Contents. Executive Summary Cities actions in favour for SMEs Fostering the SMEs Access to Finance by financial incentives...

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1 Imprint URBACT-Network ECO-FIN-NET SMEs Access to Finance Cities actions in disadvantaged urban areas Leipzig/Brussels, June 2006 Publisher Lead Partner City of Leipzig Business Development Agency Neues Rathaus, Martin-Luther-Ring Leipzig, Germany Tel +49 (0) , Fax +49 (0) Editor Thematic Coordinator German Association for Housing, Urban and Spatial Development (DV e.v.) 47-51, Rue du Luxembourg 1050 Brussels, Belgium Tel +32 (0) , Fax +32 (0) This report is the final output of the URBACT-network ECO-FIN-NET: City of Leipzig (Lead Partner), German Association for Housing, Urban and Spatial Development (Thematic Coordinator), City of Birmingham (GB), City of Evosmos (GR), City of Gdansk (PL), City of Gera (D), City of Gijon (E), Communauté d Agglomération Grenoble Alpes Métropole (La Métro) (F), City of Marseille (F), City of Rotterdam (NL), City of Venice (I), City of Vienna (A), City of Vilnius (LT), Association for the Development of West Athens (ASDA) (GR) The report has been compiled with assistance from experts Silke Brocks (German Association for Housing, Urban and Spatial Development), Jeroen den Uyl (City of Amsterdam) and Patrick Fourguette (expert with GIP ADETEF - French Ministry of Economy, Finance and Industry). Contents Executive Summary Cities actions in favour for SMEs The ECO-FIN-NET network rationale Background SMEs as one of the main motors for economic development The ECO-FIN-NET s view on businesses SME Support a core task for local governments SMEs needs and requirements Need of an integrated local SME strategy Three main support pillars Different local contexts Strong local partnership Fostering the SMEs Access to Finance by financial incentives Private Financing High level of risk assessed by the banks for SME loans Costs of small loan applications Lack of information Public Financial Support General framework for city involvement Grants Layout: comcores, Leipzig Micro-credit Venture and seed capital Advisory services and training schemes Fostering the SMEs Access to Finance by non-financial services and network support Variety of support services Existing problems seen by the entrepreneurs Challenges from a city perspective Suggestions Recommendations The ECO-FIN-NET network... 74

2 5.1 The European Programme URBACT The URBACT-network ECO-FIN-NET Work groups / Sub themes Working approach External expertise Appendix...75 I Partner Cities / Contact Persons II Financial SME Support III Non-Financial SME Support...81 IV Sources V Partners Practice Examples Questionnaire Results...87 Executive Summary The URBACT-network ECO-FIN-NET The EU Initiative URBAN The far-reaching structural economic changes in Europe during the past decades have had a negative effect on cities and urban areas in general. These changes are particularly apparent in the inner cities and surrounding areas, and also in the large mono-structural housing estates on the outskirts of cities even in prosperous regions. In these deprived urban neighbourhoods the economic outlook is bad, the buildings are generally in poor structural condition and the quality of life is very low. And where these areas also suffer from high crime rates, they are frequently referred to as social hotspots. These significant disparities in economic and social opportunities damage the attractiveness, competitiveness, social inclusiveness and safety of cities. Thus the situation also impacts negatively on the economic growth and wealth of a city. Unless appropriate countermeasures are taken, in the medium and long term these tendencies will affect more prosperous parts of our cities or regions, since they radiate negative signals with regard to relocation and development. In order to respond appropriately to these trends, in 1990 the European Commission launched the URBAN Pilot Projects (UPP) and in 1994 the URBAN I Community Initiative. Innovative approaches were put to the test in a sort of European experimental ground for urban regeneration. In more than ten years of its existence, using the field-tested integrated development approach, the URBAN Community Initiative has contributed significantly to the sustainable stabilisation and revitalisation of urban areas that are experiencing difficulties. Measures to strengthen the local economy, promote employment and social integration and address urban planning, infrastructure and environmental issues have significantly improved the quality of life of local residents. As a result of these positive experiences and evaluations, the URBAN programme was carried forward in 2000 as URBAN II. The URBACT programme Since 2003 the European Commission has been supporting the Europe-wide exchange between cities in the field of integrated urban development within the framework of its URBACT programme. The programme supports the exchange of innovative ideas and approaches in the notion of good practices, the improvement of methods of integrated urban development, the preparation of political recommendations concerning urban development in the context of the EU Cohesion Policy post The URBACT programme focuses on all cities that have already been funded within the framework of Urban Pilot Projects (UPP) or the Community Initiatives URBAN I and/or URBAN II and have therefore been able to gain a lot of experience with integrated concepts for the regeneration and revitalisation of disadvantaged districts. Furthermore, cities from the new member states with a population of more than 20,000 are being invited to participate in the programme. URBACT is not just a straightforward summary of the experiences of the URBAN cities but has acquired an additional dimension as the result of shared discussion between various cities in different European countries and on several issues and approaches which was implemented by URBACT. The URBACT partner cities have made a significant contribution: The cities felt that they were in debt because they were receiving URBAN funding, and they have delivered information on their experiences. They have sent representatives to working group discussions in order to set up suitable recommendations and have also made a major financial contribution (50% of the budget of the URBACT networks). And they have expectations. In an integrated approach, the experiences of the other partner cities are of interest to them because they can represent added value for their own experiences. Consequently they wish this programme to be continued. The method used within URBACT consists mainly of thematic networks between partner cities, covering the main issues of integrated urban development. Within these networks the partner cities discuss comparable problems of urban revitalisation with other cities from other member states, thereby establishing a knowledge base which is generally accessible. Each network deals with a specific topic e.g. urban regeneration, citizen participation or economic activity. 1 5

3 ECO-FIN-NET The ECO-FIN-NET network dealt with the issue of support to small and medium-sized enterprises (SMEs). It focused on the access of SMEs to finance through innovative financial instruments and in particular on the access of the smallest companies in the less favoured urban areas. The network is led by the City of Leipzig in Germany and consists of 13 cities from 10 European member states. The rationale of the ECO-FIN-NET network Economic growth generates additional wealth which in return helps to enhance the whole area, increasing its attractiveness and image, and finally strengthens the commitment of the residents to their neighbourhood. The cities have turned their attention to the SMEs located in their regions because the SMEs are one of the main motors for economic development. Over 95% of all companies in the European Union are micro, small and medium-sized enterprises, and this percentage is even higher in the disadvantaged areas. These areas are characterised by a below-average rate of entrepreneurship and this is motivating the cities to pay particular attention to all sorts of business and entrepreneurial projects even the very smallest business projects. The ECO-FIN-NET project ran from January 2004 until June 2006 and was divided into three main phases: 1. The partner cities presented their practical experiences regarding local support for SMEs to one another and identified possible forms of good practice. 2. They evaluated these practices, worked out the most important potentials and obstacles and selected the most relevant elements which are deemed transferable to other cities, always bearing in mind the different national contexts and developmental stages of the participating countries: for instance, the tradition of the more strongly developed financial market in Great Britain than on the continent leads to significant differences between the financial systems of the countries concerned. In some countries savings banks are involved in the local economy whilst in other countries they simply do not exist. 3. Based on these evaluations and their own practices, they developed recommendations which some of them are currently starting to implement. Private financing The usual source of finance for SMEs is banks and other financial institutions (e.g. microcredit institutions). The problem arises when the lending organisations are, for understandable reasons, reluctant to finance some projects. These reasons are: 1 City and Public Authorities SMEs and Banks and Business- other Financial Associations Institutions Access to finance is an important factor for the development of SMEs. The three main stakeholders are the SMEs, the financial institutions and the city. If these three stakeholders are represented as being at the points of a triangle, the measures that a city can take to support its SMEs are symbolised by four arrows as shown on the chart below:, between the city and the SMEs: it represents direct funding by the city. between the city and the banks: it represents any form of city funding to the banks. between the city and the banks through the SMEs: it represents any form of non financial support the city can provide to the SMEs in order to comfort their position when they apply for a loan. between the city and the SMEs through the banks: it represents any form of support the city can provide to the banks in order to make loans to SMEs more attractive for the banks. The ECO-FIN-NET partner cities have identified the following issues: 1. The access of SMEs to finance is generally achieved through banks and other financial institutions. Where businesses have encountered difficulties, ECO-FIN-NET has studied the reasons for these difficulties and suggested possible solutions with intervention by the cities. 2. For several years the cities have been devising opportunities for financial support for the development of businesses and start-ups (grants, loans, etc.). ECO-FIN-NET has questioned the relevance of these support instruments, in particular their adaptation to the specific conditions required by micro and small businesses in deprived areas. 3. Access to financing instruments also requires non-financial services such as business advisory services, training, mentoring and networking. ECO-FIN-NET has studied the services best suited to improving the access of SMEs to finance. More generally, ECO-FIN-NET has paid particular attention to the possibilities of maximising public support in the form of different types of partnership with other public or private entities; all the more so in the current context of dwindling public financial resources, when cities are aiming to achieve more with less direct funding. For each of these three themes, ECO-FIN-NET set up a working group with representatives from the cities that have gone through this experience. Ten meetings were organised for the working groups, and external experts such as representatives of the banks, the German Savings Banks Association, entrepreneurs, micro credit and guarantee fund organisations, etc., took part in these. The working groups have been advised by two URBACT thematic experts and the German Association for Housing, Urban and Spatial Development in its role as thematic coordinator of the ECO-FIN-NET. 1. The lack of sufficient collateral which results in an increased financing risk for the lending institutions; if this increased risk were reflected in the interest rate of a loan given to the enterprise in question, this interest rate is likely to be too high to be acceptable to the entrepreneur. 2. The high cost of loan application and processing in relation to the small amount of credit: in practice, these costs cover the work of preparation of their loan applications by the SMEs and of the risk assessment and processing by the lending institutions. 3. The lack of information or track record about the small businesses. The members of ECO-FIN-NET have tried to address possible solutions for these problems: How to lower or share the risk for the banks with the small business loan applications in the disadvantaged areas? How to reduce the cost of the application and the processing of small loans? How to improve the quality of information about enterprises to the level required by the banks? Lowering or sharing the risk For a long time one solution to this problem has been loan guarantee funds that cover part of the risk for the lending institutions. Here the ECO-FIN-NET working group recommendations are as follows: The local authorities may consider making a financial contribution to existing guarantee schemes, in order to guarantee loans to local businesses or to increase the guaranteed loan percentage for the small businesses in the disadvantaged area. They should ensure that the guarantee funds are really opened up to small businesses, i.e. make small projects bankworthy : they should not only be a system that facilitates the procedure for seizure of collaterals from the traditional bank clients. In consequence, the guarantee scheme should cover SME loans, in particular including microcredit loans. A guarantee scheme should be a flexible instrument open to contributions by the local public authorities, targeted to the businesses established on (part of) their territory according to negotiable guarantee conditions. Guarantee funds should be designed on a somewhat broader basis in order to diversify and spread the risks and reduce the operational costs: this means that local guarantee funds (limited to the territory of a local authority) should be avoided. This recommendation does not contradict the fact that a local authority carries out specific measures within a specific territory: this authority may contribute to a bigger fund with specific conditions for those businesses that are located within the local authority s area. 6 7

4 The guarantee funds should be managed by specialised financial institutions in order to increase the leverage ratio and lower the operational costs. Where the strengthening of links within a local / sectoral business community is an issue, mutual guarantee schemes should be considered. At the national level, counter-guarantee systems should be developed in addition to the European counter-guarantees delivered by the European Investment Fund (EIF). Reducing the costs of small loan applications and improving the quality of information When small businesses apply for a loan, they have to prepare a loan application which sometimes includes business data, a business plan and a list of all their available securities, etc. Small loans are not assessed in the same way as large ones, but well-prepared applications are easier (and less time-consuming) for the financial institutions to process. The ECO-FIN-NET recommendation is to deliver advisory services to the applicant businesses in how to prepare their loan applications and to add such financial expertise to the list of other types of expertise eligible to the (regional) advisory support schemes like other types of advisory services. Another possibility is to also make the cost to the financial institutions of processing loan applications eligible for support from the existing business advisory support schemes. The procedure for processing loan applications should be designed in such a way as to avoid duplication of work. As a first step in this direction, credit check results could be communicated between banks and guarantee funds with the consent of the companies concerned. This cooperation with the aim of leaner and cheaper processes can be further developed and intensified: Institutional cooperation between lending and guarantee institutions, giving enterprises the option of a one-stop application point. Designing lending products with a built-in guarantee ( exemption from liability ) which is automatically applied for at the same time as the loan product. Public financial support General framework for city involvement It seems obvious that public SME support measures have to be in line with the expectations and requirements of the businesses. As a general rule, SMEs need stable, visible and efficient procedures. They also prefer the local level (city). For the cities, these conditions are met by partnerships. The ECO-FIN-NET recommendations are as follows: Stable support means sustained access to financial resources. But the current trend, at least in the old member states, shows that public resources are dwindling. For the cities, securing these support procedures can be achieved by partnership either with other public entities that run multi-annual programmes (regions, national level, EU Structural Funds...), or, as it is being developed in some countries, with the private sector. Visibility means that the support schemes have to be promoted to the SMEs. This promotion can usefully be achieved by business representative organisations, and the cities should organise a partnership with these organisations for this purpose. Efficiency requires technical expertise that as a rule is developed by specialist institutions. In order to design and offer efficient instruments, ECO-FIN-NET recommends that the cities organise a partnership with specialist financial institutions. Instruments of public financial support Instruments of public financial support include grants, loans, guarantees and venture capital. The ECO-FIN-NET recommendations on guarantees have already been presented in the section on Lowering or sharing the risk. Grants Grants are a very successful support instrument for new projects that require consolidation of the entrepreneur s equity: they bring more confidence to the projects and give them access to other forms of funding. Grants should be considered as part of a financial package aiming at making small projects bank worthy. In situations where there are scarce public financial resources, grant funds should be reserved to the consolidation of equity for new projects, irrespective of the investments and the number of new jobs. Priorities may be set for grant allocation by the local authorities, but automatic sectoral support associated with specific investments (for instance investment in IT equipment) should be avoided, since the main priority for grants in disadvantaged areas is to promote new projects (and new economic activity) and develop these in the long term. Loans There is no reason for local authorities to be involved in the operation of schemes that require particular expertise, but rather what is needed is to create incentives for existing schemes so that they are more active for micro and small businesses in disadvantaged areas. These incentives must be negotiated in such a way that the public support can be strictly applied to the businesses concerned within the area. The cities can consider making a financial contribution to cover the preparation and/or administration costs of these loans to small businesses. They can also consider making a contribution to financial institutions (microcredit) in order to cover specific local costs (within the disadvantaged area that is being targeted). They should always negotiate with the private financial institutions so that the public grants and loans are an incentive for private financing (leverage effect). Venture capital Local authorities should not raise unfounded expectations within the SME community by publicising the possibility of venture capital that will apply only to a very small minority of businesses, in particular in those disadvantaged areas where the vast majority of projects are in the traditional sector. So far as this is necessary, and if this is a requirement of local businesses (ad hoc case-bycase agreement), they could act as partners of specialist venture capital organisations. They may consider a financial contribution in order to capitalise investment funds (seed and venture capital) for investments in local businesses and also/first to cover the administrative costs of applications processing and management. Efficient implementation of these instruments requires additional advisory services, training and promotion as generally offered by service providers and business representative organisations. ECO-FIN-NET recommends that the cities provide financial support to these organisations for this purpose. Non-financial services and network support Non-financial services are an important complementary part of the measures taken by cities to improve the access to finance for SMEs. There are four main types of non-financial services: Information / Orientation: SMEs are supplied with information about a number of aspects of their activities and entrepreneurship, such as tax regulations, how to get access to finance etc. Advice is given on the viability of a business idea. Training / Qualification: Training and qualification services are intended to deliver a higher level of entrepreneurial skills in the fields of promotion, bookkeeping, use of IT, e-commerce etc. Coaching / Mentoring: Coaching and mentoring are services where the entrepreneurs are helped by a mentor, often a retired entrepreneur with a great deal of experience. The entrepreneurs are helped to reflect on their problems. Coaching and mentoring require a relationship of trust between the mentor and the mentee

5 Network support: Network support is a specific form of service intended to set up business networks between entrepreneurs in order to create a better environment for the entrepreneurs, opportunities for business-to-business transactions, joint advertising etc. However, service providers are frequently faced with a whole series of obstacles: There is a low participation rate. Many entrepreneurs do not take up the services offered to them. In an in-depth survey amongst entrepreneurs in EU member states, the following reasons were given: Lack of awareness of what is needed. Entrepreneurs do not know that they may require support and services. Difficulties in finding a service provider. Entrepreneurs do not know about all the service providers that exist. The content of the service offered. There is often an asymmetry between the type and quality of the service as delivered and the actual requirements of the entrepreneur. The conditions of service delivery. Entrepreneurs are not satisfied with the timing and price of what is being delivered. Based on these findings, their own experience and discussions with entrepreneurs, the ECO- FIN-NET cities addressed the following questions within their working group: How can we reach the entrepreneurs? How can we meet their demands and requirements? The ECO-FIN-NET cities have identified many methods of reaching the entrepreneurs. The guiding principles of these methods are: to reach out actively to the entrepreneurs, at the places where they can be found, by people who speak their language, by taking up a (quasi-) autonomous position in order to be as close as possible to the entrepreneur and by encouraging entrepreneurs to contact other entrepreneurs. How can the service / (unity of) supply be improved? What is the best approach to offering services to entrepreneurs? How can the work of service providers be organised? Because in many cities the variety of service providers is very wide, the ECO-FIN-NET cities considered what their role would be in improving collaboration between these bodies. The concept of a network covering all service providers and banks and other financial institutions is recommended. This could be further reinforced by developing focal points where information from all service providers is collected and if necessary can be redirected in order to be able to fulfil the specific requirements of the entrepreneurs with regard to services. Further consolidation of this unit of supply is achieved by the introduction of a business pass showing the most important skills of the entrepreneur. How can cooperation with financial institutions be improved in order to strengthen the effectiveness of non-financial support services? It is recommended that a stable and trusting relationship of cooperation be built up between banks, service providers and the cities. Such cooperation contributes to the understanding and appreciation of the quality of the services and network support delivered by service providers. It creates a better picture of the entrepreneur s skills and qualifications when s/he applies for a loan. As banks have certain ways of assessing the creditworthiness of an entrepreneur, the service providers must create their services in line with this. Then the banks will be better able to assess the creditworthiness of a loan application. This form of cooperation reduces the costs of information handling and risks, which means that more entrepreneurs will get access to (market) finance. What is the ideal support package and variety of services and network support that is offered to entrepreneurs? Despite the great variety of different requirements by so many entrepreneurs, we cannot avoid the question as to how the best service package offered to the entrepreneurs should look. ECO-FIN-NET cities considered it useful to define the ideal package. They came to the following conclusion: Personal skills: courses on presentation, organisation, bookkeeping etc. Market access: services concerning market orientation, location issues, permits/regulations, access to business networks etc. Finance: guidance concerning the information required by banks and financial instruments of support (guarantees, grants). Together with services in the form of consultations, network support and coaching services can contribute to all of these services mentioned above. How can we ensure a broader-based integrative support package? What is the best way to approach this? The ECO-FIN-NET cities know that getting access to finance and improving the quality of entrepreneurs through non-financial services is only part of a broader picture. These services must be rooted in a broader-based scheme. An integrative policy (like URBAN) is necessary to enforce the effects of (non-)financial support for entrepreneurs. Physical renewal can result in a safer area in places where affordable premises are available, where people are trained and social inclusion measures are taken, where higher-income residents are attracted in order to increase the buying power of the area. These integrative approaches can only work when all the partners work together. In addition to the smaller circle of cities, banks and service providers, house owners, housing associations, schools, social institutions and neighbourhood residents associations are all involved. How can we attain financial resources for support services? The ECO-FIN-NET cities are concerned about the financial sustainability of (non-)financial services. Apart from one or two exceptions, external funding is necessary. Over the past few years the influence of European programmes such as URBAN has been exceptional. As previously indicated, diminishing funds for the coming budget period are causing dark clouds to appear over these services. The cities will do their best to reduce costs and create the best conditions for the banks to supply regular market loans, but there remains a considerable need for additional (non-)financial help. Conclusions All the recommendations described above are based on the experiences of the ECO-FIN-NET partner cities with one general framework and two common rules: The general framework concerns the sustainability of support systems: It has been indicated that this goal can be achieved by a partnership with other public and private bodies. In particular, the ECO-FIN-NET partner cities wish to emphasize that the Acquis URBAN is to be integrated in the next programming period and that the appropriate measures will be integrated into EU mainstream funding

6 The two rules are: 1. Efficient support instruments to improve the access of SMEs to finance are designed as a package or combination of financial and non-financial services that are well adapted to the requirements of small businesses. 2. Part of the cities decision is to take the initiative and build up partnerships between public and private entities in their environment so that they can deliver these services efficiently to small businesses. The conclusions of ECO-FIN-NET regarding future support for SMEs, both financial and nonfinancial, form an important part of an integrated urban policy for the disadvantaged urban areas. The suggested measures to strengthen local economy, particularly micro and small businesses, are contributing to a significant stabilisation and revitalisation of disadvantaged urban areas. 1 Cities actions in favour for SMEs Today, cities all over Europe are facing huge problems. The far-reaching structural economic change during the last decades in Europe had negative effects on cities and urban areas in general that are particularly apparent in the inner cities and surrounding areas, but also in the mono-structural large housing estates on the outskirts of the cities and this even in prosperous regions. In these deprived urban neighbourhoods the economic outlook is bad, generally the buildings are in a structurally poor condition and the quality of life is very low. And where these areas also suffer from high crime rates, they are frequently referred to as social hotspots. These significant disparities in economic and social opportunities damage the attractiveness, competitiveness, social inclusiveness and safety of cities. Thus the situation also impacts negatively on the economic growth and wealth of a city. Without taking appropriate countermeasures, in the medium and long term these tendencies will affect more prosperous city regions, since they radiate negative settlement and development incentives. In more than ten years of existence, the UR- BAN Community Initiative, using the fieldtested integrated, cross-sector and participative development approach, contributed significantly to the sustainable stabilisation and revitalisation of urban areas in difficulties. Measures to strengthen local economy, to promote employment and social integration as well as to address urban planning, infrastructure and environmental issues significantly improved the quality of life of local inhabitants. Due to these good experiences and evaluations, the programme UR- BAN was continued in 2000 as URBAN II. The URBACT programme Taking into consideration the successes of U.P.P. and URBAN, the European Commission launched in 2003 the programme URBACT. With this programme, the Europe wide exchange of cities in the field of integrated urban development is supported. The programme serves: the exchange of innovative ideas and approaches in the notion of good practices, the improvement of methods for an integrated urban development, the preparation of political recommendations concerning urban development in the context of the EU Cohesion Policy post The EU Initiative URBAN In order to respond appropriately to these trends, the European Commission launched the URBAN Pilot Projects (UPP) in 1990 and following this the URBAN I Community Initiative in In a type of European experimental ground for urban regeneration, innovative approaches were put to the test. The keynote behind URBAN was to take into account all the dimensions of urban life in the context of the urban development programmes and to have all the relevant players participate in their implementation. Special characteristic of the programmes was their integrated, area based and concentrated approach: Funds from various public sources as well as different competencies in urban matters are pooled and directed at a relatively small urban area subject to serious problems. And the strong participation and information of local inhabitants is a key element in integrated urban development concepts. The URBACT programme focuses on all cities that have already been funded within the framework of Urban Pilot Projects (UPP) or the Community Initiatives URBAN I and/ or URBAN II and have therefore been able to gain a lot of experience with integrated concepts for the regeneration and revitalisation of disadvantaged districts. Furthermore, cities from the new member states with a population of more than 20,000 are being invited to participate in the programme. URBACT is not just a straightforward summary of the URBAN cities experiences, but has acquired an additional dimension as the result of shared discussion between various cities and on several issues and approaches. URBACT materialised this additional dimension. The URBACT partner cities have brought a significant contribution: The cities felt in debt for receiving URBAN funding and they have delivered information on their experience. They sent representatives in work group discussions to prepare 13

7 The ECO-FIN-NET network Birmingham Rotterdam Grenoble Gijon Marseille well adapted recommendations. They also contributed financially to an important part (50% of the URBACT networks budget). And they have expectations. In an integrated approach, the experiences of the other partner cities are of interest for them because they may give an added value to their own experiences. Consequently, they wish this programme to be continued. The method used in URBACT consists mainly in partner cities thematic networks that cover the main issues of integrated urban development. In these networks, the partner cities discuss comparable problems concerning urban revitalisation with other cities of other member States and thereby establish a generally accessible knowledge base. Each network is dealing with a specific topic, such as urban regeneration, citizen participation or economic activity. German Housing Association Gera Venezia LEIPZIG Wien Gdansk Vilnius 200 km Evosmos ASDA 1.1 The ECO-FIN-NET network rationale Since the development of local micro, small and medium sized enterprises (SMEs) plays an important role regarding integrated strategies, the network ECO-FIN-NET has been established. It covered the issue of the support of SMEs and focussed on the access to finance for SMEs, and particularly the smallest ones, in the less favoured urban areas with innovative financial instruments. 13 cities in 10 European member states, led by the City of Leipzig, Germany, constitute this network Background One of the main goals of the European Agenda, namely increasing growth, competitiveness and innovation, has been especially promoted by the U.P.P. and URBAN programmes on the local level. Contrary to most national or regional approaches to urban regeneration, the URBAN programmes place clear emphasis on economic development. Many cities launched special funding schemes for SMEs through which grants to existing businesses and start-ups are provided for establishing, expanding, modernising their business premises or safe-guarding their business location. The local economy is also supported through targeted advice and services, the creation of business networks, the establishment of technology, start-up and trade centres as well as city (district) marketing or shopping street management. There is a firm belief that the respective measures not only strengthen local entrepreneurship, but also revitalise the economic and social situation of the districts. This in turn helps to upgrade the whole neighbourhood, increases the attractiveness and image and strengthens the commitment of the inhabitants to their neighbourhood, which finally leads to an improvement in the quality of life SMEs as one of the main motors for economic development The cities have therefore put their attention on the SMEs located on their territory because the SMEs are one of the main motor for economic development. Micro, small and medium-sized enterprises represent more than 95% of all enterprises in the European Union and this percentage is even higher in the less favoured areas. These areas are characterised by a smaller rate of entrepreneurship than the average and this motivates the cities to pay particular attention to all sorts of businesses and entrepreneurial projects, even the smallest businesses projects. Assistance to SMEs is one vital element to improve the local economy and to create new opportunities in disadvantaged areas. The ECO-FIN-NET focuses on this specific dimension. Micro, small and medium-sized enterprises are playing a socially and economically major role, not only at local level: SMEs are a necessity for a diversified economy: The growth of SMEs is vital for a diversified economy. A great variety implies a necessary adaptability of the economy. Many small firms can more easily adapt to new chances and challenges. There is a tendency in most European countries that on the one hand large enterprises decrease and on the other hand SMEs increase in numbers and thereby creating more jobs than large businesses. SMEs are mainly contributing to equal opportunities: SMEs give also the opportunity for a city to benefit optimally of the diversity of the population, including ethnic minorities. The creation of a sound environment where start-ups can breed and grow is then a relevant part of the policy. The reasons for such a policy lay in the objective of poverty alleviation and empowerment of certain groups in deprived areas. SMEs are mainly contributing to upgrading disadvantaged neighbourhoods: SMEs play an important role for the socio-economic stabilisation, the vital structure and function of urban quarters. They provide inhabitants with goods and services and create or secure jobs that are well embedded in the neighbourhood. Apart from the vital and adequate availability and use of premises, reasonable height of rent levels often combined with a broader integrated approach of urban regeneration and renewal, the quality of the entrepreneurs and their possibilities to develop are crucial. This softer side of governmental concern for SMEs is often combined with specific targeted measures to uplift the skills of the entrepreneurs. This must lead in the end to a better access of entrepreneurs to finance in order to develop their enterprise in the right direction The ECO-FIN-NET s view on businesses The term of business should be accepted in a broad sense in terms of ownership status (private, public, social economy) and size (big, small, micro, self employed). Very often in less favoured areas it consists in project ideas that some individuals think of implementing to generate some form of income. The official term used by the European Commission is Micro, Small and Medium Sized Enterprises (SMEs). Micro enterprises have less than ten employees and a turnover of maximum two million Euro per year. Small enterprises are defined as enterprises with less than 50 employees and an annual turnover of maximum ten million Euro, whereas medium-sized enterprises have up to 250 employees with a turnover of maximum 50 million Euro per year. The ECO-FIN-NET rather concentrates its reflection on the micro and small businesses either formal enterprises or individual projects as these projects form the biggest part of the local economy in disadvantaged urban areas. Besides, the ECO-FIN-NET partners see the support of these businesses as part of their local urban policy. This explains why in some cases the support of a specific entrepreneur can make sense for a local authority e.g. in contrary to a financial institution as its support is seen from a different angle. To simplify the reading of this report, the general term SME is used in the following, emphasizing that this contains for the ECO-FIN-NET also and specifically the micro businesses

8 Ideal Situation Figure 1: 100% Bankable SMEs 1 The small businesses expectations have been assessed by a survey called Support Services for Micro, Small and Sole Proprietor s Businesses financed by the DG Enterprises of the European Commission. The survey has been conducted in 2001 by the Austrian Institute for Small Business Research (IfGH) on a sample of 1200 small and mi-crobusinesses from all sectors of activities in the 15 Member States + Norway. 2 The survey indicates that more than two third of the interviewed small businesses (67% in the EU) would expect services to be delivered to them preferably at local level, the regional level coming 2nd (50%), while the national and European levels come much lower (DG Enterprises 2002a-f). 3 The graphical distinction between bankable and non bankable SMEs does not illustrate the real percentage. 1.2 SME Support a core task for local governments As SMEs are contributing to create economic wealth and growth, the care for SMEs becomes a core task for local governments. And particularly micro and small businesses also expect support services at local level. They prefer that services be delivered to them at local level. 1 This can be explained by the fact that the normal environment small businesses are familiar with, is the local level. This is the level they are naturally in contact with. And it is convenient to have a service provider nearby. So, cities can do and have to do something in favour for their local businesses. The disadvantages especially small and micro businesses in derelict areas are facing, call for compensation, which justifies special public support. Local authorities have to take action to develop economic activity in the distressed parts of their territory, to render those areas more attractive and to make business opportunities easier to develop. But the general characteristics of the less favoured areas are that market conditions are not prevalent, and the few projects that may have a local economic impact should have a chance to develop. The fact that market economy conditions are not fully prevalent in these areas, in other terms, the fact that there is a need to compensate the development gap between these areas and other more developed areas, gives additional legitimacy for public support. This means that the public authorities in charge of these areas have no other choice than providing some form of support for these businesses/projects. The economic development support should help to activate endogenous potentials, but also attract new businesses from outside. The geographic perspective of local business promotion should therefore not be limited to the deprived quarter and the small and micro businesses but also show a wider urban or regional focus, as for some branches and enterprises the local markets are too limited. Service providers should bear this information in mind very carefully as if, for obvious reasons of critical mass effect or economies of scale, some services need to be designed at regional or national level, they should be delivered at local level for the small businesses to be fully receptive to them (DG Enterprises 2002a). 1.3 SMEs needs and requirements It seems obvious that successful support services should be tailored to their end users, especially the smallest businesses since larger enterprises have a greater capacity of adaptation. What are the businesses expectations towards local SME support? What are their main concerns? 2 Access to finance is a very important issue. One of the main concerns of SMEs is their access to finance. All businesses require access to finance for: Starting an activity: starting capital is required. Financing business growth: investments in premises, equipment, technology, research and development, prospecting new markets. All these activities need direct financing. Working capital to finance the gap between the dates of payments of the purchased goods and services, staff and other costs and the customers payments. Business transfers. Without finance SMEs have no or very few chances to start up in the first phase, to grow and to adapt to future prospects. In this sense, the access to finance should not be hindered in any way. It is characteristic for micro and small enterprises that they often start their business with own savings or with private money received from family or friends. But there are also many entrepreneurs who need external finance. And ideally, those SMEs who need external finance should always get access to it (see figure 1). But this ideal picture is of course not reality. Access to finance is not only one important concern mentioned by entrepreneurs, but also one frequently mentioned problem by small and micro businesses. Reality shows that for small and micro businesses access to external finance is often inadequate. Financial institutions may be reluctant to financially assist micro and small entrepreneurs in disadvantaged neighbourhoods, for understandable reasons. Financial institutions distinguish between bankable and non-bankable SMEs (see figure 2 3 ). Bankable SMEs receive financial means/credits by financial institutions, the non-bankable do not. Non-bankable means that these SMEs are excluded from access to finance due to the following main reasons: 1. The high risk and consequently often a low return activity for credit institutions; 2. The high transaction and handling/operational costs for credit institutions; 3. Unavailable or asymmetric information for both parties the SMEs and the credit institutions and thus a low trust relation. These general obstacles hampering the SMEs access to finance were identified by the ECO-FIN-NET partners in discussion with several European bank representatives. In addition to this, one can say that these obstacles are partly aggravated by the following circumstances: the Basel II rulings which banks must submit themselves to 4 ; certain traditions or cultural differences for certain groups of entrepreneurs and banks; lack of financial culture of small entrepreneurs; lack of sufficient loan collateral; problems with mortgages, especially when land or building property is not clarified; low quality of business plan; poor project estimated profitability and high interest rates, especially for small loans when interests include administration loan costs. Figure 4: Project idea... Non-bankable project Preinvestment advice New project Financial and non-financial support forms the basis for fostering the SMEs access to finance. To overcome this gap, public authorities at all levels (local, regional and national governments), NGOs (like Chamber of Commerce and other societal initiatives) as well as financial institutions have undertaken numerous measures and established support instruments. The ECO-FIN-NET project addressed all types of financial incentives and non-financial services (such as network support) that are aimed at tackling the problem of non-bankability. Figure 3 illustrates this approach. Financial incentives and nonfinancial services are existent for both the bankable and non-bankable SMEs. By these measures, one strives to lower the barrier between bankable and non-bankable SMEs, thus to increase the number of bankable SMEs and to reduce the non-bankable ones (see figure 3 and 4). There are two actors the financial institutions and the (local) public authorities who have to act in favour of and in cooperation with SMEs. The ECO-FIN-NET as a network of thirteen cities especially considers the perspective of a local authority and analyses their opportunities to assist local entrepreneurs. Bankable Bankable Credit repaymen Credit / other Credit / other Realisation of the Project Nonbankable Postinvestment advice 4 The latest Basel Capital Accord will result in profound changes in the strategies of credit institutions. For the first time, not only costs and profits, but also risk will be used as a core element in credit calculation using supervisory regulations that have been agreed on in an international context. SMEs in a number of countries have expressed concerns about the impact that Basel II could have on them, particularly in terms of access to and the cost of credits. The capital requirements that Basel II is launching are one of the factors that can affect the availability and cost of lending to (and other forms of financing of) SMEs. Figure 2: Existing Situation Figure 3: Financial Incentives Bankable SMEs Non bankable SMEs Financial Institution Bankable SMEs Non bankable SMEs Public Services / Network Support

9 Figure 5: Three work groups of the ECO-FIN-NET WG 1 Private Financial Support Facilities for SMEs Chapter 2.1 WG 2 Public SME Support Chapter 2.2 WG 3 SME Support Services / SME-networks Chapter Need of an integrated local SME strategy Three main support pillars In order to solve the various problems that SMEs are facing, the ECO-FIN-NET emphasizes that the future SME Support Policy must be based on three pillars which at the end form one integrated and consistent support package for the local economy. For each of these three themes, ECO-FIN-NET set up a work group with experienced cities representatives and external expertise: 1 Private Financial Support Facilities for SMEs The usual source of external finance for businesses is banks and other financial institutions. SMEs direct themselves first to banks when they need external finance. But as the allocation of credits to SMEs involves inherently a high risk of failure, often a low return activity and high handling costs, banks are often very reluctant to financially assist SMEs. Cities have the possibility to help solve these problems. Work group 1 of the ECO-FIN-NET discussed and developed new approaches on how local authorities can face these obstacles and how they can foster the SMEs Access to Finance (see chapter 2.1). to the specific conditions required by micro and small businesses in the less favoured areas. Besides, the partners searched for ways and strategies on how public financial means for SME support can be used in a more efficient and effective way and how the expectations of SMEs towards public sector funds can be met, even in times of diminishing public means (see chapter 2.2). 3 SME Support Services / SME-networks In addition to the financial support of SMEs, cities are in many ways in charge of or involved in delivering non-financial services and network support to SMEs. These are an important part of local SME Support Policy throughout Europe. These services often include the organisation of network support or the offer of coaching, mentoring or other advisory services. By increasing the bankability of entrepreneurs, those non-financial services can have a positive leverage effect for external finance and improve the SMEs access to finance. Besides, they constitute widespread instruments to create generally a positive environment for businesses. The work group 3 of the ECO-FIN-NET worked out the main challenges as well as success factors of those support services and studied the services best targeted at improving SMEs access to finance (see chapter 3). could not be analysed in depth by the ECO- FIN-NET. Therefore, the recommendations drawn in this report are put in a rather general context. Secondly, there are different types and situations of so called less favoured urban areas. Two main situations have been identified by the partner cities: Specific disadvantaged neighbourhoods located in developed areas (so called pockets of poverty ) which can be either in the centre or in the suburbs of the city. Here, there is the necessity for the cities to support even very small individual entrepreneurial projects. All the territory of the city is included in an area lagging behind in development (e.g. classified by the European Union as objective 1 -area) with the main issue being access to mainstream support for all the projects including the smallest ones. Unfortunately, the same situation applies in some former objective 1-areas with the additional constraint of dwindling financial EU support. The ECO-FIN-NET underlines that these differences may imply different approaches to the SME support, the main consequence of which is that in the latter case very small projects (individual entrepreneurs) may not be considered with the same care/attention as in the pockets of poverty Strong local partnership In order to face the existing barriers, integrated and consistent packages of financial and non-financial support are necessary. Only integrated and coordinated strategies make measures most effective. Besides, every target group should be offered the service that is appropriate for their situation. Those integrated (financial) packages targeted at the specific needs of the entrepreneurs can only be offered by a strong and trustful local partnership of different local actors the banks, the local authority, the Chambers and business associations, the service providers etc. and the SMEs themselves. They all have to cooperate in order to comfort existing successful schemes and to take over their respective responsibility regarding SME Support. A strong and trustful partnership of the local authority, the banks, the Chambers and business associations, the service providers and the SMEs is needed at local level. ECO-FIN-NET Partners Marseille Public SME Support For several years, the cities have designed financial support for the development of businesses and start-ups (grants, loans etc.). Today there are already various SME support schemes at a local level operating directly or indirectly with EU-funding. But with regard to the enlargement of the European Union and the lack of visibility for the Structural Policy from 2007 on, cities are confronted with new challenges, as especially EU-funds will at least for the former 15 member states not increase in the future. Thus, it will become more and more crucial for cities to search for other innovative ways and approaches for supporting SMEs. Instead of direct public subsidies, the take-up of private financial tools and a strong local partnership between public organisations and financial institutions are more and more needed. The work group 2 of the ECO-FIN-NET has questioned the relevance of public support instruments, in particular their adaptation More generally, ECO-FIN-NET paid particular attention to the possibilities of maximising the public support impact by various forms of partnership with other public or private entities; all the more in the current context of dwindling public financial resources, when the cities aim at doing more with less direct funding Different local contexts Besides these three pillars, different contexts have to be kept in mind whilst looking at the ECO-FIN-NET cities approaches. SME Support Policy must always respect the local conditions and circumstances under which a local authority acts. Firstly, the national, regional and local frameworks are differing much. For instance, the tradition of the more developed financial market in Great Britain than on the continent causes significant differences between the financial systems of the concerned countries. In some countries savings banks are involved in local economy whilst they simply do not exist in other countries. These differences 18 19

10 2 Fostering the SMEs Access to Finance by financial incentives As the English say, the natural way for small businesses to have access to finance is with the three Fs : family, friends and fools. Unfortunately, this resource is not always sufficient and access to external finance is done by the banks and other financial institutions. But in the less favoured areas, the banks may be reluctant to take commitments with entrepreneurs who operate in a difficult environment. On the other hand, in these disadvantaged areas, in order to create wealth for the local population, no opportunity of business development should be neglected and, if only viable economic development projects should be given a chance to develop, the concept of viability is probably made more flexible in these areas. As a consequence the projects should be considered with even more care than in other more developed areas, and the public authorities have the obligation to give some incentives to compensate for the banks possible reluctance. Among the various public authorities, the local ones, the cities are those that are most accepted (legitimate) by the small businesses. Of course before imagining any form of direct support to their businesses, they should make sure that their general environment is small business friendly, which implies at least: adequate local taxes, in particular with regard to the neighbouring municipalities, a good information on the local business community and its expectations: this is the role of the business observatories, a possibility of dialogue with the businesses through their representative bodies: this can be problematic in the less favoured areas as it is indicated in chapter The cities can also envisage direct support to the businesses located on their territory. The main stakeholders involved in SMEs access to finance are: the SMEs themselves with their business associations, the banks and other financial institutions, and the public authorities including the cities at local level. And, in order to describe the possible actions a city can develop to support their SME community, the ECO-FIN-NET network imagined the concept of a triangle, the three apexes of which are the involved stakeholders: the SMEs and their associations, the financial institutions and the city. The axes between the apexes illustrate the various possibilities of action: SMEs and Business-Associations City and Public Authorities Banks and other Financial Institutions In order to develop the SMEs access to finance, the cities theoretically have four possibilities illustrated by the four coloured arrows:, between the city and the SMEs: it represents direct funding by the city. between the city and the banks: it represents any form of city funding to the banks. between the city and the banks through the SMEs: it represents any form of non financial support the city can provide to the SMEs in order to comfort their position when they apply for a loan. between the city and the SMEs through the banks: it represents any form of support the city can provide to the banks in order to make loans to SMEs more attractive for the banks. The next chapter gives a detailed description of the instruments that are implemented actually, with recommendations on how to make them more consistent for the small businesses in the less favoured areas with particular attention to the smallest businesses. But at this stage it may be interesting to observe that these theoretical arrows indeed correspond to some forms of reality

11 with support instruments that have already been implemented by the ECO-FIN-NET partner cities: Direct relation between the city and the SMEs These are the instruments with which the cities provide direct funding to their SMEs: it generally consists in grants or loans that can be specifically targeted at some businesses and/or in some specific areas. In practice, grants are more widely used than direct loans, since the latter require specific expertise, longer management procedures and can be contracted with specialised institutions (see next arrow). Examples: apple City of Birmingham: Business Investment Scheme grants + loans + venture capital), Enterprise City scheme providing targeted entrepreneurs with a comprehensive package of coaching, funding and services, West Midlands Inclusive Fund targeted at specific ethnic and religious entrepreneurs apple City of Gera: grant scheme apple City of Gijón: Equal micro credits, entrepreneur micro credit scheme apple City of Leipzig: grant scheme apple City of Marseille: public micro credit scheme with the platform for local initiative being a member of the national network of local micro credit funds France Initiative Réseau, apple City of Vienna: grant schemes for start-ups, founders bonus, for retail shops, for infrastructure support and for internationalisation apple City of Vilnius: grant schemes Relation between the public authority and the bank/financial institution The cities can provide funding to financial institutions for loans to the local businesses: in some cases the funding is entirely (or almost) public and directed to the businesses as in the case of public micro credit funds funded by the city (see previous arrow), but in some cases, a partnership is developed with private donors or investors to create micro credit funds. The city can contribute to the fund capitalisation and/or to their operational costs, for the business projects located in the areas targeted by the cities. They also provide funding to loan guarantee schemes (capitalisation and/or operational costs) or venture capital: Examples: apple The City of Birmingham participating in the capital of the micro credit Arrow Fund apple The City of Gdańsk participating in the Regional Guarantee Scheme apple The City of Gijon participating in a micro credit scheme with the savings banks Caixa apple The City of Leipzig with the concept venture capital light with a city subsidy to the venture capital institution (savings bank) for small projects apple The City of Marseille: public micro credit scheme, initiated by the City, co-funded by other public bodies (regional and national) and private donors (large businesses) apple The City of Vienna granting loans in cooperation with the Economic Chamber City actions directed to the banks through the SMEs This concerns non-financial support to entrepreneurs in order to facilitate their access to finance with financial institutions (generally for loans). In this respect, two main lines are considered: a) Pre-investment support is important for the investment readiness of a business proposal. One has to check if a project is viable before financing or funding it. b) But also post-investment support is very important in order to make sure that the investment remains viable and to ensure that the funding revolves. Examples: apple Advisory support services for the preparation of loan applications or business plans were presented by the Cities of Evosmos, Leipzig, Marseille, Vienna and Vilnius. apple The City of Gijon: business network called Nautical Station apple The City of Grenoble is partner in the ECTI-organisation that delivers mentoring services apple The City of Leipzig and Gera create business networks. apple The City of Marseille engaged the SAP project aiming to enforce project ideas to become a real business idea apple The City of Rotterdam-Delfshaven: Mentorraadproject offering mentoring services apple The City of Rotterdam-Delfshaven: voucher system apple The City of Vienna initiated the Grätzelmanagement apple West Athens: reached the entrepreneurs effectively by ITC-improvement projects City actions directed to the SMEs through the banks These actions are widely used: they concern the loan guarantee schemes and the type of subsidy that has been indicated in the previous chapter. They are described in detail in chapter 2.2. Examples: apple Regional Guarantee Fund with participation of the city: Gdańsk apple Very often SME loan guarantee schemes are operated at regional level as in France, Germany or Poland or at national level as the national bank for SMEs BDPME/SOFARIS in France or the national guarantee scheme in Austria. 2.1 Private Financing As it has been indicated in the previous chapter, the usual source of external finance for businesses is banks and other financial institutions (micro credit institutions). The problem rises when the lending organisations are, for understandable reasons, reluctant to finance some projects. These reasons are: 1. The lack of sufficient collateral which results in an increased financing risk for the lending institutions; if this increased risk is reflected in the interest rate of a loan given to the enterprise in question, this interest rate is likely to be too high to be accepted by the entrepreneur. 2. The high cost of loan application and processing in relation to the small amount of credit: in practice, these costs cover the work of preparing the loan applications by the SMEs and of the risk assessment and processing by the lending institutions. The former are directly supported by the SMEs, the latter are normally covered by the interests paid by the debtors, in this case the SMEs (charged indirectly). For very small projects, implying small amounts of funding and thus small loans, the entrepreneurs often have a limited financial culture, which results in poor loan application preparation and additional costs for the lending institutions. Charging these costs through the loan interests results in too high rates to be commercially acceptable or even illegal rates in countries where the interest rates are capped by law. 3. The lack of information or track record with the small businesses: this information is the basis for the financial institutions to take decisions on business loan applications. Very often in the small businesses, the management information system is rather primitive and it is not the main priority for the entrepreneur. This lack of information reinforces the high risk assessment indicated in chapter 1. The ECO-FIN-NET participants have tried to address possible solutions for these problems: How to lower or share the risk for the banks with the small business loan applications in the less favoured areas? How to reduce the cost of the application and processing for small loans? How to improve the quality of the information on enterprises to the level required by the banks in the loan application process without putting a too heavy administrative burden on the small businesses that cannot afford a well staffed administrative structure? High level of risk assessed by the banks for SME loans Guarantee funds are an efficient and widely used instrument aimed at facilitating access to credit for small businesses, at any stage of their development, by sharing the risk with the lending institutions. It has been widely used in most of the EU countries for several decades since the end of the 2nd World War. These funds obviously are the solution for the banks to accept loan applications with a higher level of risk. The cities can usefully participate in these funds for their less favoured areas with some conditions that the ECO-FIN-NET partner cities have highlighted. There is no point in giving a detailed description of the business loan guarantee schemes in this paper, but some features should be underlined: Their financial resources come from guarantee fees paid by the borrowers, the income from their investments and the subsidies they may receive. A guarantee fund is characterised by its leverage ratio. This ratio depends on two essential factors: the percentage of risk taken by the fund and the probability of borrower s default. Other factors are also important: the return on investments,

12 The City of Gdańsk in order to support the local businesses initiated a local guarantee scheme until they realised that they could not reach the critical mass alone for a sustainable scheme. But their initiative prompted the Region to start such a guarantee scheme on the regional level with the support of the national Polish Agency for Enterprise Development and EU funding. The City of Gdańsk is a major partner in the regional scheme. Loans are guaranteed up to 70%. Important issues such as targeting at very small businesses and the operation structure vs. guaranteed loans volume still need to be addressed. For further information: Guarantee Fund Office, Katarzyna Delankiewicz, President, ul. Długi Targ 1/7, Gdańsk, Tel. +48(0) , +48(0) , Fax: +48(0) , prfpk@prfpk.com.pl, Revitalised district in Gdansk In the Region of Marseille (PACA), the regional guarantee fund is part of this nationally designed scheme. It works in close cooperation with the local initiative platform CPEM developed by the City of Marseille by giving guarantees for the CPEM micro loans. the recovery of losses and the guarantee fee paid to the guarantee fund. The lower the risk and the higher the leverage ratio, the stricter the risk appraisal and the higher the ratio, with the possible counter-productive effect that a guarantee fund that would only approve risk-free applications would loose its «raison d être» which is to encourage banks to be active on a market segment they assess as too risky. Fine-tuning this contradiction is not easy. It mostly lies on experience and the economic situation that condition the risk of business failures. For instance, the leverage ratio of a guarantee fund dedicated to new businesses is around 6, and 22 for short-term loans that are much less risky. This is the reason why a critical mass should be reached with guarantee funds (they should not be too small). In fact there are some experiences of cities setting up their own guarantee funds but these experiences generated poor results. The guarantee funds should generally operate at national or regional level (not local level that cannot allow for a sufficient volume). A good example of this necessary condition of a minimum critical mass is given by the City of Gdańsk (see at the left). This critical mass effect also applies to the qualifications and the corresponding management costs for these organisations and this condition generally implies that these guarantee funds be managed by specialised organisations, possibly with a credit institution agreement: the examples of the French Banque des PME (BDPME/SOFARIS- bank for small and medium sized businesses) or the Regional Guarantee Schemes in Germany illustrate this requirement: In France, at national level, the biggest French company (BDPME/SOFARIS) specialised in the management of SME guarantee schemes, receives funding from the central level and from French and European financial institutions. They set up a subsidiary that organises partnerships with the regional authorities, to provide sound management of the regional guarantee funds, financed with regional budget resources. Their regional agencies appraise the applications, prepare and manage the guarantee commitments. The funds financial management is done at national level. There is no need for an additional structure. The regional means are entirely dedicated to guarantees. The operational costs are borne by the return on investments and part of the guarantee fees paid by the beneficiary businesses, allowing for a low cost procedure. Additionally, the experience accumulated on several Regions and a large number of businesses make it possible for this financial institution to guarantee the regions against the risk of funds shortage: with this procedure the Regions never take a commitment that can be higher than their budget allocation. If the risk rose to a higher level, it would be covered with the own resources of the financial institution. The target and the parameters of each regional fund are negotiated between the region and BDPME. The Region set its priorities in terms of targeted businesses (startups, transfers, growth, equity ), sectors of activities or geographical areas. However these priorities should not be too restrictive and too small guarantee fund should be avoided to allow for good risk sharing and increase the leverage ratio. Of course, in this regional framework the cities have the possibility to bring their contribution and call for specific conditions for their local businesses in specific areas: a city has the possibility to offer more favourable conditions than the general scheme to the businesses/projects located on (part of) its territory by paying the corresponding additional costs to the organisation that runs the guarantee fund (BDPME in this case). This flexibility is negotiated between the city and BDPME case by case (Micheaud 2005). Following the previous observations, the ECO-FIN-NET network partner cities come to the following recommendations: A Guarantee Fund should be a flexible instrument opened to a contribution by the public local authorities, targeted to the businesses established on (part of) their territory according to negotiable guarantee conditions. In particular, the contributing authorities should make sure that the guarantee fund is really opened to small businesses, i.e. make small projects bank worthy : it should not only be a system that facilitates the procedure for seizure of collaterals from the traditional bank clients. Mutual guarantee schemes should be envisaged when strengthening the links within a local / sectoral business community is an issue. The small businesses are generally reluctant to join any form of business association: this is due to the mere characteristics of the entrepreneurial spirit (=be independent) but also to the lack of perceived services delivered by these associations. Entrusting a business association with the possibility to deliver loan guarantees will greatly increase the visibility of their services for the potential SME members. This should possibly be considered in some new Member States where small business representative organisations need to be reinforced. Additionally it may be a good instrument to fine-tune the guarantee conditions to the reality of the local businesses or specific branches of activity. Guarantee funds should be designed on a rather large basis to diversify and spread the risks and reduce the operational costs: this means that local guarantee funds (limited to the territory of a municipality) should be avoided. This latter recommendation is not contradictory with a local authority conducting a specific action on a specific territory: this authority can contribute to a wider fund with specific conditions for those businesses that are located on the territory of the municipality. The local authorities should consider bringing a financial contribution to existing guarantee schemes, to guarantee loans to local businesses or to increase the guaranteed loan percentage for the small businesses in the less favoured area. Counter guarantee systems at national level should be developed as well as the European Counter Guarantees delivered by the European Investment Fund (EIF). The guarantee funds should be managed by specialised financial institutions in order to increase the leverage ratio and lower the operational costs. In Austria a guarantee scheme is designed at national level and develops interesting concepts for SMEs: Kreditaktion für Kleingewerbe (Credits for small businesses) The Fund guarantees small business loans to reduce risks of credit and change of interest. The loans may cover material and immaterial investments, (partial) purchase of companies and working capital. The AWS (Austria Wirtschaftsservice GesmbH (Austrian Business Service)) covers 80% of investment loans and 50% of working capital loans. The beneficiary businesses pay a 0.5% premium p.a. for investment loans and a 2% premium p.a. for working capital loans. Interest rates are capped, which reduces the risk of rate increase and are limited to a certain level. Because of the support scheme there are fixed interest limits for the financing bank, which makes the interest development more predictable for the company. Garantien für Eigenkapital (guarantees for own capital) From AWS (Austria Wirtschaftsservice GesmbH) for improving the financial structure of SMEs. The guarantee covers shares of a company (except in the tourism and leisure industry) The guaranteed quota is 50 to 100% of shares, up to per person and up to 1 Mio per company. The guarantee lifetime of is up to 10 years. The costs for the guaranteed businesses are a guarantee fee of minimum 0.5% per year of the share value plus additional handling fees and guarantee promissory notes. For further information: Vienna Business Agency, Burkhard Weiler, Tel. +43(0) , bweiler@wwff.gv.at, Costs of small loan applications When small businesses apply for a loan, they have to prepare a loan application which sometimes means business data, business plan, list of available collateral items The small entrepreneurs may not be aware of these requirements or consider them as an excessive administrative burden. This may result in poorly prepared loan applications which may imply additional costs for the lending institutions that are not necessarily proportionate to the loan amount: in reality the smaller the loan, the higher the percentage of costs in comparison to the amount of loan. Charging the costs of processing the loan applications results in increasing the actual interest rates, sometimes to too high levels to be commercially acceptable or to illegal levels in the countries where interest rates are capped by law. This situation frequently occurs with small businesses applying for small loans with micro credit institutions. Small loans are not assessed in the same way as large ones but well prepared applications are easier (and less time-consuming) to process by the financial institutions

13 The Cities of Leipzig and Vienna are providing such type of support and finance the preparation of business plans with chartered business consultants. Several possibilities have been studied by the ECO-FIN-NET members. One of them consists in delivering advisory services to the applicant businesses in the preparation of their loan applications: advisory service support schemes are described in chapter 3. The ECO-FIN-NET recommendation is to add such financial expertise to the list of other types of expertise eligible to these support schemes like other types of advisory services (market surveys, production process, human resources organisation ) supported in all the EU Member States, generally at regional level. The local authorities should have the possibility to contribute financially (like with the regional guarantee schemes). To simplify the procedure, it has been imagined that every registered or pre-registered business would be entitled to a certain number of vouchers covering the process costs incurred by any recognised financial institution (including the lending institutions) as it is used in Germany for traditional advisory services by consultants. This system has the advantage of simplicity no new organisation, existing long time tested procedures- and confidentiality, which also is a key factor for success as the small businesses tend to trust a limited number of advisers, especially in financial matters, banks being one of them. Another possibility (not exclusive from the previous one) meets the requirements of the stakeholders and the ECO-FIN-NET network members also deem it useful to make it a recommendation: The idea is to make loan application processing costs by the financial institutions, also eligible to the existing business advisory support schemes. tive administrative burden. This is due to the facts that entrepreneurs generally have a limited accounting culture and even more limited staff (generally the spouse!) to prepare these data. The result is a lower confidence in the project by the banks and consequently a higher risk assessment. For new projects without proven track record, these negative factors are even more applicable. Guarantee funds have previously been recommended as a useful instrument to develop trust in the projects and lower the risk perception by the banks. Unfortunately obtaining a guarantee by a guarantee fund generally means that the entrepreneur needs to prepare a loan guarantee application based on much the same parameters as the loan application itself. For the applicant entrepreneur this is perceived as a uselessly complicated procedure if not absurd. In Germany, there are regional guarantee institutions ( Bürgschaftsbanken ) in all 16 federal states. Their offer of guarantees is not limited to a minimum size of the target company and they also guarantee loans below 25,000 Euro. The application procedure, however, may be quite long and differs between these institutions. Therefore applying for a guarantee causes additional proceeding costs, not least because of additional checks of the creditworthiness of the entrepreneur or enterprise. There are, however, several examples of how to minimize this effect and make the provision of guarantees as a substitute for lacking collateral easier and cheaper: In the federal state of Baden-Württemberg the regional state finance institution ( L-Bank ) and the guarantee bank ( Bürgschaftsbank Baden- Württemberg ) cooperate closely, so that enterprises only have to hand in their application at one credit institution and the awarding process is organised between the participating partners. This procedure is leaner, costs less and provides results within a few weeks. so-called subordinate loans to enterprises in objective 2 areas. Subordinate loans are quasi-equity and they can ease the lack of equity which exists in many SMEs; this, however, presents a higher risk to the provider of the loan which is reflected in higher interest rates ( risk premium ). NRW.Bank uses ERDF grants for objective 2 areas to partly subsidize this risk premium and offer more easily acceptable interest rates to the beneficiaries. For this purpose the ERDF grants are put into a fund which also receives reflows from loans being paid back and therefore may be used several times - increasing the leverage of the grant money. The ECO-FIN-NET network members propose the following solution to address this problem: The processing procedure for loan applications should be designed in a way that avoids duplication of work. As a first step in this direction credit check results could be communicated between banks and guarantee funds with the consent of the companies concerned. This cooperation with the aim of leaner and cheaper processes can be further developed and intensified: Institutional cooperation between lending and guarantee institutions, giving enterprises the option of a one-stop application point. Designing lending products with a builtin guarantee ( exception from liability ) which is automatically applied for together with the loan product. Other factors play an important role to increase the quality and the reliability of the information produced by the entrepreneurs: they are closely related to the services that are delivered to the SMEs and will be described in detail in chapter Public Financial Support These disadvantages increase the level of risk for banks to finance the projects of these businesses, which makes the banks more reluctant to take commitments in these areas, and they call for compensation, which justifies special public support. This public support needs to be in line with the micro and small business necessities: the requirements that concern public support design have been listed in view of analysing the adequacy of the actual instruments with the business expectations in the introduction chapter. Other criteria were also considered: How to avoid allocating public funding on projects that would develop without it? The possible responsibility of the public authorities supporting businesses and the possible domino effect that may prejudice other neighbouring businesses. Different forms of financial support have also been analysed with an explanation of their internal constraints. Bearing in mind these elements, the ECO- FIN-NET network discussion was focused on the following questions: Which instruments should local authorities develop to meet their small business community requirements? Can they develop these instruments or best be involved in them? How can they contribute in running them or having them run satisfactorily? How can existing schemes be improved? Partner cities have developed different expertise in supporting their small business communities: what are the specific features of this expertise and how can it be adapted to other contexts? Lack of information To take a decision on a business loan application, banks need some information on the applicant: this information is based on the business history (track record) and prospects (new market, new client, new investment ). A reliable accounting system is often an important instrument for collecting this information. Unfortunately the SMEs and particularly the smallest ones do not consider this information as a priority but rather as an unproduc- The national state finance institution ( KfW ) offers micro and start-up loans which are partly guaranteed by the European Investment Fund (EIF) which is paid for that from the EU Multiannual Programme for Enterprises (MAP). This EU support enables KfW to offer the micro and start-up loans with a built-in guarantee of 80 percent ( exception from liability ). Thus, the application for a loan includes directly the guarantee without any extra procedure. An even further advanced product is found in North Rhine-Westphalia, where the regional state finance institution ( NRW.Bank ) offers The vast majority of the businesses are of very small size (sole proprietors or microbusinesses) and they face disadvantages in terms of: Economies of scale, Access to funding, Cost of funding, Access to relevant information, Access to expertise in particular on fiscal and regulatory environment, Representation by professional organisations. Inadequate access to finance, being a problem for potential entrepreneurs, it is logical and legitimate that, in the deprived areas, the municipalities strive to find solutions to this problem and allocate financial resources for this purpose. The observations in this field tend to indicate that actions need to be carefully designed to better suit the micro and small business expectations and also fill the gap between these expectations and the market reality

14 SMEs require stable visible efficient procedures for support measures. Handicraft fair in Vilnius General framework for city involvement The ECO-FIN-NET started with designing the general framework for the cities support, then addressed the characteristics of the various instruments that can be implemented to support the small businesses in the less favoured areas. The prime condition for the support instruments to be used by the small businesses is to be in line with the business expectations. The ECO-FIN-NET members underline the following conditions: Small and micro-businesses put emphasis on financial services. 2/3 of the interviewed small and microbusinesses call for services in the financial sector, because they see it as crucial for the development of their activity and also because they sometimes face difficulties in access to finance: as a consequence they need support in preparing their applications for funding, but also in designing their overall strategy according to expectable financial resources. In the objective 1 areas, this percentage is even higher, 75%, probably because in deprived areas financial difficulties are traditionally more acute, and also because a wider range of supporting instruments are available, and these instruments are better funded that in other territories (DG Enterprises 2002a, PAED 2004). Financial problems are one of the most frequently cited problem for small and microbusinesses since banks that are generally perceived as the natural source of funding through credit are reluctant to give loans to these businesses because of the high risk and administrative costs per loan. Other sources of funding, through equity, is perceived reluctantly by entrepreneurs, dangerous for business independence, not linked to day-to-day operation and complicated to access. They expect a stable and predictable environment. Small and micro-businesses are often run and managed by a single person, with very limited resources (human and financial) for the legal and regulatory environment follow-up. They have no time nor background to keep regularly updated on the possible changes that may affect their business. They also need to plan their investment decisions on a long term. So in all countries one of the strongest expectations is of a transparent legislation, which is predictable, non-contradictory and avoids discriminatory interpretation, as well as ongoing funding sources rather than temporary schemes. In some countries unpredictable environment may be one of the main reasons for entrepreneurs to escape in the shadow economy. On the other hand, favourable conditions may be a powerful incentive to encourage informal entrepreneurs to become formal. SMEs are more sensitive to the funds made available to them than to the cost of these funds. For the small businesses, access to finance is a very important and difficult issue. This even is one of the most frequently problem mentioned by the small and micro-businesses: lack of access to credit or insufficient funding can be a cause of incapacity to deliver, thus jeopardising the mere existence of the businesses. Funding is thus a commodity with a very low elasticity, which explains why small and micro-businesses are more sensitive to the funds made available to them than to the cost of these funds: the cost of funding, in fact the cost of credit, can be included in the cost of the products or services the businesses provide. It is only one among various factors that influence the competitiveness of the businesses. SMEs need information about funding and related support services. The logical consequence of this perception by the small and micro-businesses, that financial issues and raising funds are of crucial importance, should be that entrepreneurs are very much in demand of training and advisory services on these subjects. Experience shows that they have very little time to dedicate to training (or pretend they do not have time) and the perfect way of providing these information and advice is still to be developed. This information should be reliable for them, which means that it should be delivered by well-known and reliable interfaces between the Administration and themselves. There is a certain form of distrust of the small and micro-businesses towards the Administration, even when they are not in the informal economy: this is due to the fact that the Administration they are most often in contact with, is the tax administration and they are scared that any information on their operations be communicated to the tax office, with the detrimental consequences they can imagine. Consequently they tend to limit the number of persons that are aware of they actual situation, in particular with financial data: their normal advisers tend to be persons they pay accountants, fiscal advisers, banks since services delivered free of charge are suspicious. One significant exception is the relation to peers and business colleagues and this is one of the main raison d être of networks and of the professional organisations and their successful operation in many training programmes and personal advisory services. Professional organisations or official business community representative organisations are often absent or inactive in disadvantaged areas. Unfortunately in most disadvantaged areas, these organisations are not or cannot be very active. Entrepreneurs in these areas sometimes consider themselves as marginal self employed that set up their own businesses because of lack of local jobs and unemployment, women and ethnic communities that do not feel integrated in the traditional business community. They do not dare to go to the Chambers of Commerce or other professional organisations because they do not feel them as their world. On the other hand many of these institutions have made very little effort to integrate these entrepreneurs (who were in some cases even hardly considered as entrepreneurs) because of cultural or language problems. In this case the peer relation that can be so productive needs to be organised on the basis of the local community. At the same time some efforts need to be made to open the traditional established business community or to break the perceived barriers. These requirements have consequences for local support design and the ECO-FIN-NET members propose the following recommendations: The cities should envisage long-term sustainable financial support. Micro and small businesses tend to look for solutions to their problems only when they face these problems. It is said that small entrepreneurs have limited capacity to anticipate, but on the other hand if they anticipated all the problems they might face, they might not start their activity at all! So they expect immediate solutions at the time they need them and designing a support scheme that will be opened only during a short period, even if it is recurring on a longer period, will prove inadequate. Access to information on support schemes is also a difficulty for micro and small businesses (this will be described in detail in the following chapter). In the above-mentioned EC survey, the percentage of businesses aware of support services that are made available to them ranges from 22 to 35% according to business size (the smallest being less aware) and in all EC countries. The percentage of businesses having used these support schemes in the last five years is 20% as an average in the EU. These figures have to be put in relation with the fact that these support schemes have been designed and promoted for more than 20 years in most of EU countries! Taking these elements into consideration implies that Municipalities should support their micro and small business communities with adapted, simple, easy to promote, and sustainable instruments, with the same rules during a long period (additionally it is the only way to ensure an efficient promotion campaign). Long-term procedures imply sustainable resources. Generally municipal budgets are voted on a yearly basis. It makes it difficult for municipal decision makers to take financial commitments on an extended period of time covering several years. It is generally easier to allocate a lump sum in a specific year budget. But there is a contradiction between the micro and small businesses expectations of having access to well known, reliable and long lasting support procedures with city budgets that need to be approved and voted every year (and assuming that the same political decisions are taken after each elections). It has been demonstrated above that The City of Vilnius designed a grant scheme, which was opened for a limited period of time. This was the first grant scheme launched by Vilnius City Municipality to support SMEs. The scheme was highly successful, but application procedure was perceived as too complicated by the grant recipients. And what happened was that Vilnius issued grants not to the most vulnerable businesses who needed it most, but to the bigger ones who had a possibility to react more quickly and had relevant qualifications to fill in all the forms and provide necessary documentation. By seeing this and a high interest of entrepreneurs, Vilnius introduced a new continuous grant scheme, which is easier to apply for, less documents and preparation is required, even if the amount granted is more modest as well. For further information: City of Vilnius, Danute Maksimaviciene, Tel ,

15 Allocation of public funds to entrepreneurs in Gera Source: Archiv Stadtverwaltung Gera support schemes that are opened on a limited period of time are not adapted to micro and small businesses expectations. Expected support is a combination. Expected support is a combination of grants, loans with guarantee schemes, venture capital and related advisory services, especially on market information and management skills. Bearing in mind that micro and small entrepreneurs prefer to have a limited number of advisers, comprehensive schemes will be mostly appreciated. The previous observations tend to indicate that actions need to be carefully designed to better suit the micro and small businesses expectations and also fill the gap between these expectations and the market reality. As a general rule, local authorities should be very careful to contribute to the stable and predictable environment businesses need to develop: in particular they should be very careful before increasing the level of taxation or other costs businesses have to bear or changing regulations. Partnership is a natural and necessary condition. With financial institutions that provide financial technical expertise All the expectations of micro and small businesses cannot be met by a single instrument or by a single organisation. There are contradictions between all these expectations and requirements. The Cities of Leipzig and Gera (Germany) designed each a comprehensive local grant scheme for small businesses in an URBAN funded area, situated in an objective 1 region. These good practices including the organisation of the municipal services in charge of SME support can also be a model for disadvantaged areas having access to heavy mainstream public support. The activity of the City Office of Gera is the role of an interface between individual local businesses and European funding with the URBAN funds. However URBAN funding has a limited duration. Regarding funding for SMEs, the City of Gera is a direct beneficiary of funding out of the EU Structural Funds (regarding grants for investments and jobs). Whereas the mainstream funding targets only on medium sized enterprises, the URBAN SME Funding Scheme supports small and micro businesses in the URBAN area. Access to funding requires specific expertise, which means developed on a wide basis, but delivered to micro and small businesses that need this expertise to be delivered locally. For instance, the guarantee schemes need a critical mass to be operational but they address single applications that need to be promoted locally among the local business community. Funding needs to be sustainable which implies stable resources whilst local budgets are voted on a yearly basis. Stable resources are available from private donors or from public sources operating at national or European level: all these resources need to be channelled locally. The FEED experts very clearly recommend: introduce innovative solutions to leverage government money for small and mediumsized business development by promoting the system of local partnerships. This is closely related to the development of a regional and local network of support to small and medium-sized businesses (FEED 1999). The solution for local authorities is to support punctually long lasting existing schemes, either with financial institutions who specialise in funding micro and small businesses and/or with the mainstream regional EC funded procedures since access to EC structural funds is made at regional level. If the city builds a trading estate (streets, mains, etc.), the Federal State of Thuringia supports this investment with funding out of the EU Structural Fund. When selling the property of the trading estate to investors / businesses only the plain property price is claimed. Thus, the SME receives the funding out of the Structural Fund through the Federal State of Thuringia. The EU funding period ends in 2006 and the new funding programmes starting in 2007 have not been worked out yet. For further information: City of Gera, Thomas Seidel, Tel. +49(0) , europabeauftragter@gera.de, City of Leipzig, Office for Business Development, Brigitte Brück, Tel. +49(0) , brigitte. brueck@leipzig.de, In Spain, the City of Gijón developed a cooperation with the savings bank (Caixa) to offer micro credit to specific target groups: single parent families, immigrants, people older than 45, disabled woman and long term unemployed. Loan conditions: euros max; Redemption period: 4 years; Interest rate: 5.5%. The City of Gijón also gives its small business community access to European funding through the EQUAL initiative: the City Equal Microcredits: Target groups: Entrepreneurs and micro businesses within the framework of Equal projects located in Asturias Conditions: Financial investments in working capital not more than 50% (total amount) euros max; redemption period: 3-5 year; interest rate: 4% Guaranteed by the Regional Guarantee Fund (ASTURGAR) and in collaboration with financial institutions offering better conditions; Support by the regional entities, CEEI and IDEPA and local entities as Municipal Centre Enterprises in Gijon and La Curtidora in Aviles. For further information: City of Gijon, Isabel de la Huerga Iglesias, Tel. +34(0) , proyectoseuropeos.alpee@gijon.es, With business associations playing the role of an interface Again there seems to be a contradiction between the small business requisites: on one hand, the small businesses have a certain distrust vis-à-vis the Administration (including public local authorities- the cities staff) and favour the provision of information and services by peers or professionals they pay. But on the other hand the small businesses have no spontaneous tendency to be members of business associations and the existing business associations generally do not put priority on the less favoured areas. Their financial resources are also limited to pay for the expertise they may require. The solution for the local authorities is to form a close partnership with the business associations and to support them in being more active, in having specific actions in the less favoured areas, the specific actions being the condition for the public support these associations may receive and for the public control that normally goes with this support. This situation is well illustrated by the City of Evosmos (Greece): entirely located in an objective 1 Region (less favoured area, access to significant EU funding through national and regional schemes), they had to deal with a business community mostly formed by micro and single proprietor (family) businesses (bars, restaurants, small shops ) and with a low level of involvement by the traditional business organisations (Chambers of Commerce ). As a first step, the City organised (and paid for) a local team of business advisers to support the micro and small businesses in processing funding applications for regional and national grant schemes and participate in training programmes (role of interface between individual local businesses and national organisations that designed national and European funded grant schemes for SMEs (mainstream support)). In a second step they developed a partnership with the local Chamber of Commerce who gradually became more and more involved in the micro business community support. Evosmos realised the necessity of a long lasting support for the small businesses (need for a stable and predictable environment): they started their activity in 1988: at that time they provided services to hardly five businesses. Now 17 years later, they have built confidence with their small business community and it is more than 100 businesses that benefit from the city support. This best practice can be a model for disadvantaged areas with access to heavy public support (EC funding) and weak professional organisations (new Member States?). For further information: City of Evosmos, Chalkidikis Paniagiotis, Tel. +30(0) , voutsa.el@evosmos.gr, In the City of Gera (Germany), a good partnership has been developed between the Municipality staff and business representative organisations (Chambers of Commerce, Chambers or associations of Crafts, small business associations ) for the local grant scheme management: these organisations are involved in the URBAN structures, such as the membership in the steering committee URBAN II Gera and the monitoring committee URBAN II, the partnership is ensured. The partner organisations contribute to the promotion of the scheme; provide advisory services to prepare the applications and the Municipality staffs make the projects evaluation and the subsidies management. SME in Marseille Source: Ville de Marseille

16 Meeting of women entrepreneurs in Vienna Source: Grätzelmanagement. Wien 20. WWFF The City of Vienna has developed an original partnership with the Economic Chamber to implement a financial support scheme in favour of the small businesses: the Gemeinsame Kreditaktion der Stadt Wien und der Wirtschaftskammer Wien (Joint action for interest support of the City of Vienna and the Vienna Economic Chamber): Target groups: SMEs which are members of the Vienna Economic Chamber for investments or for bridging the gap of temporary lack of liquidity. The earmarked funds are partly from the city and partly from the Chamber. Investment loans as well as working funds loans can be subsidized. The raised loan can be up to (for start ups 6.000). The interest is 3% current account, due half a year. Pay back period is 4 years, bankable securities and proof via bank. For further information: Vienna Business Agency, Burkhard Weiler, Tel. +43(0) , bweiler@wwff.gv.at, To summarise the position on the stakeholders, in the less favoured areas, it is a necessity that all types of businesses / projects be able to develop so that they can bring a positive contribution to creating wealth locally. Generally these businesses / projects are of very small size and need support in accessing to funding. Banks are reluctant and need to be comforted in their provision of funds to the small businesses. The small business community requirements give legitimacy to the local authorities, the cities, in delivering this support. The support should take the form of interfacing the local small business community and the national/regional subsidised schemes (EU funding) in close cooperation with the financial institutions (banks) that can provide financial technical expertise and with the local business associations, the vocation of which is to provide individual support to the businesses, including the smallest ones who need it most. Historically the initial way local authorities have financially supported the businesses located on their territories, was with grants. In a context of dwindling public resources and with the aim of improving public funding efficiency, the local authorities have looked for alternative solutions: the natural evolution was to give loans instead of grants and to guarantee loans instead of granting them. The budget previously allocated to grants could form the loan fund or the guarantee fund capital and the recurring costs are limited to the re-capitalisation to cover the losses and the operating expenses. This evolution gave rise to public micro-credit, then to micro-credit with public-private partnership and then to micro-credit funds capitalised with fiscal incentives. The ECO-FIN-NET partner cities have discussed their experiences on four types of financial instruments: grants, micro credit, guarantee schemes and venture or seed capital. Guarantee schemes have already been presented in the previous chapter 2.1.1: the following paragraph will describe the ECO- FIN-NET findings on the remaining three instruments, grants, micro-credit and venture capital Grants The traditional way local authorities have supported their micro and small business communities is through subsidies. This support has many advantages: It is targeted at specific businesses that can easily be controlled through the application procedure: sectors of activities, entrepreneurs profiles, types of businesses, types of investments (equipment, software, working capital, commercial promotion, staff, training ) can easily be defined according to the orientations the authorities like to promote. It can be open for definite periods of time, in line with the municipal budget periods. It can be tailored to the financial commitments that have been approved by the budget (with a first in, first served procedure). It is easily marketable since every entrepreneur is interested in receiving free funding. Additionally it has a clear visibility. But also according to OECD FEED experts, subsidies cause a loss of tax revenue and give recipient businesses an unfair competitive advantage over other businesses without such privileges. Taxes are made higher for all other taxpayers in the country as a result of such incentives (FEED 1999). Additionally grants are often allocated only to profitable businesses which is not the general situation of new businesses: startups are thus discriminated negatively and other instruments need to be used. Last but not least, it is a costly procedure if it is opened to a wide range of businesses, and it is only possible in case of existing national and/or EU funded scheme. In this case the Municipality acts as a local interface between the business community and the national organisation in charge of the national (and generally EU funded scheme). This situation raises two difficulties: The local level has little influence on the eligibility rules of the scheme that cannot be adapted to the local reality. In times of restrictions that will prevail in old EU Member states, there are some doubts that these schemes can be maintained after 2006 (during the next programming period of EC structural funds) and it is necessary to find alternative solutions, more sustainable and with a higher leverage effect. Bearing in mind these considerations and their previous experience of running various grants schemes, the ECO-FIN-NET propose the following recommendations for micro and small businesses in disadvantaged areas: Grants are a very successful support instrument for new projects that require a consolidation of the entrepreneurs equity: they bring more confidence to the projects, giving them access to other forms of funding. Grants should be considered as part of a financial package aiming at making small projects bank worthy. In all cases these grants should be used as an incentive for commercial banks (including private micro credit) to be involved in the projects and it is the local authority s responsibility to make it clear to the commercial banks, in general discussions with the local banks associations and with individual loan applications. In situations of scarce public financial resources, grants should be reserved to the consolidation of equity for new projects, irrespective of the investments and number of new jobs (these elements should only be taken into consideration for project credibility purposes in case of lack of track records). Priorities can be set for grant allocation by the local authorities, but automatic sectoral support, geared to specific investments (for instance investments in ICT equipment) should be avoided as the main priority for grants is to make new projects (and new economic activity) start and develop on the long term. Between 1981 and 1996, the City of Birmingham developed a very successful (long lasting and heavily funded) support scheme: the Business Investment Scheme. The Business Investment Scheme was a city wide scheme offering grants, loans or equity investments of up to 1 00,000 to SMEs in the manufacturing and related industries sector. The scheme sought to bridge the financing gap faced by businesses in priority areas, sectors and client groups in order to enable them to fully fund their development projects, e.g. relocation, expansion, modernisation. The criteria allowed grants up to 50% of project costs of up to 50,000, loans of up to 100,000 and equity investment between 5% and 19% of the share capital. This ensured that only a minority stake was held. The scheme levered in much larger sums from banks, the Department of Trade and Industry (DTI), loans from the EU and other sources enabling marginal but economically beneficial projects to proceed. The risks of failure were reduced by supporting SMEs with ongoing business advice from Officers of the Economic Development Department (EDD) and partnership organisations. The annual budget was 1 million p.a. The main results were: 600 businesses were supported; 10 million invested; 10,000 jobs have been created; 8,000 jobs have been preserved; 126 million were levered; 790,000 are repaid; 210,000 are written off. For further information: City of Birmingham, Mohammed Zahir, Tel , mohammed.zahir@birmingham.gov.uk, Centre of small creative businesses in Birmingham

17 In 2003, the Municipality of Vilnius took the decision to design a new financial instrument to support their small business community. This instrument has been completely funded by the city budget, but a local partnership with financial institutions (loans and guarantees) and the Labour Exchange, an organisation in charge of providing new staff for the businesses, was set up for the selection of the funded projects. The Economic Development Division of the Economic Department of Vilnius City Municipality Administration designed the scheme and runs it. This scheme was designed to support new workplace creation activities, and up to 65 per cent of workplace creation expenses were covered by the Municipality (expenses were covered only if employee was hired from the Labour Exchange Office). The remaining amount had to be covered by using own funds or by borrowing money from The City of Vienna (Austria) has designed 5 grant schemes for SMEs and start up companies: 1. JungunternehmerInnen Förderungsaktion (inkl. Plusprämie) The Start up grant (incl. additional premium) is intended to consolidate the starting capital: Target group: persons starting their own business for the first time and young enterprises existing for no longer than 2 years (businesses in tourism and leisure industry are excluded). Material and immaterial investments can be subsidized with 10%, maximum amount of the grant is 21,000. Additional premium may be applicable for investments with high innovation and growth potential. This investment premium ranks between 5 to 10% of the applicable costs. 2. Gründungsbonus (Founders bonus) also intended to consolidate the starting capital, with a leverage effect for the public funds: Target group: Persons intending to start their own small business for the first time. Savings from own capital starting at least 2 years ahead of company set up. The founders bonus is 14% of the savings with a maximum of 7,700 per company. The duration of the savings period is min. 2 years and max. 6 years. 3. Nahversorgungsaktion der Stadt Wien (retail shops support scheme of the City of Vienna) Target groups: small companies, existing at least for 2 years, in several branches of the retail section. Applicable costs: training and consultancy costs, building and equipment investments, software, participating credit institution. If the business decides to take a loan, it is guaranteed by guaranteeing institution, participating in the scheme. Since the very beginning, the project has been designed in partnership with other institutions (loan scheme, guarantee scheme and labour organisation). Both selected institutions (credit institution and guaranteeing institution) are acting in favour of SMEs. They are the only one specialising in this field among this type of institutions in Lithuania (limited number of possible partners). When the city proposed to them to participate in the project, they immediately agreed. For further information: City of Vilnius, Danute Maksimaviciene, Tel , danute.maksimaviciene@vilnius.lt, machinery and construction costs. The grant is 10% of applicable costs with certain minimum investment levels, with a maximum grant of 10,000 within 3 years. Interestingly, the impact of the retail sector that is traditionally excluded from support schemes is recognised with this grant scheme. 4. Wiener Strukturverbesserungsaktion (Infrastructure improvement support scheme of the City of Vienna) Target groups: SMEs in production, wholesale and R&D and production related services. Applicable costs: purchase of company plots with or without building; erection of a company building, refurbishment or extension; planning and consultancy costs The minimum investment for small companies must be min. 150,000, the grants cover 15% of the eligible costs (maximum grant of 750,000 within 10 years) 5. Internationalisierungsförderung (Internationalization support scheme) Target groups: SMEs for implementation or new orientation of business relations in international markets. Applicable costs: consulting, homepages, taking part at international fairs and exhibitions, publications, translation, market studies The grant covers partly these costs (20% - 70%) with a maximum of 10,000 per company per year. For further information: Vienna Business Agency, Burkhard Weiler, Tel. +43(0) , bweiler@wwff.gv.at, The grant scheme developed by the City of Gera (Germany) is an on-going procedure opened all year long. It has been in force since This offers the advantage that if the granted businesses have to return funds; these funds can be available for new projects within the same scheme. At the moment the projects are funded with the first tranche and about half of the available funds are disbursed. For the second tranche (innovation and technology projects) the application period is open. But the deadline for the last project application by the SMEs is set at 30 June This deadline has been set because of the eligibility regulations of the EU, the validity of the URBAN II programme Gera, and the n+2 rule. With the deadline it should be ensured that businesses implement and claim their investments until 2008 at the latest. For further information: City of Gera, Thomas Seidel, Tel. +49(0) , europabeauftragter@gera.de, Micro-credit For the local authorities that are interested in supporting their micro and small business communities, it is an option to develop a micro-credit activity. In this case it may be useful to remember how successful specialised micro-credit organisations operate. Micro credit principles The definition of micro-credit is for loans under 25,000 Euro. They are generally refundable on a short-term period, with little or even no debtor s guarantee. According to FEED experts, micro-credit schemes have been most effective in environments distinguished by five characteristics: Structural change or a persistently negative condition in an economy creating declining wage rates, growing unemployment, and a high proportion of working poor. Limited employment options due to the closure or lack of large employers or industries that were the main source of local jobs. An ethnic culture of entrepreneurial activity and a high proportion of the population interested in self-employment and entrepreneurship. Economic opportunities with low barriers to entry into the marketplace that require small amounts of start-up capital. A significant credit gap between the need for financing and the availability of personal resources (such as savings) or formal credit (such as bank loans) (FEED 1999). These are typical conditions that prevail in urban disadvantaged areas and this is probably the reason for considering micro-credit schemes as well adapted to these business communities. Micro-credit schemes also have three main categories of development objectives: Poverty alleviation, helping poor people to create additional or even their only source of income: it may be the starting point for setting up a micro-business and an opportunity for developing self determination; Self-employment programmes for people who want to set up their own activity on a stable basis with their own microbusiness, bearing in mind that the vast majority of micro-businesses do not aim at growing but at providing stable and decent income to the entrepreneurs and their families; Micro-business growth to support the development of existing micro-businesses into small businesses with access to the traditional banking system. FEED experts indicate that this latter objective may represent only 2 to 5% of businesses but they are worth considering since they have an interesting job creation capacity. Additionally, if all micro-businesses do not grow into a small business, almost all small businesses started as a micro-business (FEED 1999). These again are the general objectives local authorities should consider when supporting their micro and small business communities. Micro-credit schemes may take various forms of making loans: peer group lending where loans are made to one or two individuals within a small group typically of five: this method is being used in poor rural areas; solidarity group lending where loans are made to 6-10 members of a group who cross guarantee each other; village banking with credit and savings associations created and managed by village communities, in rural areas; direct lending which is very similar to traditional bank lending: loans are made 5 LEED: Programme on Local Economic and Employment Development, Territorial Development Service, OECD Organisation for Economic and Co-operation Development

18 to entrepreneurs based on applications with a business plan or elements permitting to appreciate the business capacity to refund the loans. Loan officers need to provide assistance to the entrepreneur in the preparation of the loan application and during the loan monitoring. This last form of micro-credit is probably the most suitable for developed economies, especially for existing businesses aiming at growth. There is a consensus that micro and small businesses do not only need funding but also market information and management skills. Successful micro-credit institutions are obliged to offer these three services together. The OECD LEED 5 report on micro-credit indicates that most micro-credit schemes share five elements: apple Targeting of particular market niches Generally, micro-credit schemes target certain groups of entrepreneurs (women, minorities, low-income individuals) or businesses (start-ups, existing micro-businesses that want to expand, businesses in particular sectors, or businesses located within a geographic area). apple Delivery of credit through a disciplined lending methodology The most common lending methodologies are direct lending (a loan to one individual with collateral), peer lending (loans to a small group of individuals or members of a group whose shared obligation replaces traditional collateral), and modified group lending (lending to the individuals within a community). apple Provision of some pre-credit technical assistance Pre-credit technical assistance is provided either as formal, mandatory training (for start-up businesses) or as assistance in completing the loan application or a business plan. Training can be a series of meetings or a formal, 6-10 week training programme for start-up businesses, which imparts basic business knowledge and screens out those who are not ready to start a business or repay a loan. apple Provision of ongoing business assistance for borrowers To improve chances of success and loan repayment, most programmes provide ongoing business advice and problem solving to their borrowers. This is usually structured as part of regular loan monitoring, separate advisory services, or a peer-based support system. apple Development of programme operations In North America, most programmes have developed systems for approving and documenting loans, monitoring the loan portfolio, financial and cash management, and staff development and training. These are designed as management tools to control cost inefficiencies, monitor loan loss rates, and prevent rapid staff turnover, any of which can quickly render a programme ineffective (LEED 1996). Public micro-credit schemes In France, the Public Authorities have developed best practices by directing their financial support not directly to businesses or credit institutions but through associative networks. The associative networks supporting new businesses are composed of local associations in connection with a central coordination, a national direction or a federation. Even if, to increase their resources, these associations look for partnerships with private organisations, large businesses or credit institutions, the majority of their resources are public subsidies that cover operating costs and form the loan funds. They are allowed to give loans by law. Some of them, with a special agreement, are allowed to borrow loans from financial institutions to give loans to new businesses (Micheaud 2005). Two types of loans are granted: loans to new entrepreneurs, without interest or guarantee, are intended to increase the capitalisation of new entrepreneurs projects and give easier access to bank loans. «solidarity» loans, with interests and guarantee of a guarantor (related to the borrower), granted to the unemployed, the persons receiving the minimum social income and those who are excluded from the banking system. Loans are granted by a loan agreement committee formed with voluntary (unpaid) members. These associations also provide the new entrepreneurs with advice such as project assessment, business plan, preparation of bank loan and new business monitoring. They must be staffed with adapted human resources. The two major issues are to recruit competent and motivated voluntary members and to control the amount of the staff payroll. The voluntary members generally come from the business community (retired businessmen) or the banks. Some financial institutions have developed specific vocational training modules for their staff members who are interested in dedicating free time (out of working hours) with micro-credit institutions. These trainings are conducted during working hours. In some business schools that have included a businesses period in their curriculum, students may work in these associations to analyse the new businesses applications. In France, there are two national complementary networks, largely funded by local authorities. The City of Marseille is supporting a local initiative platform to deliver micro loans to small businesses and individual projects. This platform is an independent non profit organisation. It is a member of the France Initiative Réseau (FIR) national network. The Marseille local platform CPEM provides micro loans without interest nor guarantee. But another principal activity is to help negotiate guaranteed bank loans with the regional guarantee fund. It makes use of mentors and experts to analyse the loan applications and accept the loans, and to provide on going advisory services in some small businesses. Experts and mentors can work on a voluntary (non paid) basis or as professionals (paid). Retired experts networks are also involved. For some specific expertise, the platform has the possibility to draw on other platforms expertise and this is an advantage provided by the network. In Marseille, the platform employs a staff of 10 (1 director, 1 manager, 5 credit agents, 3 secretaries): their cost is entirely supported by the city. The fund is capitalised by the city with regional and national public contributions. Some private donors as large businesses also contribute to the fund capital. The number of commercial bank loans linked with CPEM micro loans is increasing. Day-to-day costs (premises, equipment ) are supported by public and private contributions. These costs can be eligible to EU funding where applicable. For further information: City of Marseille, Pierre Chaillan, Tel. +33(0) , pchaillan@mairie-marseille.fr, «France Initiative Réseau» (FIR) is the most dense: initiated in 1985, it is a federation of 239 independent local member associations called «local initiative platforms» specialising in supporting new entrepreneurs and granting loans without interest nor guarantee. The central organisation is in charge of negotiations at national level for the whole network, and of conducting evaluation procedures for the evaluation and homologation of each network member. The role of the FIR network is: To deliver the homologation to the platforms on the basis of a strong local partnership, quality of the staff expertise, market survey and transparent organisation; To prepare and update the quality chart for the platforms (AFNOR national standards); To negotiate support at national level (Ministry of economy, EU funding, national banks and other financial institutions ) for the benefit of all the network members; To prepare communication campaigns, networking with other national organisations. Local platforms pay a subscription fee to the FIR network. The total amount of loans at the end of 2004 was M Euro. More than three fourth of these funds is of public origin (see complementary data in annex I.1). The ADIE association (association for the right to economic initiative) is the second national network (see complementary data in annex I.2). If commercial banks have problems with the small businesses because of lack of collaterals and high application processing costs, the micro-credit institutions, giving loans for even smaller projects, have the same problems of guarantees and processing costs: it is obvious that micro credit loans should be eligible to guarantee schemes on the same conditions as bank loans. In the same way as grants, public microcredits should be used as incentive for commercial banks (including private micro credit) to be involved in the projects. Traditional banks are interested in these networks as a source of new small business clients and as a new communication medium. Entrepreneur supported by CPEM in Marseille Source: CPEM 2005 CPEM Loan Committee Source: CPEM

19 In the UK, the City of Birmingham develops an innovative approach to entrepreneurship for specific target groups with partnership consortia delivering comprehensive packages of coaching, funding and services: ENTERPRISE CITY This is an initiative from Birmingham City Council aimed at piloting a new method of working with a target number of individual entrepreneurs. The objective being to make a positive contribution to local economic regeneration in key communities, facilitating enterprise and stimulating new business creation, encouraging innovation and aiding business growth. Thereby, increasing the number of residents potentially going into self-employment particularly from disadvantaged communities. This supports the Council plan 2005, the Community Strategy, and the Development Directorate plan. Through a new commissioning gateway process, launched in August 2005, proposals were invited to deliver the Enterprise City project valued at 800,000 across the city as outlined in the detailed prospectus. Delivery will be through a consortium approach commencing in April 2006 and running as an 18-month pilot until September The project will be independently evaluated before completion. Selected consortia will be allowed up to a maximum of 20% funding to cover management fees, the rest must be spent on direct delivery activity that adds value to the individual entrepreneurs selected to participate in the project. The initiative aims to develop an Enterprise culture, stimulate an innovative approach and to nurture and encourage entrepreneurs. It will improve the way in which entrepreneurs from the Ethnic minority, Women and Young communities can obtain the support they need to overcome the unique barriers, which they face through a delivery consortia created for this purpose and that is able to engage effectively at the community level. How this will be achieved: - Recognising the need for a new approach and greater collaboration between agencies Enterprise city has been designed to encourage creative thinking and an entrepreneurial approach that will compliment existing support provisions. The project is very focused with specific requirements under 3 strands each with defined target groups. These are Ethnic Minorities, Women and Youth. Each strand will be delivered by a purpose built consortia (2 for ethnic minorities) consisting of at least 2/3 organisations capable of delivering a specific package of flexible and measurable support activity tailored to meet the needs of the entrepreneurs that are identified for support. The approved consortia will act as a gateway, identifying suitable individuals with entrepreneurial attributes via the existing infrastructure network. The entrepreneurs are then preparing to present themselves, their ideas and aspirations before the Enterprise Den, an independent panel of experts established to bring knowledge and experience to the process. It is envisaged this panel will consist of a number of experienced individuals representing a combination of public and private sectors that can add value. Entrepreneurs demonstrating the right attributes and selected by the panel will then access a package of support through the consortium. Through a personnel development plan tailored to their individual needs this will enable the entrepreneur to develop the skills and knowledge necessary to turn their ideas into reality. Those not selected will still be signposted to existing support provision. Each development plan must be clearly defined, address the needs of the individual and clearly show how it will result in the entrepreneur being properly equipped to start their business. The plan may take up to 12 months to complete and could include a personal grant, specific skill development, the attainment of new qualifications, mentoring and coaching, as well as access to group training. Upon completion of their Development plan it is envisaged the entrepreneurs will possess a good business plan based upon their original ideas and sound research and be investment ready to start the new business or grow an existing one. At this point they will be able to return to the Enterprise Den panel to seek funding of up to 25,000 from the Entrepreneur Fund, created by Birmingham City Council specifically for this purpose. Only entrepreneurs participating in the Enterprise City project and completing their personal development plans will be eligible to access this fund. The 300,000 fund is intended to act as a deal maker as part of a funding package that provides pump-prime funding to the venture, in lieu of the owners stake or security, which will encourage and enable other lenders to provide the rest of the project funded necessary to get started. Loans of 5,000-25,000 will be available over a period of 6 36 months on an unsecured basis to successful entrepreneurs and they will also be supported with their application to other lending institutions. The creative development team will manage Enterprise City and the Entrepreneur fund with support from the Regeneration Co-ordination and accountabilities group. The project is driven by outcomes rather than outputs and seeks to establish, over a period a number of successful, sustainable additional enterprises in new areas of business created by entrepreneurs from Asian and African communities, Women and young people. Entrepreneurs are people who initiate ideas and convert these into successful innovations and ventures, assuming the risks involved. Entrepreneur development is not a quick fix and the challenge is to develop a spirit of entrepreneurship, find and develop the entrepreneurs and to convert that into economic impact. The successful consortia will be those who are able to identify a clear approach for participating entrepreneurs that can be monitored and measured against a delivery plan and which will lead to the direct development of the individual. The budget is 1.2 million over 18 months. The Birmingham City Council, Planning and Regeneration Services wholly fund the project. For further information: City of Birmingham, Mohammed Zahir, Tel , mohammed. zahir@birmingham.gov.uk, In Spain, apart from the City Equal micro credits, the City of Gijón also supports entrepreneurship with the Entrepreneur Micro credits: Target group: Entrepreneurs and micro businesses located in Gijón. Financial investment in working capital not more than 50% (total amount) euros max. redemption period: 3 years. Max. financial amount 95%. 4 per cent interest. Guarantee by the Regional Guarantee Fund (AS- TURGAR) and support by Enterprise Municipal Centre. The originality of this scheme is that working capital (that is traditionally excluded) is eligible for funding, which greatly enhances the bank worthiness of the projects. For further information: City of Gijon, Isabel de la Huerga Iglesias, Tel. +34(0) , proyectoseuropeos. alpee@gijon.es, Public / private partnership Local authorities may also engage in partnership with private stakeholders to capitalize micro credit schemes and may have the possibility to negotiate specific conditions for businesses / projects located in specific areas (less favoured neighbourhoods). In the UK the system of CITR (Community Investment Tax Relief) savings accounts with Charity banks coupled with a fiscal incentive may be an option for public support. The ECO-FIN-NET network dealt with the recent evolution of micro credit schemes in the UK that aim at making these institutions more sustainable by giving them access to more stable financial resources with market sanction. Micro credit institutions have the possibility to create special banks, Charity banks that can collect savings with a fiscal incentive for the people who deposit their money on their accounts. These deposits are re-invested in charities and among others micro credit schemes. For the depositor it is a safe, ethically and financially interesting investment. For the micro credit institution it is a sustainable form of financial resource, not depending on a reduced handful of donors (diversification of donors) with an on-going process (independently of annual budgets). Reactions were: This system requires a fiscal incentive, i.e. a national fiscal regulation that may not be adopted in all countries; Savings banks where and when they exist, can provide the same service and there is no need to create new instruments (and new regulations) when the current system is satisfactory; For the moment this system is not fully operational in the UK and obviously some micro credit managers find it easier to negotiate their financial resources with a limited number of donors. Nevertheless it looks a promising solution in line with the general trend that tends to replace public decisions and resources by private individual choices. As such it deserves careful attention during the coming period and may be an option in the countries that require micro credit development in a liberal environment. SME Meeting in the Congress Centre in Gijon Source: Gijon, Arnaud Späni, Palacio de Congreses

20 As an example the City of Vienna has developed the Grätzelmanagement in each less favoured area (the 2nd and the 20th districts of Vienna) with their own offices, supporting the existing companies and persons with their needs, which includes information about finance and business promotion schemes. Conclusions concerning the public- private partnership The ECO-FIN-NET network members, according to their own local experience have come to the following recommendations on the possible role of the cities: The cities should organise partnership with other public institutions, in particular the Regional authorities to improve access to finance for the small businesses, in particular access to more sustainable sources of funding, putting emphasis on mainstream public finance (EC structural funds); They can envisage to bring a financial contribution to cover the administration cost of the loans to the small businesses; They can also consider to bring a financial contribution to financial institutions (micro-credit) in order to cover specific local costs (in the targeted less favoured area) such as the costs of opening a local office (or refurbishing existing premises); They should always negotiate with the private financial institutions so that the public grants and loans are an incentive for private finance (leverage effect). Conclusions concerning micro-credit For the local authorities interested in developing a micro credit scheme for the micro and small business community in their disadvantaged areas, this means that: There is no point for local authorities in being involved in the operation of such schemes that require specific expertise, but rather in giving incentives to existing schemes so that they are more active in the disadvantaged areas. These incentives should be negotiated so that the public support strictly applies to the concerned businesses in the area: for instance the ECO-FIN-NET proposes that a branch office be opened in the area Venture and seed capital OECD FEED experts indicate that not only access to credit is important for small and micro-businesses, but also access to capital (LEED 1996). Seed capital: necessary to fund a project before the products or the services are marketed, Venture capital: investment in equity during the start-up or the growth phase of a business, Informal venture capital (business angel): venture capital by a private individual, Early stage finance: for investments to launch a product or service, Mezzanine: combination of equity and loans (generally with high interest rates), Corporate venturing: venture capital by existing companies for businesses set up by their own staff or in strategic activities (Saublens 2004). Figure 6 indicates clearly that the vast majority of projects fall in the first three categories, especially in disadvantaged areas but suitable instruments for bigger projects should also be accessible due to the very high potential of growth and job creation they imply. This means that local authorities need to be directly involved in the majority of cases (first three categories) and can only facilitate access to other sources of funding when needed. Unfortunately Saublens also indicates that in reality the provision of funds is not targeted towards start-ups and very early stages of business development but rather on existing businesses that have a project of growth. As a consequence, there are far more funds available than funded projects: a survey conducted at the beginning of 2004 on 40 German business angels indicate that less than a quarter of business angels have invested more than 25% of their available funds (Saublens 2004). In France, the Caisse des Dépôts et Consignations-CDC PME, active in seed capital and start-ups, received 2,200 applications for funding, presented 99 projects to the agreement Committee who finally decided to fund 41 projects. Such figures indicate a very big discrepancy between demand and offer and show a really problematic situation for small entrepreneurs in the access to capital. For Saublens, this problem is linked to three considerations: entrepreneurs and investors have not the same perception of funding: entrepreneurs make little difference between equity and loans; entrepreneurs are not prepared to meet investors; they have a different perception of innovative projects (Saublens 2004). To address this problem, which is faced in all countries, the current approach is to train entrepreneurs to investment readiness. These training schemes include: business plan critical analysis; presentation of funding sources; types and availability of funds vs. business development stage; investors expectations; project presentation to investors. Another (and recent) type of access to capital is mezzanine funding which is a combination of loan and equity: the business receives a loan refundable according to the business returns. However experience shows that, for profitability and sustainability reasons the venture capital organisations do not / cannot focus their activity on the small businesses in the less favoured areas. Figure 6 For the ECO-FIN-NET partner cities, venture capital is hardly accessible to (and designed for) small businesses located in the less favoured areas: the businesses / projects are generally too small and the eligibility conditions too strict. In the case such projects would be located on the city territory, it is recommended that the local authorities contact the regional/national/specialised venture capital institution involved for a possible tailor made support. The local authorities should not raise unfounded expectations with the SME community in publicising possibilities of venture capital that will only apply to a very small minority of businesses. They could be partners of specialised venture capital organisations if necessary and when required by local businesses (ad hoc case by case agreement). They may envisage a financial contribution to capitalise investment funds (seed and venture capital) for investments in local businesses but also / rather to cover the administrative costs of processing applications and the management costs. Source of Funding Approximate Amounts in Loans (without guarantee) 5,000 to 15,000 Micro-credits 3,000 to 30,000 Business angels 25,000 to 250,000 Seed capital 300,000 to 1,500,000 Start up 500,000 to 2,000,000 Venture capital 2,000,000 to 50,000,000 Source: Saublens 2004 Source: Ville de Marseille In his comprehensive survey on SME funding sources, C. Saublens / EURADA makes a distinction between: 40 41

21 In the UK, an interesting and innovative ad hoc instrument has been developed by the City of Birmingham, targeting specific ethnic and religious groups: The West Midlands Inclusive Fund Entrepreneurs within certain disadvantaged communities, particularly Pakistani, Bangladeshi and Indian, are prohibited by cultural and religious reasons from accessing interest based funding. This represents a significant barrier to the establishment, development and growth of SMEs within those communities, leading to the social exclusion of those groups, which are already subject to high levels of deprivation. back between years 1 to 3. The agreed percentage return in terms of profit will be payable between years 3 to 5. Investments in terms of ordinary shares will remain in the business and be repurchased at market value between years 3 to 5. Business advice, counselling, consultancy and mentoring support will reinforce the financial investments in both new and existing SMEs. This element of the project will be delivered through the regional business support organisations. All investments will be based upon demonstration of adherence to the principle of non-interest funding, viability, growth and job creation. 2 City of Leipzig An example of partnership is illustrated by the City of Leipzig with the local Savings Bank: together they develop a new project: Concept Venture Capital Light In order for a company to maintain a stable development, a sufficient amount of equity capital is essential. Small and medium-sized businesses in particular, however, find it very difficult to generate the required amount of equity. External venture capitalists are rarely available for sums below 150,000 euros, because analysis and management costs are too high to be economically viable in the case of smaller projects. But the City is interested in allowing some small projects but with a high growth potential, to develop in the area. The public authorities and the chambers of commerce with the local Savings Bank set up a venture capital programme for small businesses. Through an established venture capital company, investments between 50,000 and 100,000 euros will be analysed and, once paid out, managed. The inspection of an investment as well as its management requires the necessary resources. Costs are estimated at approx. 5,000 euros as a one-off payment for the inspection and then for each subsequent year. Given an investment of 75,000 euros and a running period of 5 years, these costs alone are equivalent to interest rates of 8.0%. Additionally, clients have to cover interbank rates (currently approx. 6.5% p.a.), general risk (approx. 7.5% p.a.) and other costs / speculation of venture capital management. Especially for very small companies, that is far too much, especially since these companies cannot expect any exit returns from the sale of shares. 2. The public authority makes available capital for specific purposes below the current standard interbank rates 3. The public authorities take on part of the risk from the investment through an indemnification clause / guarantee. From one perspective, option 1 is to be preferred. It would result in directly promoting individual companies that are of economic interest. Investment 50, ,000 euros Funding Basic funding I EUR, flat rate Further funding II EUR, flat rate Management funding III 50% of ongoing costs min. 750 euros p.a. max. 2,500 euros p.a. Running time 5 10 years Basic funding I will be paid as a flat rate to the investment management. Additionally, management receives money for the subsequent detailed investment analysis. This takes place after a positive vote during phase I and general agreement with the client. Result: For the first time, small businesses are able to develop with a solid financial structure by gaining access to investment capital that is customary in the market. Furthermore, through its close collaboration with the investment management, the company will also have access to valuable economic and strategic information. For further information: City of Leipzig, Office for Business Development, Brigitte Brück, Tel. +49(0) , brigitte.brueck@leipzig.de, The range of non-interest based products currently available within the UK does not cater for the needs of those seeking self-employment and business development and growth. Birmingham City Council commissioned the University of Birmingham to undertake research to establish the need and potential for non-interest based finance (report sent to AWM). The West Midlands Inclusive Fund will provide non-interest based loans and equity funding, with the return to the fund linked to profit generated by the business. It fills an identified gap within a niche market and complements traditional interest based mainstream sources of funds. 1.5M project running from March 2003 to March 2005: As a 2-year pilot the fund will support both new and existing SMEs with non-interest based loans and equity funding of up to a maximum of 60k, with the return to the fund linked to profit generated by the business. The capital element of the loans will be repaid between years 1 to 3. The return on the loans will be linked to the profits generated by the business and the agreed percentage return on profits will be payable between years 3 to 5. The equity investments will take the form of ordinary shares and preference shares. The capital element in the preference shares will be repaid The capital repayment and profit generated from both the loan and equity investments will be re-invested into West Midlands Inclusive Fund to ensure that the fund is sustainable and revolving. The project will be delivered through the creation of a new legally constituted vehicle called the West Midlands Inclusive Fund Ltd, a non-profit making Community Development Financial Institution. The project is partnership between the city as the lead and accountable body, Regional Business Links including Birmingham & Solihull Business Link, National SBS Phoenix fund and the private sector. The West Midlands Inclusive Fund will run along side and compliment the interest based products offered by ART and the main stream banks, which to do not currently cater for this niche market. Both ART and the banks will act as local gateways for the fund by providing cross referrals. As a pilot the programme is designed to assist some 100 new and existing small businesses within West Midlands objective 2 area focussing on key regeneration areas within Birmingham. Some 80 jobs will be safeguarded and a minimum 120 new jobs created within the businesses assisted. For further information: City of Birmingham, Mohammed Zahir, Tel , mohammed.zahir@birmingham.gov.uk, There are three possible models for escaping this circle: 1. The public authorities cover 50% of the costs for investment inspection and management S-Unternehmensbeteiligungsgesellschaft der Sparkasse Leipzig mbh, Holger Grentzebach, info@s-beteiligungen.de, Tel. +49(0) ,

22 Handicraft fair in Vilnius 2.3 Advisory services and training schemes All these support instruments require to be promoted for the small business communities at local level to accept them and then to decide to make use of them. Once the businesses have accepted to use them does not mean that they can easily follow the implementation procedure nor that they have the required expertise to use them. So the best technically designed support instruments will only be successful if they are joined with promotion campaigns (long lasting), advisory services and training schemes generally understood as non financial services and network support. These instruments will be described in the following chapter but if the cities want to bring efficient and consistent support, they should also consider as a complementary package: financial contribution to existing advisory support schemes reserved to local businesses, financial contribution to training schemes (investment readiness) implemented locally, organising local team of advisers, financial contribution to small business representative organisations to hire staff specialised on the disadvantaged area (equivalent of the support scheme developed by the French Ministry of Economy to encourage the Chambers of Commerce in hiring specialised staff in rural areas- 3-year decreasing financial aid): the ECO-FIN-NET indicates that this type of incentive may not be sufficient to induce the Chambers to hire additional staff in some countries, but see interesting perspectives for this procedure in particular in the new Member States. The condition for effective implementation is a real partnership between Chambers and paying local authorities (and good monitoring of implementation). In Vilnius, the local grant scheme project launched by the Municipality in 2003 appeared to be too complicated for many small businesses: so in 2004, the Municipality introduced a new initiative for financing new workplace creation expenses. The project was transformed and simplified to give the most vulnerable businesses a chance to have access to it. The idea of the new initiative is to allocate a fixed amount of 290 Euro for each work place creation, without asking any detailed explanation or business plan. Eligible enterprises for getting this grant are enterprises employing up to 49 employees, registered in Vilnius, having one year profitable performance and no debts to State Budget, no debts to State Social Insurance Fund Board and no violation of previously signed agreements with Vilnius City Municipality. The funding (fixed grant of 290 Euro per created workplace) was provided to cover the costs of equipment needed for manufacturing or other activities and acquisition expenses of licences required to create new workplace or to employ new staff. The created workplaces have to be maintained at least for one year after the person has been hired. The hired staff must be registered in the Vilnius Labour Exchange Office. Generally application procedures are perceived as too complex by the small businesses who need advisory service to prepare their applications. The Vilnius City Municipality VCM is organising almost free consultancy services for SMEs since So in 2003, when the project was launched, the candidate entrepreneurs could obtain consultancy on economical, legal or any other questions. Since 2002, the Municipality has a programme for training and advising entrepreneurs. Training and consultancy for entrepreneurs is provided by companies, specialising in this field. Companies were selected through simplified open competition. Evaluation of tenders was based on economical efficiency and price. 50 to 80% of expenses are covered by Vilnius City Municipality. 20 to 50% has to be financed by entrepreneur. For further information: City of Vilnius, Danute Maksimaviciene, Tel , danute.maksimaviciene@vilnius.lt, 3 Fostering the SMEs Access to Finance by non-financial services and network support Cities have several possibilities to enforce and stimulate financial incentives for SMEs, as it is mentioned in the previous chapter. Next to this, cities are in many ways in charge of creating non-financial services and network support to SMEs. Non-financial services and network support are an important part of cities policies throughout Europe. In this chapter first the definition of these non-financial services and network support is given. Paragraph 3.2 highlights the problems entrepreneurs experience with these services. The main problem is non use, which is caused by Lack of identification of the needs of an entrepreneur; Difficulties in finding a service provider; The content of the serviced offered; The condition of the service delivery. Paragraph 3.3 highlights the challenges addressed by the cities whilst delivering services. Cities are concerned with questions like: How to reach the entrepreneurs? How to meet their demand and requirements? How to raise awareness for the support services? How to improve the (unity of) supply? What is the best approach of offering services to entrepreneurs? How to organise the work of service providers? The Vienna Business Agency provides a variety of offers to their customers (start up s as well as existing entrepreneurs in Vienna). The Business Service (Wirtschaftsservice) is the first contact point for Viennese companies and (potential) start up s. An own Ombudsstelle solves problems occurring in daily business life. The Business Service in the districts (Regionales Wirtschaftsservice) offers its service directly at the entrepreneurial site in all 23 districts of Vienna. This mobile service is in charge of quick and non-bureaucratic support and helps to solve the local problems. This initiative is a common project of the Vienna Business Agency and the Vienna Employment Promotion Fund (Wiener How to improve the collaboration with financial institutions in order to strengthen the effectiveness of non-financial support services? What is the best support package and variety of services and network support offered to entrepreneurs? How to ensure a broader integrative package of support? What is the best overall approach? How to sustain financial resources for support services? Paragraph 3.4 sums up all sorts of suggestions and solutions answering these problems and issues. 3.1 Variety of support services There is a big variety of support services offered by cities to their local businesses. For a common understanding of the type of nonfinancial services and network support the following definition is used 6 : A Information / Orientation SMEs are serviced with the supply of adequate information about several different aspects of their activities and entrepreneurship. SMEs and persons who want to start up a business are informed about the necessary steps towards a viable enterprise. Information is given about taxes, regulations and about the labour market and the qualification of personnel, and, most important, about ways to get finance (grant schemes etc). Service can also consist of an additional / previous check up of the credibility of the entrepreneur. ArbeitnehmerInnen Förderungsfonds). 11 persons, each of them in charge of 1 to 3 districts, deliver services in: Investment matters Information about the economic aid program Information about available plots for companies, shops and retail space Information about training possibilities and qualification opportunities for the employees support in staff recruiting Interface to the city authorities The women s service (Frauenservice) is specially addressed to female start up s and entrepreneurs. For further information: Vienna Business Agency, Burkhard Weiler, Tel. +43(0) , bweiler@wwff.gv.at, 6 In annex III.1 some specific definitions of networks are listed

23 Entrepreneur supported by CPEM in Marseille Source: Ville de Marseille 2005 Marseille Service d Amorçage de Projet (SAP) In Marseille the experience with the SAP project led to a deep penetration of advice to entrepreneurs and people with ideas to start a business. The goals were: To reach a larger group of entrepreneurs and to support those with good basic individualized information. To stimulate (or discourage) certain project ideas on their business viability. To realize a level of competence for every entrepreneur. To reframe the (negative) perceptions of entrepreneurship by (certain parts of) the public. To take away possible obstructions by advisory organizations and financing institutions, by facilitating the elaboration of the business plan. For further information: City of Marseille, Pierre Chaillan, Tel. +33(0) , pchaillan@mairie-marseille.fr Orientation can be offered in order to enlarge the scope of the entrepreneur (assessment of business idea; business idea development). Orientation helps to fully realise the structure, problems and challenges of entrepreneurship itself and certain business ideas. The service provider gives therefore also a place where people are (re-)directed to other institutions where specific services are supplied. Orientation does not mean that just any idea is embraced and brought to a viable project that in the end could be financed. It is just as worthwhile to assess project ideas and business plans in a way that the entrepreneur is stopped before he actually starts with an unviable plan. Than it is the service provider to prevent the entrepreneur from making too much loss and create financial and professional deceptions for him self and other (business-) partners. B Training / Qualification (Skills, Management) Training of the entrepreneur is the most common service in many different cities. An entrepreneur is offered specific courses in fields like marketing, promotion, ICT-use, e-commerce, bookkeeping etc. Mostly the entrepreneur has to pay a part of the costs. Depending of the specific service provider sometimes special targeted courses are organised relevant for a certain sector (like tourism) or for a certain type of entrepreneurs (like retail) as entrepreneurs prefer these tailor-made courses and services. In respect to the two categories mentioned above, there is a growing tendency to support SMEs not only with an active service given by a service provider, but to create more self-supporting systems where the entrepreneur is introduced in networks, or helped to create networks where the entrepreneur can benefit from contacts with other SMEs. In the same category one can see that there is a growing attention for coaching and mentoring services, which is not aimed at a certain supply of service but much more concentrated to help the entrepreneur to help him/her self. C Coaching / Mentoring Coaching and mentoring are relative less known forms of services. After an intake by the service provider a contact between a mentor and mentee (the entrepreneur) is established. The mentor is selected on the base of the specific question of the mentee. This approach ensures a good demand orientated form of service. The costs are relatively low when retired experts are used as a mentor. The importance of the coaching technique is also that the entrepreneur is learning - compared to traditional forms of training - at a deeper level to cope with his/her real challenges and to create alternative strategies and possibilities. D Network Support Network support is a specific form of service aiming at creating business networks between entrepreneurs to create synergy between them. These are for instance possible through chances for business-to-business transactions, common promotion and effective (common) use of means (administrative use, personnel and other types of network synergies). Sometimes these network supports are combined with incubators or other investments in premises of businesses near to each other. But one can also see networks on a lager scale, for instance the whole urban area. At regional level one sees support Gera - SME network SME network is a project on cooperative networks between similar/ complementary enterprises in deprived areas. The networks are formed by an external organisation (BIEGE 21) financed by the City of Gera and the European Community Initiative URBAN. These networks consist of a small number of firms, which are helped by the external organisation during the seeding phase. The SMEs must in the end sustain their own network. There are now networks on themes like: textile/fashion; hairdressers/stylists and building/construction. These networks are active and viable in their purpose, even after some years of existence. Good practice element: In the range of network support projects this project is particularly of interest because of the fact that it produces sustainable (still active) networks. A small sector network is formed; entrepreneurs are empowered to grow and sustain their business. There is care about the complementarities of the entrepreneurs, and the group dynamics (such as leadership by the entrepreneurs). It is based upon and uses the strength of the local economy. Thus, it enforces the local economy-structure. For further information: City of Gera, Thomas Seidel, Tel. +49(0) , europabeauftragter@gera.de, of networks that are aimed at the strengths of the region. Some cities perceive to connect these regional cluster networks with local / urban networks. Network support depends rather heavy on the type of business. In short the differences are 8 : Company nature (industry or branch, often linked to other issues, such as site) defines the type of relations entrepreneurs seek; Company age (starting, re-starting, or established) defines the eagerness for new contacts; Company size defines sometimes the reach of the contacts; Personal characteristics of the entrepreneur (age, training, and ethnicity) enforce the general trends of type of businesses and their needs of network support. External conditions (economic tide; government initiatives) influence effectiveness of network support. Leipzig SME networks SME network is a project on cooperative networks between similar/complementary enterprises in deprived areas. The networks are formed by an open call by an external organisation financed by the City of Leipzig and the European Community Initiative URBAN. The types of networks to react to the call were therefore not predictable beforehand. Two out of three networks are a success in terms of the fact that they are still active also after the project period. In these terms there is only an initial investment with a sustainable effect. The networks of SMEs have a proven track record of activities between the SMEs in the network. These activities include amongst others: presentation at fairs and projects, cooperation on R&Dactivities, acquirement of an assignment for a group of SMEs, set up of an internet-portal. Besides an open call for network support, the URBAN organisation also organises regular meetings with 20 to 30 entrepreneurs in the URBAN funded area. From this group networks of enterprises are evolving, stimulated by several services that are offered (like qualifications trainings, Vienna - Grätzelmanagement Vienna has introduced a so called Grätzelmanagement 7. This neighbourhood management is an office in the neighbourhood to coordinate the (integral) urban renewal activities. For the economic elements Grätzelmanagement includes networking activities for business working groups. By visits and explaining possibilities, activities and plans of the entrepreneurs are stimulated to participate and once a network is formed this is followed. These (individual) plans should be accepted by the networking group. Once groups are formed, they are helped financially in order to start their networking group to function. The members of the group must decide themselves on the specific allocation of the budget. Good practice element: Network stimulation. Networks of entrepreneurs are stimulated in an interesting way. They are tempted to form a network and are given room to formulate their precise activities and allocate the financial support themselves. This creates productive group dynamics. For further information: Vienna Business Agency, Burkhard Weiler, Tel. +43(0) , bweiler@wwff.gv.at, and financial incentives). One network consists of IT-oriented firms. A special element in this project example is the prescription that the SMEs in the URBAN area reacting to the call should form a network with SMEs outside the URBAN area. This is part of the Leipzig strategy to create a relation between the (low) economy in the URBAN area and the whole regional economy. Good practice element: Growing group dynamics. The importance of regular meetings where entrepreneurs meet each other and stimulating within this process the constitution of networks is very relevant and proven successful in Leipzig. The organisation uses the existing incentives (services and also calls for projects by other governments) to stimulate group forming. Therewith the organisation does not need much extra money to create this dynamic. For further information: City of Leipzig, Office for Business Development, Brigitte Brück, Tel. +49(0) , brigitte.brueck@leipzig.de, Team of the quarter management in Vienna Source: Grätzelmanagement. Wien20.WWFF 7 Grätzel is an Austrian expression for quarter. 8 Annex II.2 gives a full description of the nuances in types of businesses

24 Meetings of entrepreneurs in Rotterdam-Delfshaven 9 The participation rate varies between the EU-member states. It is particularly high in the Netherlands (34% of SMEs have participated in support services in the last five years). The lowest participation rates are found in Greece (6%) and Norway (3%). The French participation rate lies slightly above average while in Germany the participation is equal to the EU average (20%) (DG Enterprises 2002a: 22). Rotterdam-Delfshaven. Network support In the process of building, maintaining and furnishing of housing, a large number of smaller businesses or self-employed craftspeople find a living. Within the district of Delfshaven their number is estimated at around 150; some 20% of the total number of enterprises. These include branches as divers as plumbers, interior designers, architects, builders and kitchen suppliers. Sometimes these have to compete which each other, more often they may work together or meet at sites, and always they are in need of similar information (rules, regulations, opportunities). Asked by two of them COiD has in 2005 taken the initiative to bring together entrepreneurs from the sector in a Building Circle (Bouwkring Delfshaven). Objectives of the circle: Building up relevant networks Promoting cooperation Bettering changes by jointly offering on larger projects Offering platform for acquisition of information and advise Joint promotion via COiD-website Participation is limited to those enterprises located within the district of Delfshaven, that work on a small scale (not exactly defined), with an owner/entrepreneur who is a craftsperson (no managers, but people on the work floor themselves). Membership is by introduction only. Twenty-five enterprises now participate at bimonthly (themed) meetings at the premises of one of the members; the goal is to double that number by the end of Pitfalls: interior designers, architects etc are eager to participate (and have to be limited), craftspeople like plumbers, painters, carpenters etc are much harder to get motivated. On the whole they have enough work and are not used to this kind of networking. Equally important: although the intention remains that the network will in due course be able to sustain itself, it will never be realised. Without external support (knowledge, organisation etc) it will not survive a second year. Funds should be made available for continuous support by an agency like COiD. The success of the Building Circle has led to an similar demand from another group of entrepreneurs: the Creative Circle Delfshaven. For further information: Werk in West, Benji de Levie, Tel. +31(0) , delevie@werkinwest.nl; delevie@coid.nl, Existing problems seen by the entrepreneurs After having defined what non-financial services and network support are from the ECO-FIN-NET perspective, the network cities focussed their discussions on the problems that are existent regarding the use and take up of support services. Entrepreneurs were asked to reflect on support services in a European survey by the DG Enterprises. The ECO-FIN-NET-cities have considered these issues also from their own experience, although seen from the supply side. The ECO-FIN-NET-cities have also spoken to entrepreneurs about these findings. These entrepreneurs gave the network similar reflections on the issues of services and netork support. The results of this survey and the problems as they are seen by the entrepreneurs are described in the following. Low participation rate DG Enterprises found out that the participation rate in support services among European micro, small and sole proprietor s businesses is quite low. Only 20% of the smallest enterprises in the European Union have utilised support services during the past five years. This share further declines with decreasing size of an enterprise, ranging from a participation rate of 15% for sole proprietors to 35% for small enterprises (10-49 employees). On the other hand, more enterprises in the start-up phase use external support than their mature counterpart. However, due to the size-pattern and average age of the smallest enterprises in Europe, the actual users of support services are micro businesses and in the mature phase (DG Enterprises 2002a: 19f). 9 Four reasons for non use: In general, four main reasons for not using support services can be identified: 1. The lacking identification of needs; 2. The difficulties in finding a provider; 3. The content of the service; 4. The conditions of service delivery. These are the challenges providers of support services for SMEs have to cope with in order to motivate SMEs to participate. Lacking identification of own needs SMEs do not see any need for external help. 54% of the enterprises indicate no need as the main reason for non-utilisation. Among start-ups only every third enterprise claims not to have any need for external help. Among sole proprietors the share of enterprises not feeling any requirement for external help amounts up to about 60% (DG Enterprises 2002a: 23f). 10 This attitude might be explained by the experience that many small enterprises, because of their heavy involvement in day-today business, may loose the sense of perspective when assessing their own needs. This also relates to the idea that many entrepreneurs are unaware of the possibilities to improve their business. In terms of a learning process the entrepreneurs are in the state of unconsciousness being unable to top entrepreneurship. Lack of information on support services SMEs lack information in order to find a service provider. Specifically smaller businesses encounter difficulties due to their limited personnel and financial resources. According to DG Enterprises (2002a) 33% of the enterprises indicate as the main reason for not using support services the lack of awareness on the existence and availability of support services. Especially enterprises in the start-up phase do not participate in support services due to a lack of information although a relatively high share indicated to have need for external help. Businesses seem to prefer a local and personal approach. They are looking for support services mainly at local or at regional level and the two most welcomed promotional methods are either direct contacts or personal visits. Satisfaction with offered types of services About a quarter of the SMEs did not get service that fitted their needs. As outlined above SMEs do not express a high need for services. However, it has to be differentiated between the different types of services. For example the demand for financial services, professional information services, and advice and consultancy is clearly higher than the one for specific training courses or the provision of facilities. And again there are differences between enterprises of different size: Small enterprises have a much higher demand for training courses than micro or sole proprietor s businesses. In contrary, one-stop-shops providing general information are most popular among sole proprietors (DG Enterprises 2002a: 33f). Overall, enterprises express a strong need for tailor-made support services that consider the differing needs of different types of enterprises (DG Enterprises 2002a: 38). The missing concentration on specific target groups is emphasised as one main reason for the low utilisation rate of support services (DG Enterprises 2002b-f). Service providers should react to the needs of the enterprises by providing distinct packages of services for the different size classes, sectors or phases of development (DG Enterprises 2002a: 38). 11 Quality of support services The last reason enterprises give for not using support services is that there is often an asymmetry between the type and quality of the delivered service and the actual needs of the entrepreneurs. Thus, it is vital to improve the conditions of service delivery in order not to deter potential participants who are generally convinced of the usefulness of external help and are likely to use support services regularly (DG Enterprises 2002a: 39). The level of satisfaction varies by the different facets of support service delivery: More than 80% of the enterprises that have made use of support services during the past five years express satisfaction with the communication with the service provider, the professionalism of the staff as well as with the quality of the service. Comparatively less satisfied are enterprises with the understanding of their business by the provider and with the effect the service had on the enterprise (DG Enterprises 2002a: 39f). To assess the quality of services the most important criteria for SMEs are that the delivered service was the one which they had requested, that the agreed upon budget and deadlines are met and fi nally that the delivered service suits the actual needs of the firms (Unioncamere 2000: 40). Firms show a high sensitivity to the price, due to the difficulties in estimating the value added by the needed service, which distorts the perception of its price/value ratio (Unioncamere: 39). However, there is a The City of Gera has solved the problem of defining needs through the network the service provider supports. The question of how the needs are covered by the service organisation is answered by the fact that the SMEs in the network together define their needs (with the help of the organisation) and therewith services delivered are better matched to the demands. In Rotterdam-Delfshaven the needs of the entrepreneur are met by the mentor through coaching. The problem if and how the (unconscious) needs of the entrepreneur are met is therewith nearly not present or relevant. 10 Especially low levels of need for support services are expressed in Italy, in the United Kingdom, Finland and Spain, whereas in Germany and Greece comparatively few enterprises claim a lacking need to be the main reason not to participate in support services (DG Enterprises 2002a: 24). 11 Annex II.2 contains a broader description of the relevance of the type of branch a service is provided for

25 strong link between the price of a support service and the perception of its quality by an enterprise: Free services often imply that Rotterdam-Delfshaven - MentorRaad The MentorRaad project is a coaching orientated project and delivers besides this also some network support in urban areas. It uses experienced (often retired) entrepreneurs and managers to coach the entrepreneur (in all relevant stages of the lifecycle of his firm). These people are selected to the extent that they are trusted by the target group and have adequate personal contacts. A large number of mentors is recruited through ambassadors with clubs like Rotary s and Lions, the Chamber of Commerce, district councils and two sponsoring firms. Entrepreneurs that are interested and can clearly state why they need the support by a mentor; and indicate that they are open to advice and support, are invited to an intake interview with the project coordinator. This is an experienced business adviser who makes a sketch together with the entrepreneur of the support needed and the criteria the mentor must preferably meet. With this information the project coordinator commences a search for a suitable mentor who represents added value in the specific situation. When found the three parties meet again to see whether a click can be made between mentee and mentor and to agree on goals to be met, ways of working together, communication, estimated time needed, feedback etc. In order to reach as many as possible prospects out of the multi ethnic business community in Rotterdam s poorer neighbourhoods, MentorRaad uses a wide range of communication methods including personal approach and mouth to mouth communication. Through (themed) meetings the entrepreneurs ( mentees ) have the opportunity to meet other entrepreneurs and the constitution of networks is facilitated. The project is targeted at different groups according to the city districts policy priorities (varying from specific branches in retail to start ups). All entrepreneurs are interviewed about their experiences with the Mentor- Raad project, thus giving information to improve the mentoring and network activities. Apart from this in some districts like Delfshaven external evaluation is executed. the receiver has lower expectations and therefore is more satisfied afterwards (DG Enterprises 2002: 42). Good practice element: Feedback through interview and external evaluation. The project is evaluated externally in some districts and uses regular held interviews with the entrepreneurs as a form to get feedback for the service providers and other specific information about the needs of the entrepreneurs. It gave the information that most entrepreneurs are not seeking for financial help, possibly because they do not expect to get these types of services anyway. Use of deep rooted local expertise to enhance acceptability of mentoring advice. Much attention is given to the necessity that the mentors are to be trusted by the clients. Rotterdam-Delfshaven uses retired people (like the French system ECTI) and still active ones, but pays also attention to the cultural bridge between the mentors and the mentees. A good reception of the coaching activity is a very important point to assess the success of the project. So mentors are selected with great care. Needs are defined with entrepreneur through mentor. Like other mentoring and coaching projects the needs of the entrepreneurs are met by the mentor. The problem if and how the (unconscious) needs of the entrepreneur are met is therewith nearly not present or relevant. Local priorities are integrated. The MentorRaad is a good example of a project delivering a sort of service which is adaptable to specific (policy) needs. It therewith can benefit from subsidy by various local districts for each particular policy goals, like mentoring service only for start ups, ethnic SMEs and so on. This makes the relevance for each political decisionmaking and financing body larger and therewith more sustainable. For further information: Werk in West, Benji de Levie, Tel. +31(0) , delevie@werkinwest.nl; delevie@coid.nl, Challenges from a city perspective The previous chapter showed that entrepreneurs have difficulty in getting services and network support, due to the lacking of the identification of the needs, the difficulties in finding a provider, the content of the service and the conditions of service delivery. The ECO-FIN-NET-cities acknowledged these issues. They incorporated these issues in the following questions: 1. How to reach the entrepreneurs? How to meet their demand and requirements? How to raise awareness for the support services? 2. How to improve the (unity of) supply? What is the best approach of offering services to entrepreneurs? How to organise the work of service providers? How to improve the collaboration with financial institutions in order to strengthen the effectiveness of non-financial support services? 3. What is the best support package and variety of services and network support offered to entrepreneurs? 4. How to ensure a broader integrative package of support? What is the best overall approach? 5. How to sustain financial resources for support services? In this paragraph the challenges from the city perspective are addressed. The answers and solutions to each of the challenges are assembled in paragraph How to reach entrepreneurs, to meet their demand and to raise awareness? A renowned problem is the question how to reach all possible entrepreneurs who are in need of service or network support. Many service providers find it difficult to reach the entrepreneur. Especially the people who are thinking of starting up a business are hard to track down. Entrepreneurs do not understand the personnel of the service providers when the personnel s cultural language is not identical to that of the entrepreneur. In some cities the service provider is part of the local government. These organisations might have difficulties in reaching the entrepreneurs when they have low trust in the government. Sometimes the mere distance of the location of the service provider to the target group might cause difficulty to reach this group. The cities and their service providers see themselves confronted with effective but expensive methods to reach entrepreneurs and therefore have to judge a balanced approach which leaves them with a satisfactory result for a reasonable financial effort. There is a need of having an overview of all possible methods and tactics in reaching the entrepreneur. 2 How to improve the (unity of) support supply? Cities are often considered to oversee the whole spectre of suppliers of services and network support. This is often not fully the case, given the wide variety and origin of many service providers. In many cases cities are not in control of the service providers. Most cities sustain one or two service providers, but besides these there are other service providers active in the city or region. Often these service providers have different niches of entrepreneurs they help and have a specific toolbox. Some of these services are initiated at national level by a ministry or by a societal group or by market sector initiatives. In regions, the Chambers of Commerce or ministerial agencies are sometimes stimulating service providers. This offer of different services does not imply that there are no mazes in the network. For instance, sometimes regular institutes like the Chamber of Commerce are absent in deprived urban areas 12. The variety sometimes troubles the cities in terms of managing of an effective coordination in delivering none necessarily double services and avoiding waste of time for the entrepreneur. At the other hand the variety delivers also a spectrum that deepens the service for specific groups, which sometimes is not deliverable when the service would be centralised. The question for many cities is thus what the best way of offering of services might be and how the work of various service providers could be organised. 3 How to improve the collaboration with financial institutions? Despite the finding that most banks or other finance institutions are aware of the necessity of services and network support to improve and enforce the qualifications of the entrepreneur, the collaboration between banks and service providers is in most ECO- FIN-NET cities not a common practice. It is Marseille Service d Amorçage de Projet (SAP) The SAP project delivered the implementation and financing of 60 SMEs in the neighbourhood Belle-de- Mai. Between 2003 and 2005, more than 600 inhabitants of the neighbourhood have been welcomed, and are given advice orientation on their needs and interests. The service is provided by one consultant. Centre for entrepreneurs in Rotterdam-Delfshaven 12 In the Netherlands the Chambers of Commerce of the four biggest cities acknowledged their failure to reach the (mostly ethnic) entrepreneurs in the urban areas. This led to a project Work in the Neighbourhood, in which entrepreneurs were actively searched and reach out for to provide them with advice and help

26 Incubator in Venice Marseille has with the SAP project - unlike most other projects in the ECO-FIN-NET project a goal to alleviate the poverty of the targeted people in the deprived neighbourhoods. The viability of the SME is not a priori the central issue; the empowerment, people giving direction to their own lives, seems just as important. obviously a question of how to organise a good collaboration between service providers and banks. Service providers are often focussed on the clients and therefore have fewer eyes for the financial institution as partner in the production line. The relation between banks and the service providers or their commissioners is weak, which might be explained by the fact that mostly public funds are used to finance these services and network support. Also banks show not much initiative to ask from their perspective to help to reduce the handling costs and risks. 4 What is the best support package of services and network support offered to entrepreneurs? There is an emergent need to clarify the whole package of services and sketch an ideal picture of the offer to entrepreneurs that service providers should take care for. There is a need for such a picture, as the ECO-FIN-NET cities are aware of the wide variety of services amongst the cities. This ensemble should provide a ticket to good entrepreneurship and of which access to finance. 5 What is the best overall approach / broader integrative package? Cities and their service providers are well aware of the full range of possible services and network support. Often they are confronted with a historically grown offer by (several) service provider(s). Apart from that through central (European/national) programmes certain extra services exist. Some of these services are instruments for other interrelated policy goals, like empowerment, employment, urban renewal and regeneration. Confronted with limited funds (in present and future) cities and the service providers are doubtful what the best mix of services offered is, related to budget and effectiveness and in relation to the various political aims of the programmes. Here the full effect of an integrated urban policy comes into play. 6 How to sustain financial resources for support services? Apart from one wholly private initiative in France (ECTI) and a nationally initiated project in Gijon (Nautical Station) there is not one service provider that is financially sustainable. Although some payments are required from the entrepreneur in many projects, the main part of the costs need to be covered by the government. In some cities there are local funds, but a considerable amount of the projects rely on financial support by national and EU programmes. Local funding is in some cases only there as part of the complied co-financing demands by EU or national scheme. The costs of these services are apparently a hindrance for cities to finance these services totally by themselves. The future developments of the funds in the EU, creates a dark picture for projects. Target groups and target areas are thereof often picked because of the financial and policy goals set in these financial instruments (such as Urban/ Objective 1 and 2 and EQUAL/ADAPT). This guidance given by EU-policies, through structural funds, or other steering instruments has therewith a large impact in local decisions and has to be recognised for the coming budget period. Allthough these services help to improve SMEs, which are considered as a main contributor to the Lisbon goals, a lack of structural financial support from the EU remains an unanswered and intriguing tension. 3.4 Suggestions Both the European Commission, especially DG Enterprises and DG Regio, as well as cities have recognised the issues mentioned in paragraph 3.3 as key issues to tackle better non-financial services and network support in order to improve the access to finance for SMEs. This paragraph tips on adequate solutions and other ways of improving better services and network support. The suggestions are structured along the issues addressed in paragraph How to reach entrepreneurs, to meet their demand and to raise awareness? The ECO-FIN-NET cities have considered many methods and tactics to reach the entrepreneur. These methods are often locally rooted and depending on the local situation. The following highlights are to be mentioned. The supply of information is mostly the first contact between the entrepreneur and the service provider. There is a strong necessity to lower the gap between the service provider and the entrepreneur. This is done by offering the service in the very near of the client: in the neighbourhood. Other solutions to this are seen in certain activities like being present at certain West Athens - Internet use by SMEs is a good example how to get in touch with entrepreneurs on a single ticket. Through ADAPT and other financial programmes a project was started to increase the use of internet by SMEs. SMEs that were not at all known to the possibilities of ICT-use in their enterprises were made conscious of the possibilities. A remarkable change in internet use is achieved. Further a internet node was produced in order to give SMEs a platform/ window on the internet. Many SMEs are online through this project and have a web space at the node. The project is clear in its goals and therefore easy accepted by entrepreneurs where a culture of trust to the government is not often common. This creates to the local government new chances to deliver other services to the entrepreneurs in future time. The producing organisation is part of the local community but organised at a certain distance in order to create as much trust as possible between the organisation and the SMEs. events in the neighbourhoods, organising entrepreneurs-day and visits from door to door in the neighbourhood. Crucial in this respect is that these activities are done by experts who speak the language of the client, in terms of language, culture or type of business. Of course contact itself is not sufficient; one has to offer something attractive. The way the service provider is positioned is another important element in reaching the client. In most cities the organisations that provide the services are often organised at a certain distance to the public authority. Sometimes this is done in an autonomous organisation apart from the municipality, often formed by the local authority in combination with other relevant partners (Chamber of Commerce, state-banks and so on). Sometimes the whole task is outsourced to a private company that is subsidised to deliver the services. In some cities these tasks are not outsourced, but than this is still organised in a relatively autonomous part of the organisation of the municipality. The reason for these organisational approaches is the need to have a strong focus on the target group, to deliver clear and adequate answers and services to their demands. Therefore in some cities outsourcing is chosen and external experts are hired. In many cases one uses also people with close ties to the target group. Good practice element: Niche approach: Internet use. The project is a clear example of a niche approach. No focus on the whole improvement of a SME, but a small element of the whole enterprise. This made it easy to intrude in to the entrepreneurs world and get contact with the entrepreneur. Sustainable higher degree of users. The project can be measured by the amount of users of the node. This is at a higher level than in other areas. Sustained project. Because of the success of this project West Athens has decided to maintain this project and finance it after the first (European) project phase. For further information: ASDA, Moskos Diamantopolous, Tel. +30(0) , urbact@asda.gr, Direct exchange with the entrepreneur in the URBAN area Leipzig A good example of being present is the SAP project in Marseille. It is built on the principle to be as a service institute as near to the clients as possible. Therefore the project offers its services within the locations of other existing institutions in the neighbourhood. Open discussion with entrepreneurs Support of entrepreneurs with e-services in West Athens

27 The Viennese Grätzelmanagement is a good example of such an integrated approach; urban renewal, refurbishments of the houses, public space, social measurements, participation efforts and economic stimulation is part of the whole policy. 13 FEED: Forum on Entrepreneurship and Enterprise Development / UNIDO-OECD Another reason is that in areas where the government is not much trusted, an independent status of the organisation is essential to get the client inside and trust the service provider. For entrepreneurs in the informal economy who might be helped to enter the formal economy, a (quasi-) autonomous position is necessary to get in closer contact with this target group. Informal economy When asked about the ideal environment to run a business, almost all micro and small entrepreneurs answer no tax, no social contribution and no administrative hassle. These conditions prevail in informal economy and of course guarantee its success: the share of informal economy is estimated between 10 and 25% of GDP, this percentage being significantly higher in some transition economies. Informal and shadow economy businesses deprive governments of needed tax resources and put undue burden on those companies that are legally incorporated. Micro-credit has been accused of fostering informal economy since personal loans can fund informal economy projects. According to FEED 13 experts there are three segments in the informal economy: businesses operate within the law but are in breach of minor administrative regulations, business activity is legal but operated with some systematic infringement of the legal system (generally tax evasion), business activity is illegal or criminal and promoters have no intention of legalising the activity ( black economy ) (FEED 1999). But they also indicate it is important not to suppress the informal economy, except for the black economy segment, but to seek to create the environment where legitimate business people are facilitated to become part of the formal economy (FEED 1999). Another relevant way to get in contact with new entrepreneurs is to integrate the activities of the service providers with broader activities in the neighbourhood by the local authorities. This is mostly concerning urban renewal and regeneration activities. Of course it is useful to list a number of these methods as they might inspire and create new opportunities for service providers who are confronted with the same problem. The ECO-FIN-NET-cities have identified the following best ways to reach entrepreneurs: Individual personal contact Personal contacts and mouth-to-mouth contacts (also use meeting places like café-houses, mosques, churches etc.) Door to door visits In the enterprise itself For start ups: in sport clubs, mosques, neighbourhood centres Welcoming visit for newcomers in the neighbourhood Use of existing entrepreneurs to get into contact with others General personal contacts Information days (with entertainment, presence during neighbourhood festivals etc.) Presentations at trade exhibitions Specific targeted meetings for specific groups of entrepreneurs Educational exhibitions at school-leaver Local newspaper (free week issues etc. (success stories)) Press instruments Internet pages / website that is interesting enough to visit Newsletter (electronic or print) Magazine send to all entrepreneurs every three months Advertisement in door-to-door weekly Advertisement in business magazines Link in other websites Radio station (to use to reach certain ethnic groups) Cooperation agreement with other institutions in which is stated that they promote the service in their means of communication Presence in neighbourhood Visibility of the centre in the neighbourhood Use attraction power of the Urban Regeneration programmes (offer for cheap premises/incubator, subsidies for business promotion and so on) 2 How to improve the (unity of) support supply? It is preferred when in a region there is an overview and knowledge of each specialisation of each provider and when this knowledge can be used in certain cases. Given the variety of the supply in many cities, the city could act as the initiator to bring all service providers together and let them be aware of each other. The city could organise every quarter or half year a gathering as a networking event for the personnel of the service providers. From that on cities might want to establish a focal point where at least the possibility to redirect clients is available. A focal point should not eliminate particular niche services, because they have an added value that cannot be replaced by central services. Regarding niche approaches, the City of Gijon delivered a good example amongst the ECO-FIN-NET partner cities: This leads to the conviction that one focal point in the region for entrepreneurs is advisable without blocking access to other services directly by the entrepreneur. The City of Gijon has a clear project that regroups and creates collaboration between several organisation which provide services to entrepreneurs or which are related to this field. The Compyte project (improvement competitiveness of the local SMEs) is the result of the municipality initiative to promote the network of most representative business associations in Gijon, in order to identify critical factors in the enterprises to increase growth and competitiveness. The project regards: Quality Environment ITC Innovation Labour Risk prevention Corporate social responsibility Internationalisation. There is a range of local and regional entities specialised in different sectors playing an important role in the framework of the project. Amongst the 16 organisations belong: Metal Managers Association (FEMETAL), Youth Managers association (AJE), Retail Union of Gijon, Innovation Club, Congress Office, Nautical station, ICT Cluster, Mora Gary Industrial state managers association, Somonte Industrial state mangers association, Business school. For further information: City of Gijon, Isabel de la Huerga Iglesias, Tel. +34(0) , proyectoseuropeos.alpee@gijon.es, The approach mentioned above is in fact an exercise that is led in a top down way. Complementary to this, a bottom up approach is possible that also helps to structure the supply of services. This structuring is achieved by the concept of the Business pass, developed and recommended by the ECO-FIN- NET partner cities. This is a pass that gives entry for entrepreneurs to all kinds of services. The pass has a list of services offered of which the entrepreneur can make use. When consulted about this, the entrepreneur might need a specific consultation or access to a certain network to improve his enterprise or his entrepreneurship. These consultation or introductions to networks are, next to his already present skills and prepared work, added to his pass which in the end indicates that the entrepreneur Gijon Nautical Station. Nautical Station is a project aiming at partnerships between SMEs in the tourist industry in order to attract and redirect more tourists to the project members. SMEs in the tourist business are members of a network. This network is created and sustained by Gijon (with the help of the Spanish ministry for tourism). It is a clear example of sectoral network support, specifically targeted at a certain sector. The SMEs are visited by specialists who speak the language of these specific entrepreneurs. The network is supported by activities like: organising meetings between their members, caring for promotion for the members and so on. This is on the one hand helping the individual SME and on the other hand improving the supply of tourist industry and thereby the attractiveness of Gijon in the tourist market. In the course of the passed years this is an approach with has proven to be sustainable (about 70- SMEs are a member). This sustainability is also achieved in financial terms. SMEs pay for their membership. Good practice element: Sectoral approach. In the range of projects supporting SMEs Nautical Station is very clear in targeting the services to a certain sector. This makes the services products clear for the SMEs and the producing organisation and the effectiveness as well. Effective sustainable network support. Over the years there is a steady number of SMEs that is paying for the membership and thus convinced of the extra value the network and the services give. The financial commitment in relation to the steady number of SMEs being a member, underpins the sustainability of this project. For further information: City of Gijon, Isabel de la Huerga Iglesias, Tel. +34(0) , proyectoseuropeos.alpee@gijon.es, Two exemplary ways of dealing with the variety of services provided in the city/region: The introduction of a voucher system that gives the entrepreneur the right to access services might solve the question of the allocation of different services to different entrepreneurs with different needs. It seems that such a voucher might also have a streaming effect towards the broader variety of services offered. The City of Vienna provides a Training-Check to employees. Some German cities have already introduced the voucher system; there it is a proven practice. The City of Grenoble uses the variety of many (about 40) service providers, national or regional, subsidy based or based on voluntary commitments. Where relevant it knits the services together by additional financial incentives. In this construction Grenoble has much freedom and less attachment. The harbour of Gijon

28 is fully qualified and suited to extend or to start his enterprise. For banks and financial institutions that release grants and guarantees, this pass may function as a trustworthy proof of entrepreneurship. The Business pass is therewith a key to all necessary items a SME would need for successful entrepreneurship and for receiving a bank loan and/or guarantee. The aspects are to be approached in such a pass: 1. Personnel skills. Courses on presentation, organisational skills, bookkeeping etc. 2. Market access: Services concerning the market orientation of the business idea/ plan. 3. Finance: Guidance about information banks require, finance possibilities. Rotterdam-Delfshaven OOR. Ondersteuning Ondernemers Rotterdam (Entrepreneurs Support Rotterdam). This project is a newly introduced voucher system. For many years start-ups who applied for support at the Municipality s desk (OBR) at the Rotterdam Chamber of Commerce Information Centre, would in many cases be referred to one of three (private) business advisers with whom the City Council had a contract. This system had a number of disadvantages: Expensive: as it was free of charge it attracted many weaker start-ups who were unable or unwilling to invest themselves in their future Supply sided: the entrepreneur had hardly any choice of advisor or advise Limited: only support by the start was applicable Unclear results: little proof existed that support and advise lead to a more successful start for more than a few businesses Since September 2005 a different system was introduced, a voucher system: Open to all entrepreneurs Demand orientated the entrepreneur decides the need, the kind of support and the service provider of his/her own choice With a financial contribution of the entrepreneur the Municipality subsidises to a maximum of 50% of the costs or Every entrepreneur who seeks support can apply for the OOR-scheme. The procedure is simple and fast: Exploratory interview with Chamber of Commerce consultant If successful (entrepreneurs request is regarded as useful and in compliance with the Of course this Business pass should not be a bureaucratic structure that sets out a rigid list of requirements. The Business pass in itself orders the existing services and the relation between the several services. It should be an open and flexible path maker for entrepreneurs in need of (non-) financial services to improve their business. It offers in this way a checklist that helps the entrepreneur, the service provider and the bank. Possibly a voucher system (as mentioned in chapter 2) could be introduced for all of the three stages. This might create an even stronger bottom up effect: the entrepreneur himself will choose the type of service and the organisation (the service provider) has to deliver the requested services. criteria) direct reference to the OBR desk (in the same building) Immediate formal approval by OBR-consultant (decision of co-financing) Payment by Municipality to entrepreneur after receipt of invoice In the first four months more than 100 entrepreneurs were rewarded a contribution. They differ from those who in the past applied for the startup scheme: More established entrepreneurs than startups Far better quality of entrepreneurship Strong willingness to invest in own company and own future The problems entrepreneurs now seek an answer to are widespread; the main five are: Development of own website Marketing advise Business plan (after first start) Financial advise Strategic questions and corporate planning Financial advice as a rule means advise by a business consultant and includes preparation for application of financial support/credit facilities to be used for investments. The intention of the Municipality is to contact applicants for the scheme after a year to learn the results of the support provided and stay in contact with the entrepreneur. For further information: Werk in West, Benji de Levie, Tel. +31(0) , info@ondernemerswinkel.rotterdam.nl, delevie@coid.nl, All in all a Business pass and voucher system create a demand driven unification of the large variety of suppliers of services and network support in a city/region. 3 How to improve the collaboration with financial institutions? The improvement of the relation between service providers and the banks is essential when the added value of service providers has to be captured in order to get access to finance for SMEs. The city could play a key role in this by organising events, such as round tables where banks and service providers meet. It is important to establish those round tables at different levels an upper level for strategic decisions and a lower level for concrete clarifications of individual problems. In order to set the right perspective it is interesting to set out the possible synergy between banks and service providers. Clear offer of services Banks and other financial institutions recognise the value of a well and clearly structured offer of service and network support. When these services are delivered at a high professional level the financial institutions clearly benefit from this. The entrepreneur with his loan application is better prepared and skilled; this results in both reduction of risks and reduction of handling costs. Network of all service providers This recognition can be strengthened by creating stronger networks that include all existing service providers in the region. This happens once the sector of service providers is more united and uses the same sort of language. This unification respects of course the particular functions that each different service provider offers to certain niches in the demand of certain entrepreneurs. This will provide along the whole production line between service providers and financial institutions a quicker and less costly process (less transaction costs, less time consuming for the banks and the entrepreneurs, quicker redirection of specific demands, better use of scarce subsidies to providers). Focal point used by banks to redirect clients The favoured unification of services implies at the side of the service providers the forming of a so-called focal point, which is a place where there is an overview of all existing (niche-) services in the region. Banks and other financial institutions can also direct clients who come to their organisation for a loan but are not yet ready for it, to this focal point. The concept of the focal point implies that the wide variety of services in itself is not a problem; on the contrary it provides a wide service package which answers to a large variety of possible questions. An example of this variety in demand can be seen in annex 3.2. Service providers deliver qualification measures The recognition by banks and other financial institutions is also stimulated through the work service providers deliver on the aspect of qualification. Through workshops, short training meetings or longer courses (starting) entrepreneurs are provided with professional knowledge that contributes to a more trustworthy entrepreneur during the assessment by the financial institution during the loan application procedure. When entrepreneurs are better qualified on several aspects like bookkeeping, marketing etc. the risks are reduced and the creditworthiness is increased. It therefore creates a leverage effect to access to finance. Entrepreneurs better prepared for loan application Another relevant leverage effect service providers can deliver is the preparation of the entrepreneur on issues like getting the right information from standard governmental procedures and documents whilst starting up or extending a business. It helps a bank to decide on a loan application positively when an entrepreneur can show he is prepared with the help of service providers on issues like permits, planning regulations, obtaining affordable business space, and dealing with an adequate location-market-research. Entrepreneur firmly based in Business networks Of course this leverage effect applies also for the provision of entrepreneurs with relevant business contacts and networks. The more entrepreneurs are part of networks and can benefit from business/to/business contacts, the more self sustainable they can operate and more changes they have The City of Gera has created a business platform and round tables where contacts with banks are fostered. Personal contacts are most important in order to streamline the collaboration between banks and service providers. The City of Vienna has introduced the business plan competition (amongst other instruments) in order to get a higher profile of the collaborative relations between the city (the main service provider in Vienna) and the banks. The City of Vienna has constituted a regional economic information centre which brings together all existing services and network support offered in the city and its districts. The City of Leipzig has chosen to collaborate with one bank (the local Sparkasse) in order to help the entrepreneur to draft his business plan. The activities are undertaken by the city and an organisation at the local centre in the neighbourhood (Business Information Centre). The City of Gijon has organised the collaboration with banks on a regional scale under the umbrella of the regional government

29 for profitable businesses. Service providers, who deliver network support, therefore contribute to creditworthiness of entrepreneurs. Streaming information to lower the application costs The last lever to access to finance for SMEs to be mentioned lays in the possible stronger collaboration between banks and other financial institutions and service providers on the issue of streamlining the loan application information flow. Due to the Basel II agreements banks have to rate the solvability of each loan. For SMEs and start ups certain categorisations are made, indicating each banks assessment of the creditworthiness. Each bank defines its own rating criteria per branch. Although partly a banksecret, there are common data which every bank will seek in order to assess and thereby rate the creditworthiness of the applied loan. When service providers are able to pre check this common information during the service procedure with each new entrepreneur the information flow is partly shifted from the bank to the service provider. This will certainly imply a reduction of the transaction costs for the banks. After loan allocation collaboration between the two partners might be useful in order to provide services and coaching during entrepreneurial difficulties. The banks might want to have a sort of back up help. Support services that are helping to reduce the risk and the handling costs for the bank are for example: Before credit allocation Orientation / Information Profiling / Business Plan advice Assessment of business idea; Business idea development Qualification and Training Relation to labour market: Qualification of personnel Mentor service (already in start-up-phase) Additional / previous check up of credibility of entrepreneur Pre-check: by ECTI or ex-bankers Focal point as entrance (like Vienna Business Agency) 4 What is the best support package of services and network support offered to entrepreneurs? Within the scope of delivering services and network support there is the need to clarify how this package of services has to be, especially regarding its functionality towards services that help to get access to finance. The ECO-FIN-NET-cities have regarded what the services are and what should be included in an all-round package. This package should consist of three different types of services: 1. Personnel skills: Courses on presentation, organisational skills, bookkeeping etc. 2. Market access: Services concerning the market orientation of the business idea/ plan. 3. Finance: Guidance for entrepreneurs about what kind of information banks require, what kind of finance possibilities are existent (grants, subsidies), what types of guarantees are wanted etc. (see chapter 2). Apart from services through consultation, the network support and coaching services could contribute to all of these services mentioned above. These types have certain logic of subsequently qualification towards entrepreneurship. Of course in reality the needs of an entrepreneur for services vary much more, because each entrepreneur has some existing skills and qualification. But all in all the structuring of services along the mentioned types of services helps to define the best package of services. After credit allocation Continuous coaching/ mentoring Qualification and training Crisis management Labour market help advise (also for existing SMEs) The concept of several stages of services creates the following picture of a Stairway to Entrepreneurship. 5 What is the best overall approach / broader integrative package? The point above regards the inner world of services and network support provided for entrepreneurs. But there is a need to look broader and to consider what the best overall approach could be. Having limited funds (in present and future) cities and the service providers seek the best mix is of services offered, related to budget and effectiveness and in relation to the political aims of the programmes. Cities are, partly because of the URBAN programme, already used to work in a more integrative way. This broad scope is recognised by the ECO-FIN-NET-cities as an essential ingredient to complement the specific measures for the finance of entrepreneurs and services and network support as described in paragraph Especially the broader interventions cities undertake in deprived urban areas, such as social renewal and physical renewal, are creating an extra push to new enforced entrepreneurship. The physical renewal concerns amongst other issues, the availability of premises for economic activities. This is a concern of many cities as the existing stock is not suitable and attractive or in some cases much too expensive for starting entrepreneurs. Stairway to entrepreneurship Intake and check added value niche service providers Personal Skills - Presentation skills - Organisational skills - Bookkeeping - Networking -... Through consultation, coaching and network support Market Access - Marketing Plan - Business Plan - Permits check up - Premises - Location research - Business network support -... Through consultation, coaching and network support Finance - Check up all data for loan application - Advice for additional funds - Grants - Loans - Guarantees - After credit check ups -... Through consultation, coaching and network support Special incubators are sometimes erected to provide places for (selected) entrepreneurs, often combined with additional services and trainings and other help. In the City of Venice an incubator for artisan enterprises is erected in Marghera. The incubator functions as an instrument of economic development where, in a protected atmosphere, the future entrepreneur has the opportunity to experience and to develop the enterprise idea, have using of logistic, business, technical and financial supports, with the objective to pass successfully the difficult phases of the activity start up. This incubator can host at least a dozen of artisan enterprises. It has been planned that the access to the incubator would happen with an appropriate ban, that it establishes which enterprises go privileged in the allocation of available spaces. For further information: City of Venice, Francesco Bortoluzzi, Tel francesco.bortoluzzi@comune.venezia.it, attivita.produttive@comune.venezia.it, The improvement of the housing stock is another relevant issue in physical renewal. Through the renovation and creation of new houses, deprived urban areas could attract people with higher income and therewith attract additional buying power, which in itself creates more wealth and demand for the local businesses. Marseille CPEM The CPEM project is a clear project where non-financial services and network support is integrated with financial services such as grants. Business incubator in Venice

30 The improvement of the public space is also part of physical renewal and is essential next to urban safety to attract visitors to the area. Next to the physical renewal one sees an integrative effect of the social renewal. In social renewal different actions are undertaken to help people to get a higher level of education, jobs or start their own business. All in all these actions lift the area up from a different angle: in terms of buying power, self-esteem and entrepreneurship. Some of these employment schemes include financing of services to stimulate certain target groups through consultation, grants and guarantees for projects for enterprises. The City of Leipzig has engaged a business promotion bureau (UGB) that not only helps to improve the quality of the entrepreneurs by information and advice, but also by providing inexpensive premises. Apart from this, financial incentives are often available for investments and economic activities in these areas. In France the Zone Franche Urbaine (ZFU) is considered as one. In the UK the Business Improvement Districts (BID) are considered to be such an incentive. In the Netherlands the Wijkontwikkelingsmaatschappijen (local development agencies) are the carrier for tax-incentives for the developing housing associations. In some cases these instruments are paired with exemptions of legal restrictions considering economic activities. In any case a strong alliance between all stakeholders is a prerequisite. Apart from the triangle local authorities, banks, service providers, which is the first bond to deliver services and access to finance, there is a wider bond with different stakeholders, like: Organisations for social housing with interest in the area. Investors and developers (Investment banks, private capital, pension funds) having an interest or stake in the area. Neighbourhood self-organisations. Therewith an important conclusion is that a broad integrative approach using the social, economical and physical renewal of an area is expected to have a leverage effect to the stimulation of SMEs in a less favoured area. This implies important side effects creating confidence in the entrepreneurs who want to invest in their enterprise as in the banks who are have the choice of financing these investments. Having recognised that there are many local and cultural conditions that makes it difficult to compare and stipulate the one and only way to deliver service and network support, one can say that there are some general principles. The experience among the ECO-FIN-NET partner cities is that in daily practice the most effective way of delivering services and network support is based on the following principles. Close to the entrepreneurs: physical distance. Use of experts with same (cultural) background. Use of a variety of methods to reach out to new unknown entrepreneurs. Services consist of a wide variety, which contains service, training, consultation and coaching and network support. Informed about the whole spectrum of services delivered in the region, using a focal point to redirect specific needs if necessary. Service and network support before credit allocation and afterwards, when the entrepreneur is active. Close cooperation with banks, which should lead to pre check of bankability and lowering transaction costs and risks. Availability of affordable premises. Availability of employment schemes. Possible tax exemptions and other financial incentives for enterprises and investments in urban areas as part of urban policies and possibly diminishing red tape. Integrated in a broader urban renewal and regeneration process Public space Attracting higher incomes Infrastructure (roads, public transport, fibre to the home) Safety schemes In alliances of all relevant stakeholders. Marseille has a project that is obvious part of a broader strategy not solely leading towards entrepreneurship but also focussed on poverty alleviation and empowerment. Service d Amorçage de projet : (S.A.P) The SAP project (national initiative targeting urban deprived areas) aims at helping people (young people, ethnic minorities, women) to start off their project: to start an enterprise or something that might lead to an enterprise. This is offered in several deprived neighbourhoods (3 in the period ; 9 nowadays). Especially people with a long distance to the economy are targeted; unemployed people, ethnic minorities, women. People with an idea to start up an enterprise are given orientation courses and information sessions are delivered for the people. The people are helped to formulate the idea into a real viable project. The SAP project is offered in the near of the residents. This proximity is a central principle of the project. SME support is not the most important goal. It seems that poverty alleviation is even a more important part of the goal of this project. The project is organised at a distance from the local government, initiated by the investment bank Caisse des Dépôts et Consignations. It is supported by the French ministry for urban affairs (DIV). It is formed in a broad partnership. The project is evaluated by an independent organisation. Clients are questioned after the start of their enterprise. Good practice element: Poverty alleviation. Unlike most other projects the SAP project has the goal to alleviate the poverty of the targeted people in the deprived neighbourhoods. The viability of the SME is not apriory the central issue; the empowerment, people giving direction to their own lives, seems just as important. Clear target on low economy; weaker part of the population. Compared to other projects, the SAP project seems to target most clearly at certain feeble groups like ethnic minorities, women and unemployed people. Presence in the neighbourhood. SAP is built on the principle to be as a service institute as near to the clients as possible. For further information: City of Marseille, Olivier Rebeyrotte, Tel. +33(0) , orebeyrotte@mairie-marseille.fr This list of elements can be added to the figure of the stairway to entrepreneurship and leads to this figure: Best overall approach/ broader integrative package - location of service provider in urban area - experts with cultural background like clients - using the widest variety of services at all levels - using a focal point to redirect specific needs - stretching services from before to after credit allocation - close collaboration with banks reducing risks and transaction costs - part of broader social and physical regeneration process - availability of affordable premises - availability of employment schemes - other financial incentives for investment in urban areas by entrepreneurs - diminishing red tape - in alliances with all stakeholders Intake and check added value niche service providers Personal Skills - Presentation skills - Organisational skills - Bookkeeping - Networking -... Through consultation, coaching and network support Market Access - Marketing Plan - Business Plan - Permits check up - Premises - Location research - Business network support -... Through consultation, coaching and network support 6 How to sustain financial resources? The shortage of funds for services and network support for getting access to finance for SMEs is obvious. Amongst the ECO-FIN- NET-cities only two projects seem financially sustainable: One wholly private initiative in France (ECTI) and a nationally initiated project in Gijon (Nautical Station). In some cities business associations are offering to their members extra services. The entrepreneurs pay for the services. These business associations deliver services for which the public sector does not have to pay. In this sense they contribute to lower the heavy financial claims to the public sector to offer services and network support. Finance - Check up all data for loan application - Advice for additional funds - Grants - Loans - Guarantees - After credit check ups -... Through consultation, coaching and network support

31 URBAN-area Grenoble The City of Gijon and the City of Grenoble have projects that are financially self supportive. They form the exception to the rule. The nautical station project in Gijon is financially sustainable. Over the years there is a steady number of SMEs that is paying for the membership and thus convinced of the extra value the network and the services give. The financial commitment in relation to the steady number of SMEs being a member, underpins the sustainability of this project. Grenoble ECTI ECTI is a French national association that helps (amongst other goals) entrepreneurs to create a company or help entrepreneurs with their difficulties during the lifecycle of their enterprise. ECTI has different branches in each department. ECTI uses senior (retired) persons to give advice and deliver coaching to the (candidate-) entrepreneur. These persons (mentors) pay for the contribution to the ECTI network. The entrepreneurs, who get advice, pay also a limited amount. The creation of firms is one of the important fields of ECTI. The coach helps the (candidate) entrepreneur to define his needs and search for specific answers and help in the whole ECTI network. The follow up phase after creation of the SME is a service, which needs to be developed. Good practice element: Fully self supportive in financial terms. ECTI is the only proven project that is financially totally self supportive; an achievement to be mentioned as finance is in many projects a major hindrance for fully sustained services to SMEs. National network, locally based. ECTI is a good example of a national project with local/departmental branches. In the Grenoble area this branch works together with other service providers, and therewith forms a part in a broader local area network of service providers. Networks of service providers. Grenoble uses the variety of many (about 40) ser vice providers, national or regional, subsidy based or based on voluntary commitments. Where relevant it knits the services together by additional financial incentives. In this construction Grenoble has much freedom and less attachments. No governmental interference. Partly due to the fact ECTI is not financially dependent from government, it is also a project that originated from the civil society; there are no ties and strings with the government, although in some case governments (regions) pay for certain (extra) activities. For further information: Grenoble Alpes Métro pole (La Métro), Axelle Violleau, axelle.violleau@la-metro.org, But the business associations have shortcomings too: The access to these services is limited to the members and usually not to start ups. Often these associations do not have many members in deprived areas and do not deliver service in these areas. the target group consists of the inhabitants in deprived neighbourhoods. Cities themselves should realise that on a structural base finance should be redirected to services and network support in their own local budget. Financial support for these services is just as legitimate as the services of maintenance of public roads and other regular local tasks. But of course local financial resources are limited. In this regard, the importance of the URBAN-funding in the past European budget periods must be highly recognised. URBAN gave cities the opportunity to invest in the local services and network support activities, to bring together all organisations and to stimulate better quality and efficiency. The importance of URBAN in the field of stimulation of entrepreneurship, through access to finance, and services and network support is evident. When in the coming budget period these funds are not available, the activities mostly project based will stop. This implicates that in EU-documents and future European programmes based on the strategic guidelines one would expect to find a clear role for local governments to implement and finance the actual projects resolving the targets. This should be accompanied by structural (European) funds and funding programmes. City of Gijon Retailer Organization (UNION DE COMERCIANTES) Retailer Organization is a business association created in 1978 composed by SMEs retail commerce in the City of Gijon and Carreño. It is considered as beeing the association with the best representation of retail entrepreneurs. The organisation guards and represents their members interest. Since few years the organisation strives to stimulate the cooperation of the management of the business, the promotion of the quality and personal attendance towards the costumers. It is a clear example of sectoral network support, specifically targeted at a retail commerce. The network is supported by activities like: Financial, administrative and juridical counselling. Enterprises agreements (Hotels surveillance systems, insurance companies). Advising, monitoring and loyalty cards. City of Gijon Youth Enterprises Association (AJE). Youth enterprises association is a project aiming at partnerships between young enterprises. The objective of the association is to promote entrepreneurial spirit, the professional interest, the supporting projects, provide information and counselling. It is a clear example of sectoral network support, specifically targeted not in a certain sector, but targeted at the age of the youngster entrepreneurs (not older than 40 years). For further information: City of Gijon, Isabel de la Huerga Iglesias, Tel. +34(0) , proyectoseuropeos.alpee@gijon.es, 3 The cost cutting opportunities are limited for cities. Cities could reorganise the service packages and shift to less costly measures. In chapter 2 the necessary shift from grants to guarantees is pictured. In services a shift from full swing services to more self-help instruments as network support and coaching could be a possible solution. But this does not solve the problem wholly when we consider that there is a greater need in the market than reached. The possibility to raise fees to be paid by entrepreneurs can bring some positive effect, although in some cities there is a clear policy to offer the consultancy for free, especially when 62 63

32 4 Recommendations In order to face the existing barriers and to foster the SMEs access to finance in the less favoured areas, integrated packages of financial and non-financial support are necessary. This implies a strong and trustful local partnership of different local actors the local authorities, financial institutions, service providers, the Chambers and business associations, etc. and the SMEs themselves. They all have to cooperate in order to comfort existing successful schemes and to take over their respective responsibility regarding SME Support. The three work groups within the ECO-FIN- NET developed a number of recommendations that apply for city representatives as well as local, regional and national decision and policymakers. But the cultural and legal differences in cities and member states differ, which implies that some recommendations might not imply to every city or state. For instance, the tradition of the more developed financial market in Great Britain than on the continent causes significant differences between the financial systems of the concerned countries. In some countries savings banks are involved in local economy whilst they simply do not exist in other countries. One main concern of businesses is the access to external finance. In order to solve the various problems regarding SMEs access to finance, both financial and nonfinancial support must form one consistent support package. Access to finance for SMEs is achievable by two complementary approaches, both necessary to deliver the best mix: financial incentives and services and network support. European policies cannot only support the financial incentives, but also take into account the provision of service and network support to SMEs. Economic development instruments can only be successful when they are part of an integrated approach or strategy. This implies a strong support for cross-sectoral and integrated policies like URBAN in the coming policy period. National programmes executing European policies and strategic guidelines have to consider the higher effectiveness of local integrated approaches. To raise this effectiveness, local authorities should be helped to create such cross-sectoral and integrated policy; this concerns the possibility to use different (European) funds in one integrated local programme. Another form of integration is the necessity to integrate the policies to create greater access to finance for SMEs with other economic policies concerning - the availability of premises with a low rent level, - the retail policy (regulating types of shops and market forces), - area marketing, - regional cluster economic policy, - empowerment strategies for ethnic or other minorities. Therefore, the SMEs access to finance must be part of a wider economic policy. Private Finance The usual source of finance for SMEs is banks and other financial institutions (e.g. micro credit institutions). The problem rises when the lending organisations are, for understandable reasons, reluctant to finance some projects. These reasons are: The lack of sufficient collateral which results in an increased financing risk for the lending institutions; if this increased risk were reflected in the interest rate of a loan given to the enterprise in question, this interest rate is likely to be too high to be accepted by the entrepreneur. The high cost of loan application and processing in relation to the small amount of credit: in practice, these costs cover the work of preparing the loan applications by the SMEs and of the risk assessment and processing by the lending institutions. The lack of information or track record about the small businesses. Lowering or sharing the risk One solution for this problem has been presented for a long time by loan guarantee funds that cover part of the risk for the lending institutions. Concerning this subject, the ECO-FIN-NET work group recommendations are: The local authorities may consider bringing a financial contribution to existing guarantee schemes, to guarantee loans to local businesses or to increase the guaranteed loan percentage for the small businesses in the less favoured area

33 They should ensure that the guarantee funds are really opened to the small businesses, i.e. make small projects bank worthy : they should not only be a system that facilitates the procedure for seizure of collaterals from the traditional bank clients. As a consequence the guarantee scheme should cover SME loans, including especially micro-credit loans. A guarantee scheme should be a flexible instrument opened to a contribution by the public local authorities, targeted to the businesses established on (part of) their territory according to negotiable guarantee conditions. Guarantee funds should be designed on a rather large basis to diversify and spread the risks and reduce the operational costs: this means that local guarantee funds (limited to the territory of a municipality) should be avoided. This recommendation is not contradictory with a local authority conducting a specific action on a specific territory: this authority can contribute to a wider fund with specific conditions for those businesses that are located on the territory of the municipality. The guarantee funds should be managed by specialised financial institutions in order to increase the leverage ratio and lower the operational costs. Mutual guarantee schemes should be envisaged when strengthening the links within a local / sectoral business community is an issue. Counter guarantee systems at national level should be developed as well as the European counter guarantees delivered by the European Investment Fund (EIF). Reducing the costs of small loan applications and improving the quality of documentation When small businesses apply for a loan, they have to prepare a loan application which sometimes means business data, business plan, and list of available collateral items Small loans are not assessed in the same way as large ones but well prepared applications are easier (and less time-consuming) to process by the financial institutions. The ECO-FIN-NET recommendation is to deliver advisory services to the applicant businesses in the preparation of their loan applications and to add such financial expertise to the list of other types of expertise eligible to the (regional) advisory support schemes like other types of advisory services. Another possibility is to make loan application processing costs by the financial institutions also eligible to support from the existing business advisory support schemes. The processing procedure for loan applications should be designed in a way that avoids duplication of work. As a first step in this direction credit check results could be communicated between banks and guarantee funds with the consent of the companies concerned. This cooperation with the aim of leaner and cheaper processes can be further developed and intensified: Institutional cooperation between lending and guarantee institutions, giving enterprises the option of a one-stop application point. Designing lending products with a builtin guarantee ( exception from liability ) which is automatically applied for together with the loan product. Public Financial Support General Framework for City Involvement It seems obvious that public SME support measures have to be in line with the businesses expectations and requirements. As a general rule, SMEs require stable, visible and efficient procedures. They also give a preference to the local level (City). For the cities, these conditions are met by partnerships and the ECO-FIN-NET recommendations are: Stable procedures mean sustained access to financial resources. For the cities, securing these resources can be achieved by a partnership with other public entities that run multi-annual programmes (Regions, national level, EU Structural Funds ). Visibility means that the support schemes have to be promoted to the SMEs. This promotion can usefully be achieved by business representative organisations and the cities should organise a partnership with these organisations for this purpose. Efficiency requires technical expertise that is generally developed by specialised institutions. In order to design and run efficient instruments, ECO-FIN-NET recommends that the cities organise a partnership with specialised financial institutions. Public Financial Support Instruments Public financial support instruments include grants, loans, guarantees and venture capital. The ECO-FIN-NET recommendations on guarantees have been presented in the paragraph on lowering and sharing the risk. Grants Grants are a very successful support instrument for new projects that require a consolidation of the entrepreneurs equity: they bring more confidence to the projects, giving them access to other forms of funding. This is particularly true for the smallest projects. Thus cities, in their less favoured areas where the vast majority of businesses are small sized and where all projects need to be given a chance to flourish, may consider allocating grants targeted to the smallest businesses or projects to increase their capitalisation and thus bank confidence. Grants should be considered as part of a global financial package aiming at making small projects bank worthy. In all cases these grants should be used as an incentive for commercial banks (including private micro credit) to be involved in the projects and it is the local authority s responsibility to make it clear to the commercial banks by general discussions with the local banks associations and with individual loan applications. The cities should always negotiate with the private financial institutions (commercial banks) so that the public grants and loans are an incentive for private finance (leverage effect). In case of scarce public resources, priorities should be set for grant allocation by the local authorities, but automatic sectoral support, geared to specific investments (for instance investments in ICT equipment) should be avoided as the main priority for grants is to make any type of new (legally registered) projects (and new economic activity) start and develop on the long term. Loans and micro-credit Loans and micro-credit require complex skills and procedures, and may involve business liabilities that a public body should avoid. So the ECO-FIN-NET partner cities recommend that the Municipalities support existing schemes with incentives so that these schemes are more active in the disadvantaged areas, rather than run such systems themselves. These incentives should be negotiated so that the public support strictly applies to the businesses in the concerned area. The cities can envisage to bring a financial contribution to cover the administration costs of the loans to the small businesses located in the targeted areas or specific local costs such as the costs of opening a local office (or refurbishing existing premises). Local authorities may also engage in partnership with private stakeholders to capitalize micro credit schemes and may have the possibility to negotiate specific conditions for businesses / projects located in specific areas (less favoured neighbourhoods). They can also support the existing business advisory support schemes to cover the costs of loan application processing by the financial organisations (banks and micro-credit) for businesses in the less favoured areas. Venture capital For the ECO-FIN-NET partner cities, venture capital is hardly accessible to (and designed for) a large number of small businesses located in the less favoured areas. The local authorities should not raise unfounded expectations with the SME community in publicising possibilities of venture capital that will only apply to a very small minority of businesses, in particular in the less favoured areas where the vast majority of projects belong to traditional sectors of activity. They could be partners of specialised venture capital organisations if necessary and when required by local businesses (ad hoc case by case agreement). They may envisage a financial contribution to capitalise investment funds (seed and venture capital) for investments in local businesses but also/rather to cover the administrative costs of processing applications and the management costs. Non-financial support An efficient implementation of these instruments requires complementary advisory services, training and promotion that are generally achieved by service providers and business representative organisations. The ECO-FIN-NET recommends that the cities provide financial support to these organisations to achieve these missions

34 Non-financial support is as important as financial support. The best technically designed support instruments will only be successful if they are joined with promotion campaigns (long lasting), advisory services and training schemes generally understood as non financial services and network support. This implicates as well that the services should be targeted at deprived urban areas and there in addressed to the local businesses. Non-financial support needs specific investments. In order to reach out to the entrepreneurs who are most targeted as the ones in deprived urban areas, it is recommended that the service providers have a service location in the near of the entrepreneur, that is in the neighbourhood. Besides of this, the staff of the service provider should be capable to communicate in order to reach the client effectively. As deprived urban areas are often inhabited by people of multi ethnic origin, this means that the staff should reflect the ethnic population of the area they work for. The use of a variety of methods is recommended. The number of entrepreneurs not reached by service providers is substantial. Therefore there is a great need to improve the methods to reach the entrepreneurs, so that the services can be expanded to a larger group of clients. In order to meet the - in many case unexpressed - demands and wishes of an entrepreneur, a wide variety of methods is collected. There is not one outstanding method that could replace all others. Therefore to reach the entrepreneur, a wide variety of methods should be part of the repertoire of each service provider. Service providers should check the list in this report in order to improve their capability to reach entrepreneurs. The supply of various services to entrepreneurs should be brought together in focal points. In many cities there is wide range of different service providers assigned and commissioned by various authorities. Cities should arrange regular meetings between those providers in order to create more unification of the supply without any unnecessary excluding of existing valuable niche players. This should lead to a focal point where there is an overview of all providers. At this focal point a redirection to a certain suitable provider can be made, so that the most appropriate service is delivered to an entrepreneur. Supply of services can be unified through a Business pass and a voucher system. Apart from bringing together all existing service providers and creating a focal point, unification of service can be achieved by introducing a Business pass. This pass makes clear what type of service an entrepreneur is lacking and what he already has. It services the allocation of the services to the entrepreneur. The Business pass can be combined with a voucher system. A voucher system gives a (free) right for the entrepreneur to select the services he wants. This creates a demand driven unification of the (most popular) services. Collaboration between service providers and banks should be improved. The collaboration between banks and service providers should be improved. It is necessary to create a trustful relation between these groups of actors in the urban area. Through collaboration between service providers, banks and local authorities, banks can enhance their ability to provide loans to qualified entrepreneurs. In some case the necessary costs banks have to make for loan applications, can be reduced by streaming information needs and collecting this information in the phase of consultation by the service providers. The best package of services and net work support is a stairway to entrepreneurship. Structuring the different services is required and can be done by the concept of the stairway to entrepreneurship. This stairway consists of three different types of services: 1. Personnel skills: Courses on presentation, organisational skills, bookkeeping etc. 2. Market access: Services concerning the market orientation of the business idea/ plan. 3. Finance: Guidance for entrepreneurs about what kind of information banks require, what kind of finance possibilities are existent (grants, subsidies), what types of guarantees are wanted etc. Apart from services through consultation, the network support and coaching services is an important complementary element in the package and contributes to all of these services mentioned above. This stairway is best accessed when it is combined with a Business pass and a voucher system. Access to finance and service to entrepreneurs need broad URBAN policy also in the coming EU budget-period. Apart from the concept of the stairway to entrepreneurship, it is widely acknowledged that these services and network support cannot be fully effective without a broader integrative approach, which consists of economic, physical and social renewal. As collaboration is most necessary to achieve these policies, the city in the centre of this will have to engage all relevant stakeholders in this broad field. The URBAN programme has paved this integrative way of working and thinking in the past. The urban dimension in the upcoming new European Programmes is an important precondition to enhance the achievements of the services and network support to SMEs. Delivering services needs long term financing by European, national and local government. It is clear for everyone involved in financial or non-financial supporting schemes, that there is no practical way to have a fully self-sustainable service provided. Many of the existing projects are financed for only a short period of time, often combined with European funding. In order to create a longstanding finance source to the services and network support it is recommended that European programmes include this service to be eligible. A strong and clear urban dimension in the upcoming new European Programmes is an important precondition to enhance the achievements of the services and network support to SMEs. Of course local authorities have the responsibility to allocate within their own budget possibilities enough funding as well. To meet the needs it is clear that an enlargement of municipal budgets is necessary. Conclusions All the previous recommendations are based on the ECO-FIN-NET partner cities experiences with one general framework and two common rules: The general framework concerns sustainability for support systems: It has been indicated that this goal can be achieved by a partnership with other public and private entities. In particular, the ECO- FIN-NET partner cities wish to emphasize that the Acquis URBAN be integrated in the next programming period and that the corresponding measures be integrated into the EU mainstream funding. The two rules are: 1. Efficient support instruments to improve the SMEs access to finance are designed as a package or combination of financial and non-financial services well adapted to the small businesses requirements. 2. It is part of the cities vocation to take the initiative and build up partnerships with public and private entities in their environment to deliver these services to the small businesses efficiently. The ECO-FIN-NET conclusions regarding future SME Support, both financial and nonfinancial support, form an important part of an integrated urban policy for the less favoured urban areas. The suggested measures to strengthen local economy, particularly the micro and small businesses, contribute to a significant stabilisation and revitalisation of a disadvantaged urban area

35 5 The ECO-FIN-NET network disadvantaged districts. Furthermore, cities from the new member states with more than 20,000 inhabitants are invited to participate in the programme. The local economy in disadvantaged areas is based to a large extent on small and micro enterprises. A decisive approach to upgrade such areas is therefore the support of small and micro enterprises. Through the securing of employment the disadvantaged neighbourhoods can be strengthened, their attractiveness increased and the identification and binding of the inhabitants with their area enlarged. The economic revitalisation has therefore not only positive economic but also social effects. The programme URBACT is monitored by the French Ministry for Cities and Urban Development as managing authority. The Délégation Interministérielle à la Ville has taken over the tasks of programme secretariat, which is responsible for the processing of the programme. The Délégation is located in Paris. A total budget of million Euro are available in the period from More than two thirds are provided by the European Regional Development Fund and 8.86 million Euro come from national co-financing. The integrated approach is a characteristic of the European Community Initiative UR- BAN and initiated the examination of this topic on the European level in the frame of the URBACT programme. Until now micro and small enterprises, which are of such high importance to disadvantaged areas, are not sufficiently regarded or even excluded by regional and national funding policies. On the other hand existing approaches of integrated urban renewal are rarely based on successful concepts to support the local economy. Especially URBAN could take a leading role in this context. This shall be systematically analysed and developed further with the help of URBACT. 5.1 The European Programme URBACT Since 2003, the European Commission has been supporting the Europe wide exchange of cities in the field of integrated urban development within the frame of its programme URBACT. The programme serves: the exchange of innovative ideas and approaches as well as best practices, the advancement of the methods of integrated urban development, the development of political recommendations in the field of urban development on a European level after the year The URBACT programme addresses all cities that have already been funded within the frame of Urban Pilot Projects (UPP) or the Community Initiatives URBAN I and/or UR- BAN II and have therefore been able to gain a lot of experience with integrated concepts for the regeneration and revitalisation of The focus is set on the establishment and organisation of thematic networks of cities. The objective is to discuss comparable problems concerning urban revitalisation with cities of other member countries and thereby to establish a generally accessible knowledge base in the field of integrated urban development. Each network is dealing with a specific topic. The cooperation between at least five cities from three member states is a precondition for funding. One city always acts as lead partner, i.e. it takes responsibility for the organisation and the coordination of the network. 5.2 The URBACT-network ECO-FIN-NET The thematic URBACT network ECO-FIN- NET, led by the City of Leipzig, aimed at improving the relevance and effectiveness of strategies and actions and at developing new and innovative approaches for fostering the local economy in deprived neighbourhoods. Particular attention was paid to the support of small and medium sized enterprises (SME) by innovative financial techniques and instruments as especially in deprived URBAN areas the local economy consists largely of those small businesses. (Financial) assistance to SMEs is therefore one vital element to improve the local economy and to create new job opportunities in disadvantaged areas. This in turn helps to upgrade the whole neighbourhood, increases the attractiveness and image and finally strengthens the commitment of the inhabitants to their neighbourhood. Thus, the care for SMEs becomes a core task for local governments. ECO-FIN-NET Partners; Final Conference in Marseille, March

36 Active Partners Discussions, ECO-FIN-NET Midterm conference, Birmingham, September Work groups / Sub themes In the frame of the ECO-FIN-NET, three work groups were established in order to discuss about concrete approaches and strategies how SMEs especially in deprived areas can be supported in future. 1. SMEs access to finance is generally achieved through banks and other financial institutions. When some businesses face difficulties, ECO-FIN-NET has studied the reasons for these difficulties and proposes possible solutions with intervention by the cities. 2. For several years, the cities have designed financial support for the development of businesses and start-ups (grants, loans etc.). ECO-FIN-NET has questioned the relevance of these support instruments, in particular their adaptation to the specific conditions required by micro and small businesses in the less favoured areas. 3. Access to finance also requires non-financial services such as business advisory services, training, mentoring and networking. ECO-FIN-NET has studied the services best targeted at improving SMEs access to finance. More generally, ECO-FIN-NET paid particular attention to the possibilities of maximising the public support impact by various forms of partnership with other public or private entities; all the more in the current context of dwindling public financial resources, when the cities aim at doing more with less direct funding. For each of these three themes, ECO-FIN- NET set up a work group with experienced cities representatives. Ten meetings were organised for the work groups, with participation of external experts such as banking representatives, German Savings Banks Association, entrepreneurs, micro credit and guarantee fund organisations etc. The work groups have been advised by two URBACT thematic experts and the German Association for Housing, Urban and Spatial Development as thematic coordinator of the ECO- FIN-NET Working approach The ECO-FIN-NET project was conducted from January 2004 until June The course of the project was divided into three main phases: 1. During the first project year (January- December 2004), the partner cities have presented their practical experiences regarding local SME support to one another and identified possible good practices (see annex V). 2. After this phase of identification, reflection and evaluation of existing strategies and instruments, the cities started developing during the second project year in 2005 new instruments and approaches of fostering the local economy (see chapter 2 and 3). They have assessed their practices, worked out their major potentials and obstacles and selected the most relevant elements which are deemed transferable to other cities; always having in mind the different national contexts and development stage of the participating countries: for instance, the tradition of the more developed financial market in Great Britain than on the continent causes significant differences between the financial systems of the concerned countries. In some countries savings banks are involved in local economy whilst they simply do not exist in other countries. 3. On the basis of these evaluations and their own practices, they have prepared recommendations that some of them currently start implementing. In terms of meetings, there were two different types: Separate meetings of the three established work groups took place. The work groups involved those partners who dispose of specific experiences and expertise in the respective thematic field. Thus, a detailed consideration of each theme and an extensive use of existing knowledge and expertise could be guaranteed. The results of the workings groups, edited in several working papers, were presented to all partners at the network conferences. The main objective of these conferences was to merge the different results of the three work groups into one consistent and coherent concept and to disseminate the ECO-FIN-NET ideas to the interested wider public. In total, the ECO-FIN-NET organised four bigger conferences, including also a wider public, and six work group meetings External expertise The ECO-FIN-NET had a very broad approach of involving experiences of external experts in its network. Within each network meeting several external experts have participated. For instance, the work group 1 met during their first meeting in Rotterdam with about 10 bank representatives from the Netherlands and Germany. The work group 2 met in Gdansk with British and Polish micro credit and guarantee fund organisations. And work group 3 partners exchanged their ideas with local entrepreneurs and service providers. The German Association for Housing, Urban and Spatial Development was the Thematic Coordinating Partner of the ECO-FIN-NET and assisted the Lead Partner, the City of Leipzig, in the coordination of the network. As the association is also managing the German-Austrian URBAN-network, the huge range of experiences of all German and Austrian URBAN cities could also be involved in the ECO-FIN-NET discussions. Besides, the thematic URBACT experts Patrick Fourguette, expert with the GIP ADE- TEF French Ministry of Economy, Finance and Industry as well as Jeroen den Uyl from the City of Amsterdam assisted and animated the ECO-FIN-NET work groups very intensively. 1st Project Phase The German Savings Banks Association also supported the ECO-FIN-NET in an intensive way. Dr. Bertram Reddig and Dr. Lothar Blatt from the German Savings Banks Association were actively involved in the network, especially in the work group 1 of the ECO-FIN-NET dealing with financial support facilities for SMEs. They guaranteed that the position of the banks was also reflected within the network discussions. Furthermore, the network was in close contact and cooperation with several players at local, regional, national and European level. For instance, the ECO-FIN-NET regularly exchanged their views with representatives of the European Commission (DG Regio and DG Enterprise) and the European Investment Fund and with several other cooperation projects and networks which are dealing with similar questions and issues than the ECO-FIN-NET. Last but not least, one major objective of the network members was to involve as much experts as possible at local as well as national level and to disseminate and reflect the ECO-FIN-NET results. The ECO-FIN-NET thanks all partners and experts for their assistance. Kick-off-Conference in Leipzig, Germany March 2004 Work Group 1-meeting in Rotterdam, Netherlands 3-4 June 2004 Work Group 2-meeting in Brussels, Belgium June 2004 Work Group 3-meeting in Gera, Germany June st Interim Conference in Venice, Italy October nd Project Phase Work Group 1 & 2-meeting in Gdansk, Poland 7-8 March 2005 Work Group 3-meeting in Grenoble, France April nd Interim Conference in Birmingham, Great Britain September rd Project Phase Work Group (1-3)-meeting in Vienna, Austria January 2006 Final Conference in Marseille, France March 2006 Kick-off-Conference in Leipzig 2004 ECO-FIN-NET Meetings