The New Bankrolls Behind Women's Businesses

Cynthia McGeever and Chrisanne Buba hardly fit the image of bad credit risks. Both women are highly educated, both have been vice-presidents at major banks--and they now run a profitable auditing company, Earnings Resource Group, with $400,000 in annual sales. Yet, when the Wayne (Pa.) partners approached lenders for expansion capital, their star-studded client list and 30% profits counted for little. The only financing they could get was a home-equity loan. "Some bankers didn't even give us a follow-up phone call," says Buba.

They did finally land a $600,000 loan, but from an unconventional source: Compass Rose Corp., a financial services company devoted to women's businesses. A division of the $20 billion insurer Capital Holding Corp., Compass Rose debuted this past summer to provide financing, training, and other services for women entrepreneurs whom "most lenders would laugh out the door," says President Rebecca Maddox.

Compass Rose is the first major company catering to a group that lately everyone seems eager to help: women-owned businesses. The Small Business Administration in June announced a $24 million Microloan Program to assist women and minorities in getting loans of up to $25,000 at market rates of interest. Senator Arlen Specter (R-Pa.) has introduced a bill that will give tax breaks to investors who pour up to $50,000 in women- and minority-owned firms. Even banks and venture capitalists claim they are joining the financing ranks. As promising as these efforts seem, however, they are still more rhetorical than they are practical.

While women now represent the fastest-growing segment of business owners (chart), they remain an underserved market. A recent report by the National Association of Women Business Owners (NAWBO) found that women are routinely denied access to credit. "Most banks haven't had much experience with women business owners, so they are an unknown," says Douglas Griese, senior vice-president of CoreStates/First Pennsylvania Bank, which has begun a loan campaign targeting women.

That lack of experience sometimes translates into discrimination. But often, women get passed over for loans simply because they tend to start the "wrong" kinds of small businesses, i.e. service companies. "Many women start service businesses because they don't have the money to invest in hard assets such as plant and equipment," says Sharon Hadary of NAWBO. "Then no one will lend to them because they have no collateral."

But an alternative financing vehicle called microlending is becoming popular. It typically involves nonprofit lenders who give technical training and loans of under $1,000 to low-income women. The number of microlenders has doubled over the last few years, partly due to repayment rates of 85% to 90%. Women's World Banking, an international network of microlenders, has used the training-linked approach to help over 500,000 businesses in 36 countries. Closer to home, WomanVenture in St. Paul, Minn., makes loans from $50 to $25,000, primarily to startups.

NEW CRITERIA. While microlenders help low-income women, they don't address the majority of companies, which need larger loans for expansion. Illinois State Treasurer Patrick Quinn launched a program in January that will fund such established entrepreneurs. Called the Women's Finance Initiative, it bands together a coalition of banks, women's business groups, and small-business development centers to provide workshops and low-interest loans. The state treasury guarantees the loans, which range from $5,000 to $500,000, at an interest rate 3 percentage points above the U.S. Treasury bill corresponding to the term of the loan. So far, 22 borrowers--mostly service businesses--have received a total of $2.2 million from the 17 participating banks.

Other banks are beginning to focus on this market on their own. Last year, Chemical Bank began giving loans ranging from $3,000 to $250,000 to small businesses that have sales of up to $1 million. But although Chemical claims it's targeting female business owners, it has not changed its lending requirements to suit women owners without hard assets to put up as collateral.

Changing the traditional lending criteria is one way Compass Rose intends to stand out. The company says it will factor in less quantifiable measures such as trustworthiness and business acumen. "We feel our lending formula captures life experience, not just balance-sheet equations," states Maddox. Her ultimate aim is "to create the Harvard MBA program of entrepreneurs."

HARD-EARNED JOURNEY. Like Harvard, getting a "degree" through Compass Rose doesn't come cheap. Women pay $1,100 to enroll in an initial six-day training course called the Quest that--with the aid of psychologists and other consultants--helps them evaluate their ability to run a business. A few who complete the Quest will be invited to attend phase two of the program--the 3- to 12-month Journey, which costs $5,500. So far, Compass Rose has held three Quest Seminars for 125 entrepreneurs, and three women embarked on the pilot Journey in August.

Journey-goers emerge with a workable business plan and one-on-one guidance for every aspect of creating their business, from hiring staff to purchasing inventory--as well as guaranteed financing. Women who already have business plans can qualify for loans without taking the Journey. Maddox estimates that the loans--given at market rates--will average $200,000.

However, Compass Rose is not counting on seminar fees to achieve the 16% return on investment that parent Capital Holding expects. Maddox hopes that Compass Rose's faithful will be so happy with their training, loans, and personalized treatment that they will want to purchase life and health insurance, Keogh plans, and other products from the company.

That unabashed commercial focus--along with the requirement that borrowers take expensive seminars before getting a loan--has sparked criticism. But not from entrepreneurs such as Cynthia McGeever who have actually gone through the Quest: "If Compass Rose offers a product that I want, you can bet I'll buy it from them because they've been there for us." And many other female business owners may not mind the hard sell either--as long as it's accompanied by cold, hard cash.

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