ESTABLISHING A MICROENTERPRISE DEVELOPMENT AND LOANS PROGRAM IN AUSTRALIA. backing people, not just banking them

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1 ESTABLISHING A MICROENTERPRISE DEVELOPMENT AND LOANS PROGRAM IN AUSTRALIA backing people, not just banking them

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3 FOREWORD Over the past four years, NAB has increased its involvement in delivering small, affordable loans microfinance to people who, for one reason or another, are unable to access credit from mainstream financial services companies. We began our microfinance journey in 2002, when NAB entered a partnership with the Good Shepherd Youth and Family Service. Together we developed the consumer credit loan, Step Up in 2004 an unsecured not-for-profit loan of up to $3,000 to help people on low incomes meet household needs. Step Up is now available in pilot locations in New South Wales, Victoria, South Australia and Western Australia. To boost growth in microfinance lending in Australia, we announced in 2006 a commitment of $30 million over three years to support microfinance initiatives. As part of this commitment, we are proud to be providing up to $10 million in loan capital for No Interest Loans Schemes (NILS ). NILS, which operate across Australia, were developed and are coordinated by the Good Shepherd Youth and Family Service. They enable people on low incomes to purchase essential household goods. The loan capital NAB provides to NILS will ultimately become community funds, lent on an ongoing basis and continually recycled by community-based, Good Shepherd accredited NILS providers. As the next step in our microfinance journey, NAB is investigating whether and how loans of up to $20,000 can be provided to Australians without access to affordable credit to help them establish or develop microenterprises. In doing this, we are seeking to build Australia s experience in microenterprise development the support of small business enterprises that would otherwise have little or no chance to thrive. This is a natural progression for NAB, based on our ongoing commitment to help people who are marginalised from mainstream banking. NAB knows small businesses very well in Australia we bank around one in four, as well as one in three farmers. However, we wanted to understand the particular needs of microenterprise development customers and the key issues associated with the development and deployment of microenterprise loans programs. The Boston Consulting Group (BCG) volunteered its services to help us in this. This paper summarises the findings from BCG s review. We hope you find it a useful contribution to the emerging microenterprise development discussion in Australia. Ahmed Fahour Executive Director and Chief Executive Officer, Australia October

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5 INTRODUCTION This paper was prepared by NAB, based on the main findings of a pro bono study undertaken for NAB by the Boston Consulting Group (BCG). The study, which was completed in July 2006, used the following definitions: Microenterprise development is supporting, on an end-to-end basis, the establishment and maintenance of a microenterprise, including business literacy programs and the provision of microenterprise loans Microenterprises are basic business enterprises of five or fewer people, and include owner-operated businesses and businesses operated from home Microenterprise loans are business loans of between $500 and $20,000 to financially support microenterprises typically, such loans are designed to assist people on low incomes who have few or no avenues to access affordable business credit To understand the demand for microenterprise loans and the options for delivering a microenterprise development program in Australia, BCG reviewed both the Australian and the international literature. BCG also interviewed Australian and international experts in community organisations, financial services organisations, academia, government and existing Australian microenterprise development programs. CONTENTS Introduction 3 Microenterprise development experience in Australia 4 Other support for microenterprises 5 Microenterprise development experience in other developed economies 7 The characteristics of a successful, end-to-end microenterprise 9 development program Microenterprise development customers and how to reach them 9 Demand for microenterprise loans in Australia 9 Eligibility criteria 10 Avenues to reach clients 11 Business literacy development 12 The microenterprise loan 12 Mentoring 13 Economics of a microenterprise development program 14 Summary and conclusion 15 Next steps 15 3

6 MICROENTERPRISE DEVELOPMENT EXPERIENCE IN AUSTRALIA At a glance: microenterprise loans in Australia Estimated number of loans: 200 Average loan size: $3,500 (range extending from $1,500 to $5,000) Default rates: 0% through to 8.5% Where operational costs for the microenterprise development programs were disclosed they were high and well in excess of the $ lent Australia has a number of targeted microenterprise loans programs that operate outside the mainstream banking system. In total, they originate about 200 microenterprise loans each year. Individually, these programs are small in scale and have limited funding. They tend to be operated by community groups with locally based clients, often defined by specific demographic characteristics (see Table 1). Australian microenterprise development programs typically have high operational costs, driven by factors including: the time and labour involved in sourcing and screening potential participants; the need to provide quality business literacy training and ongoing mentoring; their inability to achieve scale because of funding limitations or a narrowly defined client base. Table 1: Microenterprise loan programs in Australia Name Description Brotherhood of St Laurence & FCCC small business loans scheme Women in Business Tasmania Maleny Credit Union/LEED Foresters ANA Friendly Society Parkes Forbes BEC The Traditional Credit Union Pilot project with the Fitzroy-Carlton Credit Cooperative and several NEIS (Enterprise Incentive Scheme) providers in Victoria. Designed to assist people on the NEIS program. Program run by the Department of Economic Development, the Department of Premier and Cabinet s Women Tasmania and the No Interest Loan Schemes (NILS ) network of Tasmania. QLD based credit union. Runs a partnership with LEED (Local Economic and Enterprise Development), which started in 1999 and was initially funded by the Department of Family and Community Services. QLD based Friendly Society. Provides financial assistance to a range of community organisations and microenterprises. Not an official program, but considers applications on a case-by-case basis. Clients are mainly refugees and women who have been long-term unemployed. Pilot of Indigenous self-employment program, runs from Department of Employment & Workplace Relations (DEWR) funding. Serves Indigenous communities in the Northern Territory. Mainly provides transaction banking and savings plans. 4

7 Name Landcare Revolving Loan Fund Mercy Care ENYA Description Low interest loan fund operated by landcare groups in the North East of Victoria and funded by several industry agencies (which are funded by the Federal Government). The fund assists landholders with loans for farm forestry and landcare works. Operates Leviticus Loans, which includes No Interest Loans and Step Up (A NAB and Good Shepherd Youth and Family Service initiative). Targets three areas in WA (two in Perth, and one in the Kimberley) with microenterprise initiatives for specific cultural groups (eg new migrants, refugees and Indigenous). A Youth Business International accredited program for young Australians, that started at the end of ENYA offers small interest free loans for capital purchases as well as access to business support services and reduced-fee legal advice. Other support for microenterprises Several government and not-for-profit agencies offer free or low cost business literacy support for small or emerging businesses. These include: Commonwealth Government Business Entry Point (BEP), Enterprise Incentive Scheme (NEIS), the Small Business Entrepreneurship Program (SBEP), the Small Business Field Officers Program (SBFO). State Governments Every state has an office or departmental division that specialises in small businesses and provides a variety of resources (eg workshops, mentoring, small grants). Not-For-Profit Business Enterprise Centres Australia (BECA), Small Business Counselling Service Victoria (SBCS). Business resources funded by the Federal Government Business Entry Point Web based portal for business owners and entrepreneurs. Provides essential information on planning, starting and running a business. NEIS Started in 1988 and managed by DEWR. Targets people on Centrelink benefits. Provides small business management training, coaching and living allowance for 12 months. Total 60,000 participants since inception. Delivered by private, community and government organisations. Small Business Entrepreneurship Program Funded and operated by Australian industry. Targets young entrepreneurs and existing businesses. Competitive, merit-based grant program. Provides general skills development and mentoring services. Provides incubation services through small business incubators. 5

8 Small Business Field Officers Funded and operated by Australian Industry. Provides practical and on-the-ground assistance for small businesses, particularly in rural areas. Topics include export, home-based business, e-commerce, taxation and finance. Field officers provide information in a variety of ways, including face-toface contact, phone or , newsletters, seminars, expos and field days. Business resources provided by State governments (not a complete list) NSW Department of State and Regional Development operates: smallbiz.nsw.gov.au website; Stepping Up mentoring program; Young Entrepreneur Stepping Up program; Women in Business program; Aboriginal Business Development program; Home Based Business program. VIC Department of Innovation, Industry and Regional Development (Office of Small Business) operates: website; Victorian business centres (in rural areas); Victorian Business Line (VBL); Mentoring programs; Women Access to Finance; Under New Management program; Grow your Business program. QLD Department of State Development, Trade and Innovation operates: smartsmallbusiness.qld.gov.au website; Smart Start workshops for new business operators; Mentoring for Growth program; State development centres, which offer business counselling in rural areas; SA Department of Trade and Economic Development (Office of Small Business) operates: SouthAustralia.biz website; Start Your Own Business workshops; Better Business series workshops; Business owners Coaching Program. WA Government funds the: Small Business Development Corporation (SBDC), which offers business service, online and through workshops; The Small Business Skills website, which provides online courses for business skills. 6

9 MICROENTERPRISE DEVELOPMENT EXPERIENCE IN OTHER DEVELOPED ECONOMIES At a glance: microenterprise loans overseas (developed economies) Average loan size $11,600 (range extending from $4,400 to $19,200) Default rates can be reasonable, varying from 3% though to 13% For the international programs which disclose their cost structure: 40 to 80c cost per $1 lent. As in Australia, many overseas microenterprise development programs are small and narrowly focused. Acción (US) and the ADIE (France) have been the most successful in achieving scale, making over 1000 and 6000 loans respectively per annum. Table 2 shows an overview of the main overseas programs. In the most commonly seen model, groups of financial institutions (along with other corporate and philanthropic bodies) provide credit facilities to microenterprise development programs at subsidised rates and contribute to their operating expenses through grants. Because the credit application and loan management processes are very high-touch, these tend to be delivered in a bespoke fashion by the programs not-for-profit partners rather than by the participating banks. These programs target and acquire borrowers through several channels. Banks refer a selected group of rejected credit applicants; accountants and other business service providers refer clients; and former borrowers recommend the program to friends. Active marketing at the community level is common, through, for example, frequent appearances on community talkback radio and relationship managers becoming block walkers to target entrepreneurs on the streets (eg Acción NY). Mentoring, typically delivered by volunteers, is a critical component of overseas microenterprise development programs. Regional volunteer managers often need to be employed to attract, train, retain and coordinate these volunteers. 7

10 Overview of leading overseas microenterprise development programs (developed economies) ACCIÓN USA A network of owned and franchised operations that partner with banks to provide small loans to low income micro entrepreneurs to start or grow small businesses. Loan fund is based on donations from government, foundations, community groups and banks. ADIE FRANCE A national program which partners with government agencies and banks to provide small loans to formerly unemployed micro entrepreneurs to start or grow small businesses. The program has strong partnerships with banks (eg Banc Populaire) to provide loan capital, refer clients and contribute to operating expenses. CANADIAN YOUTH BUSINESS FOUNDATION National program, partnered with local business incubators to provide small loans to young micro entrepreneurs (18-34 years) to start or grow small businesses. Strong partnerships with banks to provide loan capital, refer clients and contribute to operating expenses. FIRST STEP IRELAND Program provides loans to micro entrepreneurs who cannot access funding (or sufficient funding) from other sources. Revolving loan funds are supported by financial institutions, Government, European Union and private sector donations. STREET UK Founded with the aim of developing a national scale organisation that lends to micro entrepreneurs seen as not creditworthy by mainstream financial institutions. Table 2: Overseas microenterprise development programs and their features (developed economies only) Program features Acción USA ADIE France First Step Ireland Canadian Youth Business National Scale No Yes Yes Yes No Street UK Risk-adjusted pricing for individual borrower Yes No No No No Subsidised interest rates Yes Yes Yes Yes n/a Defined demographic target group Multiple Multiple Multiple Yes No Form on mentoring None Provider Provider Provider Provider Form of business training Provider Provider Provider Partner/ incubator Provider Loan capital and/or opex partially provided by bank Flexible, but normalised credit approval process Both Both Opex only Both Capital only Yes Yes Yes Yes Yes 8

11 THE CHARACTERISTICS OF SUCCESSFUL, END-TO-END MICROENTERPRISE DEVELOPMENT PROGRAMS The Australian and international experience suggests that four elements are crucial in establishing and sustaining a successful microenterprise development program. 1. A clear understanding of target customers and the avenues to reach them 2. Tailored business literacy programs 3. A flexible, purpose built loan product 4. A high engagement mentoring program that begins during business literacy training and continues beyond the microenterprise start-up A bank alone is unlikely to be able to put all these elements in place. Instead, a coalition of stakeholders and partners is needed to find the right microentrepreneurs and provide them with appropriate business literacy training, financial support and mentoring. Microenterprise development customers and how to reach them Is there demand for microenterprise development loans in Australia? Based on international experience, what eligibility criteria should be used? What avenues should be used to reach microenterprise development customers? Demand for microenterprise loans in Australia BCG was unable to find any publicly available research on the potential demand for microenterprise loans in Australia. To build a broad understanding of national demand, the BCG team applied three different lenses : 1. Used ABS data on low asset households and internal bank data on applications for personal loans and credit cards to estimate the number of adults in Australia excluded from consumer credit and without the security needed to access business credit, then used the Global Entrepreneurship Monitor Survey for Australia to understand the proportion likely to want to start a microenterprise. 2. Based on the ANZ Financial Exclusion Report and ABS data, estimated the number of people who are financially excluded because of income, assets, and/or demographic characteristics, then used the Global Entrepreneurship Monitor Survey for Australia to understand the proportion likely to want to start a microenterprise. 3. Estimated the number of existing small businesses that could be financially excluded today, using ABS data to identify those with non-mainstream credit and internal bank data to estimate the proportion that would have been refused credit or would not have applied. Bringing together these three views, the team assessed overall potential demand in Australia at 40,000 to 80,000 microenterprise loan customers. Further analysis identified a potential flow of between 6,000 and 12,000 new microenterprises per year that could require microenterprise loans and business support, but would not be eligible for mainstream credit. 9

12 Eligibility criteria Successful microenterprise development programs apply clear eligibility criteria to determine which applicants are genuinely financially excluded and also have a realistic chance of success in their planned or existing enterprises. Overall, microenterprise loans programs tend to target people who: have no assets; have limited business experience; may have been declined by a bank for business or personal credit; have a low household income (<$40,000 pa); have an unstable job history or residential status. However, such programs tend not to accept applicants who have past bankruptcies or major unpaid debts. In addition, evidence of business readiness for example, a comprehensive business plan is generally required. Table 3 shows the elibility criteria applied by some overseas microenterprise development programs. Table 3: Eligibility criteria of international microenterprise development programs Acción New York Canadian Youth Business First Step Ireland Loan purpose Business Only Business Only Business Only Client Demographic Minimum 21 years old, lives around NY years, eligible to work in Canada Financially excluded applicant who lives in Ireland Business profile/client Experience Minimum 2-3 years experience in business area or business endeavour Training/experience related to the business area Must hold at least 51% of voting share in the business Some sector knowledge or business experience Security/Co-signer/ References Requires small security Requires co-signer with strong credit and a stable source of income N/A Requires personal references, business and credit Business Plan Requires business plan Requires business plan Requires business plan Main Decision Factors Character Robust business plan Robust business plan Credit history and payment behaviour Financial ability to pay Client is willing to work with a mentor for the duration of the loan Good references Commitment and motivation 10

13 Avenues to reach clients Successful microenterprise development programs employ a range of avenues to reach potential customers. This not only maximises their reach and volume but also provides a number of points at which candidates can learn about program features and be screened for eligibility before making a formal application. Table 4 shows potential avenues to customers for an Australian microenterprise development program, based in part on overseas experience. Table 4: Potential avenues to microenterprise development program customers Who? A bank Branch referrals Rejected lending applicants (eg. commercial cards, Micro Business lending) Consumer Hardship group (where used for business) Third parties Community groups (Rotary, Lions) Credit Unions Welfare Groups Potential service delivery partners Government programs (eg Business Enterprise Centres, NEIS) Business Incubators Education Institutions (AMES, TAFEs) Indigenous Programs How Refer broadly screened candidates to program coordinator Educate candidates on eligibility criteria Microenterprise program coordinator to then perform precise eligibility assessment Refer broadly screened candidates to program coordinator Educate candidates on eligibility criteria Microenterprise program coordinator to then perform precise eligibility assessment Assess eligibility and business readiness needs Identify subset of existing clients who might be eligible for/interested in microenterprise development program 11

14 Business literacy development Tailored business literacy programs are core features of most successful microenterprise development programs. Such programs: educate participants on relevant legislation and regulation, and on the basics of running a small business; help participants to translate great ideas into robust business plans with realistic financial projections; expose would be entrepreneurs to the realities of owning and operating a small business, and ensure that only those with genuine entrepreneurial characteristics and fundamental business skills take their ideas further. As described earlier, many business literacy programs are available in Australia, but some adaptation may be needed for participants in microenterprise development programs. For example, an incubator style program could offer very inexperienced participants hands-on work experience in a successful small business in the same or a similar industry. In addition, some training courses may need to be adapted to meet cultural sensitivities or learning preferences (for example, by tailoring the presentation style or language). Overall, a participant in a tailored business literacy program for microenterprise development should have by the end of the program: a robust business plan; experience in or understanding of the technical and operating skills needed for their proposed enterprise; general business management skills (eg budgeting, marketing, legal and financial management skills); entrepreneurial understanding. The microenterprise loan Someone who completes a business literacy program, as described above, and also meets financial exclusion criteria, should be eligible to apply for a microenterprise loan. Banks that originate such loans must meet a twofold objective: that applicants get the finance they need, despite their failure to meet mainstream lending criteria; and that the bank continues to meet prudent and safe lending criteria, despite using non-standard credit criteria. Experience shows that a mainstream lender in a microenterprise development program should make the loan decision: on a case by case basis, applying established but non-standard credit criteria; on the candidate s completion of an accredited business literacy program and approved business plan; on the recommendation of a mentor who can attest to the applicant s capability and business capacity (see Mentoring). 12

15 Mentoring Mentoring is compulsory in half the international microenterprise development programs examined in BCG s review. The remainder refer participants to local mentoring providers where required. Australia has a wide variety of business mentoring services, coordinated by both government and not-for profit agencies at no or low cost to participants. The mentors themselves are experienced entrepreneurs, bankers and small business owners who often volunteer their services. In successful microenterprise development programs, mentoring is not purely an after lending activity. Including mentors at the business literacy development stage helps them to make an early assessment of the business idea and the individual s capabilities, and can also smooth the transition from the business literacy training to loan application and then start-up. The tasks performed by mentors should include: 1. Build the relationship principally by sharing experiences during the business startup and for as long as the relationship is delivering value. The relationship with the entrepreneur must be based on mutual trust and support, so matching is critical. 2. Guiding the entreprener by acting as sounding board or coach; providing guidance on solutions to business problems; and challenging the entrepreneur to make their own decisions. 3. Providing additional avenues of support for the entrepreneur through personal contacts and business networks. 4. Reviewing the business progress by facilitating a monthly financial review and submitting any necessary reports. 13

16 ECONOMICS OF AN ESTABLISHED MICROENTERPRISE DEVELOPMENT PROGRAM Based on all the requirements identified above, a fully costed end-to-end microenterprise development program in Australia is estimated to cost about 72 cents per dollar lent. This assumes a program with about 1000 loans, and includes: 12 cents per dollar lent for sourcing customers, including screening against eligibility criteria and marketing of the program; 32 cents per dollar lent to deliver a business literacy program; 17 cents per dollar lent to deliver a mentoring program; and 11 cents per dollar lent for lending costs including the loan application assessment and loan losses (this assumes an interest rate on the loans of 10%). 14

17 SUMMARY & CONCLUSION People on low incomes with few assets may have great business ideas but their options are limited when it comes to accessing affordable credit. Microenterprise development programs in Australia are small, narrowly focused and relatively high cost. Internationally, some programs are much lower cost, primarily because of the larger scale of open loans. A conservative estimate of the Australian demand for microenterprise loans suggests that between 6,000 and 12,000 potential new microenterprises per year require funding but are unable to obtain it from mainstream lenders. Successful end-to-end microenterprise development programs are characterised by: 1. A clear understanding of target customers and the avenues to reach them; 2. Tailored business literacy programs; 3. A flexible, purpose built loan product; 4. A high engagement mentoring program that begins during business literacy training and continues beyond the microenterprise start-up. To get all these elements together, a coalition will be needed between lending institutions and other partners and stakeholders. Intensive, one-on-one work is required to source, train, support and finance microentrepreneurs. Based on the initial research, a fully costed microenterprise development program with all the elements described and around 1000 open loans would cost about 72 cents for every dollar lent. Next steps The demand for microenterprise loans and the benefits they could deliver must be balanced against the cost and risks of providing them. The challenge is to find ways to achieve an appropriate balance in a sustainable way. Over the next year, NAB proposes to pilot, in selected locations, a delivery model for a low cost microenterprise development and loans program. We envisage working in close partnership with community-based organisations that already deliver aspects of microenterprise development, such as the business training programs identified earlier in this report. NAB does not believe that a single microenterprise development program can fulfil all the demand across Australia. It is therefore our intention to look for opportunities to share the experience gained in pilot programs so that the model and any lessons learnt can be replicated at locations around the nation. 15

18 For more information on: No Interest Loans Schemes (NILS ) please visit either the Good Shepherd Youth and Family Service or NAB s websites. Step Up Loans & Insurance please contact the location nearest to you: Victoria (03) New South Wales Bathurst, Lithgow, Cowra & Orange (02) Western Australia Perth, Geraldton, Kalgoorlie South Australia (08) NAB Concession Card Account please visit your nearest NAB branch or call us on 13 BANK ( ) NAB Community Fee Saver Account please visit your nearest NAB branch or call us on 13 BANK ( ) Our website, provides detailed background and other information on NAB s community banking and loan products. 16

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20 2006 National Australia Bank Limited ABN (10/06)