Lecture 10: Global Financing Issues for Entrepreneurs

Craig S. Galbraith, Ph.D.EBD 482 – Global Entrepreneurship, Spring, 09

"Micro-entrepreneurs" – in developing countries, or poor enclaves in developed countries make and sell tortillas, sew

clothes, sell vegetables in the street,etc

No capital to grow their businesses, they remain trapped in a cycle of poverty (poverty-traps).

Often borrow from loan sharks, who charge as much as ten percent daily, or they pay higher prices to buy goods on credit.

Any profit they earn goes to others, leaving them locked in a daily struggle for survival.

Micro-loans attempt to break free from no working capital

Why did this happen to Argentina?

Could this happen to the U.S.? How can a small business

operate in a country with no capital?

Recent elections in El Salvador http://www.bloomberg.com/apps

/news?pid=20601086&sid=aQNHDrcgXuKU&refer=latin_america

Does this mean that business and entrepreneurs are leading the fight for democracy?

http://www.youtube.com/watch?v=-4VdUbQOu2U

http://www.youtube.com/watch?v=ZsbTEFixYPM

Customers In developing countries

▪ are among the region's poorest people at the time of their first loan

▪ usually have no collateral ▪ may not be able to read or write ▪ may not have enough capital to open for

business every day ▪ are 65 percent women

In the U.S.▪ are 87 percent minority and 52 percent

Hispanic ▪ are 35 percent female ▪ are 55 percent low-income by federal

HUD/CDFI standards (earning 80 percent or less of area median income)

▪ often rely on their micro-enterprise for 50 percent or more of their family income

▪ often have business assets of less than $5,000

▪ often have no personal or business credit or have bad credit prior to receiving a micro-loan

“Accion” Micro-loan models Individuals Form solidarity groups

▪ this method allows members to cross-guarantee one another’s loans in lieu of collateral

First loan, $100 in developing countries, $500 in the U.S.

Increasing amounts based upon performance – “step lending”

Cumulative Statistics from 1996-2005 for

ACCION Partner Programs:

Number of Clients Served:

3.97 million

Amount Disbursed: $9.4 billion

Historical Repayment Rate:

97 percent

Women Borrowers: 65 percent

2006 Statistics for ACCION's Partners*

Latin America & the Caribbean

Africa & Asia USA Totals

Active Clients: 2.37 million 92,308 1,031 2.46 million

Total Amount Disbursed:

$3.63 billion $93.4 million $5.65 million $3.7 billion

Active Portfolio: $1.97 billion $64.7 million $5.4 million $2 billion

Average Loan**: $829 $701 $5,197

Melvin Gibson spends his days making thick, green slime.  The owner of a local franchise of Mad Science, he earns his living performing hands-on science experiments for elementary school children. With presentations ranging from creating slime out of household ingredients to hair-raising demonstrations of static electricity, Melvin's in-class workshops make science fun.  "Kids love this stuff," says Melvin.  "In the classroom, we become superheroes."

Melvin had always wanted to work with children and launched his home-based business two years ago with the help of his wife, a former schoolteacher. "To start up, we cashed in all our savings," he remembers.

Soon Melvin found he needed a computer to track expenses and organize curricula. "We went to a lot of banks for a loan, but we didn't have any collateral," says Melvin. "They saw us as a financial risk."

Discouraged, Melvin chanced upon an ad for ACCION USA in his local paper.  He applied for a loan and soon had the $2,500 he needed for a computer. "ACCION was a good opportunity for me," he says. "With the computer, our productivity is way up."

Fatouma Dijbril Issifou began selling vegetables when she was just five, working alongside her mother in a crowded market in the poor West African country of Benin. When she grew up, Fatouma inherited the stall, and was poised to live hand-to-mouth, just as her mother had.

But Fatouma wanted to give her children a better life - and the chance to go to school. She knew that if she grew her business, she would be able to save enough to make her dreams a reality. She tried to put a little money aside at the end of each day, but it was hard to save much.

Then a friend of hers told her about PADME, an ACCION partner program in Benin. PADME saw that Fatouma had the drive to succeed and approved her for a loan of $130. She used it to buy vegetables in bulk at a lower cost, boosting her earnings. A second loan for $260 allowed her to buy even more inventory and continue to save. Now, she earns about $2 on a bushel of carrots and a little more for a kilo of potatoes.

These may seem like small profits, but for Fatouma and her family, they have meant big changes. Before the loans, she was able to save just $13 a year to invest in her tiny stand, and she struggled to support her three children. Today, two of them are in school, and the youngest is eager to follow in their footsteps. "The loans have helped me a lot," she says. "I can buy medicine and there is enough food for the children. Now, I don't worry anymore."

Pre-Export Financing Ex-Im Bank's working capital guarantee

helps exporters access working capital funds to acquire inventory and finance export-accounts receivables to fulfill sales orders for U.S. goods and services to international customers.

Benefits of Pre-Export Financing: ▪ Makes funds available to fulfill export

sales orders ▪ Permits financing of exporter's inventory

and accounts receivable ▪ Offers fast turnaround

Insurance Ex-Im Bank's export credit insurance

helps exporters get paid and provide your international customers with competitive credit terms.

Benefits of Insurance for Exporters: ▪ Eliminates most risk of nonpayment by

international buyers ▪ Provides credit terms to international

buyers that can increase sales ▪ Short- and medium-term insurance

available

Buyer Financing: Loan Guarantees and Direct Loans Ex-Im Bank's loan guarantees and direct loans

provide your international buyer with medium- and long-term financing for purchases of capital goods and services produced in the United States. Our buyer financing gives you a cash sale, and we take care of collecting from your buyer.

Ex-Im Bank will support up to 85% of the contract amount (depending upon the U.S. content) after a cash payment of at least 15%.

Guarantees cover 100% of the loan principal and interest against political and commercial risks of buyer nonpayment. EXIM also make fixed-rate direct loans to international buyers.

Loan Guarantee Benefits for Exporters: Protects lenders against risks of nonpayment by

international buyers of U.S. capital goods and services

Ensures loans will be paid, making more money available for financing

Local costs and ancillary services (e.g., financial, legal and technical consulting fees) may be financed

Medium- and long-term guarantees available

http://www.exim.gov/

http://www.exim.gov/smallbiz/index.html

Borrow money in U.S. for foreign operations Usually collateralized

by U.S. assets Can be simple, to

very complex with “paper-companies” for tax advantages

Often used to “repatriate” pre-tax or restricted foreign profits (rigidity of foreign capital markets)

Benefit is often function of local country valuations and capital costs

Source: Ho and Wong, (2005)

Issues: in many countries Formal VC is government or labor union controlled, which results in a) social objectives (Canada), and b) much greater regulation (United Kingdom)

Source: Ho and Wong, (2005)

Economic growth, better financial regulation and a wave of foreign acquisitions have stabilized a banking sector nearly collapsed after the devaluation of the peso in late

1994. The authorities have now succeeded in re-

capitalizing and re-privatizing all the banks they had to take over in that crisis. Foreign banks dominate the Mexican Banking sector

Foreign investors have also made important acquisitions in other financial-services sectors, such as insurance, fund management, factoring and leasing. These three areas are relatively sophisticated in Mexico

Financing conditions for foreign companies in Mexico have improved in recent years as a result of the peaceful transition to multi-party democracy, responsible economic policies and the flotation of the peso, the local currency. Recent Presidential controversy has hurt Mexico within

international community (Felipe Calderon v. Lopez Obrador - To hell with the institutions" is Obrador's new slogan)

Since NAFTA, Mexico has become a favored destination for US and Canadian direct and portfolio investors.

There are no restrictions on capital flows, but foreign investors remain barred from important sectors of the economy (Oil, mining, natural resources, etc.)

Mexico has competitive tax rates but offers inadequate public services.

http://www.stratfor.com/sitrep/20090316_mexico_increasing_tariffs_some_u_s_products

Regulated savings-and-loan groups (sociedades de ahorro y préstamo—SAPs) predominantly serve areas of fewer than 250,000 people. These non-profit companies, authorised by

the Secretariat of Finance and supervised by the National Banking and Securities Commission (1.2), are organised and owned by depositors in a mutual form.

Credit unions are non-bank financial intermediaries. They primarily provide financial services to small and medium-sized businesses. 135 credit unions, but declining

SAPs and credit unions serve business or farm groups or small communities, and aim to make low-overhead credit available to those who, for geographic or structural reasons, are unable to obtain bank financing.

Credit unions and SAPs are allowed to accept savings, demand and time deposits, and to make loans exclusively to their partners.

Mexico’s stock exchange, the Bolsa, continues to suffer from a gradual erosion of its trading volumes and liquidity Failed to attract a significant number of new

listings. 2003 implemented a series of changes to widen

its investor base, improve corporate governance and attract listings from medium-sized companies.

Derivative exchange MexDer, is much more successful.

Access to Funds Multinationals and blue-chip Mexican firms,

have easy access to bank credit and international debt markets.

Small and medium-sized domestic enterprises, often locked out▪ Expensive and limited to the short-term

(under one year). Foreign owned small firms often have more

access to local lenders than Mexican owned small enterprises

BANCOMEXT is the “EXIM” bank for Mexico

Conclusions Domestic credit

remains stagnant Non-bank financiers,

such as leasing companies and factoring firms, have expanded their operations.

Private pension funds and government efforts to establish longer-term benchmarks have bolstered the still-small market for corporate debt issues.

Small U.S. firms more respected than small domestic Mexican firms