Birth of an enterprise: successful entrepreneurs tell of securing capital, navigating sea of red tape and making it through the first 18 months.

When Esperanza Franco wanted to start her own business after working for other people for 32 years, the easy part was coming up with an idea to beat the competition.

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What Mexico City's mechanics needed, she thought back in 1997, was an express delivery service that would speed auto parts to their shops "as fast as pizzas."

"It was an idea based on the city's economic situation," said Franco, 56, who had worked most her life in the auto parts business. "Mechanics' shops here don't have the money to keep a large stock, so we figured we could offer them a way to give quick service without having to worry about inventory."

The concept took hold, and seven years later Franco's company, Frammex, which she runs with her son, is now one of Mexico City's leading distributors of shock absorbers. Getting the company off the ground, however, took a lot more than a clever idea.

Franco and her son, Xavier Mendoza, spent years getting the necessary business and zoning permits. A start-up loan was completely out of reach, though they had to drum up some form of credit. Employees came, went and robbed along the way. And they had to learn the ropes of running a business in a topsy-turvy economic climate where regular customers are here today, gone tomorrow.

"Needless to say, the first months were very difficult," said Mendoza.

LAND OF OPPORTUNITY

While being an entrepreneur isn't easy anywhere in the world, in developing nations like Mexico, starting and successfully running a small or medium-sized enterprise (SME) pose particular challenges.

Scarce credit, extensive bureaucracy and lack of education or business training among company owners and workers alike keep the chips stacked against entrepreneurs, researchers and businessmen say.

Regardless of the adversity, however, Mexico is actually one of the world's most entrepreneur-rich countries. The Global Entrepreneurship Monitor, an annual study conducted by the London Business School and Babson College, found that 12.4% of Mexican adults were involved in an entrepreneurial venture in 2002, and Mexico ranked eighth among 37 nations surveyed. By comparison, the study found that 10.5% of Americans and 5.4% of British, qualified as entrepreneurs.

Some 99% of Mexican businesses are SMEs, with the vast majority of them being what Mexican tax codes classify as "micro" companies--those with 10 employees or less.

PUTTING YOURSELF ON THE LINE

Despite the abundance of self-start business ventures, however, the same GEM study found about 60% of first-time entrepreneurs in Mexico fail within one and a half years.

"Most SEMs fold because they run out of capital during the first 18 months," said Kiyo Kajihara, who teaches entrepreneurship and small and medium business administration at the Instituto Tecnologico Autonomo de Mexico (ITAM) in Mexico City. "Securing credit can be very difficult, if not impossible."

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For Geoffrey Alles, who in 1997 started a small real estate services company in Mexico City with seven employees, the task was impossible.

When the Toronto native went shopping around for a revolving line of credit, he found that "typically, local financial institutions look for hard asset collateral between 200% and 300% of the size of the loan you're looking for."

"At that point it ceases to make sense," said Alles. "Then you apply the volatility of the peso and the high interest rates that banks charge, and it becomes very difficult."

So Alles and his partner, Mexico City native Giovanni D'Agostino, did what many small businessmen in Mexico do when financing is out of reach.

"We invested out of pocket to start the company, and then reinvested everything that we ever made back into the company until very recently," Alles said in an interview at the Mexico City headquarters of Alles Group, a medium-sized company with offices in three Mexican cities and 52 employees.

DAWN OF AN EMPIRE

Franco and Mendoza's auto parts distributor had the same problem finding a bank loan, but the working-class family had only 20,000 pesos for start-up capital, and some form of credit would be necessary for their company to survive.

Their solution proved to be the most common source of credit for companies in Mexico: supplier credit.

After convincing two friends to put their houses up for collateral, Mendoza reached an agreement with an important industrial group to supply the company with shock absorbers on credit. Franco and Mendoza's company in turn also supplies its customers on credit.

The system works interest-free, and makes doing business possible, but it hardly replaces a cash loan.

"Supplier credit was the only credit we ever had," said Mendoza. "But in the beginning we were short on infrastructure, like delivery vehicles."

Seven years later, and now with 35 employees and a small fleet of delivery vehicles, Mendoza is still trying to secure a loan.

"Our balance sheet is solid, and we hope that now we can get approved for a revolving line of credit," said Mendoza. "We know a loan would be even more difficult to get if the company ever got in trouble."

Kajihara said most business loans go to larger companies, and that "unfortunately in Mexico, if you don't have political or family ties to an important businessman or high-ranking politician, getting credit can be very complicated."

And while banks in Mexico have come a long way since the credit-killing economic crisis of 1994-95, commercial lending institutions today cover only 20.3% of companies' financing needs, according to Central Bank estimates for the fourth quarter of 2003. Supplier credit makes up 56.8%, and loans from other companies, 12.9%.

Improving credit access has been one of the federal government's chief strategies to aid the nation's SMEs since President Fox took office in December 2000.

During the first two years of Fox's term, the government spent 1.4 billion pesos in programs mostly geared toward guaranteeing SMEs access to loans with public and private banks. The government budgeted 670.5 million pesos for SME financing and training programs in 2003, and 1 billion pesos in 2004.

The vast majority of SMEs have yet to see any of the programs, however, and researchers like Kajihara say that if the government is to improve the long-term business climate for SMEs, it must also raise education levels and make it easier for people to open companies.

"Besides lack of credit, another main reason companies run out of capital and fold is the lack of planning," said Kajihara. "And this stems from poor education and the absence of business culture."

Studies done by the ITAM's business administration department have found that among entrepreneurs with 10 employees or less, nearly 40% only studied through the 6th grade.

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Kajihara said the scarcity of college graduates--which add up to only 12% of people over 24 years old--is a serious disadvantage for both business owners and workers.

"We teach business culture in the university, but most people don't have a chance to get here," he said.

Mendoza said unqualified workers have been a constant headache for Frammex.

"Human resources have been one of our biggest problems," he said. "There aren't enough well-qualified people out there."

Mexico's labor laws, which make it very expensive to fire workers, also make entrepreneurs cautious to take on new employees. Because no public unemployment insurance exists in Mexico, workers have the right to severance pay equivalent to three months salary, plus 20 days of wages for every year with the company.

"No matter how much you look into somebody--background checks, psychometric tests, whatever--there's a risk they won't turn out," said Mendoza.

A BUREAUCRATIC MESS

Another factor that makes life difficult for entrepreneurs is Mexico's complex tangle of government bureaucracy.

Getting the necessary permits to start a business here on average takes 57 days, according to a study released in January by the Center for Private Sector Economic Studies, a Mexico City think tank. According to studies by the World Bank, the same process can be finished in three days in Canada and in four days in the United States.

The winding bureaucratic trail here keeps many entrepreneurs from ever registering their businesses, and relegates them to the teeming informal economy where growth potential is limited.

LET THE GESTOR DO THE WALKING

For those determined to operate legally, there is a minor industry of consultants--who often operate informally--who "facilitate" the approval of permits. The activities of the country's gestores, as the consultants are known, can range from typing up forms and waiting in line to pulling strings within government offices.

"You pay a fee and they go and stand in line and do what they need to do to get you through the red tape," said Alles of the gestores.

When Franco and Mendoza wanted to open a new office in Guadalajara, Mendoza found the neighborhood they had selected wasn't zoned for office space. So Mendoza hired a gestor, "and he took care of it."

While gestores can be expensive, "hiring them is a much lower cost than the value of our time in building the business." said Alles.

PRICE OF CORRUPTION

Corruption also weighs down on company owners, especially when dealing with state and municipal government offices.

When Franco went to Mexico City's transit department to get license plates for the company's delivery motorcycles, a clerk explained how things worked there.

"If you want the license plates by the book, it's going to take two or three months to process them," Franco recalled the clerk telling her. "But I can give you them right now if you just give me 1,500 pesos."

Kajihara, however, points out that government workers aren't solely to blame for Mexico's corruption problems.

"Because [Mexican small business owners] often don't plan, they just keep some money handy in case" a bribe is demanded, he said.

And when the bribe is to avoid paying a fine, from then on small businessmen "prepare for the bribe rather than working to meet regulations," according to Kajihara.

FOX TO THE RESCUE

Cutting back government red tape has been another element of President Fox's programs to help SMEs. A federal program called the System for Rapid Business Opening, or SARE, allows small companies to open shop in two days if their business is considered low risk to the environment or the area's traffic.

The SARE program works to coordinate federal, state and municipal regulations so that, in theory, entrepreneurs can register their company with a single visit to a single office.

"It wasn't going to be of any use if a citizen could register with the federal tax services in one day, but the municipal zoning permit took 50," said Noreli Dominguez, who coordinates state and municipal integration to the program.

But getting the program up and running has been a slow process. In just over a year, SARE has been implemented in only 12 municipalities, including Puebla and Tijuana, and the Economy Secretariat hopes to have it running in 45 to 50 by the time Fox's term ends in 2006.

The task ahead is daunting, as there are 2,419 municipalities in Mexico. Domiguez, however, points out the program is focusing first on large, urban municipalities "with growth potential."

The importance of creating the conditions where SME entrepreneurs can thrive shouldn't be underestimated, research indicates.

According to a study published last October by researchers at the Tec de Monterrey, SMEs provide 64% of the nation's jobs and generate 42% of GDP.

Big industry may produce more overall value in terms of GDP, but as Kajihara points out, "SMEs are what keep most people working."

Jason Lange is a freelance journalist based in Mexico City.

Photos by Margaret Myers