Entrepreneurship
Theme: Entrepreneurship
Cross-cutting themes covered: Tailored financial solutions
Name of project: Micro Loan programme
City: Hamburg
What is it? The Micro Loan programme is a publicly-financed micro-credit programme targeted at unemployed people in Hamburg. Loans are available up to €12,500 per person and €25,000 per enterprise, in order to promote entrepreneurship in the city. There is no minimum loan size. The programme has been running since June 2002 and the fund, initially worth €750,000, has recently added a further €1.5 million to its stock.
Who is it? The project is delivered by Hamburg’s Ministry for Economic and Labour Affairs, in co-operation with the Johann Daniel Lawaetz-Foundation and the TeleCoaching Team at EVERS & JUNG.
Where is it? Unemployed people from all areas of Hamburg are able to benefit from the programme.
Who funds it? The project is funded by the city/senate of Hamburg. Borrowers have to pay an interest rate of 7.87% per annum, which ensures the relative financial sustainability of the programme. This is about the same rate as commercial lenders, to ensure that people who are able to receive commercial finance do so, rather than opting for cheaper alternatives. Moreover, for the target group in question – unemployed people – it is not the price of finance that constitutes a problem, it is the accessibility of finance.
TACKLING BARRIERS TO ENTREPRENEURSHIP
How does it work? Publicly-financed programme: Importantly, banks are not involved in the Micro Loan programme’s application process, or in the granting of the loans. The programme has a higher risk tolerance than banks, meaning that it is possible for the scheme to lend to people (often with poor credit ratings) who would have been turned down by mainstream lenders, based on the individual merits of the entrepreneur or business idea. Furthermore, banks often refuse to consider applications from start-ups in certain sectors or regions, without evaluating individual cases on their own merits.
Support in developing loan applications: Potential entrepreneurs are supported throughout the loan application process by staff at the Lawaetz-Foundation, ensuring that their loan applications adhere to the minimum standards required. This process helps to save time at the application-processing stage, ensuring that all applications are correctly completed and present viable business ideas. Loans can therefore be quickly processed and applicants receive decisions about whether their funding bids have been successful relatively quickly.
As entrepreneurs are given a realistic assessment of their business idea, the pre-loan intensive support phase ensures that false hopes of receiving funding are not built up. If it is deemed that entrepreneurs are not ready for finance, they are referred on to other intermediary organisations to help them to develop their ideas (NB. the Lawaetz-Foundation itself can provide this follow-up support to businesses). The final loan assessment is based on business and financial plans.
Anything else? Follow-up support for entrepreneurs: An innovative TeleCoaching scheme provides follow-up support to loan recipients. The voluntary scheme is telephone-based, meaning that it is cost-efficient and easily accessible to busy entrepreneurs who may be unwilling to take time out of their days to visit support services in person. The TeleCoaching service helps entrepreneurs to assess how their businesses are progressing, and to implement improvements where necessary. Potential problems can be identified at an early stage, allowing preventative measures to be put in place, thereby improving business survival rates.
Through the TeleCoaching programme, borrowers are contacted by experienced consultants every three months. Consultants talk to them about how their business is progressing and provide advice and support where necessary. Milestones for the next three months are set during the conversation, and relevant information leaflets are also sent out to entrepreneurs.
The service puts emphasis on self-diagnosis, where possible, to avoid being too prescriptive – consultants are not the best judge of clients’ needs, the clients are themselves. Entrepreneurs participating in the TeleCoaching receive a Microsoft Excel tool to facilitate this self-diagnosis and to provide a structure for the phone conversations with consultants (the tool focuses specifically on management and accounting). Regular workshops on how to use the tool are also provided.
The results of the TeleCoaching are documented in a detailed database, accessible by the three delivery organisations, enabling them to use the information to improve their services. As the scheme helps to improve business survival rates, the cost of implementing the scheme is offset.
What are the results? About 420 loan applications have been accepted, with around 400 loans already paid out (June 2006). The average loan size is around €8,000, with an estimated €3.2 to €3.5 million granted in total.
According to the 2006 Interim Report, 41% of the loans went to women (above the average rate of women entrepreneurs in Germany). About 10.5 % of the borrowers are non-German, and 7% of these are non-EU nationals. The start-up businesses supported represent a wide variety of sectors, from simple services (such as housekeeping services and accounting) and small enterprises specialising in catering or handicrafts, to highly qualified start-ups in the business and professional service sectors (such as architects, engineers, lawyers and software developers).
The sectoral breakdown of loan recipients is as follows: 19% of loans have gone to handicraft businesses; 16% to retail sector businesses; 10% to firms in the health sector; 3% to media sector entrepreneurs; 2% to food and drink enterprises; 2% to IT firms; and 48% to other business services sector businesses.
Is the model transferable ? The use of public funds to support entrepreneurship is transferable. In Hamburg, the Micro Loan project is seen as a more effective and sustainable use of public money than the provision of social benefits to unemployed people.
Combining access to finance with pre-loan advice in order to prepare people for self-employment is also transferable. This has helped more entrepreneurs to make successful applications, as well as cutting down on unnecessary bureaucracy at the decision-making phase.
In addition, the implementation of follow-up support to loan recipients, through a TeleCoaching scheme, is transferable. Contacting businesses at three month intervals to diagnose any problems and help implement solutions has been a cost-effective way of accessing and supporting busy entrepreneurs.
Building on local competitive advantages? Hamburg is often referred to as the ‘start-up capital of Germany’. Start-up rates are well above average and the rate of entrepreneurial activity within the working population is 12% in Hamburg, compared to 10.8 % in Germany, and 11% for the former western part of Germany (March 2004). Hamburg also has a higher entrepreneurial performance than other large German cities such as Berlin, Düsseldorf, Cologne, Frankfurt, Munich and Stuttgart. Other localities may lack such intensive demand from business start-ups for support services, which could constitute a barrier to transferability.
What are the barriers to transferability? Sub-contracting elements of the programme – for example credit evaluations and administration – has helped to minimise project costs, while allowing the Ministry to maintain a level of control over who receives funding. This is a transferable model although other regions and localities may lack human resources in this area.
