Facilitating access to finance

Access to finance is often one of the major barriers for entrepreneurs from disadvantaged groups. Relevant instruments to address these barriers include the following:

(1) Microcredit (or micro-loans)

Microcredit or micro-loans are very small loans to borrowers who typically lack collateral and a verifiable credit history, and thus have difficulties accessing credit from traditional banks.

The European Progress Microfinance Facility Programme implemented in Lithuania, for example, provided micro-loans to women entrepreneurs with favourable conditions for credit provision and repayment. Credit was provided within 1-2 business days for companies with less than 10 employees; no fees were applied on the provision of loans; and clients were able to defer the beginning of credit repayment up to 12 months. The Kiút programme, implemented in Hungary as an adjusted version of the Grameen model, provided micro-loans to groups of five individuals with low disposable income and located in disadvantaged areas (mostly from the Roma minority). One-year tenor loans had to be repaid weekly with an annual interest rate of 15%. 

(2) Equity financing

Equity financing is another tool to help entrepreneurs raise enough financial resources to undertake their project. The government, generally through a state-owned enterprise or a government agency, acts as an equity investor, taking shares in the targeted business that provides it with some form of ownership. Consequently, entrepreneurs do not have to comply with regular payments to the investor; instead, the investor participates in the gains when they occur and has losses when the business performs badly.

For example, Ireland’s Competitive Start Fund for Female Entrepreneurs programme provides equity investment to women entrepreneurs to support costs associated with developing the business plan and making progress on key technical and commercial milestones, including salaries, travel expenses and consultancy fees. Successful applicants receive an equity investment of up to EUR 50 000 from Enterprise Ireland for a 10% shareholding in the company. Another example is in Sweden, where the government created a state-owned venture capital company to support firms in the country’s northern regions with growth potential but facing difficulties in accessing finance due to their peripheral location (Inlandsinnovation AB, currently being integrated under the national development company Saminvest AB). Investments preferentially target early-stage companies, and account for 10% to 30% of company shares.  

(3) Financial education

Financial education is key to ensuring that disadvantaged groups can effectively access financial resources and make the most of them. To that end, financial education courses should focus on increasing the target group’s awareness of the existence and conditions of the forms of finance available to them, and on strengthening their skills in making effective decisions in different financial contexts (OECD/EU, 2015; OECD/EU, 2016). 

European Progress Microfinance Facility Programme – Lithuania

2014-present

Objective: Foster women’s entrepreneurship by facilitating their access to financial services.

Target: Self-employed women or micro-enterprises and SMEs either owned by women or employing a majority of women.

Instrument: Micro-loans (with favourable conditions on credit provision and repayment).

Kiút programme – Hungary

2010-2012

Objective: Enable poor people to establish their own business, with the objective of integrating them in local production systems.

Target: People around or below official poverty line, with a specific focus on the Roma minority, people living in lagging regions and women.

Instrument: Micro-loans and non-financial support (e.g. administrative help, training on financial and business issues).

Competitive Start Fund for Female Entrepreneurs Programme – Ireland

2012-present

Objective: Provide female-led start-ups with critical early-stage funding to reach key commercial and technical milestones and launch new products internationally.

Target: Women researchers.

Instrument: Equity investment of up to EUR 50 000 for a 10% shareholding in the company for costs of developing a business plan and making progress on key technical and commercial milestones, and non-financial support (counselling from a mentor).

References

OECD/EU (2016), Inclusive Business Creation: Good Practice Compendium, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264251496-en.

OECD/EU (2015), The Missing Entrepreneurs 2015: Policies for Self-employment and Entrepreneurship, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264226418-en.