TYPES OF INSTRUMENTS

There are several financial instruments that could prove valuable in SME financing.

Mutual funds function based on collective and joint responsibility of the member companies. Each member participates with a certain amount to the fund’s capital. From ICES discussions with representatives of business associations, the latter seemed extremely interested in such type of financing.

ICES has also supported together with the Corporation for Enterprise Development of a study tour in the USA of a group of Romanian consultants on the topic of rural mutual credits. A law on rural credit is in Parliament at this moment, even though it was initiated in 1996.

Here, an alarm signal should be the negative experience with the credit cooperatives that changed themselves into popular banks and used non- prudential banking procedures, being on the verge of collapse when the National Bank obliged them to enter under its supervision. Romania has been hit by a series of scandals regarding both banks, as well as other financial institutions, and these scandals had a negative impact on the financial market. Thus, supervision of mutual funds should be strict and clear procedures should be set from the beginning, including the obligation of re-insurance.

Such schemes should be expanded. A success story is the existing Rural Credit Guarantee Fund.

Micro-credit programs can have a great impact on the welfare of a society as they address the poorest, which are helped to set up a small business.

In Romania, such programs would be beneficial in areas most affected by poverty and unemployment, like rural areas, small mono-industrial towns, regions most affected by economic restructuring. They can be addressed to the unemployed, to young people in search of a job, to women or to older people that cannot any longer adapt easily to the job market, but who wish to set up a small venture.

The problems confronting micro-crediting schemes in Romania are¹⁰:

• Absence of legislation in the field and of Central Bank norms accepting the unfolding of such schemes through non-financial institutions (NGOs, cooperatives, community organisations etc.).

• Lack of interest from banks in working with small clients due to high Mutual Funds

Credit Guarantee Funds

Microcredits

10 Despina Pascal – Micro-crediting, Access for women to economic power, in AnaLize, December 2000

transaction costs.

• Lack of banking infrastructure in rural areas and small towns.

• Lack of adequate financial knowledge on the part of possible micro- credit users that further limits their access to credits.

• Inflationary environment that erodes the revolving funds involved in micro- credit schemes.

• Reduced community activity, passive and fatalist attitude towards poverty.

In order to deal with such issues, support should be given not only towards provision of funds for micro-credit schemes throughout the country, but also for technical assistance to increase financial and business skills in potential borrowers, to implicate the local community more actively and to increase the capacity of existing NGOs or associations to carry out such type of financing schemes. Micro-crediting carried out through local business associations could be developed, although the National Bank of Romania does not consider such associations mature enough. However, some pilot micro-crediting schemes have been set up and have proven to be a success.

A regional venture capital fund could attract donor funds and could also increase links among the countries in the region, while local venture funds, set up at the level of regions within the country, could benefit from better knowledge of local conditions. Such local funds could be started with seed money and would also attract funds from local small investors by going public on the stock exchange.

In addition to friends, family relatives, and business associates, angel networks can provide SMEs with access to prospective investors who are likely to become involved in private financings (i.e., supplying capital for start-ups, expansions or transfers of business ownership).

Angel networks are a loosely-defined array of organizations that facilitate initial contacts between entrepreneurs and investors. Generally, they are non-profit ones. Angel networks do not act as brokers or investment advisors and they do not become involved in completing or structuring transactions.

After introducing entrepreneurs and potential investors, angel networks leave all further interactions to the parties involved.

It is hard to delineate angel networks precisely. They tend to vary in size, composition and orientation. Entities that become involved in angel networks include businesses, academic institutions, government agencies, economic development authorities, and profit making entities.

Angel networks do facilitate the provision of significant amounts of capital to fund start-ups and expansions. Typical angel investments range from

$10,000 to $500,000 and sometimes approach $1 million. Every year in the U.S., approximately 250,000 angels bankroll 20,000 companies. Throughout the years, angels invested at least $10 billion.

Regional and Local Venture capital funds

Angel Capital Networks

Although there is no central tracking of angel networks or their participants, there are certain characteristics that can help determine the probability of a network’s success. The most effective angel networks tend to be older with established credibility. There is, of course, a correlation between the number of people involved in a network and its success. Successful networks employ experienced staff and have sufficient funds to engage inaggressive marketing activities.

With respect to the angels themselves, research indicates that most are self-made, high net worth individuals who have built up their own successful businesses and are interested in putting their expertise and money into other entrepreneurial ventures.

The legal issues involved in soliciting capital through angel networks are generally the same as those involved in dealing with investors.

Angel capital networks can be set up through existing associations, like employers’ associations, SME consulting centers, producers’ associations etc.

4. CONCLUSIONS AND POLICY RECOMMENDATIONS

In a situation of scarce resources, support actions will need to be prioritised with clear selectivity criteria and the procedures for implementing and administrating support measures will need to be transparent and with full accountability. The actions should be addressed towards:

1. Developing specific proposals and actions to enhance access to finance;

2. Creating initiatives to enhance access to technology and information and to encourage innovation;

3. Provide support to promote exports and to improve SME skills to operate on the international market;

4. Concentrating grant funding on specific areas such as quality improvement, technology or productivity improvement, environmental control, export marketing, management training etc;

5. Improving the regulation of non-bank funding sources.

There is a stringent need to find ways of improving access to finance and particularly to address the problem of collateral for loans, improving access to the capital markets, leasing etc. There is also need to support start-ups and infant micro-enterprises, technology and innovation transfer/

dissemination projects, quality improvement and quality insurance systems development, marketing activities, environmental control, energy saving and cooperation among enterprises projects through micro grant schemes.

There should be a focus on the following financial instruments:

• Guarantee funds;

• Mutual credit funds;

• Venture capital funds for SMEs;

• Angel capital networks;

• Micro-credit schemes.

Improving SMEs’ access to financing depends both on general and specific measures. General measures imply stability in implementation of policies;

simple, consistent and stable legislation; low inflation; modernisation of the payment systems in the banking sector; stricter enforcement of contracts and decrease in inter-enterprise arrears. Specific measures could comprise¹¹:

• Support start-ups and infant micro-enterprises, technology and innovation transfer/dissemination projects, quality improvement and quality insurance systems development, marketing activities, environmental

11 National Agency for Regional Development - ACTION PLAN to support SMEs

control, energy saving and cooperation among enterprises projects through micro grant schemes;

• Establish micro-credit schemes for SMEs;

• Establish low interest medium and long term credit schemes for SMEs;

• Promote the use of bills of exchange and promissory notes;

• Address in a comprehensive and coherent way the loan collateralisation issue;

• Support the establishment and operation of regional guaranty funds for SMEs and set up a re-guarantee mechanism;

• Create a banking system friendly to SMEs;

• Improve financing-related skills in the SME sector.

Supervision institutions should also be strengthened and clear procedures should be legislated. Attention should be given to a wide dissemination of know-how and expertise both of the financing institutions and of the SMEs themselves.

PRACTICE AND PROSPECTS OF SME