business plans can
be very helpful, but caution should be used in the selection
of someone to help.
There are many who can talk good
The company's accountant
finance, but who cannot deliver it.
is a good place to start, however, many accountants have
neither the training nor the inclination for financial planning work.
The company's banker may be helpful, as some
banks have management assistance programs, and in other cases
a good loan officer can refer the business owner to a profesOther sources of
sional consultant in financial management.
help are the Small Business Administration and the Office of
Minority Business Enterprise in the Commerce Department.
Local colleges may also offer management consultation through
their business administration faculties.
The Loan Application
After the business plans have
been drawn up the problem of obtaining funds for the new
business must be addressed. Arranging a loan for any company
;

16

is one of the most complicated transactions in all of business, especially for small companies which are new and growMany pitfalls can be encountered when attempting to
ing.
arrange financing.

Since there is no financial history for a new business,
the loan officer must evaluate the soundness of the company's
Is the initial capitalization
starting point.
For example:
adequate given the company's business plan and the amount of
financing requested? Is there clear-cut management control
of the business at the outset or is ownership spread among a
group of persons such that control could shift, causing
management instability as the business develops? A straightm
forward presentation of such information, along with a simple
balance sheet listing assets, liabilities and equity at the
opening of the business will enable the loan officer to
Personal financial statements of the
answer these questions.
firm's principals are also usually requested along with
credit histories.
One of the most frequent problems encountered by many
entrepreneurs is the fact that obtaining an initial bank loan
for a business does not in any way ensure that larger, more
important loans for expansion will be available from the same
bank one or two years later.
Further complicating the finanthe owner often finds that it is concing of a business,
siderably more difficult to arrange an expansion loan with a
new bank than the one with which his or her company has been
deal ing.
As a consequence, some small companies find they are
able to fill only a portion of their precious sales demand
because of their "sudden" credit limitations.
Even worse,
some companies can get into extreme cash flow difficulties,
even bankruptcy, because funds are invested in expansion in
anticipation of additional bank financing, which later turns
out to be unavailable.
These situations develop because
initial loans of $10,000, $25,000, or even more made by a
bank are based on some specific collateral consideration,
such as net worth of the entrepreneur or some asset of the
business.
These loans are often made by a branch manager
whose primary responsibility in the bank is new business
development and whose loan approval authority is exhausted by
Often little or no financial
the amount of the initial loan.
analysis of the company is made initially by the bank because
Later, when expansion
the loan is small and fully secured.
creates increased loan requirements, the application is
referred to a more senior loan professional, who reviews the
company's financial condition far more rigorously.
Invariably the sales expansion has pushed the company's loan

17

.

requirements beyond the collateral considerations which
justified the initial loan, and the new request is declined
at the very time when the loan is crucial for the future of
the business.
Perhaps fifty percent of all small businesses have this
It
problem within three years after they begin operations.
is only one of the many pitfalls in arranging financing, all
of which exist primarily because entrepreneurs need substantial amounts of other people's money to run their businesses.
Yes, banks and other sources of financing earn interest on
the loans which they make, but the failure rate of small
businesses is high, and one bad loan can wipe out interest
In addition, the
earnings on a large number of small loans.
administrative costs of small loans are high in proportion to
the cost of administering large loans to established
companies

Within this context, a loan application from a small
business, except for the small, initial loans with ample
collateral just mentioned, will be carefully and cautiously
reviewed by a loan officer.
Frequently the final decision is
made by an officer who has had no personal contact with the
applicant.
As a consequence, obtaining the loan can be
extremely difficult.
For this reason it is imperative that
the owners and/or management of the company do a thorough and
professional job of preparing their presentation for
financial assistance.
A good presentation rarely can convince a loan officer to make a questionable loan, but a bad
presentation can deter that loan officer from making a workable loan.
Often a loan to a small business is a border line
yes/no decision for the loan officer because of the lack of
financial history, unclear profit trends, undercapitalization and on and on.
An effective, competent presentation
by the applicant can be instrumental in reaching an agreement with the bank.
This is so because a good financial presentation demonstrates to the loan officer that the company management
grasps the management requirements of the business at the
present time and for the foreseeable future.
A good presentation for financing is a clear and complete statement of a
good business plan.
The business plan delineates the key
elements for effective marketing, operations and financial
management.
It should leave no major questions about the
company's operations or finances unanswered, thus giving the
banker as complete an understanding as possible.
The banker
can then be more aggressive in making the loan decision,
especially if the entrepreneur has demonstrated a sound grasp
of the management requirements.

18

.

What Has Been Done To Ease Market Entry ? Federal
Government assistance to the small business community is most
readily available from the Small Business Administration.
Assistance can be obtained in several forms: written brochures, both free and priced, SCORE and ACE consultations,
and referral assistance.
Another government sponsored
program designed to assist the small business entrepreneur
is the Office of Minority Business Enterprise at the Department of Commerce.
The point of mentioning these agencies at the entry
phase of business is that entrepreneurs often want advice
that is difficult or embarrassing to ask for.
Entrepreneurs
may well assume the posture that to ask these questions of
their banker or friend would be interpreted as a weakness.
Therefore, the need for a non-threatening atmosphere which
encourages a free exchange of ideas and experiences is at
least partially met through such vehicles as state and local
chambers of commerce and local offices of the SBA and OMBE
Available resources can be divided into free and "for a fee,"
government and free enterprise. One should not necessarily
draw a correlation between free and government assistance or
"for a fee" and free enterprise assistance.
Many accountants, financial planners, lawyers, insurance agents and
bankers will agree to an initial interview with a prospective
client to discuss her ideas and plans, free of charge.

Insurance
Small and medium-sized businesses are often more
vulnerable to the impact of loss than are larger firms,
because small operations do not have extensive resources to
fall back on to cushion a severe loss, nor can they ordinarily afford to retain a lawyer to defend them against
potentially damaging lawsuits. The small business owner
needs the financial protection of insurance to assure the
continued operation of the business following a serious
property or liability loss.

Insurance agents and brokers can be sources of business
planning assistance.
And, since few businesses are solely
financed by savings or family contributions, it makes good
sense to include an assessment of the business's exposure to
potential financial loss in the business plan presentation. (31)
This will not only supply evidence of the entrepreneur's financial management ability to the financial
institution, it will also enhance her conception of the
day-to-day operations of the business.

19

.

Commercial insurance is readily available from thousands
of agents and brokers. (32)
The commercial insurance market
is quite competitive, and different companies offer different
rates.
Some insurers specialize, prefering to solicit certain types of companies or to emphasize particular coverages.
The only rule in selecting insurance is that the prudent
business owner should be aware of the existing coverage alternatives.
Commercial insurance coverages are most commonly
categorized as either surety bonds or property and liability
insurance

Surety bonds will only be briefly addressed here since
they are more appropriately related to procurement through
contractual arrangements.
For the purpose of clarity, surety
involves three parties in a contract through a bond issued to
a contractor, the "principal," whose satisfactory performance
under the contract with the contracting agent, the "obligee,"
is guaranteed by the "surety," the third party to the contract instrument.
Surety is not insurance.
If its whole
role is to be completely understood, it must be viewed in the
light of pre-qualifying a contractor so he or she can secure
a contract for which he or she is primarily liable.
Surety
should not be confused with any form of insurance policy or
the contract, itself.
The Study Team queried six surety companies relative to
their experience with woman-owned businesses.
All companies
responded that "no one wants to write the first bond whether
to a woman-owned or male-owned business, surety is blind to
sex."
The familiar analogy was drawn "if you can prove you
don't need the loan, the bank will lend you the money." The
underwriting process in surety is similar to the financial
analysis of the bank loan officer and the "three C's" of
character, capacity, and capital are stressed as well as the
track record of the business in the respective field.
Most
small businesses have difficulty meeting the stringent
criteria.
All six firms stated that it has to be costeffective for them to underwrite a business and that this is
often not the case with a small business.
Although, one
rather large firm did offer surety to small business firms at
a high premium.
Requests from small businesses were usually
referred elsewhere, such as to the Small Business Administration.

When a business owner cannot obtain the required surety
bonding, she is precluded from competition for contracts.
This barrier would particularly impact the new, small business owned by a woman.

20

.

Property and liability insurance are generally sold in a
comprehensive policy although one can be purchased without
The price of property/liability insurance is
the other. (33)
based on two components:
the expense factor (including the
agent's commission) and the loss factor (based on the proThe loss component is the pure cost of the
jected claims)
insurance and is frequently calculated using the combined
experience of a large number of companies which pool their
statistical data in order to estimate the anticipated losses
on a particular class of risks.
.

Sex is purportedly not a factor in establishing rates in
commercial insurance but it is an integral factor in determining eligibility. (34)
Does the insurance industry target
market the women-owned business? Does the insurance industry
deem the women-owned business a viable segment of the business community? The Study Team surveyed property/liability
insurance agents and brokers as well as the various trade
associations across the country.
The response to these
questions was generally "No." The female agents/brokers
responded that they do seek out the woman-owned business for
their portfolios.
Eight out of ten of the male respondents
explained that "business is business" and that they would not
consciously seek to exclude a woman-owned business as a
cl ient

Disability income insurance and medical insurance are
ancilliary costs of doing business, whether directly for the
woman business owner or her female employees.
Disability
income insurance and medical care insurance as offered by the
insurance industry are replete with discrimination toward
women in all three categor ies of (1) premiums, (2) underwriting practices (the selection of insurable risks), and (3)
policy terms and conditions (35)
It has been well documented
that these coverages are not equally available to women as to
men (see Task Force reports to the respective Insurance Commissioner's of California (1975), Colorado (1975), Iowa
(1975), Michigan (1975), New York (1975), and Pennsylvania
Denial of equal access to insurance at fair rates
(1974)
affects the economic status of all women.
It touches employment discrimination, opportunities to hold a job, ability to
maintain a family in the face of personal catastrophe, and
economic security. Other economic disadvantages of women can
be magnified by discriminatory, inadequate, or prohibitively
costly insurance.
.

.

)

.

What is being done to ameliorate the high cost of
insurance and to encourage non-discriminatory marketing
practices? For approximately eighteen months, the Department
of Justice, on behalf of and at the request of the Task Force

21

on Antitrust Immunities of the Economic Policy Board, conThis study
ducted a study of the insurance business (36)
focused primarily on property/casualty lines and addressed
the question of whether continuation of the present exemption
of the insurance business from federal antitrust laws, by
virture of the McCarran Act and state regulation, is in the
Essentially, it was necessary to deterpublic interest (37)
mine whether thirty years of state regulation has provided
the public with the benefits normally attributed to competireasonable prices based on the cost of rendering
tion, i.e.
the services; efficient services rendered at the lowest posthe utilization of new or
sible cost; and innovation
or services and methods of distribution.
improved products
The underlying premise of the study was that, if regulation
had not provided these benefits, or if it now appeared that
the application of the federal antitrust laws would not
interfere with the basic policy objectives of insurance regulation, then legislation should be introduced to modify the
statutory antitrust exemption.
.

.

,

—

The Department of Justice Study Group observed that over
the past ten years, a number of states adopted an open competition system of rate regulation after attempting to
The study revealed that
administer highly regulated systems.
the long-run experience of at least one major insurance state
(California) under an open competition system, in which the
state has relied on market forces to control prices, suggests
that unrestricted price competition can provide an effective
substitute for rate regulation as a means of achieving
reasonable prices and maximum efficiency in the sale and
distribution of insurance. A comparison of the experience of
the same insurers under certain open competition and prior
approval systems suggests that competition fosters independent pricing, operating stability, and flexibility in the
pricing structure.
In commercial lines, the findings of the Justice Department indicate that state regulatory schemes are largely
illusory and that insurers are generally free to set their
own prices, owing to the availability of state-authorized
rating plans which permit insurers to price risks individually based essentially on their business judgment and competitive pressures.
The prevalence of these plans in commercial lines raises a fundamental question as to the purpose
and need for state rate regulation in these lines of
insurance.

The study concluded that (1) the insurance industry
should be able to conduct its business without any special
exemption from the federal antitrust laws, (2) antitrust

22

precedent indicates that insurance companies could pool their
loss experience through a statistical bureau consistent with
federal antitrust standards, (3) federal antitrust laws would
not prohibit any necessary trending of future losses on a
composite basis by advisory organizations that were independent of the companies they were serving, and (4) the antitrust laws would not prohibit those voluntary risk-sharing
arrangements such as insurance pools and reinsurance agreements, that either were necessary to the conduct of business
or served some other legitimate business purpose without
substantially lessening competition.

While the Justice Department's report did not propose
definitive measures for this dual regulatory system, it did
propose measures which are akin to depository financial
institutions, involving federal chartering and a related
guaranty system. "Thus, insurance companies would have the
option of seeking a federal charter and thereby losing the
McCarran Act protection, or retaining that protection under
state charter and remaining subject to the full scope of
state regulation.

a

The study also noted that competitive restraints may not
prevent invidious discrimination in which individuals are
denied coverage or are charged disproportionately high rates
Consequently they recombased on their age, sex, and race.
mended federal legislation that would prohibit invidious
discrimination in the sale of insurance and that would
require validation of risk classes based on age, sex, and
race and provide relief against risk classifications that
It follows,
are, among other things, arbitrary or illogical.
then, that federal disclosure requirements with respect to
pricing and underwriting experience are not only an important
complement to these anti-discrimination measures, but are
essential to the full and fair exchange of information in a
competitive environment.

Currently, there are two bills pending in Congress which
They are S.
address the repeal of the McCar ran-Ferguson Act.
1710 introduced by Senator Brooke on June 16, 1977, and H.R.
As
7623 introduced by Representative Downey on June 6, 1977.
of this report both bills are "in subcommitof the writing
tee."
The Study Team believes that passage of either S. 1710
or H.R. 7623 would significantly improve the availability of
reasonably priced insurance for the woman-owned business.

23

3

FORMATION

CAPITAL

The Task Force questionnaire (see Appendix) asked
questions designed to assess the extent to which predicted
variables actually influence the availability of funds for
women-owned businesses.
For example, questionnaire
respondents were asked to indicate all sources of capital
used to obtain their businesses and also the total amount of
capital obtained.
The results of summing responses by loan
categories are quite interesting, as can be seen in Table 1.
(We realize that summing probably resulted in double-counting
capital amounts for those responses where more than one
category of capital sources was checked, but feel the data
can still be useful in a gross sense.)

According to the data, 67.3 percent of the capital used
to start-up the businesses of respondents came from "angel
money," i.e. , it was obtained from savings, family, and
friends.
This was true at the larger amounts of capital as
well as the smaller.
The amount of capital needed to start
the business was $15,000 or less in 51.7 percent of the
responses.
Even at these relatively small amounts, 22.7
percent of the money came from loans (both public and private
sector financing)
The size of the capital needed by the
respondents supports what the study team heard from the
bankers they interviewed; women do not usually own businesses, they own micro-enterprises
The data indicate that
smaller loans are available to women.
Bankers we interviewed
stated that this is not so because small loans are too expensive to administer.
Perhaps the smaller loans were obtained
from smaller banks outside large, metropolitan areas.
.

.

Venture capital firms appear to play a very small role
financing new women-owned businesses.
Such firms usually
make larger loans to larger organizations, but our data do
not show such a pattern with 13 of the 17 fundings of $50,000
in

or

less.

25

TABLE 1

How Capital Was Obtained By Amount Obtained
Women Business Owners
$1 ,000

$6 ,000

$16,000

$26,000

$51,000

$76,000

to

to

to

to

to

to

5,000

15,000

25,000

50,000

75,000

PERSONAL SAVINGS

469

267

148

128

JOINT SAVINGS

172

106

64

FAMILY

142

98

FRIENDS

62

GOVERNMENT PROGRAM

COMMERCIAL BANK LOAN

VENTURE CAPITAL FIRM

COLUMN TOTAL

(COLUMN PERCENT)

100,000

$101,000
and
Over

Total

(Row
Percent)

61

213

43

1,191

(34.9% )

82

29

23

30

506

(14.8 % )

65

51

20

14

25

415

(12.2% )

47

31

17

11

5

10

183

(5.4% )

17

65

68

113

41

24

39

368

(10.8 %)

146

166

116

148

55

34

70

735

(21.5% )

2

5

4

2

2

17

(0.5%)

1,010

754

496

541

219

144

250

(29.6%)

(22 .1%)

(14 .5%)

(15.8%)

(6.4%)

(4.2%)

(7.3%)

Row

3,415

(100.0% )

SOURCE: Task Force Questionnaire

.

.

The questionnaire data was used to assess the extent to
which a woman's marital status influences her ability to
obtain capital and credit, as this was a problem area often
raised in Congressional hearings, magazine articles, and
interviews

Even considering the uneven numbers of responses in the
different marital categories and the very small numbers of
responses in some of the cells of the table, marital status
appears to have little, if any, relationship to the amount of
financial capital obtained to become a business owner (see
Another way of saying this is that married women
Table 2)
do not seem to have an advantage over non-married as far as
The proportion
having access to greater amounts of capital.
of business owners who are unmarried is high at 40.3 percent
of the respondants in comparison to what we would expect the
population of all women to be. Observations about the
pattern of distribution would be more meaningful if a sample
of men owners were available for comparison.
.

This chapter of the report describes capital formation
beyond that capital obtained from personal savings, family,
or friends, where most new small businesses get their money
We discussed earlier that women are at a disadvantage in
building a capital base because they do not ordinarily have
It may also be
as high an income to generate savings as men.
more difficult for women to borrow money from family and
friends because of role expectations. These societal influences may very well be the greatest barriers to capital formation for women, particularly in light of the fact that very
small businesses are usually not in the target group serviced
by venture capital firms.
To build the whole picture one
must consider not only the sociological issues and the operations of venture capital firms, but also the availability of
money for venture capital investment.
This topic is discussed in this chapter as well as the chapter on taxation.
.

Availability of Capital
The woman who seeks capital for her business has
potentially available to her the same sources of capital as
those available to her male counterparts.
In many cases the
woman-owned small business collapses, falters, or never gets
started because the owner is unable to make full use of these
sources

27

TABLE

2

Percent Distribution of Responses: Current Marital Status

By Amount

of Capital

Obtained

Women

Business Owners Only

$1,000

(N

$26,000

$51,000

$76,000

$101,000

to

to

to

to

$15,000

$25,000

$50,000

$75,000

$100,000

and
Over

41.6%

28.0

10.9

10.5

3.5

1.6

3.9

34.9

21.0

13.0

16.8

5.7

4.0

6.0

37.1

25.0

10.0

11.0

4.0

3.1

5.6

35.1

21.0

5.3

15.9

1.8

5.3

7.1

32.4

= 257)

$16,000

to

$5,000

Never Married

$6,000

to

23.6

10.1

14.9

5.4

4.1

9.6

Married
(N

=

1288)

Divorced
(N

=

423)

Separated

(N=57)

Widowed
(N = 148)

Total responses

= 2173
SOURCE: Task Force Questionnaire

.

Personal savings and loans from family, friends and the
local bank, are most often the sources of start-up funds for
a woman's business, as they are for small business in genOnce started, the growing small business is supported
eral.
by continued bank financing and, if potential for profits is
great enough, by venture capital and public equity financing
through the selling of common stock in the company.
If the
enterprise successfully passes through this difficult stage
of rapid expansion and heavy dependence on external finanThe rate of growth
cing, it emerges as a mature business.
slows and stabilizes, and increased profitability combined
with more moderate growth finally permit capital needs to be
met, at least in part, by internally-generated funds.
The extent of specific knowledge a woman may have about
obtaining financial support from these various sources and
her persistence in seeking such support are factors which
bear heavily on her success in obtaining funds.
These are
factors she can influence.
Beyond the enterpreneur s control, however, are general economic conditions and the state
of the capital markets, which generally determine the amount
and terms on which investment funds are available, and which
help shape the investor's predisposition toward the entrepreneur.
These macroeconomic forces and their effects on small
business have particular claim on the attention of government
bodies interested in assisting women in business, and an
understanding of general conditions in the capital markets
can aid the businesswoman in planning her capital outlays.
For this reason, this section takes the macroeconomic view,
and is a preface to the greater detail which follows.
'

In view of
The "Capital Shortage" for Small Business
the recent recession and a presently hesitant economy, it
However, a
seems paradoxical to speak of "capital shortage."
shortage of funds for small business indeed appears to exist,
and it results from a concentration of size and influence
within the business world and the capital markets, and from
the high degree of uncertainty surrounding current economic
;

decision-making
Conditions in the stock market have been bad for several
years, especially for new issues of stock by small companies,
and small companies typically cannot fall back on the pools
of internally-generated funds or the relatively easy access
to bank loans and other external sources that larger corporations are able to use in place of public equity financing.
Evidence of the problem is sobering.
February 1978 hearings
by the Senate Select Committee on Small Business revealed
that companies making their first stock offering accounted
for a healthy 633 in 1972, or 62 percent of new issues in

29

that year, but this group dwindled to 42 in 1976, or only 16
percent of new issues. (38)
John P. Birkelund, President of
New Court Securities Corporation, a New York-based investment
banking concern, wrote in the February, 1977 Dun's Review
"...medium sized and smaller corporations are attracting a
substantially lower proportion of the trading on securities
exchanges than four years ago, when we were at a similar
stage of economic recovery ." (39
He remarked further that,
at the time he was writing, many stocks were still selling
above the issue price.
,

)

Small businesses hoping to enter the market, yet faced
with these conditions, are forced to reassess their plans.
For small business, the effect of limited access to the new
issues market and of weak stock prices is to reduce the
potential for expansion as independent concerns.
If entrepreneurs cannot succeed with a public offering, they must try
to sell stock to friends and acquaintances, reduce growth and
capital needs, or sell out to a larger firm.

Reasons for the "capital shortage" faced by small
businesses are several.
The most pervasive cause is the
trend toward bigness in the U.S. economy.
Investment
decision-making is being carried on by fewer individuals.
More than ever, savings are being directed to large institutions (money-center banks, pension funds, mutual funds)
whose officers place funds in large, well-established
businesses, rarely considering the smaller firm as an
investment 'possibility.
This trend toward concentration of investment decisionmaking has been largely responsible for the reduced opportunities awaiting the small company in the stock market.
When the stock market plunged in 1974, the small investor
dropped out of the market and, still remembering his losses,
has yet to return in force.
Meanwhile, institutions have
been trading in record volume.
A significant difference
between these two classes of investors is that small investors are often willing to trade in the shares of small
companies, while institutions as a rule are not.
The
disinclination of institutions to trade in small companies
stems from two causes.
First is the obvious one of size.
The average trade for an insurance-company or pension-fund
account may well run hundreds of thousands of dollars.
For
most companies listed over-the-counter or on the American
Stock Exchange, a buy or sell order of this magnitude would
be equivalent, or nearly so, to the entire volume of a
company's outstanding shares, and if executed could cause
extreme disruption in the market for such a company's stock.
The Securities and Exchange Commission and the stock exchange

30

)

s

discourage market disorder, with the result that institutions
The second cause of
shy away from small-company stocks. (40)
this behavior by institutions is the Pension Reform Act
(ERISA) of 1974, which seeks to limit the risk in pensionfund investment.
The law appears to be effective:
a survey
of pension-fund and employee-benefit officials found that 60
percent were less willing, after ERISA, to invest in anything
but blue-chip and fixed-income secur ities (41
.

Competition in the brokerage industry, leading to
numerous failures and mergers among brokerage firms, has
further concentrated economic activity in the stock market,
to the detriment of the small business seeking equity
finance.
Many of the broker-dealers which have failed in
recent years were regional firms, the traditional underwriters of new stock issues for small, local companies. The
larger brokerage houses remaining, especially those based in
New York, are reluctant to spend time and money in bringing
out a small stock offering.
According to one estimate, major
Wall Street firms now handle stock offerings only for companies with more than $1 million in profits, a figure small
businesses cannot match. (42)
In recent years, the availability of venture capital to
the entrepreneur has also been reduced, the result of various
developments. Venture capitalists had typically expected to
realize their greatest returns by investing in a small business to give it the financial strength for rapid growth,
then, within a couple or three years, introducing an issue of
the company's stock to the market and reaping a handsome
return on the initial investment.
However, due to the problem of reduced opportunities for small companies in the stock
market and the market's general price weakness, this formula
is now rarely successful.

In another development, it now takes a larger initial
investment to see a venture through its infancy and the time
to fruition is longer.
For example, Dun's Review reports the
estimate of Paul Wythes, a partner in the Palo Alto firm of
Sutter Hill Ventures, that the typical investment his firm
makes in a new company has increased to $700,000 in 1977 from
$300,000 five years before.
Another venture capitalist,
Arthur Rock of San Francisco, credits part of the escalation
in cost to inflation, but also cites, according to Dun'
"a
sharp increase in the complexity of equipment needed in a
modern plant and a stretch-out in the time required to produce a new product because of the close tolerances ." (43)
,

31

.

The inducement to venture capitalists has always been a
high-risk, high-reward combination, but now these various
economic and technical conditions have warped the risk/reward
Risks are high, yet the size and immediacy of possiratio.
ble returns are reduced.
Consider that during the 1960's a
venture capitalist could hope to recover ten to thirty times
his investment within two to three years. Now the figures
have changed to ten times an investment recovered in five to
seven years. (44)
Not surprisingly, venture capitalists have
reacted to these changed circumstances by making less venture capital available for start-ups, the riskiest phase of a
venture. Venture capitalists are increasingly interested in
supporting small companies already in their portfolios, and
in investing in under-valued stocks of small companies already trading in the market.
Those venture capitalists who
would formerly have sold stock to the public when a venture
was ready to pay off now sell the entire company to a single
purchaser, usually a large corporation.
Indeed, a few giant
corporations are now conducting their own venture capital
operations

The potential for both stock-market and venture-capital
investors to take an interest in small companies has been
adversely affected by Federal tax and regulatory policy.
Most evidently damaging has been the movement of capital
gains tax rates toward the level of tax rates on regular
earned income.
This subject will be discussed later in this
report.
As this happens, the tax incentive to invest is
severely weakened.
All businesses seeking funds are affected, but small businesses, with their limited resources and
alternatives, are, perhaps, most vulnerable.

Bank financing is another problem.
In many cases the
small-business owner searches no further for funds than the
local bank, not feeling the need to tap the larger pools of
capital in the stock or venture-capital markets.
Even so,
she may well be caught by limited availability of bank funds,
since a small business in need of capital may quickly reach
the limits of prudent debt financing, which bankers will be
unwilling to surpass.
This problem is often shared by small
businesses which seek public equity finance and are rebuffed
by the stock market;
having been frustrated in their attempts to broaden the equity portion of their balance sheets,
these companies find that, for this very reason, they are
unable to persuade bankers to lend substantial amounts of new
money.
Simply put, the growth prospects of these companies
are stunted.

32

At the same time and strangely enough, a few wellestablished but small companies are finding bank funds
plentiful.
Beginning in 1975, large corporations worked to
redress their borrowing excesses of 1973 and 1974 (when the
prime rate averaged an astounding 10.81 percent, according to
As these corporations strove to
Commerce Department data)
develop alternative sources of finance more fully, their
Nonfinancial corporations
demand for bank loans dropped.
actually paid down bank loans in 1975 and 1976, and large
money-center banks are still troubled by low demand from
these customers.
The result is that a number of the large
banks have begun seeking business customers from the socalled "middle market" of firms whose sales fall in the $2
million to $100 million range. At the very low end of this
range are the small businesses.
For companies of this size,
connection with a large money-center bank had been highly
unusual.
Financial advice and other services may accompany
these small companies' loan accounts with the big banks, and,
for the moment, their financial needs appear to be satisfied.
There can be a degree of danger in this situation, however,
for if loan demand from large corporations picks up again,
the money-center banks may no longer need the business of
their smaller clients and new loans or refinancings may no
This was the situlonger be forthcoming from this source.
ation in the early 1970 's, and the small company with limited
financial alternatives is ill-equipped to deal with this
situation.
.

Capital Availability for the Woman Business-owner
The
"capital shortage" is a condition encountered by small business in general, but how greatly does it affect the woman
business-owner? Information is scarce, but some tentative
conclusions seem reasonable.
The Commerce Department reports, as a result of its 1972 survey, that two-thirds of
women-owned businesses were concentrated in the following ten
industry groups, arranged in descending order of gross dollar
receipts for each group:
eating and drinking places (average
gross receipts per firm $36,000), miscellaneous retail
operations ($15,000), food stores ($52,000), automotive
dealerships and gas stations ($92,000), personal services
($9,000), real estate ($13,000), apparel and accessory stores
($43,000), special trade contractors in the construction
industry ($26,000), business services ($10,000), and hotels
and other lodging places ($16 000
Generally speaking,
(45)
small businesses in this group of industries turn relatively
low profits and have modest growth potential, and thus are
not the enterprises most likely to need or attract capital.
As can be seen from the receipts figures, most of the
women-owned businesses are very small.
For most of these
women, it is simply not realistic to contemplate venture
:

,

,

)

.

33

capital participation or public stock offerings, and condi tions in those markets are irrelevant to their operations
However, there are exceptions to this generalization, and
over time there surely will be more.
Those female entrepreneurs in highly profitable industries, cosmetics, for
example, or businesses in the health field, with the potential to grow to corporate maturity, face the same capitalshortage problems as male entrepreneurs.
.

There are signs that women's businesses as a group are
far from fully engaged in the financial arena.
Although the
development of women's businesses has hardly begun, the future offers possibilities.
In the years ahead, the greatest
opportunities for profitable, financeable businesses in the
U.S. may well shift toward the development of labor-saving
innovations and communications advances, as growth of the
labor force slows; and toward leisure activities and more
personalized and luxurious consumer goods and services, as
the number of workers per household and income per household
increase. (46
Although women compete in all fields of enterprise, these latter areas are ones in which women may expect
to do especially well, judging by the present distribution of
their businesses, with retail and service operations predominating.
Sound enterprises in these growth areas, managed
with purpose and vision, will be likely to attract financing.
The major question is whether or not the forms in which
financing is available to the small businesswoman will permit
her to retain ownership control of the company throughout its
growth years and into maturity.
If capital markets developments in recent years are any indication, the road to financial growth for small enterprises may lead increasingly to
merger or acquisition agreements with larger firms.
)

The probable effect of these trends on the economy is a
matter of conjecture.
Certainly the economy can only benefit
as more women come to develop their talents, including entrepreneurial talent, more fully. However, the problems of
financing the small business in the shadow of relatively concentrated economic power may dim the enthusiasm of potential
entrepreneurs for embarking on the arduous course of smallbusiness ownership.

Regulation A and Other Stock Issues
As noted earlier, small companies are practically foreclosed from the public securities markets, in large degree
because of government controls.
As a result, even those with
more fortunate and aggressive management may find themselves

34

in desparate need of equity capital and with unfavorable
means of acquiring the capital except by merging into a larWe would only amend this statement to state
ger company. (47)
affirmatively that small companies are currently closed out
of the securities market.

Effect of Federal Securities Regulation on Capital
Public debate has centered on
Formation by Small Business
three separate ways in which Federal securities regulation
regulation of public offer(1)
impacts small businesses:
ings, (2) restriction on resale of securities exempt from the
registration requirements, and (3) periodic reporting under
the Securities Exchange Act of 1934.
:

1.

Regulation of Public Offerings

The first area is the regulation of the public offerings
The regisof securities under the Securities Act of 1933.
tration costs of new issues appear to be proportionately
larger for small businesses, which generally raise capital
through small offerings.
It is estimated that the cost of
registration statement is approximatepreparing the required
ly $240,000.

Recent efforts by the Securities and Exchange Commission
to ease the burden of the registration requirements have
tended to help larger, more established companies, which
already have outstanding registered securities that are traded publicly and, therefore, are subject to the comprehensive
periodic reporting requirements of the Securities Exchange
Act of 1934.
This is because the SEC has attempted to integrate the 1934 Act reporting requirements and the registration requirements for new issues.
These efforts have not
lessened the burden for smaller, emerging companies because
they do not report under the Securities Exchange Act of 1934.
response to the concerns over the impact of existing
registration requirements on small companies, the SEC has
proposed a new registration form (Form S-18) under the Securities Act of 1933 which would reduce the narrative and
financial statement disclosure requirements of sales of
securities not exceeding three million dollars.
In

Because the cost of a full blown
Exempt Offerings
registration is proportionately larger for small issues, most
small businesses seeking to raise capital from the sale of
securities look for alternatives to registration with SEC.
One major alternative relied upon extensively by small busi:

35

nesses, as well as large companies, is the issuance of securities in a private offering that is exempt from the registration requirements of the Securities Act of 1933.

—

The rationale of the
Private Offering Exemption
private offering exemption is that registration should not be
required where there is no practical need for it or where the
public benefits of registration are too remote. Accordingly,
in determining whether an offering is a non-public offering
exempt from registration, the courts have focused on whether
the offerees and purchasers of the offering have access to
the kind of information that a registration would disclose,
possess the necessary sophistication in financial matters to
evaluate the offer intelligently, and generally are able to
fend for themselves.
However, until 1974, the SEC never set
forth with any specificity the requirements for the private
offering exemptions, and, thus, issuers faced uncertain risks
in attempting to rely on the exemption.
In 1974, the SEC issued Rule 146 in an attempt to remove
these uncertainties by setting forth specific "safe harbor"
criteria, which companies could satisfy and be reasonably
certain of qualifying for the private offering exemption.
Rule 146 specifies that the offering must be limited to 35
purchasers and requires that the issuer have reasonable
ground to believe, prior to making any offer of sale, either:
(1) that the offeree has sufficient knowledge and experience
in financial and business matters to evaluate the prospective investment; or (2) that the offeree is a person who can
bear the economic risk of the investment.

While Rule 146 has worked reasonably well for larger
companies, which are registered under the 1934 Act and have
established investment banking relationships, some commentators have maintained that it has restricted the ability of
small companies to use the private offering exemption.
They
point out, for example, that the disclosure requirements of
Rule 146 appear to bear more heavily on the small issuer.
36

While companies subject to the periodic reporting requirements of the 1934 Act may find it reasonably convenient to
supply the required information, many small companies that
are not subject to the 1934 Act may find the cost of supplying the information required by Rule 146 to be nearly as
great as the cost of filing a registration statement.
Some observers also contend that the Rule's requirements
with respect to the qualification of the offerees and purFor example, it is
chasers disadvantage the small issuer.
argued that issuers still face uncertainties under the Rule
in determining whether a prospective purchaser of a private
offering possesses the requisite knowledge or financial
expertise to enable him to evaluate the returns and risk of
the investment.
The uncertainty in this regard is more
likely to hurt the small issuer than the larger issuer because small companies rely more heavily on individual investors than on institutional investors, which can readily meet
the qualifications of Rule 146.
As noted above, Rule 146 does permit a small issuer to
offer securities to unsophisticated investors, provided they
are able to bear the economic risk and are represented by an
"offeree representative" or group of representatives, who
possess the requisite financial and business expertise.
Commentators claim, however, that the use of offeree representatives may prove cumbersome and costly in small offerings.
They contend that most likely offeree representatives
will be registered investment advisors or investment banking
firms experienced in evaluating issuers.
They claim that
attorneys and accountants may not have sufficient investment
expertise to qualify as offeree representatives under the
Rule.
In addition, attorneys not previously registered may
be reluctant to subject themselves to the Investment Advisors
Act, as the SEC apparently has required where an attorney
serves as offeree representative.

Small issuers may not be able to obtain the services of
an investment banking firm to act as an offeree representaFor example, the size of the
tive for a variety of reasons.
offerings may not justify the cost of the required detailed
investigation of the issuer by someone with sufficient expertise to serve as offeree representative.

—

The Securities and Exchange
Small Issue Exemptions
Commission has established two exemptions for small issues
under section 3(b) of the Securities Act of 1933, which
authorizes such exemptions for offerings of $500,000 in stock
or less.
The first is Regulation A, which provides an exemption from the registration requirements for small issues
37

.

Under this regulation the
involving not more than $500,000.
issuer must file an offering circular ten days in advance of
the sale at the appropriate regional SEC office, the issuer
is free to sell the securities without any limitations on
Moreover, investors receiving
their sale or distribution.
securities in a Regulation A offering can resell them without
restriction.

Critics, however, contend that this exemption has its
First, they complain that the total amount of
disadvantages.
capital that can be raised is limited to $500,000, which does
Secondly,
not permit equity financing at an efficient level.
they contend that the Regulation A offering circular has
become increasingly complex to prepare so that its overall
costs on a percentage basis are not substantially less than a
The SEC is currently reviewing the
full registration.
$500,000 limitation of Regulation A to determine whether
raising of the limits may be justified in light of the rate
of inflation in recent years.
The second small issue exemption is Rule 240, which the
Rule 240 permits an issuer, in any
SEC promulgated in 1976.
12 month period, to issue to the public without registration
up to $100,000 of its securities, as long as immediately
after and before each sale the securities are not beneficially owned by more than 100 persons, and so long as no advertising is employed and no remuneration is paid in soliciting
sales.
The Rule places no limit on the number of purchasers
or on their qualifications to evaluate the investment or to
bear the economic risk.
Moreover, unlike Rule 146, Rule 240
does not require any formal disclosure, but relies upon the
antifraud provisions of the securities laws to protect investors.
The Rule merely requires the issuer to file notification of an offering on Form 240 with the regional office
within 10 days of the close of the month in which the sale is
made

The $100,000 limitation does not apply to securities
sold to executive officers, directors, promoters and employees of the issuer, or to non-convertible debt securities sold
Therefore, it
to certain enumerated institutional investors.
is possible to raise in excess of $100,000 under the Rule so
long as only that amount is raised from the public.

While Rule 240, on the whole, solves many problems for
small businesses in issuing securities, it is argued that the
Rule has limited utility because of the $100,000 limitation.
On the other hand, Rule 240 has been criticized on the ground
that it does not adequately protect investors because it does
not require the provision of information.

2.

Restrictions on Resale of Securities Exempt from the
Registration Requirements

Thus far, we have focused on the problems of the small
issuer in seeking an exemption from costly and lengthy
registration procedures. However, other securities regulations restrict the resale of securities issued by a small
business under the private offering or Rule 240 exemptions.
To the extent that these regulations restrict the ability of
investors to sell their investments in small businesses, they
tend to reduce the liquidity of such investments, and thereby
impede the flow of capital into small business and venture
capital investments.
Rule 144 is the principal SEC regulation governing the
resale of securities purchased by investors in transactions
exempt from registration. The rule is designed to insure
that purchasers of securities in transactions exempt from
registration (restricted securities) do not act as conduits
for the sale to the public of unregistered securities of
issuers concerning which adequate current information is not
available to the public.
Thus, Rule 144 prohibits the resale of securities
received in transactions exempt from registration, unless
certain conditions are met.
First, the purchasers must hold
Second,
the securities for a minimum period of two years.
the issuer must be subject to the periodic reporting requirements of the Securities Exchange Act of 1934 for at least 90
days prior to the sale of the securities, thus assuring the
public availability of information concerning the issuer.

Finally, the securities must be offered in such a manner
and in such quantities as to not disrupt the trading markets.
Thus, the securities can only be sold in normal trading
transactions with no unusual brokerage commission and the
amounts which can be offered are limited.
For exchangelisted securities, the number of securities sold by an
individual during any six-month period must be the lesser of
one percent of the shares outstanding, or the average weekly
trading volume.
For over-the-counter stock the amount is
limited to one percent of the shares outstanding, without a
trading volume limitation.
For the small issuer, Rule 144 provides little help
because it requires either registration under the 1934 Act or
making publicly available information equivalent to that
Thus, investors holding
provided in 1934 Act reports.
restricted securities of small issuers, which do not wish to

39

assume the burdens of registration, generally have to seek
other methods of resale, such as a resale in an exempted
private offering.

Some have maintained that Rule 144 is overly restrictive
even as to those small issuers who are willing and able to
bear the costs of registration under the 1934 Act.
The SBA
Task Force on Venture and Equity Capital (48) concluded that
the volume limitations of the Rule are too severe, and seriously impair the ability of venture capitalists and other
professional investors to free up capital for other investments.
The Task Force's recommendations have given rise to
proposed legislation, pending before Congress, which would
relax certain provisions of the securities laws and regulations that affect small issuers. This legislation includes
proposals to raise the statutory ceiling of the small issue
exemption in section 3(b) from $500,000 to $3 million, and
liberalize Rules 144 and 146.
The SEC is currently reviewing
the volume and sale rate limitations set forth in Rule 144.
3

.

Periodic Reporting Requirements Under the Securities
Exchange Act of 1934

Companies with a class of securities listed on a national securities exchange or those with total assets
exceeding $1 million and a class of equity securities held of
record by 500 or more persons must register those securities
with the SEC.
Upon registration these companies become subject to the periodic reporting and proxy solicitation provisions of the Securities Exchange Act of 1934.
As a general
rule, companies required to file periodic reports with the
SEC presently are required to provide essentially the same
type and quality of information regardless of their size.
Similarly, the present proxy solicitation provisions do not
recognize differences among users by size.
Recent Initiatives to Examine the Impact of Federal
Securities and Regulation on Small Business
The Study Team
asked the Securities and Exchange Commission whether there
has been any recognition of the plight of the small business
owner in the capital markets.
The response was affirmative.
That is, the SEC has, within the last year, studied the problem and is planning to conduct public hearings to examine the
effect of Federal securities regulations and disclosure requirements on the ability of small businesses to raise
capital.
As mentioned above, the SEC will examine the effect
of the registration requirements of the Securities Act of
1933 on small companies and the effectiveness of various procedures under which small issuers may make securities offerings without filing a costly registration statement.
These
:

40

The second major area which
include the private offering.
SEC intends to examine is the impact of the periodic reporting requirements of the Securities Exchange Act of 1934 on
small companies, and the desirability and feasibility of
reducing these disclosure requirements for smaller companies.

While the periodic reporting requirements of the
Securities Exchange Act are not a direct cost of a new
securities financing, they do impose significant costs which
may deter small non-public companies from raising funds in
The SEC s Advisory Committee on Corpothe public markets.
rate Disclosure found that the costs of preparing periodic
reports were significantly higher for small companies than
for medium and large ones.
Thus, the Committee recommended
SEC study whether, and to what extent, it should
that the
attempt to reduce the burden imposed on smaller companies by
the existing periodic reporting requirements of the Exchange
Act.
The SEC intended to explore this question in April
hearings.
'

The SEC s Advisory Committee is working closely with the
Financial Accounting Standards Board (FASB)
the private
rule-making body of the accounting profession. The FASB,
responding to its constituents, recently agreed to amend FASB
Statement No. 14, dealing with reporting requirements, to
recognize that differences do exist between large and small
businesses, and to reflect these differences in the accounting rules.
Thus, there now is an awareness that small and
closely held companies are in an economic environment completely different from that of large and publicly held companies. (49)
'

,

The Study Group also met with the Treasury Department's
Small Business Advisory Committee and discussed capital formation problems of small companies. The committee urged the
Securities and Exchange Commission to adopt the following:
1.

Increase the ceiling for Regulation A offerings from $500,000 to $3 million;

2.

Amend section 12(g) of the Securities and
Exchange Commission Act of 1934 to change the
criteria for companies subject to the Act's
periodic reporting requirements to companies
having assets exceeding $5 million and 2,500
shareholders;

3.

Relax the volume and rates of sale limitations
in Rule 144 governing the resale of securities

41

received in offerings exempt from registration;

and

Program SEC's management information system to
include the sex of the owner company seeking
to go public and those who actually do go
public.
Venture Capital Firms
Do women have access to, and are they utilizing the
major sources of venture capital which are available to
promote business growth? For that majority of women business
owners whose businesses are small, there are two possible
alternative developments. On the one hand, the firm may fall
within the traditional small business category (characterized
by low demand for capital, lack of sophisticated technology,
and a local geographical market) and, by choice, remain
small.
On the other hand, the firm may simply be in its
beginning stage and have a real potential for growth.
It is
this type of small business which requires capital and, because of the special riskiness of small business, financing
through the use of venture capital markets has developed.
In exploring the area of venture capital, the Study Team
came to the conclusion that while venture capital is presently in short supply for all small businesses, women-owned
businesses have received less funding of this kind than other
small businesses.
Respondents to the Task Force questionnaire reported that less than one percent of their start-up
capital came from venture capital firms.
Further, those
institutions which the Federal government has licensed specifically to provide venture capital, such as Small Business
Investment Companies, have not succeeded in significantly
furthering women-owned businesses.

Venture capital comes from a number of different sources
ranging from individual wealthy investors to partnerships,
mutual funds, investment development corporations, and
others.
Recognizing the lack of hard information on women in
venture capital markets and in an effort to establish the
beginning of a data base on the use by women-owned businesses
of venture capital, the Study Team undertook a survey of
twenty-six venture capital firms of all types in the major
geographical regions of the U.S.
The risks of the small firm are magnified compared to
those of businesses in general.
Economic conditions, labor
costs and competition in the market place all have a more

42

In addition the small firm is more vulnerimmediate impact.
able because of its limited geographical market and the lack
of up-to-date financial advice or management techniques often
Such firms may also be unable to
found in small businesses.
One state-funded study
afford modern cost-saving technology.
estimated that at least 20 percent of all small businesses
All firms thus have risks, small businesfail annually. (50)
ses have more severe risks, and women-owned small businesses
are perceived by the venture capital markets as being even
more risky.
Reasons given for this include the perception by
many analysts that women lack business training, lack a
"track record" of business success, and usually select fields
of business which are unsuited to the high yield returns
which make a risky investment worthwhile.

Where can women business owners turn for venture
capital? The tax advantages of capital gains income had made
such investments attractive for wealthy individuals until
Private sources of capital range
recent changes in tax laws.
from "angel money" from family and friends to the more structured venture partnerships and companies.
Most of these
investment companies prefer to buy equity in the company but
occasionally participate in financing part of the debt of
company.
Close ties are maintained between the investors and
the client company with the investors frequently represented
on the board of directors of the company.

Ninety-seven percent of all businesses are classified as
small. (51)
Small businesses exemplify the American ideal of
the individual in business for himself or herself, fostering
independence of thought and thwarting monopoly.
In fact,
about half the nation's workforce gain their livelihoods from
small businesses.
Many small businesses provide ideal proving grounds for the development and introduction of new products and technology, and young, high-technology companies
had an average contribution of 40.7 percent per year job
growth rate from 1969 to 1974 in comparison to a 0.6 percent
per year rate in mature companies. (52)
To foster these businesses the Small Business Administration (SBA) was established by Congress in 1953 and several
programs initiated including the Business Loan Programs and
the Economic Opportunity Loan Program and the Local Development Company Loan Program for economically disadvantaged and
low-income areas. More important for women was legislation
permitting the creation of Small Business Investment Companies (SBICs) in 1958 and 301(d) SBICs [formerly known as

Minority Enterprise Small Business Investment Companies
(MESBICs)
in 1972.
SBICs are owned privately, either by
Albanks or by operating companies, or are publicly held.
]

43

though a $150,000 minimum investment is required to start
one, currently SBA's policy is to require $500,000 as initial
capitalization; additional funds may be raised by selling
subordinate debentures to the SBA.
The 301(d) SBICs
(MESBICs) were licensed to assist businesses owned by
socially or economically disadvantaged persons.
SBICs, like
other venture capital firms, generally take an equity (or
ownership) position in the companies in which they invest,
and also provide financial and management advice for a fee.
The 301(d) SBICs differ from SBICs primarily in that socially
or economically disadvantaged individuals must own and manage
at least 50 percent of the client business.

Currently, there are approximately 280 operating SBICs
and 87 operating 301(d) SBICs with resources of over $1
billion.
The Study Team's survey of these venture capital financing sources has led us to conclude that major barriers exist
that have kept women from participating in this money market.
As mentioned earlier, for all types of venture capital firms
our most disturbing finding is that venture capital is now
shrinking both in the number of underwr itings (down from 418
in 1972 to 4 in 1975) and in amounts of capital raised (down
This
from $918 million in 1972 to $100 million in 1975). (53)
decrease is due to a number of factors including:
A falling stock market which discouraged
investors of all kinds;

increased concentration of savings in large
banks with conservative investment policies
(10 banks now have 33 percent of all
deposits) (54)
;

the rapid growth of mutual and pension funds
which are constrained from more speculative
investment by the Employee Retirement Income
Security Act (ERISA);

increasing government regulations which
discourage small business starts by demanding
many statements, surveys, and reports which
place a time consuming and costly burden on
the small firm;
the institutionalization of market trading and
the decline in the number of stockbrokers
which makes market access more difficult for

individual investors;
44

the prohibitively rising costs of making a
public offering; and
the reluctance of investors to place their
money in ventures where profits can be maximized only as capital gains or losses, i.e.
As one
when a company is sold or goes under.
it, "There is no compensation for
investor put
higher risk in the present tax structure."
Those interviewed felt that current high
capital gains taxes are discouraging investors
from withdrawing funds from a successful venture, thus further shrinking the amount of
available funds for new enterprises.
,

The result of these developments has been the drastic
reduction in the availability of venture capital, especially
The consequences for women are parfor start-up ventures.
ticularly serious.
If we recognize that few individuals of
either sex have the desire, training or experience to expand
their own business, and then realize that the critical mass
of women-owned businesses from which such managerial types
will rise has just begun to gather, we must appreciate the
urgent need for funds to be available to encourage start-up
prospects.

There are still other barriers to full utilization of
These
that venture capital which is still available.
include:

Women are not fully informed about opportuniThese
ties for obtaining venture capital.
financing institutions do not advertise.
Instead, they rely on word-of-mouth communication in a business network which has traditionally excluded women.
Women business owners are frequently in fields
which do not lend themselves to large scale
investment which in turn leads to rapid
growth, high sales, and an eventual public
offering to stock.
Economies of scale make
$150,000 the minimum
loans of at least
acceptable to most private venture capital
firms
As one analyst put it, "Where is the
woman who will walk through my door asking for
money to set up a computer software company?
I'd fund her in a minute.
All I get are
boutique owners."
.

45

Investors do not perceive women as a separate
market segment with ideas that might be
pursued.
One northeast analyst commented, "If
I go after women as a target market I'm afraid
all I'd do is flush out the beauty parlors."
Only five of the venture capitalists surveyed
had been approached by a woman business owner
seeking funds.
Of thirteen proposals by women
which were funded in the past two years by
these venture capital firms, six have already
failed (these were:
a building maintenance
company, a voting machine manufacturer, a
wholesale grocer, two jewelry store owners,
and a publisher) while seven are still going
(these are:
a honey importer, a toy distributor, a typing service, a liquor distributor, a
hairdresser, a photography gallery and a construction firm)
None of the successful
ventures presently shows the potential for
taking off in sales and going public through
the sale of common stock.
Half of the fundings were done by 301(d) SBICs, whose standards of funding selection include criteria
other than potential for rapid financial
growth.
.

Women lack the background in finance and the
business experience which form the basic
criteria for accepting and funding proposals.
These include what most analysts refer to as a
"good track record" or "good tickets," i.e.
years of sound business experience and good
personal references. As another investment
company official expressed it, "Most venture
opportunities develop from managers in their
late 30 's with ten to fifteen years of solid
management experience behind them. There are
mighty few women in that bracket who want to
go on their own.
Perhaps only one man in a
thousand is willing to leave a large organization, and you can figure out what those
statistics mean for the small number of women
in business now.
However, there are many
bright women now starting out and ten to
fifteen years will show a big difference."
,

The picture for women presented by SBIC and 301(d) SBIC
funding is even more grim.
Our survey disclosed a situation

46

301(d) SBICs are under-capitalized
Very few of those surveyed are currently
and illiquid.
funding proposals and none is soliciting projects specifiThere is even substantial confusion among
cally from women.
the 301(d) managers over whether women per se are eligible
for funding and different responses were given to these
questions ranging from, "Sure we'd fund a woman if we ever
saw one," to, "We wouldn't fund a proposal from a woman
unless she were a member of a racial minority and we haven't
seen any of those.
In fact, we're out of funds and we're
just hanging on, hoping the SBA will save us somehow."
in which many SBICs and

Fairly typical of the venture capital picture is a seven
It has
year old southeastern 301(d) SBIC funded at $300,000.
given only two loans this fiscal year totaling $88,000,
It has taken equity positions in those
neither to a woman.
businesses it has funded, thus giving it no current interest
income with which to pay off its $200,000 loan from the SBA
As a result of its subordinate
($10,500 interest per year).
debt position it has failed to collect when investments have
gone sour, and it still must find funds for current operaI
The manager admitted, "It's a vicious circle.
tions.
don't have the funds to hire good analysts to properly
evaluate business proposals and, as a result, I've invested
in a lot of businesses that have gone sour."
This 301(d)
SBIC has had losses of $50,000 to $80,000 every year since
1973 and is only holding out in the hope that Community
Development Corporation funds will be available to it in
October.
The manager added, "I've never seen a woman with a
fundable idea."
In sum, SBICs and 301(d) SBICs (MESBICs)
as currently
structured, were not designed to meet and do not meet the
needs of women business owners both in funds available and in
reaching out to support and educate women.
The trend is not
encouraging.
For example, while 85 301(d) SBICs are listed
as operating, our telephone survey of six found one out of
business, one dormant, and a third not answering the phone
and presumably dormant.
Those still functioning admitted
they were not thriving and were not a good current source of
funds.
One manager commented, "The concept behind MESBICs
was more social than economic and we're having to live
This has
through the experience of being a social solution.
given MESBICs a bad name from a strictly economic viewpoint."
Another added, "MESBICs were never capitalized properly.
They are insufficiently leveraged. They haven't treated
minority-owned businesses as businesses but as solutions to
social problems."
,

47

Recommendations about furthering the entrance of women
into money markets are made elsewhere in this report.
However, it should be noted that there is strong agreement among
most investors in venture capital areas that legislation and
tax policy changes can go far in encouraging a reawakening of
interest in the field of venture capital.
For example, there
is general agreement among certain investors that a tax law
that would permit a business woman or man to withdraw funds
from an on-going business and reinvest them in another within
a given time limit without being taxed on capital gains (just
as an individual selling a house is not taxed if he buys
another within a year) would encourage a new influx of seed
money for new projects. Other regulations on depreciation,
surtax exemptions, institutional investment regulations, and
small offerings exemptions are also needed.
These topics are
covered in more detail in Chapter 5.
The Deputy Administrator of the Small Business Administration recently testified before Congress:
In today's markets few small or medium size firms
are able to make private placements or go public.
With these routes to liquidity closed, and little
prospect for near-term realization of capital
gains, SBICs must structure their financings to
produce income to cover their own expenses.

This means that SBIC financings are increasingly
taking the form of loans, or quasi-equity with some
fixed repayment features.
Thus, the basic intent
of the program
to provide long-term growth
capital for small firms
is not being adequately
addressed.
Also the small business person is being
squeezed into the difficult posture of debt repayment, or equity repurchase, at a time when
retention of permanent capital is vital. (55)

—

—

Although the statute does not presently allow short-term
debt or consumer loans, a few SBICs and 301(d) SBIC managers
suggested that SBA ask Congress to restructure the statute to
allow them to make more investments in higher return loans
such as short-term debt or consumer loans in order to ease
their cash flow problems and to meet their interest payments.
This would, however, have the effect of simply transferring
the interest burden onto the small client businesses who can
least afford it.

48

.

The Study Team recognizes that while legislation is
needed to increase the availability of venture capital, the
goal of increasing the numbers of successful women business
owners can be approached from another side -- that of
funding, training, and encouraging women to become the
entrepreneurs of tomorrow. We call for the creation of
programs which would carry out the following activities:

Identify potential women entrepreneurs,

conduct workshops to train and evaluate them,
guide and assist them in developing comprehensive business plans, and
aid them in securing adequate equity and debt

financing
Some workshops are presently being run on a small scale
by a private group in Boston (Institute for New Enterprise
Development)
some under the auspices of the Commerce Department Office of Minority Business Enterprise. No women have
as yet been included in the OMBE program
,

.

To facilitate moving women into the mainstream of
business ownership, a mechanism for assisting the transition
We suggest
is needed similar to services provided by OMBE.
using grants or contracts to fund the establishment of local
groups.
Such a group has been established in Minnesota for
minority business. A description of the Twin Cities Model of
an Economic Development Organization follows:

Local companies make grants (pledges of funds for five
years) to a non-profit entity with a small salaried management group. The funds are used to form a pool of capital and
to pay operating expenses.
The capital is loaned to small
businesses as equity capital. The organization is associated
with teams within local banks who become specialized in
making loans to the target group.
In addition to satisfying
the "charitable instinct," there are incentives to such
organizations built into tax laws (cf Sec. 501C3 IRS Code).
Losses are tax deductible as are the original corporate
contributions, which are treated as charitable deductions.

49

CREDIT AND
BUSINESS

THE

WOMAN -OWNED

respondent to the Task Force questionnaire wrote, "I
find that for me, running my own business is much like
raising a child.
As the child reaches a new stage of
development, the parents have new problems to face and
handle.
Once these problems are resolved everything runs
smoothly again until the next stage and the next problem.
For right now, things are running smoothly."
A

The major commercial sources of funds for the estaThese are in
blished business are described in this section.
addition to money from family and friends or from the business owner's "sweat equity."

Equal A c cess

to

Credit

The availability of credit to women is vital because it
improves their economic status and determines their access to
entrepreneurship, and yet inability to obtain credit because
they are women has been reported as a problem faced by women
Historically, women have not been able to
business owners.
obtain credit on the same basis as men due to a pattern of
lending practices which discriminated against women. (56)

The refusal of credit to women has often been based on
societal attitudes, for example, presumptions about women's
permanency in the labor force and the unreliability of their
income; belief that women do not really need to work because
they do not have to support a family, and if they work it is
only for "pin money"; assumptions regarding women's job patterns based on the probability of marriage, pregnancy, and
childrear ing old-wives' tales that women do not know how to
control money; belief in the instability and inability of
;

51

single and divorced women to control personal affairs; and
the attitude that all women need male protection.
The social
justification for discrimination in the granting of credit to
women was that a woman's legal status is inferior to a
Though research has shown that women are, in
man's. (57)
fact, good credit risks, women often have had discontinuous
work force experience and low-paying jobs which do not provide the background lenders look for when judging credit
Credit discrimination has pervaded all forms
applications.
of credit:
consumer, mortgage, and business credit. (58)

Unfortunately, most of the written materials available
on the subject, such as accounts of Congressional hearings
and articles, relate to consumer credit; thus, the full
extent of the difficulties in specifically obtaining business
credit is not known. (59)
However, there is little reason to
doubt that many of the societal barriers applying to women
attempting to obtain consumer credit apply to commercial
credit as well.
Because market processes were not leading to automatic
improvement of the credit situation for women, and there was
no automatic tendency for the economy to lead to improvement,
assuring improvement in the future required a sociopolitical
intervention. (60)
In the early 1970s the intervention came
in the form of the Equal Credit Opportunity Act as a response
to the pressure of women to correct unfair credit practices.
The Equal Credit Opportunity Act, which became effective
in October 1975, provides that it is unlawful for any
creditor to discriminate against any applicant for credit on
the basis of sex or marital status.
The law covers all
aspects of the credit transaction.
The intent of the law is
that sex is not relevant to risk determination, and that

archaic and sex-stereotyped considerations which have nothing
to do with a woman's willingness and ability to repay a debt,
can no longer determine whether or not the credit is to be
granted.
Business credit was included in the law. Regulation B, promulgated by the Federal Reserve Board, implements
the law.
There is, however, a difference between the law and
the regulation, and Regulation B exempts banks from certain
requirements of the regulation when extending business
credit.
For example, business credit is exempted from the
notification requirements regarding an applicant's rights,
the limited prohibition against inquiry as to marital status,
and the automatic maintenance of records, although records
must be kept upon written request.
Specific reasons in
writing for rejection of the credit request must be given by
the bank, but only upon written request from the potential
borrower.
The effective impact of the procedural limitations

52

that women seeking business credit are virtually excluded
Importantly, however, the
from Regulation B's protection.
law and regulations prohibit the use of attitudes about women
that are derived from socialization processes in making
For example, questions as to the
business credit decisions.
applicant's private life and family planning are prohibited.
A creditor may not discriminate against an enterprise on the
grounds that it is owned or operated by a woman but must
consider the quality and capability of the enterprise's
management and judgments must be based on sound credit
criteria, the same as those which are applied to men. (61)
is

The Study Team found that the impact of ECOA on credit
practices of commercial financial institutions has not been
great.
(Our findings are described later in this chapter.)
Despite the limitations of the regulations, the uneven application of the law, and the slow enforcement process, the
Equal Credit Opportunity Act yet may become a major step in
reducing societal barriers to the acquisition of credit
However, because the
necessary to business ownership.
of de facto rather than de jure
remaining problem is more one
discrimination, the solution is more complicated than merely
passing more laws. (62)

Because there are no uniform requirements for commercial
loan packages, at the moment it would be very difficult to
monitor Equal Credit Opportunity Act compliance in the area
of commercial credit on any basis other than that of investigation of individual complaints. Thus far there have been
Increased effectiveness can occur only
few complaints filed.
after a system has been established to monitor compliance
industry-wide.
We recommend, therefore, that a study be done looking to
the design of a reasonable and feasible monitoring system of
Equal Credit Opportunity Act compliance for business credit.
Included in this study should be an evaluation of the crite ria for determining credit worthiness to determine their
validity when applied to women
.

We also recommend that the Board of Governors of the
Federal Reserve System amend Regulation B to read that all
individuals applying for business credit be told specifically
and clearly their rights under the Equal Credit Opportunity
Act.
In order to relieve any potential paperwork burden we
suggest that the agencies regulating financial institutions
distribute pamphlets stating the borrowers' rights and the
creditors' obligations under the law.

53

Women's Banks
Lack of credit contributes to the economically disadOne response to the effort to end
vantaged status of women.
credit discrimination against women was the expansion of a
special type of financial institution controlled by
The first women's bank opened in 1919 and the
women. (63)
As of mid-1978, there
first savings and loan in the 1920s.
were seven commercial banks, four savings and loans, and 17
credit unions. (64)

The major difference between women's financial
institutions and all others is that they are committed to
ending discrimination against women while serving the needs
Women's banks have
of all their customers, men and women.
stated in their charter applications that they will give
special attention to the credit needs of women--a community
need and service the organizers feel has not been met in
The women's banks provide
their respective communities.
personalized, individual attention to help allay women's
fears that they will be considered ignorant, unsophisticated,
or lacking in financial judgment when asking for a loan.
The
banks pride themselves on taking more time with women opening
Among the
small businesses than traditional banks do. (65)
special services women's banks offer are seminars in starting
In addition to loans, women's banks are
a business. (66)
developing trust departments and financial and investment
counseling services which the organizers feel commercial
banks do not now adequately provide. (67)

Women are in the banking business because of the profit
motive; the banks are business-oriented and are not causeoriented.
Like other banks they are concerned with proving
themselves by producing a reasonable return on equity. (68)
Only time will tell if the Equal Credit Opportunity Act
has diminished the need for these institutions (69
If ECOA
is vigorously enforced, no bank will be able to discriminate
against women and women may prefer the efficiency and wide
range of services provided by bigger, more established banks.
On the other hand, despite ECOA, a bank which women feel
meets their special needs may well fill a vital need in many
.

communities. (70)

54

)

The Treasury Study Team contacted the women's banks
across the nation and found their managers very helpful in
defining the relevant issues, such as the need for capital
and credit by most small business owners, and the problems
women have in obtaining credit.

Accessibility of Credit
If discrimination on the basis of marital status were
operating in banking practices, we could expect that some
categories of women business owners would receive less money
To check
than others when applying for the same size loan.
whether this was true of the Task Force questionnaire sample
group, the responses on the questions related to "size of
loan sought" and "amount obtained" were converted to
Then the percent
percentages so they would be comparable.
obtained was subtracted from the percent sought in each
amount category e.g.
loans of $1,000 to $5,000).
(

,

If the women received what they applied for, that
If the amount requested
percent difference would be zero.
minus the amount obtained is less than zero, we can infer
that the loans granted were for less money than that
requested (because more loans fall into the lower dollar
If the difference is greater than zero, we can
category).
infer that the loan obtained was greater than the original
amount requested.
This kind of a check is extremely rough
and small differences probably mean nothing.
To draw
conclusions we would have to use a random, stratified sample
of participants and a far more rigorous statistical analysis
of the data.
Table 3 shows the outcome of these calculations
.

Several inferences can be made from the pattern of
differences.

Frequencies of zero or positive outcomes are
as follows:
Divorced

TABLE 3

Percent Differences: Loan Amount Requested Minus Loan Amount
Obtained by Current Marital Status-Women Business Owners
Dollars in Thousands
$1-5

$6-10

$11-15

$16-20

$21-25

$26-30

$31-40

$41-50

$51-75

$76100

$101150

$151200

$201500

$5011,000

$1,000
or more

NEVER MAR RIED
(N = 173)

- 9.0

+ 9.6

- 4.8

- 0.5

+ 2.1

+ 3.5

- 0.6

0

-1.4

-0.3

X·

X·

-0.3

X·

+ 0.6

MAR RIE D
(N = 1,064)

- 3.0

+ 0.4

-0.4

+ 1.2

- 0.1

+ 0.1

- 0.3

+0.6

+ 1.1

+ 0.3

+0 .2

0

+ 0.2

0

0

DIVORCED
(N =363)

- 5.5

+ 2.4

+0.5

+ 1.2

-1 .2

+0.4

+0.4

+ 2.2

- 0.9

+0.1

0

+0.4

0

+0.3

-0.1

SEPARATED
(N=42)

- 4.9

-0.4

-1.7

+ 1.2

+6.0

- 1.1

+ 1.2

+ 1.9

- 4.0

X·

-2.4

X·

-0.5

X·

X·

WIDOWED
(N = 157)

-3.7

+0.7

0

+ 2.2

+0.2

- 0.6

+0.9

+0.7

0

+ 0.3

-0.4

+0.4

-0.4

- 0.2

X·

-3.8

+ 1.6

- 0.5

+ 1.0

+0.1

+0.4

0

+0.8

+0.2

+0.2

0

+ 0.1

0

0

COLUMN TOTAL
(N = 1,799)

0

X· = no loans requested or received .
SOURCE: Task Force Qu estionnaire

Thus, there may be a difference in the way
women are treated by lending institutions.
Divorced and married women appear to be more
successful than other marital categories in
obtaining the funds they feel they need.

Although most of the loans are for relatively
small amounts, some women have been successful
in obtaining very large sums.
Smaller loan requests get reduced more often
than larger requests.
Additional data from the questionnaire indicate that
69.7 percent of the loans were secured by collateral with a
somewhat larger proportion of widowed and married women
securing their loans than unmarried women (72 percent versus
60 to 6 5 percent)
.

Of those business owners who have, at some time, applied
for bank credit and been turned down, separated women were
turned down most often (49.0%), followed by divorced (48.9%),

never married (44.7%), married (33.6%), and widowed (26.6%).
The banks gave reasons for the turn-downs in at least 75
percent of the cases with "lack of collateral" the most often
cited followed by "bank policy regarding small or new business owners" next most frequent.
We have mentioned that the bankers we interviewed feel
certain educational experiences are essential to obtain a
loan, however, without comparable data on male entrepreneurs
we can make no conclusions about how uniformly this criterion
is applied.
Among our respondents semesters of business or
math courses taken in high school appear to have little, if
any, relationship to the size of loan obtained.
Courses
beyond high school also have little relationship to loan
amount, as all categories of "number of courses taken" show
approximately the same distribution across the loan amount
categories.
There is a difference in the numbers of women in
each of the groups under "numbers of semesters of business or
math courses" with 64.6 percent having taken three or more
Only
semesters of business or math courses in high school.
25.3 percent have taken three or more courses such as these
beyond high school. There appears to be no uniform application of the educational criteria for women according to the
data, since those respondents with more business-related
education did not get more or bigger loans.

57

Business Owners and Commercial Banks
One of the most intriguing questions the Study Team
asked lending officers was, "Do you recognize women as a
viable sector of the entrepreneur market?" The response,
loud and clear, was, "WHAT WOMEN?!?!"
The findings seem to
point to the conclusion that women business owners are
certainly viable -- to the extent that they exist at all
but they constitute so tiny a segment of the entrepreneur
market as to be practically invisible.
In seeking answers as
to why this is the situation, and if sex discrimination in
commercial banks' lending policies plays any role, the Study
Team found some expected and some very unexpected answers.

—

The most frustrating aspect of assessing credit and
capital formation as it relates to women business owners is
the lack of information available.
Recent legislation (ECOA)
designed to eliminate sex discrimination in credit practices
may have inadvertently obliterated data that might have shed
light on this area.
Bankers are confused.
One banker said,
"I don't know how to lend money to anyone anymore."
Bankers
feel damned if they do and damned if they don't have records
indicating sex and racial designations.
In an effort to evaluate the current state of banks'
relationships with their female commercial clients, the Study
Team attempted a dual data gathering program consisting of
(1) a series of roundtable discussions, and (2)
interviews
with bankers in commercial lending.
Six cities representing
regional banking centers were selected.
They were Washington, Chicago, Atlanta, Dallas, Los Angeles, and New York.
Washington, though not considered a major financial center,
provided the Study Team a close-at-hand opportunity to test
the data collection techniques of the interview guide and the
roundtable format.

Banks of the type most likely to provide commercial
financing were selected from those with deposits in excess of
$100 million on the somewhat arbitrary assumption that smaller banks would be less likely to have made a large number of
commercial loans to small businesses and would have fewer
experienced loan officers specialized in commercial lending
available for interviews. The shortness of time available
for data gathering also influenced the decision to focus on
banks not highly dispersed.
In order to avoid concentration
on the largest banks, selections were made from three categories: approximately 30 percent were in the $100 million to
$250 million in assets range, 20 percent in the $300-$950
million range, and 50 percent in the over $1 billion
category.

Though it was not possible in the time available, a
survey of small town and non-branch suburban banks would help
There appeared to be some indication
complete the picture.
from interviews that because very small banks know their
customers better and are more in need of small business
customers, women business owners may find a warmer welcome
In contrast, however, the Small
there than elsewhere.
Business Administration indicates that most of their transactions are conducted with only 700 of the 15,000 banks
throughout the country, and the majority of those banks are
located in the areas visited by the Study Team.
Because the suggestion had been made that women bankers
might have a significantly different viewpoint from their
male colleagues, women bankers were asked to participate in
roundtable discussions with women business owners. Other
bankers, specifically commercial lending officers, both at
the policy level, and those with large small-business loan
portfolios, were asked to submit to in-depth, structured
interviews conducted using a set of open- and closed-ended
questions.
A copy of the interview guide can be found in the
Appendix.

While setting up the data collection process, we
observed differing reactions among those asked to participate.
Women bankers were approached through suggestions from
the National Association of Bank Women and a sort of "old
girl" network of referrals.
They appeared extremely cooperative and eager to share their time and knowledge with the
study group.
They are justifiably proud of the strides they
have made in the banking industry, eager to share their
expertise and very cognizant of their high visibility. At
the same time, women banking professionals, having gotten
where they are by dint of hard effort, are extremely wary of
easy answers for commercial customers who also just happen to
be women.
Some 67 women bankers, three men bankers, and many
women business owners took part in the roundtable discussions
held in the six cities.
One additional roundtable of 10
minority women business owners was held in Washington.

Gaining the cooperation of lending officers, approached
directly through phoning the banks, proved a more difficult
task
in all fairness, probably due in some measure to
inadequate advance notice.
Highly suspicious of the motives
behind our data requests, and generally wary of "the Government" snooping into their lending practices, some 51 bankers
knowledgeable about commercial lending agreed to be interviewed.

—

59

)

:

Of the bankers interviewed, 80 percent were male, 99
percent were non-minority, 80 percent were married and had an
average of 2.8 children.
They averaged 15.3 years of banking
experience and nearly three-quarters of them had a college
education or better. Three-fourths of the bankers in the
About two-thirds
survey were between 30 and 50 years of age.
of them listed spouse's occupation as "housewife."

Mail Survey
The Task Force's questionnaire was used to
obtain input from women as to their experiences and perceptions of commercial lending practices.
Of the 2,913 women
business owners who answered the questions "Were you one of
the original founders of that business?" and "Have you ever
applied for bank credit for the business?" we found that 64.8
percent (1,502) of the founders have applied for bank credit.
:

Founders were asked whether they started the business
response was then compared with the answer to
"Have you ever applied for bank credit for this
been turned down?" Of those women who started
alone, 42.9 percent (309) have been turned down.

Each
alone.
the question
business and
the business

Other responses were as follows

How Business Was
Started

Alone
With Spouse
With Other Family Member
With Non-Family Member
With a Combination of Fa
and Non-Family Members
Several observations can be made about these data.
(We
must remember, however, the flaws in how the responses were
obtained; for example, respondents were not randomly
selected
.

Although the percentage turned down is
greatest for those who started alone, there is
very little variance between categories.
The average turn-down rate is 38.4 percent.
This rate applies to all credit encounters
over the life of business.

The other side of the coin is that 61.6
percent (1,134) of the founders of these
particular women-owned businesses HAVE NEVER
BEEN TURNED DOWN WHEN THEY APPLIED FOR BANK
CREDIT.
What, then, are the circumstances that portend a
business owner's successful quest for commercial credit
through ordinary banking channels? What are banks looking
for in their commercial customers?

We found in conducting the interviews that almost
everyone -- bankers and women business owners alike -- agrees
that women are likely to own small service or retail sole
proprietorships, which do not produce a hard product or a
professional service.
Almost universal agreement can also
be found that commercial banks are not in the sort of
business that can afford the extremely high risk involved in
financing the "start up" of such enterprises.
Nor can banks
usually afford the high costs of administering many very
small loans (less than $25,000) when the return for the time
invested is much greater on a few large loans.
In assessing the banking industry's interaction with
entrepreneurs, the discussion is, by definition, focused on
on-going businesses with some track record of performance,
some healthy assets, some demonstrated managerial expertise,
and some very convincing reasons why a considerable amount of
additional credit will enhance the prospects of the business.
If lending "start-up" capital is anathema to bankers, lending
"bail-out" capital is even less attractive.

The survey revealed that commercial loan categories vary
widely, depending on the internal organization of each institution.
Loans may be recorded by size, subject matter, by
purpose, by collateral, or simply by geographical location.
Borrowing requirements determine the location of the loan,
i.e.
branch or headquarters office. Almost all bankers
interviewed indicated that their banks had no dollar amount
cut-off for classifying a loan as being a "small business"
loan.
At the same time, the definition for a "small business" varied from hobby-type cottage industries to under $5
million in sales per year.
Bankers generally feel bullish
toward lending to well established, small or medium-sized
business and indicated that economic downswings do not
restrict money available to small businesses due to the
relatively small amounts involved per customer and reduced
borrowing demand on the part of large corporations.
"Competition among banks for the large corporate accounts is very
tough," one banker said.
"In any event," another banker
,

61

.

commented, "existing customers are serviced first when a
tight money situation arises." Bankers were asked to
estimate the percentage of small commercial loans made by
their banks.
Answers ranged from less than one percent to
about five percent.
Of that small percentage, most subjects
interviewed could recall at least one female client, but most
of their comments were similar to "very, very few," "can't
remember the last one," "only a handful," or "some couples
where the wife manages."

When bankers were asked why they thought more women did
they frequently cited the social and cultural
conditioning traditional for girls in our recent history.
Comments included the following:
not apply,

**

Women who have earned good money, have worked
to achieve and are hesitant to leave the known
for the unknown -- they are not yet motivated.

**

Opportunities are better in large businesses.

**

This area of the country is not progressive -it is way behind the East and West coasts.

**

There is a need for education in financial
management and accounting.

**

Women lack confidence.

**

Women don't read the financial press
don't understand money.

**

Women are not electing to (enter business) at
this time -- it will be very different in
10-20 years.

—

they

Bankers also frequently made comments regarding their
perception of changes in the making.
Examples:
**

**

62

Women are now cutting their teeth in management and may soon be showing up as really good
candidates
More women are applying for loans now that
there are more corporate officers who are
women.

**

The gap between men and women in education,
work experience and level of expectation is
narrowing.

Some effort was made to ascertain any differences
between male and female business owners' approaches to bank
selection. While bankers usually felt that their calling
programs and advertising were effective, they said referrals
While indicating
bring in most new customers of all kinds.
that they thought both men and women had the same kind of
referrals, bankers mentioned "husbands" and "family contacts"
only when discussing women clients.
One question in the survey addressed itself to prelimiBankers did not seem to think
nary phone calls from women.
more women made such calls than men, or asked any different
questions as they "let their fingers do the walking" while
shopping for banking services.
If, as some roundtable
participants suggested, women are more timid about walking
into a bank and try phoning first, no survey evidence was
found to indicate that banks are aware of such a possibility
or take any special pains to allay such feminine fears.
A
recent author made the following observation:

know that most of us are or have been
rather timid about approaching banks.
There's a somber, forbidding atmosphere
that often surrounds money in an institutional setting.
A lot of this is a
legacy of the past fifty years, when
banks were deliberately built to look
like money temples, their high-vaulted
ceilings echoing and re-echoing like the
nave in Westminster Abbey.
Then there
are those heartrending movies of the
thirties on the Late Show, with the
impoverished farmer sitting hangdog with
his hands between his knees, at the mercy
of the well-fed, well-dressed banker
behind the big mahogany desk... (71)
I

Bankers uniformly indicated that no research had been
done to detect male versus female pay-back rate differences.
Some reported that they had no feeling for one way or the
other.
Others felt that the female pay-back rate was as good
or better as that of men.
Some seemed to regard it as a
trick question.

63

Survey participants were asked to try to construct a
profile of commercial applicants and comment on any
differences they may have noticed between men and women.
While no clear picture emerged, some of the most often
mentioned characteristics for all applicants included:
age
in 30 s
degree or some college education, some experience in
the field, with risk-taking personalities.
Bankers indicated
that the few women they are seeing tend to be younger, better
educated, more tenacious, and better prepared than the men.
"They may have given it much, much more thought than men who
assume they can just jump in."
But women are still deemed
deficient in "hands on" experience directly related to the
venture they wish to undertake.
"They usually worked in
production or sales and have no financial experience and may
be overly optimistic."
,

'

The kinds of business experience bankers are looking for
a great deal from individual to individual.
Some of
their comments were: "It depends on the size of the the
loan", "Minimum of three years", "Quality, not Quantity",
"Depends on the industry, doesn't have to be specific, but
should be transferable," "Purchased experience (from attorneys, accountants) can substitute", "Should be practical ",
and "Ten years in the industry, at least three of which
should be managing a substantial line operation".

varies

Among the reasons frequently mentioned as problems with
loan requests and explanations given for turn downs, were the
following, in approximate order of frequency mentioned:
**
**
**

**
**

**

Inadequacy of preparation of proposal
prior business experience
Company under-capitalized
No money of own to invest
Lacking accountant/attorney input
Lack of market survey or projection of
anticipated earnings

No

Bankers said they did not consider the lack of a credit
record a major problem.
They indicated that only a bad
report would be a factor in a loan for business purposes.
Bankers were asked how much equity and collateral they
looked for.
Most of them indicated that it depends on the
industry, but most frequently indicated was a two-to-one
debt/worth ratio at the very least.
Again, they reiterated
that too little money on the part of the business owner is a
big problem.
Bankers complain that the new business owner
wants the bank to put up all the money.
For example one
banker made the statement" ""Women are not looking for a loan,

64

Some of their comments in
they're looking for a partner."
response to "How much equity are you looking for?" included
such responses as "125 percent," "as much as the bank is
putting in," "decreases on the basis of track record and
experience." Only one banker indicated any difference for
women.
He said, "Women may have to have more."

Bankers indicated that they had no commercial loan
application per se
Rather, they depended on financial
statements, letters outlining projects, copius notes, etc.
Some of the things they mentioned looking for included
personal resumes, financial projections, primary and secondCredit history was mentioned also
ary sources of repayment.
-- although again the emphasis was on there not being someOne banker
thing derogatory, rather than the extent of it.
mentioned "common sense" and another indicated he relied on
"looking him in the eye,"
as parts of the process of
gathering information about the prospective loan.
.

In response to questions about who has the authority to
decline loans, most bankers indicated that while loan
officers have authority to lend up to some specified limit,
they can essentially decline much bigger loans by simply
never bringing the application to the next higher authority.
Although few bankers indicated having a committee for deciding to decline loans beyond the individual's lending authority, most banks seem to have a very informal arrangement
consisting of checking with the credit supervisor or having
two officers on a "turn down."
Bankers did not seem to feel
any discomfort with this system as sufficient to provide a
check on possible individual prejudice or personality conflict.
One banker said, "An early turn-down is sometimes
kinder." One of the women bankers at a roundtable told of a
women applicant for a $100,000 loan who didn't hear for two
months if she was approved or not, and another commented that
"maybe because she was a woman she would wait."

One survey question attempted to probe the mechanism of
how banks assign loan applicants to loan officers.
Methods
for handling this vary a great deal in the banks surveyed.
Some banks do have assignments made by management or simply
by workload, but many banks seem to let the chips fall where
they may.
Bankers indicate that junior officers naturally
their teeth on the smaller loans.
cut
Larger loans find
their way to other officers experienced in the heavy servicing required by larger businesses.
One banker said, "The
secretaries screen for size -- bigger loans to vice presidents, smaller ones to assistant vice presidents."
In branch
banking situations, smaller commercial loans usually stay in

65

As the size of the bank increasthe customer's own branch.
es, so do the number of loan officers who specialize in
certain industries, types of business, or SBA loans.
Junior
loan officers are on their own to drum up business for their
loan portfolios through calling programs and working their

own contacts.
One banker commented that junior officers like
to lend to new businesses.
A successful new business
customer is a long range prospect for the bank in general and
for the loan officer in particular.
One banker did mention
personality and another compatibility as factors in assigning
loan applicants.
The questions about assigning loan applicants were
immediately followed by questions related to women loan
officers in an effort to see if bankers felt women loan
officers might have some different perceptions toward women
in the highly subjective matter of sizing up an applicant.
Even reminded of their comments about personalities and an
individual's contacts, most bankers felt having female loan
officers was not a high priority.
Some comments were:
"There are plenty of women out in the branches", "Some women
like female loan officers, others don't recognize their
expertise", "Not enough women applicants to try the idea",
and "See no purpose".
Other comments indicated an evolving
new feeling about having women loan officers available to
women applicants: "Not done now, but believe it would work",
"(Women) might find it easier", "Sometimes a customer
requests a black or a woman", "Useful from the standpoint of
relating".
Some banks indicate they are now experimenting
with minority officers helping develop new business.
One
banker said, "It is very important for blacks ... not sure
about females." Whether the blacks' situation parallels that
of non-minority women in this area is not at all clear.
The
comments of some roundtable participants seem to suggest that
non-minority women, especially in the South, move in the same
social circles as bankers and can converse across a desk as
easily as across a dinner table.
There also is some indication that female loan officers are far from coddling their
female applicants.
One female loan officer at a roundtable
said, "I think I'm probably tougher on other women than some
of my male counterparts -- because I expect women to be more
professional, just like I try to be. My male counterparts
have each spent lots of time with two women clients that I
probably wouldn't have spent the time with.
They went out of
their way to help these women."

Another commented, "We don't make any leg loans,"
referring to a woman's loan being facilitated through
flirting or acting helpless.

66

When queried about the percentage of women loan officers
banks, most subjects in the study had no idea unless
there were so few that they could be counted on the fingers
of one hand.
Other answers ranged from none, up to about 20
percent, except on the West Coast where estimates were 40 to
Some indicated that female branch managers
50 percent.
Often bankers said that they
counted as loan officers, too.
had women in training programs for lending officer positions,
but the percentages were quite small except in the Los
Angeles survey, where up to 60 percent of lending officers in
training are women.
In Los Angeles, the training programs in
some banks offer a specialization in small business commercial lending.
A southern banker mentioned that he didn't
think women were attracted to this area of banking because of
the unpleasant factors, i.e.
turning people down.
in their

,

Near the end of the interviews, bankers were asked what
they thought were the major obstacles to women trying to run
a business or start a business.
Many of their answers to
this question were similar to answers to why more women did
not apply for business loans.
And while several bankers
insisted the obstacles are the same for everyone, many
indicated their sensitivity to women's special situation in
getting into business and staying there.
Some of the things
they said were:
**

Women don't have the temperment, they can't
manage people, don't want the long hours.

**

Women have to overcome the traditional bias
against them.

**

Women lack experience and the opportunity to
get it
comes from their non-breadwinner
history.

**

Women lack entrepreneural drive -- their
competitive instinct may be missing.

**

Women have had

**

Capital requirements to start a business are
greater than in the past -- it is now harder
to make "sweat-equity" result in success.

**

Women are not usually free to consider
business ownership as an option.

**

"Contacts" are missing.

—

a

non-business "up-bringing."

67

**

Women don't know what they are getting into.

**

Women face psychological barriers
skepticism of women as entrepreneurs
need cultural support.

—

—

they

An effort was made to determine to what extent banks may
now be courting prospective women customers through special
programs or advertising.
Responses were divided between
those banks doing nothing (2/3) and those making efforts to
attract women-owned business accounts (1/3)
Some of the
responses were as follows:
.

**

We are trying to set up a women's department
looking for someone to head it -- we are
now exploring women as a market.

**

We participate in local National Association
of Women Business Owners seminars.

**

We're thinking about it; not much money for

—

it.

**

No,

**

No, but we do locate (branches)
centers (where women are).

**

We have special personal banking services.

but lending personnel are active on the
speakers' circuit.
in

shopping

The surveys and roundtables revealed that although
little is now being done to attract women customers, some
banks are beginning to explore the possibilities.
Some
ideas, such as a large mid-western bank's filmstrip and tape
program, which are minority oriented, are being adapted to
fit women.
Most of the push to seek actively women customers
appears to be coming from within the the ranks of professional banking women.
In the roundtable sessions many women
bank officers indicated that they made an effort to participate in speaker's programs for women's organizations and
school-connected programs at many levels, including the
highly-regarded Junior Achievement Program at the high school
level.
These women appear to form the backbone of educational efforts now underway to help women become more knowledgeable and more independent in their financial dealings.

The study team asked bankers about the Equal Credit
Opportunity Act.
First, they were asked what effect they
foresaw on their approach to the small business community if

68

"

.

the record keeping requirements were extended to include
Despite considerable groaning and sighing
commercial loans.
at the mention of ECOA, responses proved to be rather mild.
Some typical responses:
**

Impact would be smaller in the commercial area
because of fewer people.

Confident of (positive) effect on the consumer
credit score, not sure there would be an
effect on commercial.
**

Would change procedure, but not really
availabil ity

**

Only affects paperwork.

**

Administrative nightmare, doesn't make more
credit available, but is consciousnessraising
.

The more negative responses indicated a fear that the
cumbersome compliance paperwork added to the cost to the
customer, made it tougher to get credit, and took away
valuable counseling time from the very customers who needed
it most.
In zeroing in on Regulation B
bankers were asked what
might be done to make operations e asier without changing the
Frustration at the paperwork problem
intent of the law.
One banker
seemed to be universal.
Everyone hates it.
indicated he simply refuses to dea 1 with it and relies on
"someone else to keep him out of t rouble." Afte r availing
themselves of the rare opportunity to "sound off about
Regulation B to someone from Washi ngton, many ba nker s
conceded that even though it may h ave been a cas e of overkill, they "agreed with its purpos e"
that "th ere probably
everyone awa re of
was a need for some push," "it mad e
abuses," and "may be necessary bee ause intent to discr iminate
is hard to find
,

—

.

In considering the extension of ECOA requirements to the
commercial area, bankers fear losing that "free exchange"
They
with their customers that they feel they now enjoy.
feel that having mandatory reporting requirements are
unnecessary because they are complying with the intent of the
legislation.
Figures from the Task Force Questionnaire sent
to women business owners seems to support the bankers'
contentions.
Some 82.4 percent of business owners reported
being told the reason for their being turned down for a loan.

69

.

In trying to come to grips with the implications of all
that bankers told the Study Team, one key factor emerges:
women must understand that "equal credit" does not mean "easy
credit."
In many instances, the stories related by women
entrepreneurs alleging discriminatory credit practices could
be examples of banks applying their "standard" credit
estimation of the applicant's ability to
criteria, i.e.
repay and intent to repay.
For example, consultants must
collateralize loans with something harder than a signed
contract since there is no guarantee, as far as the bank is
concerned, of performance on the part of the consultant.
Women must come to the understanding that banks are in
business to make a profit -- not for any social reason.
Women must understand that often it is against the high-risk
nature of small business undertakings that banks are
prejudiced -- not against women as a class.
,

If women are able to originate a viable business
enterprise through private or some other source of capital,
then the question of prejudice in obtaining loans from
commercial banks is another matter.
Because the credit
judgment is a highly subjective one, it is quite possible
that a male applicant would be judged more credit-worthy and
Of
that less collateral would be required for his loan.
course, this discrimination is the most difficult to substantiate and will be the most difficult to overcome.

The data on discrimination complaints are very scanty.
Some technical violations have been found, but virtually no
substantive complaints have been filed. While numbers of
complaints may be related to degree of education with regard
to legal rights under the ECOA, no studies have been done to
substantiate such a premise.

The Study Team feels that written notification of
adverse action would not be the best way of educating women.
We believe that if there is discrimination against women
business owners it occurs long before a loan request is
declined--it occurs when the woman telephones for preliminary
information, or it occurs before a complete loan package is
formally submitted. Women need to be informed of their
rights during the preliminary negotiations with lending
institutions—that is the point at which they are precluded
from entry into the system.
What must also be stressed is
that women do not now possess the qualifications men do to
meet banks' lending criteria.
This means that attempting to
compare male and female applications would be very difficult,
for not only does the woman's personal qualifications have to
be comparable, but her business' characteristics must also be
comparable

70

Comparison would be further complicated by the fact that
a banking decision made today can be validly compared only
with another decision made under the same circumstances. We
are all familiar with how interest rates fluctuate and the
impact changes in rates have on fund availability for small
What this may mean is that saving records for two
loans.
Saving records would
years or ten years would not matter.
numbers of female applicants could be
mean that greater
In
captured, but they would not necessarily be comparable.
addition, for every application from a woman, approximately
999 applications from men would have to be stored.
In discussing records, one more point must be made.
Consumer credit applications are pretty much standardized
(due to Regulation B) and are one page of information.
Credit worthiness is judged by an actuarial-type of method of
awarding points for different characteristics such as income,
Business
number of years on the job, home ownership, etc.
There are no
credit transactions are far more subjective.
formal loan application forms, usually a loan package is
built from financial statements and resumes from the principals, financial statement or profit and loss statement for
the business, cash flow projections and five-year business
plans, marketing analysis, etc.

Before we can require banks to comply with new
regulations, we have to first define what it is we are
Before we can require that "records" be
talking about.
retained, we have to determine precisely what information
would be needed to seek judicial remedies for a discrimination complaint.
We need to develop the framework for a
viable compliance monitoring system before we can require
banks to change their operations and incur additional costs.
The Task Force should press for the development of a system
that will work, based on sound principals of both social
science and law.
Merely extending provisions of a regulation
designed for an entirely different kind of transaction is not
in the best interests of the woman business owner.
In analyzing the written materials and the data
collected in the field study, the Study Team can state only
that our findings are inconclusive.
Little or no direct
evidence was found that women have unique problems in
obtaining business credit, all other things being equal
If
women are not presenting loan proposals which are as strong
as men's, that is not the fault of the banks.
The barriers
to women which prevent them from successfully approaching
banks are constructed long before the loan is applied for.
.

71

They are built when a woman decides on a course of study,
when she plans her career to exclude substantive work and
management experiences, and when she neglects building a
capital base to support her desire to own a business.
In short, women who wish to eventually become entrepreneurs must get into the "pipeline" early on; and this is
exactly what they are now doing today in large numbers -whether they know it or not.

Commercial Banks and the Small Business Administration
If a business is able to stay in business and make a
profit for several years, it experiences a natural tendency
to expand and grow.
It is at this point that businesses that
have done well in the past suddenly fail, often because of
extreme cash flow problems.
Sometimes the failure is a
consequence of management inadequacies. Problems which could
be finessed in the small enterprise can become overpowering
in the rapidly growing business.
A roundtable participant
said, "In your report please put in something about helping
those women business owners who are already started
at
least that have a track record. .Help! Help! Help!
We're in
over our heads now.
What we were able to do on energy, guts,
stupidity and naivete, because we didn't know what we were
getting into five years ago, is now at a point where it is
critical for us to get some good, sophisticated help."

—

.

One source of financial and management/technical
assistance for women business owners is the Small Business
Administration. During our survey we solicited comments from
the commercial banking community and from women entrepreneurs
vis-a-vis their relationships with the SBA, turn-around-time
on applications, the burdens of paperwork, how many loans
under the respective programs were made to women, what percentage that was of their entire commercial loan portfolio,
the dollar amount of the loan, if there were any particular
difficulties with women applicants, and the primary reasons
for loan default.

Analysis of the responses and voluntary comments did not
reveal a bias in any particular geographical region.
Further, it did not reveal any common experience and/or difficulty relative to the size of the bank surveyed.

72

;

The analysis did reveal three high priority areas of
In order of
concern to bankers and women business owners.
frequency mentioned they are:
**

increase the quality of management/technical
assistance available (from the Small Business
Administration or elsewhere)

**

increase direct loan assistance from SBA
rather than loan guarantees; and

**

streamline paperwork required by SBA.

Time and time again w as echoed a desperate n eed for
management and technical a ssistance. The comment was made
that because of the lack o f management and techni cal assistance, people were experie ncing business bankrupt cy, loss of
The bankers
home and personal possessi ons, ruined lives.
felt that weak management is the overwhelming rea son why the
Bankers and entrepre neurs alike
majority of SBA loans fail
questioned whether a Feder al agency should provid e access to
money either on a direct d isbursement or guarante e basis
without providing proper s creening of applicants and access
Responses
to adequate management and technical assistance,
to the field inquiries wer e used to develop a ser ies of
questions about the SBA Ma nagement Assistance Pro gram, the
answers to which were obta ined from SBA headquart ers staff.
QUESTION: What is the follow-through from the loan
assistance stage to management/technical
assistance? What is the average servicing
caseload portfolio for a loan management
employee?
A portfolio management loan officer conducts
an initial field visit shortly after disburse-

ANSWER:

QUESTION

ANSWER

;

:

Is the management/technical assistance
personnel adequate vis-a-vis the workload?

The SBA is painfully aware of the
shortage of qualified personnel. This has
been a problem since 1968; we need four times

No.

73

the present number of professional staff and
those people should have varied experience to
offer credible, sensitive assistance to
However, we do have
fledging entrepreneurs.
the authority to utilize the private sector to
provide this assistance and we do so through
training programs which are co-sponsored with
universities, community colleges, associations, chambers of commerce and, our 406 Call
Contracting Program. This latter program,
section 406 technical assistance, is available
only to "socially and economically disadvantaged people." The Small Business Institute
Program provides counseling from various
business schools, often using their graduate
In addition, counseling is provided
students.
by the Service Core of Retired Executives
(SCORE) and the Active Core of Executives
(ACE)
All resources are managed by the
management assistance office.
.

In our field study we often heard criticism of the calibre of management and technical expertise available from SBA.
It appears, however, that the problem may simply be one of a
lack of small business management experience among the counMany of those employed by SBA are students with no
selors.
The Study
experience or managers from large corporations.
Team was unable to verify this information given the short
period of time available.
We submit, however, that the heavy
workload in many SBA offices is totally unrealistic and support SBA's request for Congressional assistance in the areas
of budgetary requests and for the Civil Service Commission's
swift cooperation in obtaining the needed personnel to meet
the needs of the small business owner.

The second most frequent comment stressed the need for
more SBA direct loan assistance.
Following prudent banking
guidelines, bankers commented, "If you have to rely on a
guarantor to support a loan it's a bad credit risk." Other
comments:
"If you've got a good loan, you can fund it
SBA should
directly.
If not, it shouldn't be funded at all.
"The spread [profit] is too low for
make more direct loans."
If there's no profit,
SBA guaranteed loans under $50,000.
"SBA guaranteed loans
why should the bank make the loan."
"Turntie up our money for too long at too low a profit."
around-time on an SBA loan application can take anywhere from
This causes two
one to three and sometimes even nine months.
One, business owners shop
problems for the business owners.
banks which means that if we can't respond, we loose a
And second, small businesses cannot
potential client.

—

74

survive their cash flow demands when the turn-around-time is
that unreasonable."
The Small Business Administration does make available
direct loan assistance to those eligible applicants who have
The obvious
been denied assistance by two commercial banks.
implication here is that the SBA does make available direct
If the SBA makes
loan assistance to very risky transactions
available more direct loan assistance the cost of this assisIt should also be
tance will be passed on to the taxpayer.
noted that utilization of the SBA s guaranteed loan assisIf a
tance program is voluntary for the commercial banks.
commercial bank finds itself in the position of not being
able to assist a client with a business loan, it does have
the option of submitting the loan package to the SBA for loan
guarantee assistance. The SBA can provide the commercial
bank with up to a 90 percent guarantee on the transaction and
extend terms, i.e ., where the commercial banks would normally
offer 3 to 5 years, the SBA guarantee loan assistance would
This does tie up the
offer 5 to 7 years for repayment.
However, there is
bank's funds for a longer period of time.
This program has
a secondary market for guaranteed loans.
been in existence for five years and provides the lender with
the opportunity to sell the guaranteed portion of the loan.
The spread between the interest to be earned on the loan and
its selling price is retained by the banks as a servicing
This allows the bank to increase its yield on the
fee.
unguaranteed part of the loan that the bank retains in its
own portfolio.
.

'

We asked the Small Business Administration a series of
questions about constraints which would affect their ability
to (1) hire qualified personnel to serve the public in a
timely manner, (2) conceive of and implement new programs,
and (3) generate internal statistics on their clientele.

QUESTION

ANSWER

:

:

What is the average turn-around-time for a
response, either affirmative or negative, in
each of SBA's programs?
After receipt of a complete application from
an applicant for a direct loan, or a bank for
a guaranteed loan (business type)
the SBA
response is 19 calendar days on the average.
This varies by region and by district office,
depending on the volume of applications at any
given time.
After approval, loan closing time
may be considerably longer, depending primarily on the ability of the borrower to meet the
terms and conditions of a loan authorization.
,

75

We hope to significantly reduce this time with
new automated procedures.

QUESTION

ANSWER

Assuming a commercial bank is involved in a
loan assistance request, with whom does SBA
communicate, the enterpreneur or the financial
institution? Please explain the procedure.
Does this vary by region or office?
Assuming a commercial bank is involved, SBA
normally deals with the bank, rather than the
applicant.
By law we cannot make a loan if a
bank will make it without our participation;
nor can we make a direct loan if a guaranteed
loan is available.
For these reasons all
direct loan applicants must first be turned
down by a bank (two, in cities of 200,000
population or more).
This is the same in all
SBA offices.

:

QUESTION

ANSWER

:

:

If a request for loan assistance is approved,
what is follow-up procedure to monitor the
loan? What is the bank's role?

Direct loans are monitored by the SBA
Portfolio Management Division. Guaranteed
loans are pr imar ily the responsibil ity of the
bank servicing the loan which also provides
SBA with major decisions requiring concurrence

:

of SBA.

QUESTION

ANSWER

:

We no longer have loan account tickler files
as a national requirement; some field offices
may use some form of Kardex or similar system.
We are currently automating a monitoring
system.

:

QUESTION

Is a tickler file set up and kept current for
each loan account?

:

If the entrepreneur experiences operational
difficulties which result in cash flow
problems, e.g
inability to make loan
payments, what usually happens does the
entrepreneur advise SBA of the situation and
If
seek assistance or does a default occur?
a default occurs, what is SBA's procedure?
.

,

—

—

ANSWER

76

:

Rarely do we get an indication of trouble
before there is a serious erosion of assets.

We rely on banks a great deal to monitor the
accounts, since we have 200,000 clients and
only 4,000 employees.
The system is not
satisfactory. We recently requested that our
budget be increased to include 1,200 new
employees. We received 120, 60 of which are
earmarked for the 8A program.
The Study Team also asked the SBA if they could generate
data on respective program utilization by women business
owners by geographic region.
The response was that the SBA
could generate data on loans given to women by region, but
not on loans given to particular women-owned businesses.
That is, they keep track of numbers of loan units to women
but cannot generate the demographic and industrial data to
complement this information.
The SBA has only been generating data on women-owned businesses by race since 1974.
In Fiscal Year 1976, eleven percent (13,537 out of
118,413) of those counseled by SBA's management assistance
staff were women.
In the same year, 49,516 women out of a
population of 183,630 SBA trainees were women -- over 27
percent.
SBA had no data on procurement assistance given to
women-owned businesses, although they are currently developing this capacity.

Another pertinent question posed to both the commercial
bankers and to the Small Business Administration related to
the percentage of defaults on loans to women-owned businesses
delineating the type of assistance, date of approval, terms
authorized, date of first disbursement, first due date, and
date paid.
The commercial banking community's management
information systems were not able to report that information.
The SBA could generate some of the information requested,
however, the critical factors that would evidence prompt
payment or the circumstances of default could not be readily
generated.
Thus, the Study Team did not press for this
information, since the SBA appears to be making a herculean
effort to improve their data retrieval capabilities.
Several recommendations for action can be concluded from
this three-way dialogue:
(1)

The Small Business Administration's management
information system needs to be expanded to
service its clients in a timely manner.

(2)

The SBA should implement their pilot Bank
Discretionary Program within the Loan
Guarantee Program.
This program should

77

.

.

improve communication and service between the
SBA and commercial banks.
The SBA should
certify banks to make SBA guaranteed loans of
no more than a specific amount without prior
SBA approval and banks should be given greater
authority to administer SBA loans, particularly with respect to the waiver of loan
covenants
(3)

A bank that has made a loan to a small

business without SBA participation should be
allowed to roll-over that loan into an SBA
guaranteed loan.
This would ameliorate the
current situation where a bank, after granting
a small business a non-SBA loan, must refer
the small business to another bank if it seeks
an SBA guaranteed loan.
(4)

The SBA direct loan program should be
increased to aid women who cannot compete
equally in the open market on the basis of
"credit-worthiness." Concurrently, a test
program should be developed and implemented to
evaluate the validity of criteria used to
judge credit-worthiness.
Different probabilities of success could then be predicted on
the basis of the different levels and combinations of experience, education, and capital
available.
This could result in a credit
scoring system similar to those used for
consumer credit.

(5)

SBA should provide management training for
women with a longitudinal study of outcomes as
part of the program to evaluate results.

(6)

SBA should institute standard, objective
criteria for evaluating loan packages to limit
regional subjectivity.

One of the criteria should be that applicants
provide evidence of minimum level of experience and/or education in specific areas (such
as accounting, financial management) before
becoming eligible for Federal funds or guaran tees

78

Factoring and Finance Companies
Are women participating to a reasonable extent in this
country's money markets? We have concluded that women are
excluded, for a variety of reasons, from important financing
sources.
Two such sources which we suggest need attention
are the use by women of finance companies and factoring
institutions.
Both of these financial institutions are
associated with the on-going firm, and thus fall into the
category of solutions for problems that women business owners
meet after they have been in business for some time.

These problems are often associated with a need for
short-term financing, which can arise from several causes:
(1) the business is so successful that it cannot expand
rapidly enough to meet demand, it cannot generate sufficient
cash to pay for increased variable costs, and it runs into
cash flow problems, and (2) the business is experiencing
financial difficulties due to insufficient sales and is in
danger of failing.
The fact that it is almost impossible to
locate data on the use of these two methods of bridging
short-term money needs by women is a serious indication that
women are failing to use fully all financing vehicles.

Factoring Companies
There are thirty-five major
factoring companies both independent and captive in the
United States, 80 percent of which are located in New York
with the majority of the others in large metropolitan areas
(Chicago, Dallas, Ft. Worth, Atlanta).
When we called these
companies not one could think of more than one woman client
who was a full owner of a business.
(It is true that a small
number of businesses are jointly owned but the male partner
deals with the factoring company.)
This is even more surprising when the nature of the factoring business is considered. More than 80 percent of factoring clients are in
apparel, an industry traditionally associated with a large
number of women retailers.
A majority of other important
factoring areas are also in related "soft" industries such as
carpeting, textiles and furniture while an even smaller segment deals with electronics and toy firms.
What we are
seeing, then, is a field in which women play a role at the
retail level but have failed to penetrate to the wholesale,
manufacturing or distributing level.
:

Factoring companies offer many services which could be
of value to women business owners.
By selling her accounts
receivable to a factoring company she could pass on the chore
of credit checking, with its additional cost of creating a
credit department.
Factoring companies would also absorb
major portion of her financial risk -- the collecting of

a

79

accounts due.
Many factoring companies offer related services that would be of enormous value to a vigorous firm -the use of their computer for calculating sales commissions
and the breakdown of sales by territory or sales person, the
making of trade surveys, the finding of agents here and overseas, the compiling of management reports, and general business counseling are all services which may be offered by a
factoring company.

Factoring could provide the woman business owner with
liquidity and flexibility.
Because of computer technology
and the concurrent centralizing of credit functions, rapid
increases in the factoring business are forecast.
One large
factoring company, for example, stated that its annual goal
had realistically been set at a 10 percent increase on a
current volume of $1.75 billion. Why, then, aren't women
availing themselves of this important source of financing?

Women do not own many businesses in the manufacturing, wholesale, or distribution areas,
those which factoring companies service.

Women are not educated to the use of factoring
firms.
Factors rarely advertise except at
meetings of trade associations such as those
in the garment industry, or in industry
specific publications such as Women's Wear
Daily or the Daily News Record
.

Most factoring clients are referrals. They
come to the factor through CPAs, lawyers, and
above all, commercial banks. Women have
traditionally not been part of this network.
The Small Business Administration, where many
women go for advice and loans, decides on a
case-by-case basis whether to allow owners to
use factoring for expansion funds.
The criteria used to assess financing requests
are the very ones women have traditionally
found so difficult to obtain.
As one vice

80

:

.

president of a factoring company summed it up,
"Track record, number of years in the business, qualifications, contacts, and personal
references.
That's all we look at, and all we
need to look at.
They tell the story."
For a
woman, these can create an insurmountable
bar

r

ier

In order

to be considered as a potential
factoring client a woman must be able to
produce complete financial documentation on
her firm which may create another barrier.
Many factoring companies insist on a certain
in-house format for balance sheets, operating
statements, and sales forecasts.
This may
simply be beyond the skill or the financial
resources of a woman who is facing a critical
need for short-term financing.
Few factors
offer to do the work using their own accountants, and, naturally, would expect to be paid
for this additional service.

Women often lack the necessary collateral to
secure a factoring agreement.
Rarely are
personal assets accepted, although, occasionally, listed securities are approved.
Generally, however, 80 percent of the accounts
receivable is the maximum a factor will lend.
This may create a "Catch-22" situation for the
firm which badly needs funds to create sales
to generate accounts receivable.
Finance Companies
Within the area of commercial
finance companies the problems are much the same.
Again,
their function is to bridge short-term financial needs, and
again we find very few women taking advantage of this form of
financing.
There are 130 members of the National Commercial
Financial Conference, the finance companies' trade association, ranging from local to large national institutions.
The
managers we contacted insisted that women are "treated just
the same as men," but then admit they have never had a woman
customer, except as a second partner in a husband-wife-owned
business.
Commercial finance companies also sell to wholesalers, distributors, and manufacturers, all areas in which
"women don't have any interest," according to one field sales
representative.
"Women," he added, "don't sell to other
companies, they are mainly selling to the general public."
:

Barriers to effective use of finance companies by women
include

81

Misconceptions of finance companies due to
insufficient education about money markets.
Just as factoring firms traditionally have had
the reputation as institutions of last resort
for bankrupt securities, finance companies may
be perceived as exorbitantly priced, lastditch aids to a failing business. Confusion
exists between the high rates they charge -frequently 6-1/4 percent above prime, or about
14-1/4 percent today
and the actual cost of
their money.
Finance companies can enable a
client to get on a discount basis with a supplier (not a service provided by commercial
banks) which may lower costs two percent, and
can offer a revolving payout schedule with
charges computed on an average daily balance
rather than on the full term amount as is done
with a commercial bank loan.
All of these
services significantly lower the actual
finance costs.

—

Women are not perceived as a significant
market segment and little advertising reaches
them.
Most clients are referrals from banks
(which women may not even get into)
whose
officers suggest that a client go to a finance
company after he has used up his line of
,

credit.

Women have difficulty in meeting the collateral requirements from finance companies.
Most
of these institutions, if lending on fixed
assets, will only loan 75 percent of the
"knock-down value," i.e.
the value they would
receive if the business had to be auctioned
off immediately.
Most women are not in the
position of owning large amounts of fixed
,

assets.

Women do not frequently need loans in the
large amounts finance companies prefer to deal
with ($50,000 minimum loan for a very small
finance company; a minimum of $100,000 or
$200,000 is not uncommon for one of the larger
ones)
It simply is not worth their while to
service small loans.
.

82

Thus, women may find themselves in the anomalous situation of being unable to find a company that is willing to
give them the small loan they wish, because of diseconomies
of scale, but of failing on the other hand to have the assets
to qualify for a
be they plant, equipment, or inventory
larger loan.

—

—

Our survey of the field has turned up very few
One large
encouraging signals of a change in this trend.
finance and factoring company in Chicago did have one woman
client, in specialized manufacturing, who was buying out her
boss's company with the help of $1,000,000 in funding
guaranteed by her employer; hardly a typical situation.

When factoring and finance companies were asked if they
made any attempt to encourage women business owners or perceived them as a separate marketing target, the answer was
One field sales representative did
100 percent negative.
mention having once attempted to solicit business from women
using a metropolitan directory of women business owners
compiled by OMBE.
Perhaps it is in this area that maximum effort should be
applied.
Making institutions aware of women business owners
as a separate segment, educating and publicizing through the
use of such tools as directories may be an important and
reasonable step towards bringing women into the financial
mainstream.
Other areas that also deserve consideration are:
educating women business owners to the possibilities of using
financing companies and factors by such means as lists of
companies (perhaps categorized by size of loans offered) and
their services and costs; facilitating obtaining SBA's
permission for its small business owners to factor their
accounts receivable would, in conjunction with increasing the
number of SBA loans to women, offer another channel; encouragement, by whatever means, of women officers in lending
institutions would further emphasize that sex plays no role
in discouraging women from obtaining funds.
Only when steps
such as these are taken will there be significant use by
women of these financial resources.

83

5

THE

SMALL

BUSINESS

AND

TAXATIO

At present, there is no definition of small business in
A business is defined in the Tax
the Internal Revenue Code.
Guides as a pursuit carried on for a livelihood or for
profit; the profit motive must be present and some type of
economic activity must be involved.
Two characteristic
elements of a business are regularity of activities and
production of income. Business activities that result in a
profit make the enterprise liable for taxes. (72)

The tax code is not the only place where it has been
difficult to define small business.
Lack of definition has
impacted upon scholarly economic studies and analysis of the
magnitude of small business in the economy. (73)
Why is it so
difficult to define small business in a clear cut way so that
special tax programs can be designed to assist small businesses without increasing inequities in the tax system?
Small businesses can be categorized on the basis of
receipts, employment, total assets, share of the market,
income and value added.
Value added is considered by many
tax economists to be the best method of measuring a small
business, but this information is not on the tax forms.
Use
of assets is another good method.
However, it exaggerates
financial institutions over other forms of business.
Number
of employees is deceptive because many businesses that make a
great impact on our gross national product have few employees.
Use of employees as a guide skews the definition in
favor of labor intensive rather than capital intensive industries.
Measuring small business by receipts has drawbacks as
well, as receipts are not a good measure of the contributions
of a firm to gross national product.
Receipts also bias
statistics in favor of those who buy and sell rather than
those who manufacture a product. (74)

85

Use of income is very deceptive although Federal taxes
are based upon income.
In fact, many argue that income is
the poorest of measures.
Taxable income as defined in the

Internal Revenue Code differs substantially from economic
income and, because of special statutory deductions, surtax
exemptions, alternative tax rates on capital gains, tax
credits, and other special provisions, the apparent effective
rates on income of businesses may vary substantially among
industries and sizes of firms in any year.
Use of income is
further complicated by the fact that very large corporations
may have low taxable incomes. (75)

Beyond general observations, such as that small businesses are clustered at the lower end of all these classes,
exact statements about small business are hard to make.
The
basic difficulty is that there is no real reason to lump all
small businesses together and no clear criteria for classifying them by size.
We found no standard definition during
our bank interviews, and thus the interpretation of what is
small business is left to the interpreter (76)
.

Taxation issues play a key role in defining barriers to
the establishment of successful small businesses, primarily
through their effect on equity infusion.
The major sources
of equity capital for expansion of a business are retained
earnings and reinvested profits. The size of the total tax
bite is an important determinant of the amount of money
available for expansion. Of course, taxation is not sex specific
A small business is taxed as a business, not as
female versus male-owned
As a consequence, any changes in
tax laws to benefit small businesses would benefit men more
than women, since so few businesses are owned by women.
Later in this report, when tax policies related to increasing the amount of venture capital are addressed, we will see
that men would, again, be the major beneficiaries because so
few women have sufficient capital to make such investments.
.

.

Forms of Organization and Type of Business
All businesses are not taxed at the same rate.
Type of
business, form of organization, and size of business are the
major parameters defining total taxes owed.
There are three
different legal forms of business organization:
proprietorships, partnerships, and corporations. Within each type of
organization, nearly all types of businesses, from services
such as travel agencies to heavy manufacturing, can be found.
The Task Force Questionnaire responses indicate that,
among the community of established businesswomen, today's
picture of legal form of ownership is quite different from

86

.

what was represented in the 1972 Commerce Department study.
Corporations, which were included in the 1972 study only if
shown on individual income tax returns (i.e., Subchapter S
corporations) represent 25.3 percent of our sample (as
opposed to 0.3 percent in the 1972 study).

Table 4 shows a difference between the two groups of
women with minorities forming more sole proprietorships and
On the question of how the business was
fewer corporations.
formed, whether alone or with some other person(s), there was
very little difference between the two groups, less than four
These data indicate that
percentage points in each category.
businesses were established by the woman
72.7 percent of the
alone (42.9 percent) or with her spouse (29.8 percent).

Gross receipts of the business in 1977 were also similar
(see Table

5)

Minority women-owned businesses cluster at the lower
income end to a greater extent with 58.5 percent making less
than $50,000 gross in contrast to 45.1 percent for nonminority businesses. Of greater interest is the number of
businesses at the upper end of the scale. Clearly, there are
This
some substantial women-owned businesses in the sample.
fact is borne out by employment figures supplied by questionAlmost 30 percent of the businesses
naire respondents.
employ five or more people, 43.1 percent employ one to four
Only 29 percent have no employees (77)
people.
.

The tax implications of each form of organization will
be discussed in the following pages, as well as implications
of tax policy on venture capital investment.
An individual engaging in business
SOLE PROPIETORSHIPS
Sole proon his or her own account is a sole proprietor.
prietorships are the simplest form of business organization.
They have no existence apart from the owner, and the liabilities and assets of the business are the personal liabilities
The proprietor undertakes all the
and assets of the owner.
Over seventy percent of all
risks of doing business (78
This form of organizasmall firms are sole proprietorships.
tion accounted for 98 percent of the businesses and 89 percent of the gross receipts for all women-owned firms reported
As can be seen in Chart 2 the domiin the 1972 survey. (79)
nant type of business for sole proprietorships is retail
trade.
:

.

)

87

TABLE

4

Percent of Responses To
Legal Form of Business Ownership:
Minority and Non-Minority Women
Sole

Joint

Proprietor-

Proprietor-

ship

ship

Partner-

Corporation'

Other

ship

Minority

Women

57.8%

8.7

10.9

20.3

2.2

47.7

8.8

14.2

26.2

3.0

49.3

8.8

13.7

25.3

2.9

(N=448)

Non-minority

Women
(N = 2504)

Column
Total

*

Including those

who

are substantial but not majority stockholders.

SOURCE: Task Force Questionnaire

Table 5

Percent Distribution of Gross Receipts 1977 for Firms
Owned by Minority and Non-Minority Women
-

Under
$10,000

$10,000

CHART

2

Gross Receipts of Sole Proprietorships
for Firms Owned by Women: 1972

$7,225,336

Gross Receipts

(88.7%)

Percent of Total

($1,000)
in

Division

488890

430 277
73 6
,

j£l£

-

<

>

406221
(82.5)

mm

LULU
^ *F
v'

A?

S^
^

^

'

252,533

80:

^

.C?

\<?

212

131,289

112,724

(88.1)

(86.2)

«&#
y

(96.2)

y J?^
^

^ 0"
^v
\<

SOURCE:

U.S.

Department of Commerce,

Women-Owned

Businesses,

1972, 1976, p. 241.

.

The pattern of business ownership by minority women does
not differ significantly from that of ownership by all
women. (80)
We can conclude that if tax advantages were increased for sole proprietorships, it would not favor majority
over minority women.
In 1972, almost half of all women-owned firms had gross
receipts of less than $5,000 (201,623 firms out of a total of
As can be seen in Chart 3, the number earning more
402,025).
than $5,000 drops sharply.
This is consistent with 1972 data
that indicate that two-thirds of all small firms made under
$25,000 in gross receipts that year.
Data from the Task
Force Questionnaire shows a very different picture.
(See
Chart 4.)
Only 17.4 percent of the respondents had gross
receipts in 1977 of $10,000 or less in contrast with 66.8
percent in 1972.

Minority women-owned firms also fit this pattern, with
few bringing in sizeable receipts.
Again, approximately half
of all minority-women-owned firms earned less than $5,000
This similarity of pat(15,601 out of a total of 33,810).
tern indicates majority and minority women business owners
are similarly affected by the tax code. (81)
Sole proprietorships are not taxed as business entities.
Income from a sole proprietorship is taxed as a part of the
total gross income received by the individual owner.
The
sole proprietor is able to deduct all business expenses, and
the sole proprietorship is part of the graduated and progressive individual tax system, with rates ranging from zero
to 70 percent.
Thus, sole proprietors can benefit from the
advantages accorded to the lowest income taxpayer s (82)
Sole
proprietors would be interested in tax reductions for individuals, for these reductions would increase their after-tax
income and ability to place more capital into their
businesses
.

In addition to deductions from taxable income, the sole
proprietor, as he or she files Form 1040 as an individual
taxpayer, has certain tax credits.
These are deductions from
the tax liability, or income tax owed the Federal government,
rather than deductions which reduce the income on which a
sole proprietor and individual figure the tax owed.
The
three major tax credits that affect small business are the
investment tax credit (Form 3468)
the Work Incentive (WIN)
Credit (Form 4874), and the New Jobs Credit (Form 5884).
The
WIN Credit enables an employer to deduct 20 percent of the
first 12 months of an employee's salary who was hired under
this program.
The Jobs Tax Credit was intended to encourage
employers to create new jobs and is paid under a formula that
,

90

CHART

3

Gross Receipts of Sole Proprietorships
for Firms Owned by Women: 1972

402,025

(100%)

Number of Firms
Percent of Total

400,000

200,000

100,000

Gross Receipts

SOURCE:

U.S.

Department of Commerce,

Women-Owned
1972, 1976,

p.

Businesses,

239.

CHART

4

Gross Receipts of Women-Owned Firms: 1977
2,973

3000

(100%)

Number

of

Firms

Percent of Total -

2000

1000

718
(25.9)

133

12 4

(4.8)

(4.5)

SOURCE: Task Force

Questionnaire.

Unemployment Tax.
(It is
FUTA wages paid during 1978
The ten
exceed 102 percent of FUTA wages paid during 1977)
percent Investment Tax Credit is for new or used property
Unlike
acquired for use in the business during the tax year.
the depreciation deduction, the investment tax credit applies
only to tangible property such as machinery and not to
buildings; further, the property must be depreciable and have
The Administration
a useful life of at least three years.
has proposed that this credit be extended to industrial
buildings, but in no case does it extend to working, office,
sales or store space; warehouses; garages; railways or bus
This means that certain kinds of women-owned
stations. (83)
business, namely those in manufacturing, receive larger tax
credits than those in the service industry.
is based on the amount of Federal
50 percent of the amount by which

.

In summary, sole proprietorships deduct from their gross
Receipts minus
receipts almost every cost of doing business.
Thus, as
costs equals the profits on which taxes are paid.
far as the tax code is concerned, there is little more that
The tax credits
can be done to assist sole proprietorships.
discussed above apply to the two major components of business, capital and labor, but the great majority of womenOnly about 13
owned small businesses use little of either.
percent of all women-owned firms surveyed in 1972 hired any
As mentioned
employees, and these hired very few. (84)
earlier, respondents to the Task Force questionnaire reported
29 percent of the women-owned businesses had no employees.

PARTNERSHIPS
A partnership is the unincorporated
relationship existing between two or more persons who join
together to carry on a trade or business with each person
contributing money, property, labor, or skill and each
expecting to share in the profits and losses of the business.
For tax purposes, the term "partnership" may also include
syndicates, groups, pools, joint ventures or other unincorporated groups not classified as trusts, estates or corporations.
Important factors in determining whether or not the
relationship is a partnership are the parties' conduct in
carrying out the provisions of the agreement, the testimony
of disinterested persons, the relationship of the parties,
and the abilities and contributions of each.
Thus, coownership is a joint undertaking merely to share expenses,
not a partnership.
A family partnership is one whose members
are related through blood or marriage and a family member is
recognized as a partner if he or she has a capital interest
where capital is the material income-producing factor, or
where the individual contributes substantial vital services
where capital is not a material income-producing factor. (85)
:

93

In 1972 very few women-owned businesses were partnerships, only about 1.7 percent.
The Task Force Questionnaire
showed 23.7 percent of respondents had organized as partnerships.

Women-owned businesses in the form of partnerships
accounted for seven percent of the gross receipts of all
women-owned businesses
$564 million out of a total of over
Retail trade far outdistanced all other
$8 billion in 1972.
businesses in the amount of gross receipts. There is a
slight difference in the rank ordering of types of businesses
between majority and minority-women-owned firms,
but
receipts are so small that there are no implications for
taxation.

—

Partnership profits and other gains are not taxed to the
partnership.
Instead, each partner determines his or her
income as an individual taxpayer.
However, choices determining computation of the partnership's income are determined by the partnership and not the individual partners.
Such elections include the methods of accounting, computing
depreciation, and amortizing organization fees. (86)
Each
partner is required to file a Form 1065; however, this form
only serves to indicate to the Internal Revenue Service the
amount and kind of income, deductions, and credit that the
individual partners ought to report on their individual tax
returns as their share of the income in the partnership.
The
distributive share is reported even if not actually distributed.
Each partner's share is commingled with all other
reportable income on his or her Form 1040.
In the case of a
loss, a deduction on the individual return to the extent of
the adjusted basis of the partner's interest in the partnership is allowed. (87)
The main interest of partnerships is in tax relief for
individual taxpayers.
Thus partnerships would benefit from
the Administration's proposals to reduce the share of the
total income tax burden for each income class through
$30,000.(88)
This reduction would especially aid women-owned
businesses, which often have incomes falling well within this
range.

CORPORATIONS
A corporation is a business legally
incorporated under state laws.
It can take various forms,
the most well-known and widely used is the joint stock
company.
For tax purposes, businesses operating in other
forms may be treated as corporations if they have the
characteristics of corporations.
The tax treatment of
corporations differs markedly from that of sole proprietorships and partnerships.
Only corporations are taxed
:

94

That is, the tax law treats
separately as businesses.
corporations as entities separate and apart from their
Corporate profits are taxed
individual shareholder/owners.
when the profits are distributed as
to the corporation and
On
dividends, the individual shareholders are also taxed.
by a corporation are not
the other hand, losses sustained
available as deductions to the stockholder s (89)
.

The Internal Revenue Code enables some corporations to
elect the status of "Subchapter S corporations," under which
they are not to be taxed as corporations, thus avoiding the
That
double tax, but in a manner similar to partnerships.
Subchapter S corporation, itself, does not pay taxes
is, the
(except that it may be subject to capital gains taxes if its
Rather, the individual shareholders
gains exceed $25,000).
include in their individual gross incomes distributive
portions of the corporation's profit or loss. (90)

Subchapter S corporations are generally limited and are
However, any group of
best suited for small business.
elect to be a Subchapter S corporation so
shareholders may
long as they meet all six of the following requirements:
1.

The corporation may not have more than ten
shareholders unless it has been in existence
Then it may
years.
for five consecutive tax
The Administrahave up to 15 shareholders.
tion has proposed that the number for all be
raised to 15 to eliminate this technical and
complicating exception.

2.

The corporation may have only one class of
stock.

3.

The company must be a domestic corporation.

4.

Only individuals, estates, and certain types
of trusts
may be shareholders (the Administration is attempting to simplify this rule)
but no partnership or corporation may become
a shareholder.

5.

No non-resident alien can be a shareholder.

6.

The corporation must not be
affiliated group. (91)

a

member of an

The actual number of women-owned corporations is not
known, because the 1972 Survey only counted Subchapter S
In 1972 there were 1,251 women-owned
corporations.

95

Subchapter S corporations, 0.3 percent of all women-owned
firms.
Minority women-owned corporations totaled 486. Once
again, the patterns by industry for majority and minority
women were almost identical with the largest numbers in
retail trade and selective services. The Task Force Questionnaire showed 25.3 percent of respondents to be stockholders in corporations.

Despite their small number in 1972, women-owned
Subchapter S corporations accounted for four percent of the
receipts of all women-owned businesses ($356,665,000).
Minority women-owned corporations earned $132,045,000 in
gross receipts. (92)
The corporate income tax is structured so that a
corporation pays tax at a rate of 20 percent on the first
$25,000 of corporate income, 22 percent on the next $25,000
and 48 percent (the 22 pecent plus a surtax of 26 percent) on
all income over $50,000.(93)
Exemption from the 26 percent
surtax is in itself a substantial tax benefit to the corporation whose income does not exceed $50,000. The Carter
proposals would have an effect on small corporations by
reducing the tax rate to 18 percent on the first $25,000 of
income; 20 percent on the second $25,000; and, when fully
phased in, to 44 percent on all income over $50,000. (94)
The
tax savings on the proposal would be of proportionately
greater significance to smaller corporations, but in absolute
dollars the savings would be much larger for major corporations.
The President's stated aim is to deal with the inadequate capital spending in the U.S. during the past several
years and to help to insure increased capital formation. (95)

General corporations file a Form 1120.
In computing
taxable income they take the same deductions that apply to
individuals and, in addition, are eligible for special
corporate deductions. (96)
Since few women-owned corporations
appear to be in the class of general corporations, subsequent
discussion will concentrate on Subchapter S corporations.
In
Subchapter S corporations file a Form 1120S.
general, each shareholder must report as gross income his or
her pro rata share of the corporation's taxable income.
Under certain conditions, a Subchapter S corporation must pay
a capital gains tax.
However, very few women-owned Subchapter S corporations are subject to this capital gains tax.
Subchapter S corporations are not eligible for the special
deductions of general corporations. (97)

96

To summarize, major tax reform and reduction will not
To understand
assist women business owners significantly.
why this is so, it is important to place these businesses and
Since
all small businesses in perspective in the economy.
to call attention to the
taxes are paid on profits, we want
low income of small businesses in general, women-owned
In fact women-owned small businesses
businesses among them.
have even lower income than small businesses in general.
In 1971, about 32 percent of all small businesses filing
Of the 8.5
with the IRS showed no income or a deficit.
million profitable firms (including farms) 75 percent had
average taxable incomes of less than $10,000 and paid a
Federal income tax of under $1,000.(98)

Since most small businesses have extremely low earnings
bases from which to generate additional capital, even large
reductions in the tax rate at the lowest levels of small
business income will provide little help in significantly
increasing earnings either for cash-flow or for minimal
However, reform and simplification of income tax
investment.
required can lower the cost of tax compliance.
forms
Tax Provisions Governing Small Business

Each year many proposals are made to change the tax code
Those relating to establishing a
to assist small business.
small business, to businesses having gross receipts of under
$50,000, and to individuals or firms providing venture
capital will be reviewed in this section.

AMORTIZATION
Of particular importance to small
Generally,
business is the deduction of start-up expenses.
the tax code does not permit these expenses to be deducted
immediately, but, rather, allows them to be amortized (that
is, deducted in equal amounts over a set time period, generThe following start-up
ally not less than five years)
expenses can be amortized:
cost of acquiring a lease,
research and experimental expenses, interest and real
property taxes on construction used for business, legal and
accounting fees for initial organization; bond premiums;
temporary costs of directors; costs of organizational
meetings; and on-the-job training and child care facilities.
A table of amortization is supplied by the IRS to simplify
the procedure. (99)
:

.

Small businesspeople feel that the amortization of
start-up expenses should be possible automatically without
the taxpayer having to formally file the election on his or
97

her tax return.
SBA s Office of Advocacy recommended in June
1977 that the limitations on the types of expenditures be
broadened to include the costs of obtaining initial capitalization, syndication expenses, and trademarks and trade names,
The purchase of good
precisely those expenses now excluded.
will is also recommended for inclusion. (100) Current Administration proposals do not include any further liberalization
of the amortization rules.
'

PAYMENT OF TAX IN EARLY YEARS OF OPERATION
The tax
code does not raise a barrier to fledgling businesses.
Although businesses must file income tax returns, this does
not mean that they pay tax.
Taxes are paid on profits and if
there is no profit, which is usual in the first years of
operations, then no tax is paid.
Absence of income does not
prevent a businessper son from saving the ordinary and necessary expenses directly connected with his or her trade,
business, or profession for deducting in later tax years.
;

PAYROLL TAXES
A major complaint of small business is
the administrative burden of paying payroll taxes.
In 1977
the Commission on Federal Paperwork reiterated at Congressional oversight hearings that payroll tax returns are the
most costly reports for most small businesses to prepare.
For these, as well as for other requirements, the Internal
Revenue Code and its related regulations have become more and
:

more complex, resulting in increasingly burdensome reporting
requirements.
Because the small business does not have ready
access to resources such as lawyers and CPAs, complying with
tax laws has a prohibitively high cost.
In the case of payroll taxes, the relative cost of compliance with the regulations is far greater for a small business than a large
corporation, thus making the burden of compliance highly
regressive.
Small businesspeople want and need a simpler tax
structure. (101)
The Treasury Department is sympathetic to the needs of
small businesspersons to be relieved of some of the paperwork
burden and complexity of tax compliance. On the other hand,
the integrity of the withholding tax system, which collects a
major portion of all taxes, must be protected.
SBA's Office
of Advocacy recommended in June 1977 that any employee making
less than $200 a calender quarter not be classified as an
employee for payroll and withholding tax purposes.
But past
IRS surveys indicate that such a rule would lead to substantial amounts of income going unreported by taxpayers.

Another complaint dealing with payroll taxes is a
financial one.
Business taxpayers pay their taxes on an
estimated basis in quarterly installments.
This system was

98

.

developed in the late 1950 's in an attempt to equalize tax
burden between businesses and individuals. Although all
taxes were due on April 15, employees had their taxes removed
each pay period, while employers had the use of their full
However, with
income without tax deductions all year long.
current quarterly payments, if a small business profit is
the
not maintained, the excess of estimated tax is not refunded
Since
until the following annual income tax return is filed.
financial reverses from profit to loss may cause a hardship
on small business, SBA's Office of Advocacy recommended that
a taxpayer get a quick refund of estimated tax when it became
clear that the amounts paid will be clearly in excess of the
The Treasury Small Business Advisory
tax liability. (102)
Committee and the IRS should prepare a simpler estimated tax
form and study the timing of payment of refunds of overpaid
taxes

—

RETIREMENT EMPLOYEE RETIREMENT INCOME SECURITY ACT
Sponsored by IRS's Small Business Advisory
Committee in 1974, the Act has, in actual practice, placed
It should be simplified to
great burdens on small business.
permit participation by small businesses which cannot afford
to administer retirement plans under the new laws and reguCongress should consider simplifying the law for
lations.
plans covering 100 employees or less, thus reducing reporting
A standard plan for
costs and administrative burdens. (103)
every type of business with 10 employees or less should be
This would reduce costs to small businesses but
developed.
its impact on women-owned business would be limited to those
that have employees.
(

ERISA)

;

RETIREMENT SECURITY OF THE SMALL BUSINESS OWNER
A
recurring complaint is that existing retirement plans are not
responsive to the need of small businesses because they are
complicated and expensive to establish, place unwarranted
emphasis on the legal form of business organization and make
compliance too complex (104
This issue should be investigated and the tax code amended to simplify retirement plan
requirements for both owners and employees.
:

.

)

Taxes Related to Business Operations
Capital is the most important need of small business.
The inaccessibility of traditional outside financing sources
forces small businesses to finance themselves largely by
reinvestment of earnings, which must be sufficient for both
Profits left after
current operations and future expansion.
Besides
taxes are of vital importance to small business.
internal cash flow a small business' major source of working
99

capital is borrowing, and ability to obtain credit depends,
Proposals to reduce taxes on small
in part, upon profits.
business are directed at the difficulty of forming
capital. (105)

ADDITIONAL GRADUATION OF THE CORPORATE TAX
The tax
code first instituted a graduated rate for corporate taxes in
1936.
Two years later the code made a sharp distinction
between corporations making up to $25,000 per year and those
earning more.
In 1940 a system of graduated steps was
established, and ten years later, in 1950, the current
concept of normal tax and corporate surtax was introduced,
with the surtax being levied against the amount earned over
$25,000.
By 1961 the effective tax rate on corporations for
It was not until
all income over $25,000 was 48 percent.
1975 that the first major reduction in corporate taxes was
made.
This tax change reduced the corporate tax rate on the
first $25,000 of earnings from 22 to 20 percent.
The tax
rate on earnings between $25,000 and $50,000 was lowered from
48 to 22 percent.
A surtax of 26 percent was added on income
over $50,000, hence making the effective rate of tax on all
income over $50,000 equal to the former 48 percent.
It is
this structure which the Carter Administration now proposes
to reduce slightly, the tax on the first $25,000 would drop
to 18 percent; that on the second $25,000 would fall to 20
percent; and that on all income over $50,000 would drop first
to 45 percent, then permanently to 44 percent (106)
:

.

It is believed that small business will not be
particularly pleased with this proposal even though it would
result in tax reduction for most.
Instead, each year a more
progressive rate structure is suggested, for example, in
December 1976 the Treasury Small Business Advisory Committee
on Economic Policy called for a four-step graduation (0 to
$9,999; $10,000 to $49,999; $50,000 to $199,999; and $200,000
and over).
In the spring of 1977 a former IRS Commissioner,
Randolph Thrower, then a member of the Advisory Committee,
told the House Ways and Means Committee that inflationadjustable graduated rates for small incorporated businesses
The Advisory Committee
are probably the best form of relief.
also recommended an alternative, such as increasing the
surtax exemption or maintaining the current form but
spreading out the rates to 10 percent, 28 percent and 45
percent. (107)

DEPRECIATION AND SIMPLIFICATION OF ASSET DEPRECIATION
RANGE (ADR)
All businesses are able to recover the cost of
certain types of tangible and intangible business property
through the process of depreciation.
Each year the taxpayer
deducts as depreciation a reasonable allowance for the
:

100

exhaustion, wear and tear, and obsolescence of depreciable
property utilized in the production of income.
Property so
The shorter the
depreciated must have a limited useful life.
useful life of equipment, the greater is the amount allowed
Depreciation is a major deduction from
for depreciation.
income for small business,

The small businesswoman or man has had problems in
computing depreciation. Businesses now have the choice of
claiming depreciation on the basis of "facts and circumstances" applicable to their situation, or using an asset
depreciation range and class life system developed by the
Internal Revenue Service, based on standard depreciation
lives.
Substantial tax benefits are derived through use of
the published depreciation lives and the additional range,
which allows a business to select a depreciable life from 20
percent below to 20 percent above the established class
lives.
For example, if the useful life is ten years the
property can be depreciated on the basis of a useful life of
from eight to twelve years.
Generally, the ADR system
permits more rapid writeoffs of costs of productive assets
than would be the case under conventional rules. (109)
Taxpayers who do not use the ADR lives are also subject to
challenge by IRS auditors.

Although the standandized treatment was designed to
prevent disputes between the taxpayer and IRS, it has ended
up imposing such burdensome and complicated reporting
requirements on small businesspeople that, as a practical
matter, this system is not available to small business.
In
effect, IRS regulations have become highly discriminatory in
that the most advantageous depreciation method cannot readily
be used by small business (110)
.

Recognizing that such complexities in tax laws are
especially burdensome to the small businessperson, the Carter

101

Administration has proposed the adoption of a simplified
table by which the small businessper son may determine the
useful life of property without complex recordkeeping
requirements
The simplified tables maintain the 20 percent
range feature, and would enable the taxpayer to ignore salvage value.
He or she would not be required to participate
in surveys.
It is expected that the special depreciation
system would be available to more than 90 percent of all
small businesses regardless of organizational form. (Ill)
This proposal would not only ease the recordkeeping
burdens of small businesswomen but would be of great assistance in increasing retained earnings of every businesswoman
regardless of the form of organization chosen.
Its impact
would vary depending upon the industry her business is in.
For example, women in transportation and manufacturing would
benefit more than those in the retail or service trades.

DEPRECIATION AMOUNTS AND TIMEPERIODS
While the
President has recognized, and proposed remedies to, the
problems of computing depreciation using ADR, there are no
current recommendations for further shortening the time
period or permitting a lump-sum deduction.
In the past a
number of suggestions have been made.
In December 1976 the
Treasury Small Business Advisory Committee on Economic Policy
recommended that a taxpayer be permitted to write off any
amount up to and including 100 percent of asset value in the
year of acquisition with a limit of $200,000 per year.
This
was also one of the principal recommendations of the Small
Business Administration Venture and Equity Capital Task Force
chaired by William Casey.
In May 1977 the Smaller Business
Association of New England advanced a similar proposal. They
asked Congress to allow a deduction for the full cost of the
first $200,000 of depreciable personal and real property, the
timing of the deduction to be totally within the control of
the taxpayer.
The suggestion would eliminate the need for
preparation of detailed depreciation records on each property
:

item.
In 1977 the Council of Small and Independent Business
Organizations and a group of five regional small business
organizations recommended to Congress that they consider an
accelerated capital recovery program under which there would
be:
(1) a two-year depreciation period for vehicles, equipment, and tools up to a limit of $100,000 annually; (2) a
five-year depreciation for machinery, transportation
equipment, office furnishings and leasehold improvements,
with a similar $100,000 annual limit; and (3) a ten-year
depreciation for all forms of commercial structures up to a
limit of $200,000 annually.
This proposal was drafted into

102

Section 403, Adjustment of Depreciation Schedules, of the
proposed "Small Business Venture Capital Act of 1977
(S.1815)," which was introduced in the Senate in June 1977.
The Senate Select Small Business Committee offered a similar
The Committee tested these different
proposal in early 1978.
alternatives for calculating depreciation and found that the
most promising for small business was three-year life, with
one-third of the investment credit retained with an average
The Committee also proposed
gain of about $410 per company.
that their plan apply to business equipment purchases of all
kinds rather than to the Administration's 18 categories only.
The Committee held that many small business organizations
would find their plan to be a major simplification which
would stabilize the service life of the productive assets and
would decrease uncertainty.
In addition, the requirements
for expensive professional accounting advice would be
reduced.
In June of 1977 the SBA Office of Advocacy called for a
new method of computing depreciation in order to circumvent
inflation.
The calculation of the deductible amount is now
based upon the historical cost of the asset which would have
to be replaced at a higher cost due to inflation.
SBA
recommended that small businesses be permitted to depreciate
all depreciable assets at twice the straight-line rate, and,
in view of this increase, that the additional first-year
allowance be repealed.
This proposal would provide funds
quickly through a tax reduction and would also permit
depreciation which would more realistically reflect the
economic erosion of inflation. (112)

All of these proposals provide for more liberal
depreciation than the Administration has itself proposed to
Congress. Most of the proposals subsidize certain kinds of
small business at the expense of others to the extent that
some sorts of depreciable property have a longer real life
than others, yet all have the same write-off or depreciable
timetable.
There is also a subsidy in favor of small business over larger business due to the dollar limitations in
the suggestions.
On the other hand, Administration proposals
develop a set of simplified tables which take into account
every kind of business and the average length of life for
depreciable property, as measured by experience.
Treasury's
tables would reduce the accounting cost and make it easier
for small business to take the table or ADR option.
In
addition, the new tables would be useful to new businesses by
decreasing the cost of making out their tax forms and
decreasing uncertainty. (113)

103

.

)

INVESTMENT TAX CREDIT
A relatively small percentage of
small businesses benefit from the investment tax credit.
It
does not generally assist women business owners, many of whom
are in industries that require low capitalization.
Increasing the investment tax credit would not assist small firms
mainly because they use much labor relative to capital as a
factor of production.
:

The investment tax credit plays a minimal role in the
financial and tax planning of small business for two reasons.
First, small business investments in any one year are
typically modest; second, tax credits are only useful for
profitable firms and many small businesses, especially those
in operation for less than five years, do not show a profit.
In short, since most women-owned businesses do not pay high
taxes, the investment tax credit, which is a deduction from
the tax owed the Federal government, is not much use in
significantly increasing after-tax prof its (114
.

The investment tax credit was originally established in
1961 to give an incentive for investment in new productive
machinery.
The purpose was to make the credit effective by
aiming it at those industries that make investments.
Since
very few women-owned businesses are in the areas of manufacturing, construction, transportation and public utilities
(only about 29,000 out of 402,000 in the 1972 survey), the
investment tax credit does not serve to reduce the taxes of
the bulk of women-owned businesses (115)
.

The Carter Administration has proposed the following
changes in the investment tax credit.
1.

The ten percent rather than seven percent
investment credit would become permanent.
This
provision would assist those women-owned businesses
able to utilize the credit.

2.

Eligibility would be extended to the construction
and rehabilitation of industrial or manufacturing
structures or those used by utilities.
This
provision is almost meaningless to women business
owners.
What has a greater impact is the fact that
commercial buildings and retail stores are not
eligible for the credit.
For the handful who are
covered, the proposal will simplify and lower the
cost of compliance by reducing disputes with the
IRS over what structural property qualifies for the
credit

104

3.

The tax liability ceiling would be changed to a
Though the
flat 90 percent of the total tax.
proposal's effectiveness is meant for businesses
with relatively high investment needs and low
taxable income, it is slightly detrimental to small
businesses which can no longer use the investment
tax credit to completely eliminate their entire
tax.
Under the proposed rule, the 90 percent
ceiling means that ten percent of the tax must be
paid. (116)

In practice, this change will affect fewer than 30,000
women business owners out of 402,000. And this number will
be greatly reduced because many of the women-owned businesses
in the capital-intensive industries do not make a large
enough income to have a profit to pay a tax on, or pay such a
low tax that ten percent of that tax will have no bearing on
The
the ability to significantly increase after-tax profits.
negative effect will be minimal despite the fact that there
is a detrimental impact in exchanging no tax for some tax.

Commercial buildings or intangible depreciable property
were not included as eligible for the investment tax credit
as recommended by SBA because the Treasury Department feels
they are already receiving generous treatment under depreciHowever, industrial structures and machinery
ation rules.
Treasury might consider making the
can be depreciated.
investment tax credit less biased against certain kinds of
assets acquired by small commercial businesses that do not
use machinery or heavy equipment or work in industrial
buildings.
Such a credit could be structured to prevent its
This would mean a restructuring of the
use as a tax shelter.
tax credit(117) and, since it is of such limited use to small
business, it appears better to press for increased employment
credits.
Strangely, this is a tax advantage to which laborintensive small business seems to have given little thought.

NEW JOBS CREDIT

Small businesses need incentives, such
that are directly linked to
their operations and employment, rather than to credit and
capital formation. (118)
:

as an employment tax credit,

An employment tax would have positive effects on both
employment and aggregate spending by reducing real labor
costs, thus encouraging businesses to maintain or increase
employment.
The credit would also result in an increase in
aggregate spending if the reduced cost of labor leads to a
reduction in prices.
It was from such macroeconomic thinking
that the Government recommended the current jobs tax credit.
As one witness told Congress, the benefits of employment

105

credits to small business will far exceed the benefits from
an investment tax credit or its increase.
And firms can
adjust their use of labor to changes in the employment credit
rate faster than they can adjust capital to changes in the
investment tax credit. (119)

Currently, there are two employment tax credits to
employers.
Under the WIN program (Work Incentive Program Tax
Credit) 20 percent of the salary or wages paid for the first
12 months of work to someone hired under this program is
subtracted from the tax liability. There is a limit on the
amount of credit allowed.
The credit is permitted only if
the employment lasts for 180 days without termination.
But
the program, which is at first glance very attractive for the
very small businessman or woman, has been laden with such
complex and almost incomprehensible rules and administrative
requirements that most small businesses are afraid to even
attempt taking the credit. (120)
The Jobs Tax Credit is an incentive to create new jobs.
the tax credit is based on the Federal Unemployment Tax Act wages (FUTA) paid during a calendar year and
employers who do not pay this tax are not eligible to take
the credit
As the law now reads, for tax years beginning
with 1978, the credit for new jobs is 50 percent of the
amount of FUTA wages paid during the year which exceed 102
percent of the FUTA wages paid in 1977.
Married persons
filing separate returns have a credit limit of $50,000,
unless only one spouse has an interest in the business
creating the new job, and then that persons' credit limit in
any one taxable year is $100,000.
The only exception to this
limit is the additional ten percent credit permitted for
hiring handicapped employees.
In general

Once the employment job tax credit has been computed,
and it is $100,000 or less, the credit may be applied against
the taxpayer's tax but only after that tax liability, (i.e.,
the amount owed the government,) has been reduced by the
following credits: foreign tax credit, which does not pertain
to most small businesses; credit for the elderly; investment
credit, which would apply to only a handful of women-owned
small businesses; contributions to candidates for public
office; the general tax credit; and child care expenses.
There is nothing to prevent the credit from eliminating the
total tax liability.
In addition, if the credit exceeds the
tax due, it may be used in the 10-year carry-over formula
(three years carry back, beginning with the earliest year;
and several years carry forward)
If after this length of
time the credit has not been used up it is lost. (121)
.

106

.

)

The form of business organization also impacts upon the
For partnerships it
the new job tax credit is taken.
way
reduces the deduction for wages and salaries otherwise allowThe amount of the credit earned is
able to the partnership.
apportioned pro rata among the partners and is shown on
Schedule K-l of Form 1065.

Subchapter S corporations compute the dollar amount of
the credit in the same manner as partnerships. The amount
earned by the credit is then apportioned pro rata among the
shareholders on the last day of the tax year and is shown on
Schedule K-l of Form 1120S.
The amount of credit that each
shareholder may claim on his or her individual return cannot
exceed the amount of his or her individual tax liability.
The amount of credit allowed a partner or a shareholder of a
Subchapter S corporation is further limited to the proportionate part of the tax for the year allocable to the
taxpayer's interest in the partnership or Subchapter S
corporation from which the credit is der ived (122
.

Changes in the new jobs tax credit are needed.
This
credit would be of great benefit to small business in general
and women-owned businesses in particular.
It would increase
employment and might encourage many women-owned businesses
that do not now employ any full-time or part-time help to
begin to do so.
With employment experience women might
consider expanding operations, which they might not do if
they had to operate the business alone.
Secondly, the new
jobs credit is neutral, it does not discriminate in favor of
one type of business over another.
Suggestions for changes
are as follows:
1.

Eliminate the WIN jobs credit program
altogether

2.

Provide, instead, for one, permanent, new jobs
employment credit.

3.

Make the calculation of the credit clear and
simple and reduce the large administrative
burden and current costs of compliance.

—

MISCELLANEOUS THE ESTATE TAX
The Federal estate tax
contains no structural bias against women business owners as
compared to other business owners.
Indeed, the estate tax
marital deduction enables a husband who predeceases his
spouse to pass separately-owned property equal to the greater
of $250,000 or one-half of his adjusted gross estate to his
surviving spouse free of estate tax.
(This applies equally
to husbands inheriting from wives who predecease them; the
:

107

However, our discussion here
tax code makes no distinction.
focuses on the wife who inherits a business, since that is
Thus, where the subject of the
the topic of this report.)
marital bequest is a business interest, surviving wives may
be viewed by some as tax-favored when compared to non-spouse
recipients of a decedent's property. There are, however,
problems of applying the statutory structure which, as a
practical matter, may have an impact upon surviving wives.
These problems relate to the difficulty of determining, in a
spousal business, what precisely is to be included in a
deceased husband's estate.
The amount of the jointly-owned property included in the
estate of the first owner to die is determined by reference
to the proportion of the consideration for the acquisition of
the property supplied by the decedent.
Problems then arise
because title to property may be held in the name of the
decedent, but some other person may allege he or she was
actually the owner of all or a portion of it. Or tracing
contributions to determine the includible amount may often be
difficult, particularly where the contribution has its source
in services.

These problems exist whether or not the individuals
involved are spouses.
However, the issue may be exacerbated
in the spousal case because of the reluctance generally of
many state courts to hold, in the absence of a written
agreement enforceable under local law, that services rendered
by a wife constitute statutory "consideration" for the
acquisition of the property.
To illustrate, assume a husband establishes a sole
proprietorship or corporation.
He supplies all the initial
capital and takes title of all the business assets or stock.
Thereafter, his wife contributes her time, labor, and,
perhaps, some funds, but none of it is documented. On the
basis of the documented facts, if the husband dies first the
entire value of the business or stock is included in his
gross estate.
To reach any different result, the executor of
the decedent's estate must prove either that a specific portion of the business or stock was actually owned by the wife,
despite title being held by the husband, or that the business
or stock was jointly owned, in which case the consideration
supplied by the wife must be known to determine the amount
includable in the husband's estate.
If the executor prevails, the husband's estate is reduced, the estate tax is
reduced, and the wife has additional capital to maintain or
expand the business.

108

The answer to the problem is not to create special rules
for spouses, but rather to require that spousal businesses be
conducted on the same basis as businesses which involve

unrelated parties.
The important point to make for the purposes of this
report is to recommend that all practical means be used to
bring this estate tax information to the attention of women
who contribute funds, goods, or services to a business
operated jointly with their husbands, and to urge them to
properly document their interest against the possibility that
their husbands predecease them.
By thus reducing their
estate tax, they will protect their business capital (123)
.

Taxation to Encourage Venture Capital
One of the greatest problems for small business is
finding sources of capital, for start-ups and continued
operations, and for expansion, for without such funds it is
difficult to obtain significant credit financing. Therefore,
small business advocates join other business-people in
recommending changes in the tax code that will provide for
easier entry and withdrawal of venture capital and to
facilitate the internal generation of capital (124)
Given
this, small business is expected to react negatively to some
of the Administration's current tax proposals claiming they
do not provide enough incentives for venture capital.
.

The majority of small businesses have no direct need for
traditional venture capital and, in fact, venture capital has
never really flowed to small businesses.
As mentioned
earlier, venture capital firms prefer deals in the $125,000
and up range.
It appears that small business has confused
the situation that existed some time ago, when small business
was the recipient of venture capital investment, with the
situation today in which venture capital is going to smaller
companies which are founded by managers with experience in
large and sophisticated firms, and which very soon become
medium-sized. (125)
Therefore, tax aids to venture capitalists will provide little if any aid to today's small business.
According to many people, there is an element of the
chicken and the egg problem in the Administration's argument.
When capital gains were taxed at an appreciably lower rate,
and when capital losses could be more easily taken, and when
stock market regulation and economic conditions facilitated
stock issues from small businesses, there was venture capital
available.
It is unlikely that changing one of these adverse
conditions would markedly increase venture capital funds, a
more systematic approach would be necessary.
The fact that

109

.

such changes would make the rich richer is, perhaps, unfortunate from an equity standpoint, but it is the rich, and
only the rich, who can afford to take the risks inherent in
venture-type investments.
If small business is, indeed,
indispensible to the American way of life, mechanisms must be
found to make such businesses viable.
If rich people's money
is not to be used, then the Federal government will have to
fill the void by direct funding programs using general
revenues
In the interim, we feel that small business should be
concerned about obtaining commercial bank credit, and
financial and non-financial assistance, i.e management and
technical assistance from Federal programs.
Venture capital,
particularly that which it is hoped will be called out by
current proposed changes in the tax code, will not meet these
needs.
Only direct programs which help to develop human
resources can help now and such assistance can come from
either the public or the private sector.
.

In summary, the Administration believes that proposed,
changes in the capital gains and losses provisions of the tax
code would not increase the supply of the kind of venture
capital needed by most small businesses in the United States.
Therefore, solution to the problem of capital formation for
these small businesses must be found outside the tax
code (126) in direct aid that looks to the development of
human as well as economic capital.
The Study Team feels more
effort is needed to investigate alternatives and develop new
approaches to supplying funds for venture capital investment.

LOSSES ON SMALL BUSINESS STOCK
Special tax treatment
of losses on small business stock is designed to encourage
investment in small businesses by decreasing the risk of such
investment.
Section 1244 of the tax code specifies that such
stock must be common stock of a domestic corporation, issued
under a specific plan adopted by the company in return for
money or property but not for securities.
Only the original
individual owner is permitted to deduct an ordinary loss
rather than a capital loss. (127)
Ability to take the stock
loss as ordinary loss provides much more favorable tax
treatment than loss on the sale of other capital assets.
:

There are size limitations on eligibility written into
Section 1244.
The problem is that inflation has eroded the
dollar's value and effectively tightened these limits. The
Carter Administration realized that these limitations would
have to be changed in order to make it easier to attract
outside equity capital to small business and to decrease the
risk associated with failure. (128)
Reforms have been proposed
110

The corporation issuing stock eligible for Section 1244
benefits must be below a certain size, the total stock
offering plus the equity capital of the corporation may not
The President is proposing that the
exceed $1,000,000.
limit on the corporation's equity capital be
$1,000,000
completely eliminated, thus relaxing the size limits.
A corporation may only issue up to $500,000 worth of
The Administration proposals would
Section 1244 stock.
double this issue limit to $1,000,000.

Other technical requirements that needlessly restrict
the ability of the small business corporation to issue
Section 1244 stock would be eliminated. This is particularly
important because the requirements for getting tax benefits
from Section 1244 are unduly complex and failure to comply
strictly with these requirements results in denial of
ordinary loss treatment.
If the President's tax proposal is passed by Congress
the amount of ordinary loss that an individual may declare on
his or her income tax return would be doubled from $25,000
per person or $50,000 in the case of a joint return to
(Gains on Section 1244 stocks are
$50,000 and $100,000.
If Congress passes this proposal
treated as capital gains.)
it will be put into effect in the 1979 tax year.
The proAlthough
posal has no significant revenue effect. (129)
similar or identical versions of this proposal have circulated for several years, they have not until now received

strong Administration support. (130)

Women-owned corporations would benefit significantly
from this tax change.
The Study Team strongly supports
passage of this tax proposal and recommends review of this
provision and the impact of inflation upon it, so that
periodic changes in the limits permitted for loan loss can be
made if warranted.
Section 1244 is one of the best incentives for investment in small businesses and its benefits and
advantages should not be weakened.
Small Business
SMALL BUSINESS INVESTMENT CORPORATIONS
Investment Corporations, SBICs, are private corporations
licensed by the Federal Government in an effort to provide
more venture capital to small business.
Liberal tax concessions have been provided for both SBICs and their investors
in sections 1242 and 1243 of the tax code.
SBICs generally
make their investments by purchasing a convertible debenture,
that is, a bond which may at some point and under certain
:

111

.

conditions be converted into common stock.
This is the
method by which most SBICs make their investment secure,
because if the business is successful the SBIC can convert
the debenture to stock and receive tax-free dividends.
If it
is unsuccessful the debenture secures the SBICs rights as a
creditor.
The SBIC has a benefit both ways. (131)
SBICs are permitted to deduct from their income tax any
dividends received from the small domestic businesses in
which they have invested.
The exemption of these dividends
from taxation is a high incentive to investment.
In addition, the surtax on accumulated earnings that might be considered excessive by the IRS in other circumstances is not
applicable to SBICs.
Further, liberal bad debt reserve
privileges may permit a postponement of income taxes. And
finally, SBICs are not subject to the personal holding
company tax. (132)
The provisions in the tax code governing the gains and
losses of SBICs and SBIC shareholders, as differentiated from
shareholders in the small businesses themselves, are also
liberal and are structured so as to attract venture capital
to small business.
Any gain on the disposition, by sale or
other means, of small business company stock is taxed as
capital gain, that is 50 percent of the gain is taxable,
rather than the full amount.
The alternative capital gains
computation for corporations is also available -- 30 percent
of the net long-term (an asset held 12 months or more)
capital gain over the net short-term capital loss.
The
amount arrived at by whichever method is more favorable is
then added to shareholder individual income and taxed
accord ingly

SBICs and shareholders also are entitled to liberal tax
provisions governing operating losses as well as losses when
the small business stock is sold.
Net operating losses may
be carried back ten years.
Losses on the sale or disposition
of convertible debentures, stock or loans is taxed at the
more favorable ordinary loss rates, rather than at capital
loss rates.
All of the amount of the loss is deductible
against ordinary income and there is no limit on how much may
be deducted.
The SBIC stockholder may likewise deduct from
his or her income any losses suffered from the disposition of
SBIC stock. (133)

Despite these favorable tax provisions, SBA's Cffice of
Advocacy in June 1977 made a number of recommendations about
further liberalizing the taxation of SBICs.
SBA recommends
that the tax code be amended to allow a deduction for additions to loss reserves of SBICs for the equity portion of

112

their portfolios as an alternative to waiting until the
investment actually is sold or becomes worthless. This
provision is already permitted for additions to reserves for
losses from debt instruments.
The Treasury Department is of
the opinion that because of the special tax breaks SBICs
already have and the fact that their dividends from stock are
SBICs have stock, on
tax-free this provision is not needed.
some of which they take a loss and on others of which they
make a gain, but in the long run they must expect to profit.
Thus further tax incentives of this kind will not call out
more investment (134)
.

The Treasury Department feels that the liberal tax
treatment of dividends to SBICs and other corporations which
receive dividends from corporations, as opposed to an individual receiving a dividend from a corporation, eliminates, for
now, the need for this suggestion.
Under the current tax
code, dividends are taxed twice, once to the corporation
which made the profits and again to the individual who
received the dividend as income; so, the Government taxes
dividends to intermediary corporations very lightly, at a
rate not exceeding 7.2 percent.
If SBICs make money from
their investments and they receive lightly-taxed dividends,
there is no need for additional tax incentives to investment.
Most of the SBIC venture capital firms are owned by large
corporations or rich individuals and these corporations and
individuals already have enough incentives to invest under
the current tax code. (135)

CAPITAL GAINS
Many people believe that the capital
gains tax has become so high that it no longer serves as an
incentive to long-term capital investment. The movement of
the capital gains rates toward the level of tax rates on
earned income has altered the risk-reward relationship for
investors.
This is likely to have the greatest impact on
equity investment in small businesses where capital is
already scarce and the risk of loss is greatest. (136) If the
Administration's proposal is accepted by Congress, all capi tal gains will be taxed alike:
50 percent of half of the
gain will be included in gross income on which the taxpayer's
tax is based.
This income is then taxed at rates which
currently go as high as 70 percent but are proposed to be
reduced to 68 percent.
The alternative tax provision will be
eliminated.
That is, taxpayers whose capital gains exceed
$50,000 may no longer tax the first $50,000 at the rate of 25
percent.
Those taxpayers making occasional large capital
gains, over $50,000 in one year, may use income averaging to
achieve tax relief. (137)
:

113

,

But there are those who feel that this simplification of
the tax code may have an effect on the supply of venture
capital to small business , (138) and alternative suggestions
have been proposed to encourage investment in small business
by using a 25 percent tax rate on capital gains in a strictly
limited way.
The Treasury Department has not reacted positively to
these and similar recommendations regarding favorable tax
treatment for capital gains. The Department is of the
opinion that such tax advantages to the investor would aid
only the wealthy rather than benefiting the small businessperson and little additional venture capital would be
invested.
Also, Treasury believes that the additional amount
of capital forthcoming would be at a tremendous cost in tax
revenues.
Thus, it would be far cheaper for the Government
to give direct grants or provide special loan programs
e.g
establish special investment companies like SBICs)
Treasury
feels the tax code is not the place to provide incentives for
venture capital to small business. Women-owned businesses,
like all small businesses, would be better assisted by direct
loan programs rather than through changes in the tax
code. (139)
(

.

.

What small businesses need is credit, tax changes will
not encourage banks to lend if they do not think the venture
is profitable.
And, at the moment, most small businesses do
not have problems getting credit for viable, profitable
needs.
The main area to be addressed, then, is start-up capital
and some form of investment credit for that factor of production which, in small business, is intensive
labor.
A new
jobs tax credit has been suggested to assist small business.

—

But what small businesses really need is simplification
of the paperwork involved in tax compliance.
They need
simpler tax forms and procedures.
In 1964 it was noted that
the small business was becoming a free tax-collecting agent
for the Government with the costs of this collection being
paid directly by the firm.
Recordkeeping and reporting were
considered complicated and burdensome 15 years ago and matters have only become worse.
Many firms find it necessary to
turn their tax compliance work over to a bookkeeper or
accountant, many of whom are not sufficiently skilled in
application of the tax code and who only serve to increase
the cost of compliance.
Many small businessmen and women
lack a general knowledge of their tax responsibilities,
according to the study done 15 years ago; and to a great
extent this was due to an unwillingness or reluctance to make

114

the effort to become better informed about tax matters.
There was seldom any evidence of organized planning to meet
the tax problem in a better fashion; in seeking tax help the
cheapest help was equated with the best help.

What most small businesses need to know is how to find
competent help. The two major tax problems of small business
are lack of knowledgeable personnel and inadequate accounting.
The businessman or woman also needs to pay better
attention to the planning phase of taxes, particularly to
State and local taxes, which, because they are deductible
from the Federal tax, are not deemed to constitute a full
burden.
The solutions to the high costs of compliance are not
simple.
Many of the solutions to these problems are not
found in the tax code itself, nor even in the regulations,
but in training.
Again, the answer is direct assistance.
The Treasury Department has proposed that the IRS, in
conjunction with the Small Business Administration and the
Commission on Government Paperwork, prepare a series of
proposals that will:
1.

reduce the number of forms that are required,
especially the different types of forms;

2.

simplify those forms that are necessary;

3.

provide free tax compliance seminars;

4.

set up a program whereby retired small
businessmen/women and accountants can assist
the small business owner; and

5.

clarify the regulations under which the tax
laws are implemented.

Most small businesses fill out income tax forms that are
not complicated.
What is complicated is understanding the
regulations which govern deductions and credits and the ways
by which it is required they be computed .( 140
This type of
assistance can be made available to small business now; major
changes in the tax code would require a great deal of time
and political activity.
)

115

CONCLUDING REMARKS
We started this paper with a
description of sociological conditions which have produced a
disparity in the distribution of economic rewards between men
The policy usefulness of much of the material
and women.
primarily
contained in our report may be less than optimal
due to the almost total absence of hard data on women business owners.
Many of our recommendations are aimed at
treating the symptoms of the problem, not the problem,
itself.
More direct aid is essential for women entrepreneurs
This
until they can compete on an equal footing with men.
will not, however, do much to change the underlying societal
The
belief that women do not make good business people.
Federal government can do a great deal to change this image
through its programs, but it will require that more affirmaB.
tive steps be taken than has been the case in the past.
F. Skinner believes that as one changes one's behavior, a
It
change in attitude will occur to match the new behavior.
is certainly worth a try.
;

—

116

T E S

In order to elicit information from women entre1.
preneurs, the Task Force undertook a special inquiry so that
women business owners today could provide a picture of how
Due to the short time frame of the the
they see themselves.
Task Force, public hearings were not possible, therefore, an
inquiry form was distributed through the regional offices of
the Department of Commerce and the Small Business Administration, and women business and professional associations to
In addition, public service
elicit volunteer responses.
announcements on national and local radio stations were used
to obtain this volunteer input.
This approach represented
the most effective way of getting the greatest number of
responses in the shortest time.
It should be noted that the information from these
volunteer resources does not approximate scientific sampling.
Therefore, this information cannot be compared to the existing data from the Bureau of the Census or the Bureau of Labor
Statistics, nor can it be generalized to the population of
all women entrepreneurs because of its public inquiry format.
However, it has proven very useful in illuminating some of
the barriers women entrepreneurs believe they face.
2.
U.S. Department of Commerce, Situation Report
(Washington, D.C., November 1977), p. 1; U.S. Small Business
Administration, Office of Advocacy, The Study of Small
Business, (Washington, D.C., June 1977), p. v; U.S. Congress,

117

.

House of Representatives, Women in Business A Report of the
Subcommittee on Minority Enterprise and General Oversight of
the Committee on Small Business, No. 95-604, 95th Congress,
1st Session, 1977, pp. 2, 4.
,

3
Women in Business Subcommittee Report p 7 U.S.
Congress, House of Representatives, Women in Business
Hearings before the Committee on Small Business, Subcommittee
on Minority Enterprise and General Oversight, April, May,
June 1977, pp. 47, 101; Simone de Beauvior, The Second Sex
translated by J.M. Parshley (New York: Vintage Books, 1974),
passim see especially pp. 663-664, 666-668, 694, 780;
Phyllis Chesler and Emily Jane Goodman, Women, Money and
Power (New York: Bantam Books, 1976), pp. 11, 223, 252;
Monthly Labor Review 97 (May 1974): 40; Eleanor Brantley
Schwartz, "Entrepreneurship:
A New Female Frontier," Journal
of Busines s V (Winter 1976): pp. 62, 66, 67, 69; "A Close-up
of Women in the U.S.," U.S. News and World Report, Decem,

,

.

;

,

,

,

ber 8,

1975, p.

73.

4.
House of Representatives, Women in Business
Hearings, 1977, pp. 47, 101; Subcommittee Report 95":r6"04, pp.
7, 14, 23; Helen S. Astin, Nancy Suniewick, and Susan Dweck,
Women: A Bibliography on Their Education and Careers (New
York: Behavioral Publications, 1974), pp. 1, 137, 139.
,

57;

5.
U.S. News and World Report
Astin, et. al.; p. 45.

,

December

8,

1975, p.

6.
Margaret Hennig and Anne Jardim, The Managerial
Woman (Garden City, New York: Anchor Press 1977), p. 109;
Letter from Margaret Ann Watson to Patricia M. Harvey,
March 3, 1978, pp. 3-4; See also Astin, et. al. pp. 62, 190,

202.
7.
Astin, et. al
p. 128; Wyndam Robertson, "The Ten
Highest-Ranking Women in Big Business," Fortune April 1973,
p. 87; "Still More Room at the Top," Newsweek
April 29,
1974, pp. 74, 79; Schwartz, p. 71.
.

,

,

,

Francine Blau Weisskoff, "Women's Place in the
Labor Market," The American Economic Review, Papers and
Proceedings LXII (May 1972): 161; Elizabeth Waldman and
Beverly J. McEaddy, "Where Women Work - An Analysis by
Industry and Occupation," The Monthly Labor Review 97 (May
1974): 3, 9; Beatrice G. Reubens and Edwin P. Reubens, "Women
Workers, Nontraditional Occupations, and Full Employment,"
Paper presented in U.S. Congress, Joint Economic Committee,
Subcommittee on Economic Stabilization, American Women

118

.

.

Workers in a Eull Employment Economy A Compendium of Papers
95th Congress, 1st Session, 1977, p. 106; Council of Economic
Advisors, Economic Report of the President 1973
,

,

,

p.

90.

9.
It is interesting to note that the concentration of
women-owned businesses into a few industries closely
parallels the traditional or female occupations into which
For example, more women-owned
most women are clustered.
businesses are in services than in any other industry and the
service industry continues to rank first as the most
important employer of women.
The linkage between employment
and business enterprise is seen on the low side as well;
there are few women-owned businesses in those industries in
which few women are employed.

10.
1977, p.

Reubens and Reubens, Joint Economic Committee,
106.

11.
U.S. News and World Report , December 8, 1975,
61; Barbara B. Reagan, "De Facto Job Segregation," Joint
Economic Committee, 1977, p. 96; "Women Seek Equal Chances in
Business," Commerce Today II (July 10, 1972): 5-6; Astin, et.
al., pp. 133, 210; Schwartz, p. 62.
p.

12.
Reagan, Joint Economic Committee, 1977, p. 93;
Reubens and Reubens, Joint Economic Committee, 1977,
pp. 117, 124-125; Mary Hamblin and Michael J. Prell, "The
Incomes of Men and Women: Why Do They Differ?" Federal
Reserve Bank of Kansas City, Monthly Review (April 1973):
9-11; Women's Bureau, U.S. Department of Labor, The Earnings
Between Women and Men 1976, pp. 1, 6.
,

13

Ibid

,

pp.

1

,

6

Victor R. Fuchs, "Recent Trends and Long-Run
Prospects for Female Earnings," The American Economic Review,
Papers and Proceedings LXIV (May 1974): 236-242; Victor R.
Fuchs, "Women's Earnings:
Recent Trends and Long-Run Prospects," Monthly Labor Review 97 (May 1974): 23-26; Council of
Economic Advisors, Economic Report of the President 1973, p.
14.

,

106.
15.
Fuchs, The American Economic Review pp. 236-242;
Reubens and Reubens, Joint Economic Committee, 1977, pp. 121,
,

124.

p.

16.
70.

U.S. News and World Report, December 8,

1975,

119

17.

Ibid

,;

Bureau of the Census, Statistical Abstracts
1977 p. 54 0.

of the United States,

,

18.
U.S. News and World Report
December 8, 1975,
Chesler and Goodman, p. 52, 57 note, 58; "Lady
Capitalists," Wa 1 1 Street Journal 10 January 1965, p.

p.

,

70;

,

1.

19.
Chesler and Goodman, p. 51; Paul Nelson, The Joy of
Money (New York: Bantam Books, 1977), p. 3.
20.

Chesler and Goodman, pp.

51,

Nelson, p.

53;

3.

21.
U.S. News and World Report
December 8, 1975,
70; Chesler and Goodman, p. 49; Wall Street Journal
,

p.

,

January 195G,

p.

U.S. News and World Report

22.

10

1975,

p.

1.

December 8,

,

70.
23.
Robertson, Fortune April 1973, p. 86; Elisabeth
Anthony Dexter, Colonial Women of Affairs
Women in Business
and the Professions in America before 1776
Clifton, New
Jersey, Augustus M. Kelley, reprint in 1972 of 1931 edition;
and Career Women of America 1776-1840
Clifton, New Jersey,
Augustus Kelley reprint in 1972 of 1950 edition.
,

:

,

,

24.
James W. Schreier, The Female Entrepreneur:
A
Pilot Study (Milwaukee:
The Center for Venture Management,
March 1975), a survey of fourteen women business-owners in
Milwaukee, Wisconsin; Schwartz, pp. 47-76.

25.
Schwartz, pp. 47-59, 65-68, 71; Schreier, pp. 3-4,
10-11, 13-14; Mary R. Sumner, "Women in the Business and
Office Occupations as Depicted in the American Novel:
1890-1950" (Ph.D. Dissertation Rutgers University, the State
University of New Jerse-y, 1977), abstracted in Dissertation
Abstracts January 1978, p. 3890-A; "Up the Ladder," Business
Week Executive Portfolio, 1976, pp. 152, 159.
6,

,

2 6.
Sc hreier, pp. 8-9, 12; Joan Libman, "Going It
Alone:
Fema le Entrepreneurs Like Del Goetz Make 'Man's Work'
Pay Off,"
W'all Street Journal
2 2 August 1975, p. 19; Hennig
and Jardim, pp
pp. 27, 29; Schwartz, p. 68.
,

27.
68;

120

Hennig and Jardim, pp. 74, 112-113; Schwartz, pp
Schreier, p. 11.

28.
Federal Home Loan Bank Board, "Report to the Task
(Washington, D.C., 1978),
Force on Women Business Owners"

pp.

3-6.

29.
"Competing with the Giants," Dun's Review 11
46-52.
(October 1977)
:

30.

The description of the business should include:
the business
primarily merchandising, manufacturing, or
1.

The type of business:

Is

service?
The status of the business:
Is it a
start-up? An expansion of a going concern?
take-over of an existing business?
2.

A

The legal organization of the firms:
Sole proprietorship, partnership, corporation
3.

or Sub-chapter S corporation?
4.
Why is the business going to be
profitable?
5.

When will

(did)

the business open?

6.
What hours of the day and days of the week
will it be open?

If

it is a seasonal business,

or if the
hours will adjust seasonally, the seasonality
should be reflected in replies to 5 and 6.
7.

For the new business the entrepreneur must go
through a critical self examination.
For instance:
1.

Why will she be successful in this business?

2.

What is her experience in this business?

3.
Has she spoken with other people in this kind
of business?
What was their response?

Has she spoken with prospective lead suppliers
to find out what managerial and/or technical help

4.

they will provide?

121

.

5.

Has she asked about trade credit?

6.
If she will be doing contract work, what are
the terms?
Reference any firm contract or letters
of interest, and include it as a supporting

document
7.

31.

How will she offset slow payment by customers?

Insurance professionals can assist business owners

in developing a four-stage strategy of "risk management" as
follows:
All known risks are identified, these are the
(1)
various property and liability losses which might be incurred; (2)
the likelihood of occurrence and potential size
of each possible loss is estimated; (3) ways to reduce the
risk or control severity of the potential loss are developed;
and (4) the best way to protect against the loss using
insurance as the mechanism is defined.
Warren C. Leoy,
"Insurance for the Small Business," Credit and Financial
Management 78 (October 1976): 33.

Agents are classified as (1) direct writers, (2)
captive agents and (3) independent insurance agents. Without
defining each, suffice to say that agents are state licensed
and sponsored by an insurance company.
Brokers are also
state licensed; however, they are independent of any
particular insurance company affiliation.
Brokers shop the
various companies for the best policy to meet their clients
needs, and generally service commercial accounts.
32.

1

Property insurance, often referred to as the fire
policy, generally covers fire, windstorm and hail, smoke and
vandalism.
Liability insurance generally compensates a third
party for an injury, inconvenience or loss he or she has
suffered.
Liability insurance includes workmen's
compensation.
33.

34.
"Insurance and Women in North Carolina," Report of
the Task Force on Sex Descr imination in Insurance to John
Randolph Ingram, Commissioner of Insurance, 1976, p. 27.
35.

Ibid.

36.
"Federal-State Regulation of the Pricing and
Marketing of Insurance," A Report to the Task Force on
Antitrust Immunities of the Economic Policy Board Edited by
,

122

.

(Washington, DC: The American Institute for
Public Policy Research, 1977).
Paul W. MacAvoy,

37.
Insurance regulation was a state matter until 1944
when the Supreme Court held that the sale of property and
casualty insurance was inter-state commerce and subject to
(United States v.
the provision of federal antitrust laws.
South-Eastern Underwriters Association, 322 U.S. 533 (1944).)
This decision made illegal the private rate-fixing agreements
which had determined prices in the property/casualty field,
and it raised questions as to the validity of the various
types of state regulation of insurance.

The following year Congress enacted the McCarranAct which ratified the states' power to regulate
Ferguson
insurance, absent specific federal insurance legislation? and
provided an antitrust exemption for private concerted pricefixing activities which were subject to state regulation. The
antitrust exemption was justified on the ground that competitive pricing in the insurance field would lead to ruinous
competition and the demise of many insurance companies,
thereby denying the public the benefit of a reliable insurance mechanism.
Thus, all states adopted regulatory schemes
relating to property/casualty insurance rates. While some
states set the rates themselves, most adopted "prior approvStill other
al" systems which feature private rate bureaus.
states adopted "open competition" systems which allow cartel
rate setting but enable insurers to price independently with
relative ease.

Nancy L. Ross, "Small Business Capital Investment
Aid Proposed," Washington Post 11 February 1978, p. C8.
38.

,

John P. Birkelund, "Capital Gap:
A Big Problem for
Small Firms," Dun's Review 109 (February 1978): 81-82.
39.

Ted Baron, "The Smaller Company's Struggle for
Investment Dollars," Public Relations Journal 32 (April
1976): 30-32ff.
40.

41.

Birkelund, op. cit

42.

Ross, op. cit.

123

43.

Dun's Review 109

44.

Ibid.

(February 1977):

52-54ff.

45.
U.S. Department of Commerce, Women-Owned Businesses
Government Printing Office, 1976).
1972 (Washington, D.C.:
(Hereinafter cited as Commerce Report .)

46.

Ahead,"

Silk, Leonard, "Study for Congress:
New York Times 9 February 1978.

Slower Growth

,

47.
"The State of Small Business, A Report to the
President of the United States," Center for Small Business of
the Chamber of Commerce of the United States, January 1978.

48.
Report of the SBA Task Force on Venture and Equity
Capital for Small Business U.S. Small Business Administration, Washington, D.C., January 1977.
,

49.
"Fitting GAAP to Small Businesses," Charles Chagen
and Benjamin Benson, Journal of Accountancy LXV (February
1978); 46-51.
50.
J. Fred Weston and Eugene
Finance 5th ed
(Hensdale, Illinois:
.

p.

P.

Brigham.
Managerial
Dryden Press, 1975),

830.
51.

SBA, The Study of Small Business

52.

Report of the SBA Task Force on Venture and Equity

Capital

,

p.

3.

.

53.

Ibid.

,

p.

1.

54.

Ibid.

,

p.

3.

55.
Patricia M. Cloherty, Statement Before the
Committee on Small Business, United States Senate,
January 23, 1978.

124

:

Margaret J. Gates, "Credit Discrimination Against
Women," Vanderbilt Law Review XXVII (April 1974): 410;
Barbara J~ Klein, "The Equal Credit Opportunity Act
Amendments of 1976," Catholic University Law Review XXVI
(Fall 1976): 151; Donna Dunkelberber Geek, Equal Credit: You
The Equal Credit Opportunity Act,"
Can Get There From Here
North Dakota Law Review LII (1975-1976): 382-383; Chesler and
Goodman, p. 170.
56.

—

57.
Laurie D. Zelon, "Equal Credit: Promise or
Reality?" Harvard Civil Rights-Civil Liberties Law Review XI
(1976): 188, 195; Gates, p. 409; Geek p. 388; Maureen Ellen
Lally, "Comments: Women and Credit," Duquesne Law Review XII

(Summer 1974)

:

878,

889.

58.
Gates, p. 412; Chesler and Goodman, p. 171;
National Commission on Consumer Finance, "Hearings and Final
Report," 1972; U.S. Congress, Joint Economic Committee,
Economic Problems of Women 93rd Congress, 1st Session,
Hearings, July 1973, Part I, pp. 195-202; Dennis Kendig,
"Discrimination Against Women in Home Mortgage Financing,"
Yale Review of Law and Social Action III (Winter 1973)
166-176; "Loans to Women
A Case For Questioning Lending
Criteria," Savings and Loan News January 1974, pp. 36-42;
Jane Roberts Chapman, "Women's Access to Credit," Challenge
XVII (January-February 1975): 40-45; Geek, p. 383.
,

—

,

59.
JEC, Economic Problems of Women, Hearings, Part I,
202-210, Part III, pp. 572, 587; Eugene Adams, "Bankers
pp.
Urged to Reconsider Assumptions Regarding Women and Credit,"
American Banker June 25, 1973, pp. 12, 22, 26.
,

60.
David H. Swinton, "Factors Affecting the Future
Economic Prospects of Minorities," The American Economic
53-58.
Review Papers and Proceedings LXV (May 1975)
:

Zelon, pp. 186, 194, 202-205; Gates, p. 412; Geek,
Connie Walker Core, "Consumer Protection: The
pp.
Equal Credit Opportunity Act, Oklahoma Law Review XXVII
(Summer 1975):
579; Lily Pilgrim, "A Banker's Primer on
Credit Discrimination Against Women," The Banking Law
king
=T577
Journal XCIV (April 1977): 349; Kelin, pp. 156-157, 163
61.

387,

390;

.

125

June Kronholz, "Women Complain That New Equal
Credit Law, Applied Unevenly, Enforced Haphazardly," The Wall
Street Journal 21 January 1977, p. 32+? JEC Economic
Problems of Women pp. 202, 208-210.
62.

,

,

,

63.

Chapman, p. 40.

64.
John Charnay, "Women's Banks Not For Women Only,"
The Bankers's Magazine 160 (Autumn 1977): 103-104, 110;
conversation with regulatory agencies.

65.
Jenny Tesar, "Anti-discriminatory Women's Banks,"
Banking LXIX (October 1977):
66, 72, 77; "Women's Bank: A
Special Interest Grows," James Rousemanere, The Baltimore
Sun 11 December 1977, p. K-7.
,

,

66.

Ibid

;

.

Tesar, pp. 66, 72.

67.
"Now a Rush by Women to Start Their Own Banks,"
U.S. News and World Report , October 27, 1975, p. 62.
68.
69.
8,

Tesar, p. 77; Charnay, p. 110.

"Financial Trouble for Feminists," Time

1976, p. 99; Charnay, p.

,

November

110.

70.
Time , November 8,
11 December 1977, p. K-7.

1976, p.

99;

The Baltimo re Sun,

71.
Paula Nelson, The Joy of Money (New York: Bantam
Books, 1977), p. 81.

72.
U.S. Treasury Department, Internal Revenue Service,
Tax Guide for Small Business, 1978 Edition, pp. 1, 3, 150.
73.
Literature search "for Treasury work for Task Force;
Statement of the Honorable Frederic W. Hickman before the
Senate Select Committee on Small Business, February 20, 1975,
U.S. Treasury Press Release, p. 5; Conversation with Office
of Tax Policy, U.S. Treasury Department, February 1978.

74.

126

Ibid.

;

Hickman, p.

4.

Statement of William M. Goldstein before the Senate
Select Committee on Small Business and the Subcommittee on
Capital Markets, November 13, 1975, U.S. Treasury paper, p.
A-3; Coversation with Office of Tax Policy, March 1978.
75.

76.

Hickman, pp. 3-4,

77.

Task Force Questionnaire.

78.

Tax Guide

,

p.

6.

3.

79.
Small Business Administration, The Study of Small
Enterprise in the Economy, Summary June 1976, p. 6 (hereinafter cited as SBA, Summary)? Commerce Report p. 4.
,

,

274.

80.

Commerce Report

,

pp.

4,

81.

Commerce Report

,

pp.

239,

268;

SBA, Summary

,

p.

6.

Tax Guide passim; Ray M. Sommerfield, Federal
82.
Taxes and Management Decision (Homewood, Illinois: Richard D.
Irwin, 1974)
pp. 43-44; U.S. Senate, Select Committee on
Small Business, "1978 Tax Proposal Relating to Small
Business; Analysis of Administration's 1978 Small Business
Tax Proposals and Certain Alternative Approaches," February
24, 1978, pp. 10-10A (hereinafter referred to as Select
Committee on Small Business, "1978 Tax Proposals Relating to
Small Business"); U.S. Treasury, The President's 1978 Tax
Program, January 1978, Part I, Table 11.
,

,

83.

Tax Guide

,

pp.

140,

147,

149.

84.
Commerce Report p. 238, (Self-employment taxes for
Social Security are not deductible and are not creditable
against taxes.)
,

85.
86.
p.

Tax Guide

Commerce Report, pp. 241, 274-277; Tax Guide,

,

p.

4,

122.

121.
87.

Sommerfeld, p. 44; Tax Guide

,

passim.

88.
Statement of Emil M. Sunley before the Tax Force on
Tax Expenditures of the House Budget Committee, February 23,
1978, U.S. Treasury News Release, p. 2.

127

.

Commerce Report p. 8; Tax Guide pp. 3-4; U.S.
Treasury, The President's 1978 Tax Program: Detailed
Descriptions and Supporting Analyses of the Proposals,
January 1978, p. 264 (hereinafter referred to as 1978 Tax
Program: Proposals
89.

,

,

)

90.

p.

Tax Guide

,

pp.

4,

136; Sommerfeld, p.

91.
1978 Tax Program: Proposals, p.
136; Sommerfeld, pp. 45-46.
92.

Commerce Report

,

pp.

4,

7,

21,

38.

264; Tax Guide,

274-277.

93.
Sommerfeld, p. 39; Conversation with Office of Tax
Policy, March 1978.
94.
Goldstein, pp. 7, A-4 Hickman, pp. 10-11; U.S.
Treasury, The President's 1978 Tax Program, January 1978,
Part I, p. 21; Fact Sheets 30 and 33 (hereinafter cited as
The President's 1978 Tax Program)
;

.

Arthur Andersen & Co., United States Tax Briefs,
January 1978, p. 2; The President's 1978 Tax Program
95.

,

pp.

5-6,

19.

96.

Tax Guide

97.

Ibid.

98.

SBA, Summary, pp.

99.

Tax Guide

,

,

pp.

,

p.

4.

138-139, 177.

pp.

10,

4-5,

16.

78-79.

100. U.S. Congress, House Of Representatives, Committee
on Ways and Means, Subcommittee on Oversight, Hearings,
Problems of Low-Income Taxpayers and Small Businesses with
the Intenal Revenue Service, May 12, 1977, p. 94 (hereinafter
referred to as House, Committee on Ways and Means, Hearings ,
May 12, 1977); SBA, The Study o f Small Business, pp. 21,

84-85.

128

,

101. SBA, The Study of Small Business
p. 31; House,
Committee on Ways and Means, Hearings May 12, 1977, pp.
,

,

61-62, 67-71, 82,

84-85, 91-92.

102. Conversation with Office of Tax Policy, March 1978;
SBA, The Study of Small Business p. 35.
,

12,

103. House Committee on Ways and Means, Hearings
1977, pp. 63, 74, 85, 90.

SBA, The Study of Small Business

104.

,

p.

,

May

35.

House Committee on Ways and Means, Hear ings, May
12, 1977, pp. 68, 75; SBA, The Study of Small Business,
p. 26; Select Committee on Small Business, " 1978 Tax
Proposals Relating to Small Business," pp. 9, 38; Report of
the SBA Task Force on Venture and Equity Capital for Small
Business pp. 9-10.
105.

106. National Tax Research Committee, Taxation and
Enterprise New York, 1938, pp. 59-61; Select Committee on
Small Business, "1978 Tax Proposals Relating to Small
Business," pp. 10B, 11, Appendix IV; The President's 1978 Tax
Program, Part I, p. 5.
,

107. U.S. Treasury Small Business Advisory Committee on
Economic Policy, "Report of Recommendations to the
Secretary," December 1976, p. 3; House Ways and Means
Committee, Hearings May 12, 1977, p. 62; U.S. Senate "Small
Business Venture Capital Act of 1977," S. 1815, June 30,
,

7-8.

1977, pp.

108. Tax Guide
pp. 44-47; Hickman, Appendix; The
President's 1978 Tax Program Fact Sheet 33, p. 2.
,

,

109. Tax Guide
p. 46; The President's 1978 Tax Program;
Proposals pp. 20, 268-269; Statement of Donald C. Lubick
before the Senate Select Committee on Small Business,
February 18, 1978, U.S. Treasury Press Release, pp. 6-7;
House, Ways and Means Committee, Hearings May 12, 1977,
,

,

,

pp

.

6

3-72.

129

.

110. The Presidents' 1978 Tax Program: Proposals,
pp. 20, 268? House Ways and Means Committee, He arings,
May 12, 1977, pp. 63, 72.

pp.
pp.

111. The President's 1978 Tax Program: Proposals,
268-269; The President's 1978 Tax Program , Part I,
2 , 21
20,

112. Treasury Small Business Advisory Committee on
Economic Policy, p. 2; Report of the SBA Task Force on
Venture and Equity Capital for Small Business p. 9; House
Ways and Means Committee, Hearings May 12, 1977, p. 73;
Senate Bill, S. 1815, pp. 12-13; Select Committee on Small
Business, "1978 Tax Proposals Relating to Small Business,"
pp. 44-50; SBA, The Study of Small Business
pp. 28, 84.
,

,

,

113.

Conversation with Office of Tax Policy, March 1978.

114. SBA, Summary p. 17; Hickman, p. 18; Statement of
Armand J. Thieblot, U.S. Senate, Select Committee on Small
Business, Impact of the Administration's Tax Stimulus Package
on Small Business
Hearings, 91st Cong., 1st. Sess., February
,

,

22,

1977, pp.
115.

111.

106,

Hickman, p. 18; Commerce Report

p.

,

241.

116. The President's 1978 Tax Program, Part I, p. 20;
Fact Sheet 31; The President's 1978 Tax Program: Proposals,
pp. 258-259; conversations with Office of Tax Policy, March
1978; Arthur Andersen & Co., United States Tax Briefs,
January 1978, p. 3.
117. SBA, The Study of Small Business
pp. 27, 84;
Conversation with Office of Tax Policy, March 1978.
,

118.

Hearings

,

U.S. Senate Select Committee on Small Business,
February 22, 1977, pp. 106, 111.

119. Statement of G.C.

Fethke, Ibid

.

120. Tax Guide
p. 149; Select Committee on Small
Business, Hearings February 22, 1977, p. 106.
,

,

121. Tax Guide
122.

130

Ibid

.

,

p.

,

pp.

148.

147,

149.

123.

Conversation with Office of Tax Policy, March 1978.

124.

SBA, The Study of Small Business

,

pp.

iii,

15-21,

30-35.
125. Conversation with Office of Tax Policy, March 1978;
Conversation with Office of Capital Markets Policy, March

1978.
126.

Ibid

.

The stock cannot be owned by an estate, trust, or
corporation and subsequent owners are not entitled to the
advantages of Section 1244.
Should small business stock be
owned by a partnership, the owner must have been a partner
when the stock was issued and remained one until the loss was
sustained in order to add his/her distributive share of the
loss to his/her individual loss before applying the ceiling
on the amount which may be taken as a loss.
However, if the
partnership distributes the stock to the partner, the stock
loss no longer qualifies for ordinary loss but must be taken
as a capital loss.
Tax Guide p. 109; House, Ways and Means
ings
May 12, 1977, p. 94.
Committee, Hear
127.

,

,

128. The President's 1978 Tax Program: Proposals, IVC-4,
271-272; SBA, The Study of Small Business p. 19; Lubick,

pp.
p. 8.

,

129. Tax Guide
p. 109; The President's 1978 Tax
Program: Proposals ICV-4, pp~ 271-273.
,

,

130. Goldstein, pp. 14-15; SBA, The Study of Small
Business, pp. 19, 34, 86,; House, Ways and Means Committee,
Hearings, May 12, 1977, p. 94; "Small Business Venture
Capital Act of 1977," S. 1815, p. 14.
131.

Conversation with Office of Tax Policy, March 1978.

132. Tax Guide
p. 126; Richard C. Osborn, "The Supply
of Equity Capital by the SBICs," Quarterly Review of
Economics and Business 13 (Spring 1973): 69.
,

133.

Ibid.

;

Conversation with Office of Tax Policy;

Hickman, Appendix.

131

134. SBA, The Study of Small Business, pp. 33, 65;
Conversation with Office of Tax Policy, March 1978.
135. Conversation with Office of Tax Policy, March 1978,

136. Report of the SBA Task Force on Venture and Equity
Capital for Small Business pp. 9-10.
,

137. The President's 1978 Tax Program , Part I, pp. 2,
13; Fact Sheet 17, pp. 1-2; The President's 1978 Tax Program:
Proposals pp. 19, 28.
,

Select Committee on Small Business, "1978 Tax
Proposals Relating to Small Business," p. 52; Conversation
with William Penick, partner, Arthur Andersen & Co., March
138.

1978.
139.

Conversation with Office of Tax Policy, March 1978.

140. Fred J. Mueller, "Burden of Tax Compliance Keeps
Mounting for Small Business Firms," The Journal of Taxation
XXI (December 1964): 378-381.

132

.

BIBLIOGRAPHY

Women business owners are a largely unknown group in the
There is little information on women entrepreliterature.
neurs and women-owned businesses; there is even less on the
difficulties women have in obtaining credit and forming a
large enough capital base on which to build or expand a small
business
An in-depth search by the Credit and Capital Formation
Study Team in the Library of Congress found no books or
monographs on the subject. A thorough search was also made
in three periodical indices: Public Affairs Information
Service (PAIS) (1960-1977)
Business Periodical Index (19601977), and the Journal of Economic Literature (1972-1977).
Many cross references were tried, such as credit, banking,
In
entrepreneurs, loans, small business, and women.
addition, the Federal Reserve Board and all twelve Federal
Reserve Banks were contacted and the Center for Women Policy
Studies graciously permitted a search of their files. Very
few journal articles, monographs, or government publications
relating directly and at length to women and commercial
loans, bonding, insurance, or venture capital and financing
or to articles on taxation and small business were found.
,

The best sources listed below had little more than a
cursory reference to the problems of women business owners in
obtaining financing.
Many are superficial.
The better articles relate to the problems of credit, financing, insurance,
etc., of small businesses in general.

133

"

Finally, the few excellent articles and other sources on
the Equal Credit Opportunity Act presented a thorough analysis of the whole issue of credit discrimination, but they
deal primarily with consumer credit.
A word about tangential material is in order.
Employment stability and level of earnings are factors in determining credit worthiness. Both the education and socialization of women and the impact of job segregation, due to
discrimination and role differentiation on the earnings of
women, have a varied and excellent literature.
These issues
have been well and thoroughly analyzed, but these references
have been excluded because they lie outside the specific
issues of credit and capital formation.

BIBLIOGRAPHIES
Center for Women Policy Studies.
"Bibliography on Women
Entrepreneurs," 1974. 7 pages.
"Women and Credit: An Annotated Biblioqraphv.
1974.

27 pages.

Hughes, Marija Matick.
The Sexual Barrier
Washington,
D.C.: Hughes Press, 1977.
843 pages.
Very
comprehensive bibliography, includes a separate section
on credit.
.

SMALL BUSINESS IN THE ECONOMY AND THE ACCESS TO CREDIT
Books
Bangs, David H. Jr., and William R. Osgood.
Business
Planning Guide
The Business Assistance Monograph
Series.
The Federal Reserve Bank of Boston, 1976.
.

134

Unpublished Papers
AICPA, American Institute of Certified Public Accountants.
"Businessman's Information Guide." Adapted and
published by the Committee on Economic Opportunity of
AICPA, 1972.

Journal Articles
Alexander, D.H. "Dilemma of the Small Businessman Or How to
Get That Loan." Credit and Financial Management 79
8-9.
(January 1977)
,

,

Boyer, Robert.
"How to Help Your Client Obtain A Bank Loan."
The Journal of Accountancy 144 (October 1977)
78-85.
,

,

—

Delman, Maury.
"Pitfalls Why Some Small Businesses Have
Failed." American Legion Magazine XC (February
,

1971)

,

24.

Haskell, Nancy.
"What to Look for When Extending Credit to
a Small Business."
Credit and Financial Management
78 (October 1976), 33, 38.
,

Redding, Harold T.
"The Fair Credit Reporting Act and NonConsumer Credit Information." The Journal Of
24-31.
Commercial Bank Lending
LIV (September 1971)
,

,

"Small Business Financing: Corporate Manufacturers." The
8-22.
Federal Reserve Bulletin XLVII (January 1961)
,

,

"Small Business:
The Maddening Struggle to Survive."
96-104.
Week (June 30, 1975)

Business

,

Ulrich, Thomas A. and Herbert S. Cassel.
"Factors Influencing
the Extension of Bank Credit to Small Business."
Journal
28-34.
Of Small Business Management, XII (January 1975)
,

"Increasing the Probability of Obtaining Bank
Credit. " Business and Economic Dimensions XI
6-9.
(September/October 1975)
,

,

Government Publications
U.S.

Small Business Administration.
January 1977.
.

SBA Business L oans

.

Business Plan For Small Service Firms.
SBA: What It Does.

1977,

135

"Report and Recommendations on
Review Board.
the Section 8(a) Program." Washington, B.C., January 1978.

Business
.

Summary

.

The Study Of Small

Office of Advocacy.
June 3, 1977.
.

The Study of Small Enterprise in the Economy
June 19 76.
.

:

March 1977.

Congressional Research
Committee on
House of Representatives.
Congress.
Select Committee
Banking and Currency. And U.S. Senate.
"Commercial Banks." D.F. Eastburn
on Small Business.
Prepared
Financing Small Business
and J.J. Balles.
April 11, 1958.
for Congress.

U.S.

.

WOMEN IN BUSINESS

:

GENERAL

Books
Chesler, Phyllis and Emily Jane Goodman,. Women
Power
New York: Bantam Books, 19 76.

,

Money

&

.

Journal Articles
Hartman, H. "Managers and Entrepreneurs: A Useful
Distinction." Administration Science Quarterly
429-451.
(March 1959)

,

III

,

"Entrepreneurship: A New
Schwartz, Eleanor Brantley.
Female Frontier." Journal of Contemporary Business
47-76.
(Winter 1976)

,

V

,

Congressional Testimony
U.S.

Subcommittee on
House of Representatives.
Congress.
Minority Enterprise and General Oversight of the
Committee on Small Business. Women in Business
95th Cong., 1st Sess. Hearings. April 5, May 24, June
.

1977.

Women in Business
September 15, 1977

136

.

Report No. 95-604.

7,

WOMEN AND CREDIT
Books
Chapman, Jane Roberts.
"Sex Discrimination in Credit:
The Backlash of Economic Dependency."
in Economic
Independence for Women
The Foundation for Equal
Rights Edited by Jane Roberts Chapman.
Beverly
Hills, Calif.: Sage Publications, 1976.
:

.

Unpublished Papers
Chayes, Antonia and Robert Barr.
"Credit and Sex
Discrimination." January 17, 1973.
(Available in
the files of the Center for Women Policy Studies)

Center for Women Policy Studies.
Credit."
1973.

"Final Report:

"Women Entrepreneurs."

Women and

1973.

Journal Articles
Chapman, Jane Roberts.
"Women's Access to Credit."
40-45.
Challenge XVII (January/February 1975)
,

,

Feldman, Marcia.
"Free Help for Women in Business."
McCalls (October 1975), 39.
Gates, Margaret.
"Credit; Bargaining for 'Trouble'."
11-12.
Agenda (Spring 1974)
,

Goodwin, Susan A. "Commentary--Opportunities for Women
Business and Economic Review
in Small Business."
3-6.
XXII (March 1976)

,

,

Hruska, Donna.
"Finding Your Business: Help for Entrepreneurs17-18.
Progressive Women (December 1972)
to-be."
,

Small Business."
"Women's Work:
Jeffries, Georgia Thomas.
4-5, 13.
National Business Woman LV (May 19 74)
,

A Case for Questioning Lending Criteria."
"Loans to Women:
36-42.
Savings &_ Loan News (January 1974)
,

Maymi

"Fighting to Open the Doors to Opportunity.
Carmen R.
8-10.
Agenda (Spring 1974)
,

,

137

"Women and Money:
Beyond the Cookie Jar."
Monitor III (May/June 1977)
6-7.
,

Equal Rights

,

"Women Seek Equal Chances in Business."
(July 10, 1972), 4-7.

Commerce Today, II

WOMEN-OWNED FINANCIAL INSTITUTIONS
Charnay, J. "Women's Banks not for Women Only."
Magazine 160 (Autumn 1977)
103-110.

Banker's

,

,

Martinez, Arabella.
"One Answer:
Controlling Financial
Institutions." Agenda (Spring 1974), 13-14.
"A National Bank By and For Women."
Woman LIX (January 1978)
7.

National Busines s

,

,

"Now a Rush by Women to Start Their Own Banks."
and World Report LXXIX (October 27, 1975)
,

,

U.S. News
61-6 2~

Tesar, J.
a

"Anti-discriminatory Women's Banks: One Even Has
Man President." Banking LXIX (October 1977), 66-67.
,

Newspaper Articles
"Bankers Urged to Reconsider Assumptions Regarding Women
and Credit." Eugene H. Adams.
American Banker
June 25, 1973, pp. 12,22, 26.
,

"Business Ownership by Women Helped."
Metal Market August 11, 1977.

Hal Taylor.

American

,

"Diamond Lil is No Match for Credit Card Susie."
New Haven Journal-Courier January 3, 1973.

Dee Burghordt.

,

"First Regional Businesswomen's Conference Planned." Pat
Kailer. Albuquerque Journal October 14, 1973, p. Bl.
,

WOMEN-OWNED FINANCIAL INSTITUTIONS
"Go-Ahead Given Bank For Women. "
Rudolph Pyatt. The
Washington Star July 7, 1977, p. B5.
,

"Two Groups Plan Banks Geared Toward Women." R. Erich
Heinemann.
The New York Times May 8, 1973, pp. 57, 65.
,

138

"Women's Bank: A Special Interest Grows." James Rousmanere,
The Baltimore Sun December 11, 1977,
Jr.
Financial Section.
,

"Women's National Begins Stock Offering." William H. Jones.
The Washington Post October 12, 1977, pp. D8, D10.
,

Government Publications
Governor's Commission on Women's Programs. Hearings on
Discrimination in Finance
Boise, Idaho, May 12, 1972.
.

National Commission on Consumer Finance. Report of the
National Commission on Consumer Finance
December 1972.
.

Ohio.

Office of Minority Business Enterprise. Women's
Component.
"Business Opportunities for Women."
74.
April 17, 19

U.S.

Department of Commerce. Office of Minority Business
Enterprise.
And U.S. Department of Labor. Women's Bureau
Continuing the Search for Greater Horizons Report on
Geraldine Rickman.
Women in Business
July 1971.
:

.

U.S.

Small Business Administration.
Women as Users of SBA Services

.

The Facts About
August 1976.

Congressional Testimony
Economic Problems
Joint Economic Committee.
93rd Cong./ 1st Sess. Hearings. July 1973.
pp. 202-210, 214-217; Part III, pp. 565-579.

U.S. Congress.
of Women

.

Part

I,

Subcommittee on Consumer Credit.
Senate.
Committee on Banking, Housing and Urban Affairs.
Hearings
93rd Cong., 1st Sess.
Consumer Finance
May- June 19 73.
.

ACCOUNTING
"Fitting the GAAP to
Chazen, Charles and Benjamin Benson.
Smaller Businesses." Journal of Accountancy XLV (February
,

1978).

46-51.

BONDING
"New Construction Guidelines to Benefit
Barfield, Thomas J.
Credit Executives." Credit and Financial Management 78
(November 1976). 13, IT.
,

139

"

Foster, Karen L. "Why Surety Bonds Are So Important."
Credit
and Financial Management 78 (November 1976)
16-lTi
,

,

McCann, Robert W. "How Solvent is the Guarantor?"
and Financial Management 78 (November 1976)
,

Credit
14-15,

,

36-37,

EQUAL CREDIT OPPORTUNITY ACT

Monographs

National Commission on the Observance of International
Women's Year. Credit A Workshop Guide 1977.
.

:

Journal Articles
Gates, Margaret J. "Credit Discrimination Against Women:
Causes and Solutions." Vanderbilt Law Review XXVII
(April 1974)
409-430.
,

,

Geek, Donna Dunkelberger
"Note: Equal Credit: You Can Get
There From Here -- The Equal Credit Opportunity Act.
North Dakota Law Review LII (1976), 381-409.
.

,

Gore, Connie Walker.
"Notes and Comments: Consumer Protection:
The Equal Credit Opportunity Act." Oklahoma Law Review
XXVIII (Summer 1975), 577-585.

Klein, Barbara

J. "The Equal Credit Opportunity Act
Amendments of 1976: A Meaningful Step Toward the
Elimination of Credit Discrimination." Catholic
University Law Review XXVI (Fall 1976), 149-167.
,

Lally, Maureen Ellen.
"Comments: Women and Credit."
Law Review XII (Summer 1974), 863-890.

Duquesne

,

Littlefield, Neil 0. "Sex Based Discrimination and Credit
Granting Practices." Connecticut Law Review V (Spring
575-597.
1973)
,

,

Pilgrim, Lily.
"A Banker's Primer on Credit Discrimination
Against Women." The Banking Law Journal XCIV (April
348-351.
1977)
,

,

Polikoff, Nancy D. "Legislative Solutions to Sex Descrimination
in Credit: An Appraisal."
Women s Rights Law Reporter
26-33.
II (December 1974)
'

,

140

,

,

Zelon, Laurie D.

"Equal Credit: Promise or Reality?" Harvard
Civil Rights-Civil Liberties Law Review XI (Winter 1976)
,

186-216.

Newspaper Articles
"Women Complain That New Equal Credit Law Is Applied Unevenly,
Enforced Haphazardly." June Kronholz. The Wall
Street Journal January 21, 1977, p. 32.
,

"Women Neglect New Credit Rights."
The Christian Science Monitor

,

Guy Halverson.
November 1, 1977.

10.

p.

Government Publications
Board of Governors of the Federal Reserve System. The Equal
Credit Opportunity Act and L Women. May 19 77.
.

Doctors

,

.

The Equal Credit Opportunity Act and
Lawyers Small Retailers
May 1977,
.

,

What Truth in Lending Means to You.
Federal Trade Commission.
April 1977.

Equal Credit Opportunity Act.

Congressional Testimony
House of Representatives. Subcommittee on
Consumer Affairs. Committee on Banking and Currency.
93rd Cong., 1st Sess.
Statement of Arthur S. Flemming,
Chairman of the United States Commission on Civil
Rights.
June 21, 1974.

U.S. Congress.

93rd Cong., 1st Sess. Statement of Margaret
November 13,
Gates, Center for Women Policy Studies.
1973.
.

FINANCE COMPANIES
"Finance: New Credit Packages for the Small Borrower."
74-75.
Business Week
(September 5, 1977)
,

,

Hampton, Robert J. "Analysis of 1976 Composite Ratios of
Installment Sales Finance and Consumer Finance
Companies." The Journal of Commercial Bank Lending
LIX (August 1977), 23-43.

,

141

INSURANCE

Monographs
Federal-State Regulation of the
MacAvoy Paul W.
ed.
Pricing and Marketing of Insurance
Washington, D.C.:
The American Enterprise Institute for Public Policy
Research, 1977.
,

,

.

"Sex Discrimination in
Naierman, Naomi and Ruth Brannon.
Insurance: A Guide for Women." Women's Equity Action
League, 1977.

Journal Articles

Credit
Blum, Arthur F. "Using Credit Insurance Effectively."
12-13, 33.
(October 1976)
and Financial Management
,

,

Credit
Levy, Warren C. "Insurance for the Small Business."
36-37, 40.
and Financial Management 78 (October 1976)
,

,

"Comment:
Gender Classifications in the
Sydlaske, Janet.
Insurance Industry." Columbia Law Review LXXV(1975),
1381-1403.
,

Taylor, Stephen L. "Keeping Solvent When Your Customers
Aren't." Credit and Financial Management 78 (October
,

1976)

,

14-15.

Government Publications

California Commission on the Status of Women. "Women and
Insurance." February 1975.
Insurance
North Carolina, Task Force on Sex Discrimination.
1976
Report of the
and Women in North Carolina
Task Force on Sex Discrimination in Insurance to
John Randolph Ingram, Commissioner of Insurance.
,

.

Congressional Testimony
Economic Problems
U.S. Congress. Joint Economic Committee.
Hearings. July 1973.
of Women 93rd Cong., 1st Sess.
Part I, pp. 151-190, 210-213, 217-222.
.

TAXATION OF SMALL BUSINESS

Monographs
AICPA, American Institute of Certified Public Accountants,
Proposal for Complete Revision of Subchapter S_
Washington D.C., February 1978,
Corporation Provisions
.

142

,

Unpublished Papers
U.S. Congress.

Senate.
Select Committee on Small Business.
"1978 Tax Proposals Relating to Small Business."
February- 1978.

Journal Articles

Arthur Andersen & Co.
"Carter Administration Tax Proposals-Tax Reduction and Reform Act of 1978."
United States
Tax Briefs
January 1978.
.

Mueller, Fred J.
"Burden of Tax Compliance Keeps Mounting
for Small Business Firms."
The Journal of Taxation
378-381.
XXI (December 1964)
,

,

Newspaper Articles
"Small Business Capital Investment Aid Proposal." Nancy
The Washington Post February 11, 1978,
L. Ross.
,

Government Publications
U.S.

Small Business Administration.
The Study of Small
Enterprise in the Economy
Summary
June 1976.
:

The President
U.S. Treasury Department.
Washington, D.C. January 1978.

.

'

s

19 78

Tax Program

.

The President's 1978 Tax Program: Detailed
Descriptions and Supporting Analyses of the Proposals
Washington, D.C, January 1978.
.

Business

Internal Revenue Service.
Annual Edition.

Tax Guide for Small

.

Congressional Testimony
U.S.

Subcommittee on
Congress. House of Representatives.
Oversight of the Committee on Ways and Means. Problems
of Low- Income Taxpayers and Small Businesses with the
Tnternal Revenue Service 95th Cong., 1st Sess.
Hearings.
May 12, 1977.
.

Select Committee on Small Business.
Senate.
95th Cong., 2nd Sess. Statement of the Chamber of
Commerce of the United States of America on Small busiFebruary 28,
ness and the Administration's Tax Proposals.
1978.

94th Cong.,
Subcommittee on Capital Markets.
Statement of William M. Goldstein,
Deputy Assistant Secretary for Tax Policy, U.S.
Treasury Department, November 13, 1975.
1st Sess.

143

:

__.
Select Committee on Small Business. Impact of
the Administration s Tax Stimulus Package on Small
Business and Examination of Employment Tax Credit
Hearings.
95th Cong., 1st Sess.
Alternatives
February 22, 1977.
'

.

Statement of
94th Cong., 1st Sess.
Frederick W. Hickman, Assistant Secretary for Tax
Policy, U.S. Treasury Department. February 20, 1975.
Statement of
95th Cong., 2nd Sess.
Donald C. Lubick, Acting Assistant Secretary for Tax
February 28, 1°78.
Policy, U.S. Treasury Department.

._.

.

VENTURE CAPITAL
Books

Guide to Venture Capital Sources
Rubel, Stanley M.
Capital Publications Corporation, 4th, ed.
Chicago:
.

1977.

Journal Articles
"How to Develop a Plan for Securing
Brockhaus, William L.
Venture Capital." Business Horizons XIX (June 1976),
,

66-72.

"The Rise and Fall of Ten Venture Groups."
Dunn, Dan T. Jr.
32-41.
Business Horizons XX (October 1977)
,

,

"Managing Venture Capital.-"
1977)

,

p.

Business Horizons

,

CXX

(October

31.

"Raising Capital for Small Businesses."
(November 3, 1973), 96, 98.

Business Week

"Vanishing Species, Venture-Capital Division."
(November 15, 1977), 120-121.

Forbes

,

120.

Whittaker, Gerald F. "Capital Accumulation through ESOPs
Business Horizons XX (October
A Black Perspective."
,

1977)

,

23-30.

Government Publications
U.S.

144

Report of the SBA Task
Small Business Administration.
and Equity Capital for Small Business
Force on Venture
January 1977.

.

APPENDIX

145

Form Approved: O.M.B. No. 4I-S78007

TASK FORCE ON
WOMEN BUSINESS OWNERS

7.

Now, please think of managing (rather than owning)
the business. Mark the one statement that best
describes your position

most

rj] Very good,

2

Q3

but report to

3

someone else
the

in

management

Now, please think back to the time when you
became an owner of the business.
a.

b.

What year

did you
the owner?

s

11a.

How
1

2
3

d.

rj Not

c

2[]No-

Q Alone
rj
spouse
Q
member

4

With

5

With another

1

2
3

4
5

b.

Answer d

Q member
Q

ly

c.

With non-family

With a combination
of family and nonfamily members

how

did you

d.

e.

Q Bought
Q
Q
Q Gained ownership some

the business from a family

3

4
s

6
7
8

did you obtain
at that time?

Was

.00

the loan secured?

Yes

Was

2\Z\ No

the term of the loan for less than one year?

2Q No

Yes

for bank credit
business and been turned down?

Inherited the business from spouse

Yes - Answer

1

Inherited the business from

b

and

c

for this

No - SKIP

2

to (3

someone else

other

way — Describe

Did the bank tell you why your application
rejected?

b.

was

Yes

2\Z\ No

What factors do you think influenced the bank to
reject your credit application? Mark ALL that apply
i

you obtain
become an owner of

of the following sources did

2

rj Lack

Q No

of collateral

previous business credit history

3 rj^ Poor business credit history

Personal savings

Q
Q Family
\J
Q Government
Q Commercial bank
fj
—
Q

4 [^J

Joint savings

No previous personal credit

5

personal credit history

6

Friends

Q Poor
Q] Bank

policy regarding small or

new

business owners

program
7 fj]

Bank policy regarding female business owners

Venture capital firm

e \23

Bank policy regarding minority business owners

Other

9 \23 Inadequately prepared loan request

loan

Describe,

io
1

b.

to 13

.00

Have you ever applied

12a.

member

financing and/or capital to
this business? Mark ALL that apply

2

-SKIP

Bought the business from a non-family member

From which

rj

z\Z] No

How much

1

c.

1

for the

When you first applied for bank
credit, how much money were

!

9a.

bank credit

Q Yes — Answer b—e

1

r_]

for

you seeking?

If you were not an original founder,
gain ownership of the business?

1

applicable, do not work with suppliers

business?

did you start that business?

fami

poor, suppliers are a major barrier to

Have you ever applied

that business?

Q Yes — Answer

Poor, suppliers cause problems that cannot
be settled

business success

Were you one of the original founders of

1

some problems but they can

Q always
Q Very

first

Year

become

Fair, there are

usually be worked out

4
8.

have a useful and productive
business relationship

executive officer

or

Share management responsibilities equally
with others

not take an active part

4

business during
1

Q Help manage,
Q Do

3

this

of 1977.

fH Chief manager

1

2 fj[j

in

How would you describe your current relationship
with your suppliers?

10.

t

Q

Don't know

rj Some

other reason

—

Explain

i

How much

financing and/or capital
did you have from these sources?

.00

147

13.

Altogether, how many businesses have you owned?
1

2

14.

[~J

One

3

J
f~ Two

Counting

J
r~ Three

-

3

the

is

TOTAL

dollar

amount of Federal

contracts you were awarded
i

businesses that you have owned, for
how many years have you been a business owner?
year or less
1—20 years
1 r~
J
4 f"]
2

What

4 f J Five or more

[~J

in

1977?

None

2r~J Under $10,000

all

I

15a.

15c.

to four

3r~J$IO,000-$49,999

I

-

J
r~ 2—5 years
6—10 years
J

s

f

J 21

5

Have you EVER been the recipient
Government contract?
f J Yes — /Answer b, c, and d
No -SKIP to /6

$50,000-$99,999

4

years or longer

f

of a Federal

r~J$l00,000-$249,999

6

$250,000-$499,999

7

$500,000

or

more

l

2Q

From which agency? Mark
i

ALL

Number

that apply

d.

[~J General Services Administration
of Defense

2

J
r~ Department

3

r

-

Department of Labor
Department of Health, Education and Welfare
r J Department of Housing and Urban Development

Federal Government
contracts were you awarded
in 1977?

J

4 [~J
5

How many

Other - Specify

6

16.

Have you ever been

a subcontractor to a prime
contractor on a Federal Government contract?

!

Yes

2[7J No

Continue with item 15c
17.

The following statements concern PRIME CONTRACTING with the Federal Government. For each statement
mark the box which comes closest to your own opinion.
a.

Agree
strongly

Agree
somewhat

Neither agree
nor disagree

2D

»D

Disagree

somewhat

Most people in my kind of business are familiar
with Government contracting procedures.

'

know where to obtain information about what
contracts are available at any given time.

in

2D

»D

believe it is good business practice
the Washington, D.C. area in order
Government contracts.

iD

2D

*U

'

2D

3D

my business.

2D

3D

There are sufficient opportunities in the private
sector, therefore,
do not need to compete in the
Government marketplace.

2D

3D

«
*
«
*
«
«

2D

3D

*

I

I

in

to
to

be located
get

The procedures for doing business with the
Government are unnecessarily confusing and
hard to locate.
I

know

a little

more about how

to

contracts than many other people

get prime
in

I

consider myself an able competitor for Government
contracts without special programs or assistance.
I

There is a "closed club" of
that is hard to get into.
If

I

wanted

a prime contract,

'

Government contractors
I

know how

to

bid on one.

Government contracts are not as desirable as
private sector contracts or sales.

The Government discriminates against small
suppliers when contracts are given out.
Female-£wned businesses have a somewhat easier
time getting contracts than do male-owned firms.

Once you get a Government contract, the contractinj
agency has too much control over the business.

iD

Strongly
disagree

D

*
*
sD
=

D

sD

18.

The questions below concern agencies
programs that provide information
businesses.
Complete these questions even if you
were not a business owner in 1977.
or

or services to small

19.

years have you worked, including ALL fullyou have held? Exclude work around
the house and volunteer work for religious, charitable,
and similar organizations,

How many

or part-time jobs

i

2
3

None

O
Q 2—5
1

year or less

years

4
s
6

|

|

Q
Q

6-10 years
1

1-20 years
more

21 years or

34.

Mark one box in EACH category.
b. Ethnicity
Race
f J Hispanic origin
r~J American Indian or
Alaskan Native
2 r~J Not of Hispanic
2 [~J Asian or Pacific
origin
i

39. Did your education and work history prepare you
for the daily problems in running a business?
If not, why not?

1

Islander
3

35.

36a.

Black

4

White

what State do
you now live?
In

How many

State
I

different residences

Number

40.

have you had since you were

valuable

18 years old?
b.

37.

Number
of these were moves
more than 50 miles?

How many
of

Mark the box in column (A) to indicate your household's total income before taxes; then mark the box
in column (B) to indicate YOUR contribution before
taxes, to the total income of the household.
Col. (B)

Col. (A)
Total

Under $5,000

.

.

.

I

I

Your contribution

household
income

$5,000-$9,999
$10,000-$ 4,999
$15, 000-$ 9.999
$20.000-$29.999
$30,000-$49,999
$50,000 or more

What information

household income

to total

to

or assistance would be most
you at the point of starting a business?

INTERVIEW GUIDE

Name of bank
City
Person being interviewed

Position

1.

Are your commercial loans broken down into categories for recordkeeping purposes?

la.

2.

Date

If yes, what are the categories?

Other than those loans guaranteed by SBA, are small business loans
in a separate category?

2a.

If yes, how do you define small business?

2b.

If no, what is the size/range of businesses you make loans to?

3.

4.

152

Do you have a dollar amount cut-off for classfying a loan as being
"small business?"

Did the general downturn of the economy during 1974 and 1975 affect
the proportion of loans your bank could make to small businesses?

?

What has happened since then? Has the amount of money available
for small business loans decreased or increased?

6.

In view of the current economic forecasts, what do you foresee your
policy being toward small business loan assistance in the next two
or three years?

Does your bank set aside a maximum dollar amount for small business
loans each year (or quarter)

What percentage of small business loans are for start-up costs of
a new business, i.e., venture capital type loans?

Are loans for buying franchises treated differently?

10.

What would you estimate the total number of smaller commercial-type
loans made per year by your bank to be?

11.

Do you know how many of those loans were made to women or firms
50% owned by women active in day-to-day management of the business?

11a. If no, can you estimate the approximate percentage of
loans made to women?

153

lib. rf yes, why do you think more women do not apply?

12.

Do you lend in the name of the individual rather than the business
entity?

13.

Is it often necessary to condition the loan with covenants and/or
collateral?

14.

Are co-signers usually required?

15.

When you are lending to small businesses, are they normally term
loans, lines of credit, or transaction lines?

16.

How long do you normally go out for term loans to small business?

17.

Are any of these loans under Small Business Administration
guarantees?

17a.

154

If no, why not?

?

17b. If yes, how many of the loans are under the guarantees?

17c. If the number is not known, what is the approximate

percentage (dollar amount) of total portfolio?

18.

How many of the loans under SBA guarantee were made to women?

18a. Percentage?

18b. Dollar amount?

19.

Have you found any special difficulties with women applicants
under the program?

20.

Could you estimate the default rate of SBA loans for us Cover
any arbitrary time span)

21.

What do you perceive as the primary reasons for default?

155

22.

Does your bank have employees trained in SBA application procedures?

23.

Has your bank experienced any difficulties with the SBA loan
guarantee program?

24.

Has your bank had any involvement with the Economic Development
Administration of the Commerce Department?

25.

How do customers find you? Do they walk in off the street, or do
they come to you by some kind of referral?
(e.g., do people call
on behalf of someone who needs a loan? Do other bank customers
bring in new clients?)

26.

Do women come with the same kind of referrals and the same kind of
support as men?

27.

Do you receive many preliminary phone calls or inquiries from
women seeking loan assistance?

27a. If yes, what kinds of questions are usually asked?

156

28.

Has your bank done any research on male versus female pay-back
records?

28a.

29.

If yes, is there a difference between the

two'i

Could you tell us a little about the people who apply for smaller
commercial loans?

Background of applicant: age, education,
prior business experience

Is the profile for women applicants different from that of men?
If yes, in what way?

30.

Are there any common problems with the loan requests you receive?

_Inadequate preparation of
proposal
_Lacking accountant's input
_Lacking attorney's input
No market survey
_No prior business experience
Bank does not make that kind
of loan
Other

projection of
expected earnings
_No established credit
_No money of own to invest ^Proposal too high-risk
Company under-capitalized
_No

^How much and what kind of experience do you look
How much equity and collateral do you look for?

for?

^_
157

31.

Do you have a commercial loan application form?

31a. What kinds of things do you look for in loan applications?

32.

If a loan request package is missing something (for example, the
market survey is sketchy) what do you do?
,

33.

Do you find you spend much time counseling your small business owners?

34.

Do your loan officers get a chance to build a personal knowledge of,
or rapport with, the business owners whose loans they handle?

35.

Do you keep records on declined smaller commercial loan applications?

35a.

If so, how many loans Cor percentage) for women were not
approved?

35b. If not, can you estimate the proportion?

36.

158

Do a greater proportion of loan requests from women get declined
than from men?

37.

What are the primary reasons for decline of women's loan requests?

_Inadequate preparation of
proposal
_Lacking accountant's input
_Lacking attorney's input
_No market survey
JNo prior business experience
_Bank does not make that kind
of loan
Other

No projection of
expected earnings
_No established credit
Proposal too high-risk
_No money of own to invest
Company under-capitalized
No difference from male
applicants

38.

When a loan is declined, is the decision made by a single loan
officer or by a committee?

39.

Does this decision depend on the dollar amount of the loan?

40.

What is the make-up of the committee?

41.

Is there a review of declined applications?

42.

How are loans assigned to portfolios?
of loan, seniority, geography, etc.)

(e.g., on the basis of type

159

43.

Are the smaller commercial loans usually assigned to specific
loan officers?

44.

Have you found it useful to assign women loan officers to women
applicants, or minorities to minority applicants?

45.

How many commercial loan officers are employed by your bank?

46.

How many of your commercial loan officers are women?

47.

Do you have women in training to become commercial loan officers?
How many? Percent of total?

48.

Is there an impact on promotions for loan officers if his or her
portfolio contains a relatively large number of smaller, higher-risk
loans?

49.

Are you in a position to know whether your small business clients
are receiving the kind of supplier credit they need?

49a. If yes, are the women owned businesses receiving
the supplier support they need?

160

50.

What do you think are the major obstacles to women trying to run a
business or start a business?

51.

Can you recommend ways more venture capital can be made available
to people trying to start new businesses?

52.

Approximately how many business depositors do you have?

52a. Of these, how many, or what percentage, are women?

53.

Do you recognize women as a viable sector of the entrepreneur market?

54.

Does your bank do any special advertising, or conduct programs, to
attract women owned business accounts.

55.

When the Equal Credit Opportunity Act Regulations include requirements
for record keeping for commercial as well as consumer credit, what
affect do you envision this will have on your approach to the small
business community?

55a. What needs to be rewritten in Regulation B to make

operations easier without changing the intent of the
law?

161

Biographical Information
Sex of interviewee

Approximate age:

Race

20-29

Education Level:

30-39_

High School

40-49_

Some College_

50-60_

B.A., B.S.

60+

M.A.

,

M.S.

,

M.B.A.

Marital status

Other

Number of children

Number of years of
experience

Spouse's occupation

162

•U.S. GOVERNMENT PRINTING OFFICE

:

1978 0-620-716/58

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TREASURY LIBRARY

006571

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102