Seth Sunderland and Dr. Ted Christiensen, School of Accountancy and Information Systems
The term “small business” is relative to who is applying the term. The United States Small Business Administration classifies any business with 1 to 499 employees as a small business. In 1999 the Peace Corp issued a study on Nicaraguan businesses that defined small businesses as employing 1 to 20 employees. The same Peace Corp study found that 79 percent of Nicaraguan labor force is employed by businesses employing 20 or less people. The Peace Corp also found that only 13 percent of the Nicaraguan labor force works for a business that employs more than 100 people. These numbers indicate that small businesses play a major role in the Nicaraguan economy. This study explores availability of capital funding for small businesses, the educational level of small business owners, and the availability of business training for Nicaraguan small business owners.
To evaluate each of these areas I conducted personal interviews with 30 small business owners, three directors of Non-Governmental-Organizations operating in Nicaragua (ASODERI, FAMA, and ASODENIC), and commercial bank employees. Additionally I corresponded with two members of the Nicaraguan Government that are involved in the Government efforts to support small businesses.
Nicaraguan business owners I surveyed utilized a variety of means to finance the formation and growth of their businesses; 43 percent had received loans fromNon-Governmental- Organizations (NGOs) providing loans, 13 percent received loans from family members in the United States, and 3 percent had received loans from private investors in Nicaragua. According to these statistics it appears that NGOs represent the only potential outside source of capital funding for most Nicaraguans who do not have family living abroad or connections to wealthy individuals.
Nicaragua’s equivalent of the Small Business Administration lists 13 NGO’s that provide small business loans. Larger NGOs like FAMA, FINDESA, and ADOCEP maintain offices in all major Nicaraguan cities. Only 43 percent of business owners surveyed received loans form NGO’s but 90 percent of business owners were aware of NGO’s in their community that provided small business financing. Despite the availability of NGO loans, many business owners do not take advantage of the loans because of high interest rates and commissions associated with the loans.
Under Law 176 the Nicaraguan Central Bank has the authority to set the maximum annual interest rates than may be charged by financial institutions. Currently the Nicaragua National Bank publishes a revised maximum rate monthly. In June of 2002 that rate was 17.77 percent. I was able to interview the Directors of ASODERI, ASODENIC, and FAMA about their interest rate and commission rates. All three organizations charge the maximum interest rate allowable by law. In addition to the interest rate, all three organizations charge loan commissions. ASODENIC for example charges the national interest rate plus a 2 percent monthly “commission”. I interviewed customers of FINDE, CONFIA, ASODERI, and FAMA who claimed to pay any where from 18 percent interest to 48 percent interest. Many business owners feel that the high interest rate prohibits growth. Several business owners who did not use NGO loans believed their businesses would not be profitable if they had to expand using NGO loans.
The Peace Corp study cited earlier mentioned the lack of education as a constraint to small business growth. This sentiment was also echoed by the Directors of FAMA and ASODERI. Only 10 percent of the business owners surveyed had a college level education. Even more surprising, only 7 percent of business owners surveyed had completed basic accounting or financing courses. Additionally, the Director of ASODERI stated in an interview that roughly 20 percent of ASODERI’s 3000 clients cannot read. The lack of formal business and accounting training and general education greatly affects the manner in which Nicaraguans manage their businesses. Only 17 percent of business owners maintain records of business sales and less than 8 percent maintain records of business costs. Only 3 percent of the business owners surveyed maintain their business and personal finances separate. The Directors of the NGOs I interviewed all agreed that the failure to separate personal finances from business finances often leads Nicaraguans to use business loans to supplement family income rather than finance business growth. Most small business owners saw no need to maintain accounting records since they were not big enough to pay government taxes.
To aid small businesses both NGOs and the Nicaraguan Government offer business education courses to small business owners. The objective of the business and accounting courses is to help small business owners obtain knowledge and training needed to manage and grow a business. The business education program has met with limited success. FAMA originally mandated that all individuals receiving small loans attend business education courses. However clients did not like attending the courses. The Director of FAMA acknowledged that only a small portion of small business owners receiving loans actually attend courses. Consequently, FAMA has dropped course attendance as a prerequisite for receiving a loan. According to the FAMA Director, Nicaraguans do not attend training courses for several reasons including, they cannot read or write, they do not feel the courses are important, and they do not have time to attend. In my survey 33.3 percent of small business owners felt that an accounting or finance class would be very useful for them and 30 percent felt it might be useful. Despite the fact that the majority of business owners feel business and accounting courses are useful, only 7 percent had completed an accounting or finance course.
In summary I found that high interest rates, lack of education, and lack of business training constrained growth of the small businesses I surveyed. I also found that NGOs play a major role in the Nicaraguan small business community. Nicaraguan small business owners I surveyed have mixed feelings about the impact of NGOS. In the future I would like to document the interest rates NGOs charge as well as their collection practices and funding sources.