3 THE GUARANTEE FUND AS DEVELOPMENT'S INSTRUMENT OF THE FEMALE ENTREPRENEURSHIP

3.1 Financial system and informative asymmetry: the role of the Guarantee Fund and comparison with other instruments

The function of the financial system consists in making the capital transfer possible from the savers (individuals with financial surplus) to the investors (individuals with financial deficit). Substantially the financial market allows the savers to postpone the consumption of their own unused financial availabilities and it allows the investors to realise their own initiatives even though they don't have sufficient financial resources at their disposal. The convenience's measure of this capital transfer is the interest rate recognised to the lender of funds for having deprived himself of his own availabilities for a certain period of time.

In order to develop the financial system in a context of allocative efficiency it's necessary that the cost of the loaned money reflects all the important information on the investment, and that it reflects the real risk. The free availability and utilisation of the information represents, therefore, a crucial factor for the financial markets efficiency.

The existence of informative asymmetries, or rather of a different quality of the information at the lender's and payee's of funds disposal, induces, instead, from one side the financer to act according to the adverse selection logic, which consists in the request of a higher return than the one required by the initiative's risk; and on the other side it induces the entrepreneur to act in compliance with the moral hazard, or rather to modify the destination of the financing sources found, and direct them towards most risky investments opportunities, and therefore most profitable, so that he can remunerate the higher claims of the financer. Such a mechanism, clearly initiates a vicious circle which forces the financer to push higher and higher his remunerative claims, and the entrepreneur "to risk" more and more funds in hazardous investments, running a major risk to lose the invested funds.

In defence of these distorted effects of the market it is possible to appeal to the following instruments:
1. accurate due diligence;
2. protection of the property rights and of the facility fee (guarantees).

With reference to the first issue, it consists in a deep analysis of the business project, which aim is to confirm the technical, commercial and economic practicability of the business initiative. It's important to point out that this procedure must not end in the phase antecedent the investment, but it must continue, although with different peculiarities, also in the subsequent phase, with the purpose of avoiding that the entrepreneur assumes positions of moral hazard and, however, to control its successive development.

For what concerns the second issue, it is referred to the request of guarantee in defence of the risk taken. The guarantee generally required, to face both short-term and long-term financing, is a real security and it expresses itself in the registration of mortgages on the corporate real estate and the relative appurtenances, together with personal securities.
The Italian financial system is unfortunately above all composed of operators who follow the second alternative, even because to arrange a control circuit it would be necessary to invest in the use of resources and competencies which evidently the financial system, and in particular the banking system , doesn't want to or rather is not able to engage. Therefore, the investment's projects are only evaluated in the presence of suitable guarantees in protection of the financer, constituting an additional entry barrier for the business. Inevitably this tie burdens the new enterprises, which, in the start up phase, are not able to provide adequate guarantees except for what concerns the real validity of the business idea.
The warrant request is above all determined by two factors:
a. an increasing risk of the banking business, which has become evident above all during the last five years;
b. inefficiency of the financial market.
With reference to the first aspect, it's necessary to point out that the bank/enterprise relationship (primarily for what regards the SME) has often been contrasting, since the smallest enterprises are reluctant to collaborate under the accounting-informative-management profile, while the banks are not interested in developing politics aimed at improving the relationship with the enterprises. These behaviours have led to the spreading of the multiple overdraft practice, which allows the enterprise to obtain a higher coverage of the financial requirements avoiding that the banks could fully perceive the level of the assumed risk.
On the basis of these considerations, it's possible to trace in general some unbalances regarding the financial structure of the small and medium enterprises, which inevitably reflect on a higher risk and on a worst quality of the banking assets:

• excessive corporate indebtedness;
• considerable importance of the short-term debts;
• excessive recourse to the banking sources and, on the contrary, scarce wealth capitalisation;
• imbalance between assets' and liabilities' maturities;
• almost inexistent recourse to the financial and to the security market.

For what concerns the second issue, in the context of the theory on the financial market efficiency and on the related interference factors, such as the credit rationing and the fiscal distortions, the attention is, in this context, focused on the delicate question of the informative asymmetries. Making the risk difficult to evaluate and impossible to quantify under the form of interest rate to apply to financial transactions, they constitute in fact, the main economic justification to the request for warrants (real, personal and institutional securities).

These phenomena are then particularly noticeable in the industrial decline or undeveloped areas, such as Southern Italy, where the necessity of supporting the relaunch of the entrepreneurship and of the employment in general is most pressing.

The problem of the informative asymmetries must be, therefore, analysed in connection with the financial imbalances previously described, due to the financers necessity to control the entrusted enterprises, or rather to continuously have under control their dynamics and their economic/financial results. In fact, the difficulty of knowledge of the real economic/financial situation of the enterprises by the financial institutions depends on two factors:

• the lack of resources to engage in the monitoring activity;
• the scarce availability or capacity by the enterprises to provide, with transparency and accuracy , the economic and financial data which allow to evaluate their own performance.

It often happens that, below certain dimensional levels, the reporting and planning systems become less rich and effective, almost always because of the impossibility to support their costs. In this context, the financer authorities perceive an increasing risk level, against which they appeal to the request of real securities and to the increase of the offered rates.

Some consequences derive from this:
1. the ability of producing income by the initiative to finance, which is the most effective of the guarantees whose existence should have to be verified by the banks, becomes nevertheless a secondary element;
2. the enterprises, and in particular the small dimension ones, show a great sensibility to the credit politics and the monetary movements;
3. these circumstances have a negative backfall in terms of real economy, and more specific on the effects caused by the investment's decisions. Substantially, these decisions tend to be graded on the basis of the available resources, or rather they strictly depend on the self-financing.

There are, therefore, some negative effects which tend to be exalted by the financial market's distortions, with obvious consequences on the real economy. At this point, it's necessary to understand which instruments can be used by the Italian enterprises to at least partially remove the above mentioned imbalances and solve the related problems.
The theme, furthermore, is of particular interest, if on one side, consideration is made to the reorganisation process concerning the Italian banking system and finalised to the profit and efficiency's recovery, and on the other side, the facilitating mechanism activated by the European Community and by every single member State to re-launch the depressed area's development.

Since the most diffused facilitating form of intervention is that of the contributions for loans on long-term financing, and since the grant for investment projects have been above all invested in Southern Italy often achieving questionable results, the attention is moved on the creation of guarantee's instruments which can also be functional for the aimed purpose: to encourage the female entrepreneurship. This is due to the conviction that an "institutional" guarantee system of medium and long-term credit, but also and above all of financing form connected to the risk capital, which however leaves a risk portion both on the financer authority and on the entrepreneur, presents interesting potentials; this system, in fact, allows the deserving business to obtain capitals suitable for substaining its own development, apart from the possibility to completely or partially loan real securities.

The Guarantee Fund represents a facilitating intervention's modality. In fact it lowers the amount of guarantees that companies must offer to the financiers in financing operations as debt and venture capital.
Through this instrument, the banks and the financer authorities in general, together with the operators specialised in operations on the venture capital, as the Closed-end Funds, the Pension Funds and the merchant banks, could obtain advantage in terms of quality of the effected operations, and in terms of risk reduction.

It's necessary to point out that the Fund management be necessarily characterised by an entrepreneurial logic with the aim of attaining high levels of effectiveness/efficiency, in order to avoid that the benefit obtained by the guaranteed individuals can be transformed in net loss for the Fund itself.

The credit insurance in the European and North-American Countries, has long represented an important instrument of support for the industrial development. In particular, guaranteeing through special funds, for specific financing operations, represents one of the most utilised form of insurance.

The situation in Italy, instead, is different, where the recourse to the insurance's system in general, and the guarantee funds' intervention in particular, is still very limited.

In Italy the Guarantee Funds came on line in the years 1960's and 1970's, to promote the access to credit for some entrepreneurs' categories, generally medium-sized and small entrepreneurs. Each Fund has been created with well defined competencies and with a specific intervention's ambit, while the pursued purpose is the same for everyone, which is to favour partial (till the 90% of the possible loss) and subsidiary guarantees for the risks deriving from financing operations, above all medium-term financing.

If there are no doubts that the main restraint for the development and the establishment of new enterprises is represented by the lack of guarantees to offer to the financers, there shouldn't be any doubt about the validity of the Fund in the creation of a virtuous circle composed by Financial Institutions - Enterprises, aimed at the exploitation of the entrepreneurial ideas.

The advantages deriving from the application of the Guarantee Fund are:

• for the financers by way of debt, an improvement in the investments' quality, with a connected reduction of the risk, essentially deriving from a more accurate investigation on the well-being state of the entrusted enterprise;
• for the financers by way of risk capital, the containment of the uncertainty, certainly greater, connected to the phase of start up and development of new enterprises;
• for the enterprises, the most risky projects could find consistent financing sources, with the possibility of the capital recoupment protracted in time. The advantage in terms of lowest risk perceived by the financers, would be furthermore converted into an advantage for the enterprises, also in terms of a lowest financing burden.

This argument is also valid for financial instruments still not very diffused among the SME, as the convertible bonds and the share issues.

It is to be pointed out, however, that the development of operations on the venture capital could possibly be realised with the creation of a special market for the small and medium-sized enterprises, for example on the model of the Nouveau marché in Paris or of the Neuer Markt in Frankfurt, achieving in this way the object of making these operations less risky and most profitable under the income's profile, since the prospect of realising a consistent capital gain constitutes the ratio based on the intervention of the venture capital societies, of the merchant banks, etc.
It is evident that the availability of a support instrument for the above mentioned operations will further incentive their utilisation by the financing operators and by the entrepreneurs.

If, for instance, the convertible bonds issues are considered, where the evaluation of the issuer's reliability and of the income's prospects are very remarkable, by virtue of the possibility to exercise the option and change from bondholder to shareholder, a judgement on the credit's value given by rating agencies and the guarantee granted by the Fund would increase the appeal of this operation; in this way, in fact, an impartial evaluation of the risk connected to the investment would sensibly contribute to the reduction of the informative asymmetries between enterprises and financial intermediaries.

If we then consider the operations on the venture capital, the activity carried on by the Closed-end Funds and by the merchant banks assumes importance, where the particular risk profile existing in the of the business start up phase does not conciliate with the traditional financing forms. Also in this case the Guarantee Fund could effectively intervene, contributing to the risk reduction, to the increase of the number of these operations and therefore to the diffusion of a risk capital culture.

On the basis of these considerations and of the European positive experiences of these guarantee instruments, it can be asserted that the intervention forms based on the contributions for loans and the grants for investment project, prevalent up to now, are destined in time to suffer a considerable downsizing. Instead, the Guarantee Funds are destined to amply increase, which are more reliable to the needs of local development, of the entrepreneurial resources and of a major involvement of the banking system in the dynamics of the real enterprises, in a scheme of co-operative relationship and not contrasting between financial institutions and enterprises.