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How Can Government Policies Stimulate Entrepreneurship?
Enterprise Surveys show that 28 percent of investment is financed through equity or owners’ contributions—which is the highest value in Europe and Central Asia (ECA).2 However, a positive point for access to credit is low collateral requirement, which average 96 percent of the loan value, the third lowest in ECA. The low collateral requirement is likely the result of several reforms, including the introduction of a public credit registry as well as private credit bureaus. Some public programs facilitate access to finance. SME Investments Universal Credit Organization CJSC was established in 2009 to support SME enterprise development. SME Investments provides financial support in the form of business loan provisions. Equity financing of up to AMD20 million ($50,000) has also been offered to SMEs, and there have been large investments of AMD20 million– AMD150 million. In addition, the Small and Medium Enterprises Development National Centre of Armenia offers several mechanisms to support SMEs with access to finance for startups at various stages of their development: • The Start-up Businesses Support Program assists SMEs in receiving seed financing through loans provided by partner banks. The loans support the early stage of business development, namely, realization of business plans. The most competitive business plans receive lending with a 100 percent guarantee of credit liabilities. Loans are for a maximum of AMD3 million (around $7,000), with a 12 percent annual interest rate and up to three years of maturity date. • The Loan Guarantees Provision Program allows entrepreneurs to qualify for loans by guaranteeing up to 70 percent of the principal of the loan and interest rates for up to three years. The maximum amount guaranteed cannot exceed AMD10 million (around $24,000). In addition, the annual interest rates for the loans provided by partner banks are below market rates. The program prioritizes SMEs in the manufacturing, services provision, and trade sectors, as well as those introducing new technologies and innovations. It also seeks to support SMEs with export potential. And it targets SMEs operating in regions with low levels of economic activity, particularly in the border regions of Armenia. SME support programs for startups should be robustly evaluated to determine their efficacy.
Facilitating Secured Lending Transactions Secured transactions, particularly for movables, are important for SMEs, which have more trouble accessing credit. When establishing rights to collateral or executing on collateral is difficult, lenders are reluctant to lend on that basis. By contrast, a well functioning secured transactions regime can give lenders the confidence to lend to SMEs and collect in case of default by seizing and selling collateral. Therefore, a healthy secured transactions system should be seen as an important part of an investment climate that supports entrepreneurship. Fostering Entrepreneurship in Armenia • http://dx.doi.org/10.1596/978-1-4648-0064-1