After years of working in fitness, Sheila Drohan decided she wanted to fill a much-needed niche in the industry: customizing and managing fitness facilities and wellness programs for businesses and agencies.
With a business plan in hand and a master's degree in business administration, Drohan and her business partner hit the bank circuit looking for financing.
Bank after bank said no. Drohan even had a close contact at one of the banks, but was unsuccessful in obtaining a loan to launch the company.
Drohan's company, Corporate Fitness Works Inc., received its startup funding from her mother, who mortgaged her home to generate cash for the business. Nearly 15 years later, the debt-free, 200-person company manages 32 facilities and has been profitable since the day it was launched.
So why didn't Corporate Fitness Works get bank financing? The founders point to several factors, including gender.
"They looked at us and it was a different mindset back then," said Drohan, co-founder of the corporate fitness consulting firm (www.corporatefitnessworks.com), which launched in 1988. "Male friends of mine have gotten loans with a basic business plan and it was no big deal."
The business world has changed in the past 15 years and Drohan's chances of obtaining financing today are a little better as banks and other sources of startup capital have slowly opened their doors to women. And those being turned down for capital are citing factors other than gender. But many women, who are known to be more financially conservative than men, have also been known to stay away from debt, using personal savings, credit cards and money from friends and family to launch businesses.
Only about one-fourth of women entrepreneurs of all races reported encountering obstacles to obtaining financing, with the exception of African-American women, according to a recent study, "Women Business Owners of Color: New Accomplishments, Continuing Challenges," by the Center for Women's Business Research in 2002. Forty-seven percent of African-American women, compared to 22 percent of Asians, 28 percent of Caucasians, and 27 percent Latinas, reported encountering financial obstacles.
Debt aversion
While the country is home to more than 7 million women-owned businesses, women business owners report that the majority of their investment has been from individuals or informal investors, according to the Center for Women's Business Research. Women will often turn to their own finances and credit cards or friends and family.
This may be attributed to the fact that women are more reluctant to take on debt, according to lenders.
"Women business owners tend to be more conservative in terms of how much debt they're willing to take on," said Brian Israel, executive vice president of commercial banking at Columbia Bank.
Business earnings are the top source of current business capital for all women, regardless of ethnicity. Business credit cards are the next most frequently used source of current operating capital. Among women who said they encountered obstacles in seeking financing, three of the top obstacles cited were personal sense of risk associated with taking out a loan; gender discrimination; and a weakening economy causing investors to hesitate, according to the Center for Women's Business Research study.
Another recent survey shows that 39 percent of women who own fast-growth firms -- firms that achieved revenue or employee growth of 30 percent or more over a three-year period -- have a commercial bank loan, compared to 52 percent of male owners of fast-growth firms, according to the National Foundation for Women Business Owners.
Gender role
When female entrepreneurs do apply for a loan or seek venture capital, they are not as quick to blame their gender for being turned down. Many are blaming their lack of experience and certain market conditions for the inability to raise money.
Drohan said banks turned her down for financing because she couldn't offer collateral. "I think we did everything we could back then in terms of a plan and what we had," she said.
Lenders say the biggest mistake women make when trying to raise money for their business is lack of preparation. Each bank or investment group has their own qualifications. For example, venture capitalists will only invest in certain types of industries. Entrepreneurs need to research the institution before submitting an application.
One of the most crucial selling points that women should make when seeking either a bank loan, grant or venture capital is their business plan. A business plan usually will include an executive summary, a marketing plan, financial projections for the next few years and an in-depth history of the founders and managers of the company.
"You have to sell to the banks that you have a good idea and one that will work, and have enough cash flow to repay the loan," said Martha Brown, Women's Business Ownership representative for the U.S. Small Business Administration in Baltimore, which has guaranteed $26 million in loans to women from Oct. 1, 2002, through July 25, 2003.
Bank lenders said it is also crucial to have good personal credit before seeking a business loan. Many women have been turned down for loans because they have shoddy credit, or no credit if their household accounts are in their husband's name.
Women business owners should also be aware of what kind of financing is best for their company.
It's not always harmful to finance a startup business with personal savings. Some banks prefer seeing that an entrepreneur has invested their own money in their business before seeking a commercial bank loan.
"I always think it's a plus when the owner has some skin in the game," Israel, of the Columbia Bank, said. "If they're putting in their own funds, then that just builds confidence in the banker."
Banks and other lending organizations offer a wide variety of options, including grants and venture capital.
Judy Britz, CEO of Cylex Inc., a Columbia-based developer of in vitro diagnostic products, is in the process of raising $5 million in venture capital for her company. She is reluctant to blame her gender for any rejections she has received so far.
"What is important about raising money is really matching your company with the appropriate venture capital firm based on their own investment objectives," said Britz, who raised $6 million in a first round of financing for the company. "That approach is taken whether you are a man or a woman."
Amy Millman, president of Springboard Enterprises, a Washington nonprofit that tries to connect women and venture capitalists, said some women are reluctant to talk with authority about their own background and expertise. The apprehension causes presentations to investors to fall short.
"They talk a lot about their team and the company but never put themselves front and center," Millman said.
