Compendium 2.3.5 Financial advice

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Financial advice & debt crisis management

The challenge

Recent events in the US sub-prime market and in Western countries’ mortgage markets more generally have shown that many of our societies are carrying an unsustainable amount of debt. For the poor and socially excluded debt can affect health, wellbeing and their economic future. Debt is often an extreme form of poverty and can be both a result of social exclusion and its cause. Many people avoid dealing with financial problems until they have become critical and often at this point the situation is too far advanced to fix.

Moreover, several sectors of the economy, such as agriculture, small trade and handicrafts, apply outdated business support models based on long-term credit, which enables them to make capital investments in expensive production tools, but affects their capacity to adapt to changing economic contexts in the long run. In France, the average debt in the farming sector in 2004 rose to €103,000 per holding. Long-term loans increased by 4%, and short-term loans represent one-third of total debts with an average of €35,900.[1]

This section deals with debt counselling for micro-enterprise and the self-employed. For these groups a debt crisis can frequently cause the business to fail, which directly impacts on unemployment and may in turn lead to personal bankruptcy. Poor financial management leading to debt is one of the major causes of the failure of businesses, around half of which fail in their first five years. Preventing businesses failing for financial reasons is one of the best ways of increasing the survival rate of micro-enterprise and the self-employed.

Because of this close link to employment and unemployment, debt crisis advice for businesses and particularly for the self-employed is a natural territory for engagement by the European Social Fund although to date there have been few actions piloted under EQUAL or mainstream ESF programmes.

Debt crisis counselling is closely related to financial inclusion and financial literacy, which are dealt with in other sections of this compendium.

Figure 1 below illustrates how the range of options available to the business changes as time moves on. At the outset the consequences of a wrong decision or misguided action are relatively minor and there is still room for corrective action. Later, as the business moves into acute crisis, what started out as a mistake leading to loss of turnover turns into liquidity problem and over-indebtedness. Failure to act in the end leads to insolvency.

The slippery slope to debt (source Evers and Jung)

[1] BIMAGRI HS n° 18, January 2006 – Ministère de l’Agriculture, France

Case studies of debt crisis advice services

Firmenhilfe (‘Firm Help’) is an inbound telephone service for small and micro-enterprises in Hamburg. It focuses on entrepreneurs who find themselves in a difficult economic situation. This specific target group is widely ignored by consultants and other agencies who tend to concentrate on bigger units. Most start-up support focuses on the pre-start phase. Existing SMEs and micro-enterprises are often referred to business consultants who are very expensive (and therefore in many cases unaffordable) and often lack the specialised know-how needed to support micro enterprises.

Firmenhilfe website

Business failure has a profound effect on every market economy. In Germany, the net rate of growth in the number of enterprises (the difference between the number of start-ups and failed enterprises) shows a declining trend. Various research and policy papers make clear that sole traders and small enterprises with less than 10 employees are especially vulnerable to failure because they:

  • often have profound technical and professional knowledge but lack the necessary commercial expertise and management skills
  • have little in the way of financial reserves to overcome difficulties
  • lack market power
  • have limited access to qualified advice and information services

Firmenhilfe aims to provide clients with hands-on advice rather than to instruct callers using complex and over-demanding methods and instruments designed for bigger companies. Furthermore Firmenhilfe’s consultants are trained to use an analytical approach in order to deal with the customers’ problems instead of getting caught up by them. This method keeps the consultant from giving an overwhelming and therefore confusing all-in-one-solution. Instead it offers the client step-by-step solutions and accompanies clients on their way out of the crisis. To meet these goals, the project took parts of an existing successful scheme, Birmingham Business Debtline and refined them for the German context. By late 2008 it had given guidance to more than 2000 clients from the Hamburg area. The project is co-financed by the ESF.

Filmenhilfe action tree (source Evers and Jung)

Unternehmer in Not (‘Entrepreneur in Need’) in Austria consists of an online platform that enables micro and small entrepreneurs to assess the health of their business, and provides them with free up-to-date information. The project is run without any additional financial resources. The online platform contains a wide range of material including articles, interviews and testimonials, book references, weblinks and a glossary. The website has information channels structured around preventing and coping with financial crisis, legal aspects such as insolvency law, and financial aspects such as managing cash flow, loans, and creditors. There is also a self-assessment toolkit and each month a newsletter is sent out. The project receives about 12,000 visits per month.

Business Debtline is a UK service supported by a wide range of banks. It provides telephone support to businesses with financial problems. It works closely with government, the private sector, and the UK’s leading money advice agencies to increase the availability of money advice, improve its quality, and improve the efficiency and effectiveness of how advice is provided. The Debtline is run as part of the Money Advice Trust which runs a range of other services that include the national Debtline for citizens with debt problems, training of advisers, research and policy and acting as a catalyst for improving efficiency and effectiveness within the debt advice sector.

In France, ADIE set up a crisis intervention service as part of the U-Turn project, supported under Article 6 of the European Social Fund. In 2008 ADIE had 17,000 clients on its loan books so as a major provider of microfinance it has a direct interest in making sure that its clients obtain services before they go bust. Because of its existing advice and mentoring activities ADIE has built its new crisis intervention service into the existing structure of support.

The service it developed was telephone-based. It provided a unique phone number for ADIE clients who were charged only for the local cost of the call. Experience showed that discussion with an adviser could solve the majority of requests for support. The support complemented ADIE’s other business support services in each region, including face-to-face interviews, training and services. ADIE also worked to convert their approach into a scalable system for managing calls so that the problem could be analysed, solutions identified and an action plan developed. Despite working on the phone the adviser needs to find ways of creating an atmosphere of proximity, trust and credibility so that the caller is comfortable about sharing information. Two staff developed the project working with ten volunteers who were either retired former entrepreneurs and employees or students.

ADIE enterprise support services

Recommendations for mainstreaming policies

  • Establish a self-help approach and a solution-focused methodology and encourage the clients to work their own way out of the problems that they are in;
  • Ensure that the support service has low entry barriers – it needs to be free to the user or very cheap;
  • Banks may be prepared to contribute finance (as in the UK), and so may economic ministries or development agencies. In Germany, debt crisis support has been demonstrated as eligible for European Social Fund support;
  • Provide platforms for exchange and learning among the clients;
  • Recruit and train qualified and dedicated advisers;
  • Ensure client data is well documented;
  • Promote the service via the client / user – they are the best sales force.

Notes and references

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