Making a big deal out of nothing.

All some people need to get a business going is a little bit of money and some training. Some states think it's a good idea to provide both.

Frank Hastings needs a new direction after being laid off from his middle management job of 27 years with a large computer engineering firm. Sharon Magee is an unemployed divorced mother with three children who desperately needs a steady income to support her family. Scot Sanderson, trained as a carpenter, is tired of working odd jobs in a small rural community. These three people, like many other Americans, are struggling with the agonies of unemployment and with the challenge of an evolving economy in which the ability to change careers is

essential.

Although these people differ a great deal in experience, they share a common American dream: All of them want to be president--of their own business.

The Self-Employment Option

State and federal employment specialists think self-employment or "micro-enterprise" development is a viable option for the unemployed. These businesses start on a small scale and often require a small line of credit for seed money. State and federal microbusiness assistance programs generally target poor people, working or unemployed, or people who have no other source of credit. In the past three years more than 200 programs have sprung up across the country to encourage entrepreneurs. These programs are structured in different ways and use a variety of techniques to accomplish their goals.

A microenterprise is typically a sole proprietorship with one to five employees and the owner involved in the day-to-day operation of the business. The federal, state and local programs being developed to encourage such businesses generally include training and technical assistance to improve the owner's management skills, and cash or credit for start-up activities or expansion. Many of these microenterprises build on skills that the potential entrepreneur has learned in previous employment or through hobbies or volunteer work. For example, many cottage industries have been created around crafts such as quilting and pottery; others include food preparation and service such as candy making or catering. Many unemployed people have backgrounds that can be adapted to a small business. The training needs, however, are as varied as the type of businesses they choose to operate. And almost all of them lack the cash or credit necessary to begin.

A World of Experience

A recent International Social Security Association study found that since the late 1970s, many countries have established self-employment programs for unemployed workers. The first appeared in France and England. During the 1980s, self-employment programs grew in popularity and spread rapidly throughout Western industrial nations.

These self-employment schemes for the unemployed represent a shift from the objective of income maintenance of most unemployment insurance systems, but operate within their framework. While the programs vary from country to country, there are some similarities. All of them target specific groups, most combine monetary support and labor market assistance, and many require monitoring, support, counseling and evaluation.

Two models emerged from Great Britain and France. The French model consists of lump-sum payments that allow the unemployed to use their unemployment insurance benefits as start-up capital for new small businesses. This lump-sum payment is equivalent to about six to 10 months of unemployment payments. Recipients are also allowed to pool their lump-sum payments to start new firms.

The British model consists of periodic payments provided as a form of income support while the unemployed develop and operate new businesses. Entrepreneurs receive approximately 40 pounds (about $76) a week for a year while starting their new businesses.

Until recently microenterprise training and funding in the United States has been mostly supported by local organizations with little or no assistance from the state or federal government. Several states are now experimenting with loan assistance schemes to help people start businesses of their own.

Montana's Loan Program

After a 1989 survey revealed that banks in the state seldom made loans to businesses for less than $50,000, the Montana Department of Commerce (DOC) launched an effort to create a credit program for small businesses. Even though applicants for smaller loans often lacked collateral or equity, and bankers generally shied away from such loans as unprofitable and risky, the DOC decided that substantial economic benefits were being lost.

Joined by several independent programs such as the Montana Women's Economic Development Group and many community action agencies, the DOC developed legislation to create start-up funding for small businesses. The bill drew $3.25 million from the Coal Tax Trust Fund, which was underused even though its primary purpose was to invest in business. The Legislature approved the Microbusiness Finance Act in 1991 as a one-time appropriation.

The Microbusiness Finance Program is operated by the Montana Department of Commerce. It lends funds to regional providers known as Microbusiness Development Centers (MBDCs), which in turn make loans to individuals. The MBDCs are nonprofit corporations that provide training, assistance and capital for start-up or expansion of microbusinesses. Each MBDC receives loans from the commerce department up to $250,000 at a 4 percent interest rate to establish a revolving loan fund. The 4 percent interest portion must be repaid quarterly to the state. To secure the loans, the agency must match the state's loan funds. These matching funds come from county and city governments, banks or other private sources. In the case of default, the first funds to be lost are the MBDC's match. The state also requires the lending agencies to maintain cash collateral in a ratio of at least $1 for every $3 in outstanding loan balances.

The MBDCs are allowed to lend the money at a higher interest rate than they pay, and they may charge fees for technical assistance and administrative costs. The law requires that they charge at least market rate on the loans. They are allowed to set their own fee schedules for services to borrowers such as workshops and loan processing.

These programs are to be monitored every four years for: the quality of the assistance provided to the borrower (as evidenced by the percent of bad loans), the administration of the loan fund, the level of staff and community support, the status of the matching funds and sufficiency of the operating income, and the ability of the MBDC to reach its target market.

The administrative costs for each MBDC are estimated at approximately $200,000. It may be unrealistic for these agencies to charge enough in interest, fees and investments to cover administration plus the match. It is also extremely difficult for some areas of the state to amass enough money for the match. About 25 percent of potential MBDC applicants may have been deterred from applying by the amount of cash necessary to do so.

But there are some success stories. Frank Hastings from central Montana borrowed $2,000 from his local MBDC to start a small computer repair shop. It seemed clear to him that there was a need for computer service and repair in his community. He used most of the funds to advertise his business throughout the state. Although he has to travel a great deal, the past 18 months have brought him back nearly to the salary he was earning when forced to leave his last job.

Vermont Has Two Programs

Vermont's microenterprise system reflects the workings of two statewide programs that complement each other. One is a state loan program that offers credit to low-income entrepreneurs, and in the other the state contracts with nonprofits to provide business development assistance to this same group of people. The programs are mutually dependent, but each operates independently with its own personnel and funding sources. The programs operate independently of the state and are not held accountable to the state.

The Vermont General Assembly created the Job Start Loan Fund in 1978. The idea and the model came from a federal demonstration program in the northeastern part of the state. The model aimed at disadvantaged populations and served them through a community action agency (CAA). Based on that model, Vermont decided to focus on the poor by helping to develop self-employment opportunities.

The law authorized the state's five community action agencies to provide technical assistance and market the Job Start Fund to help the target population. The law also specified this use of CAAs with the understanding that the Job Start staff would never have the capacity to train or make loan decisions about customers scattered all over the state of Vermont.

By serving only the poor, however, the designers of this legislation opened the question of whether the state's goal is to provide capital for business or if it is, in fact, yet another welfare assistance program. The Job Start Loan Fund reports that its purpose is to create a development program for people not served by other programs, but the technical assistance providers claim their purpose is to start new businesses. This confusion is further compounded by locating the Job Start Fund at the Agency for Human Services instead of the Department of Economic Development.

The maximum loan for any single business is $10,000. The Job Start coordinators seldom approve the maximum amount on the first request and encourage borrowers to graduate up to the maximum loan by demonstrating a successful repayment history. The loans are offered at 8.5 percent for up to four years and are truly considered a last resort. All applicants are required to show a denied bank loan application and must have no other resources available.

Business assistance providers use individualized and group training for potential business owners. Specialists also help applicants develop business plans and secure financing from the Job Start Fund.

Since 1978, Job Start has made more than 560 loans totaling $2 million and helped create nearly 100 jobs. Approximately 40 percent of these loans have been to women. In 1988, 81 participants received financing to start their businesses. Between 1990 and 1991, 88 started or expanded businesses. Most of these businesses offer services. The demand remains high. Nearly 100 potential borrowers a year seek Job Start loans, even though there have been frequent interruptions in funding for both technical assistance and the loan fund itself.

Sharon Magee borrowed enough capital to start a quilting business, but money alone was not the answer in her case. Her work history--mostly low-skill, low-wage--had not prepared her for the technical side of owning a business. She needed a great deal of assistance in marketing, finances, taxes and management of the two women she employed. Her business development specialist helped guide her through the maze of creating a strong and workable business plan. She has recently joined a cooperative with other quilters, and her business is expanding.

North Carolina's Rural Loan Program

North Carolina knew it needed a microenterprise loan program after a 1988 comprehensive analysis of capital needs found its business formation lagging behind the nation. It was clear from the report that limited assets and poverty were inhibiting the amount of entrepreneurial activity in rural areas of the state. Although these observations were not viewed as unique to North Carolina, what was particular to the state was the fact that its dispersed market centers were thought to be capable of sustaining small-scale business ventures.

The report recommended the creation of a finance system to fill capital gaps. Proponents of the loan fund idea recommended a demonstration project to investigate the need, design and appropriate role for a microenterprise loan mechanism. Advocates had a clear sense of how to pay for the demonstration and where to locate it. They believed the General Assembly would be willing to put up state money for the program, and they used the findings of the market assessment to approach the legislature.

In 1988, few members of the legislature understood the microenterprise proposal. Lobbying for the idea came from the nonprofits in the state, which saw the programs as a means of giving their customers access to credit. It was eventually sold to the General Assembly as a demonstration: a one-time grant to explore the idea of "microlending."

The Microenterprise Loan Program (MLP) is aimed at developing permanent mechanisms that will help minorities, women and rural people start or expand their own businesses. Goals of the MLP include helping people overcome deficiencies such as lack of management ability and financial experience, legal and accounting services, and marketing resources. Experience has taught the program developers that its least skilled customers need a close, hands-on, developmental approach to succeed.

The local providers who operate the program are existing community development organizations with experience in delivering services to the rural poor. They have two methods of making loans. In the group lending model, borrowers form groups of four to 10 people who meet regularly to review loan applications, make credit decisions, help one another with business problems and receive loan payments. Loans begin at $500 and can increase to a maximum of $8,000. In every case, up-front business training is required of all borrowers.

In the institutional lending model, potential borrowers must submit business plans along with their financial statements. Paid staff screen these applications for basic soundness and either reject, repair or forward the proposals to the credit committee. The credit committee consists of community volunteers with experience in small business operations and lending. Loans are limited to a maximum of $20,000. Terms cannot exceed three years, and the interest rate floats between 2 percent and 5 percent above prime. The customers in this program tend to have more business experience going in and do not require as much technical assistance.

The MLP has succeeded in leveraging enough private money for loan fund capitalization that it no longer needs additional money from the General Assembly. The primary funding challenge continues to lie in paying the ongoing costs of administration. If the legislature terminates funding for program expenses, local communities will have to make up the shortfall by soliciting greater commitments from business or investigate the possibility of federal funding.

The law requires that the rural center submit reports on the uses of funds received. An independent evaluation conducted over the first two years of the demonstration project resulted in significant revisions. During the demonstration phase, inadequate management information systems failed to provide all the information needed for accountability. MLP has clarified what information it wants tracked, and the program director now "audits" to make sure that management systems are in place and files are kept up to date.

Scot Sanderson of Buncombe County, N.C., started ABC Recycling Service with a truck and the conviction that he could make money on what other people throw away. He was right. In 1992, Sanderson's company hauled 5 million pounds of recyclable aluminum and steel cans, newspapers and plastics. He hired five employees and grossed over $200,000 in the first 18 months of operation--on a loan of less than $3,000. A recent loss of a major contract has caused Sanderson to reduce his workforce, which had grown to 14, but he hopes to rebound soon.

The Great American Dream

The United States has a long history of encouraging individual initiative and achievements. The nation began as a society of small businesses. There were farmers, artisans, shopkeepers and always those who were willing to risk it all for growth and adventure. If people were not satisfied with their standard of living, they could move toward new frontiers where opportunities seemed limited only by one's own abilities and willingness to work. This country possesses a dynamic economy with new businesses being born, growing, declining and being replaced. In this environment, starting a business is generally viewed in a very positive light. According to a national survey, more than 90 percent of American adults would approve of their children going into business for themselves.

As the 20th century comes to a close, we are seeing the end of another era. We no longer have huge concentrations of workers in individual industries. Gone are the days of lifetime employment with paternalistic corporations. Labor-saving technology, international competition and other market forces have decentralized employment patterns.

While experts will acknowledge that no one strategy will retrain all workers for new careers, most will agree that entrepreneurial training and microbusiness development can be important ingredients in the recipe for the successful transition to a new career.

NAFTA Self-Employment Program

A self-employment assistance program is part of the new North American Free Trade Agreement (NAFTA). Under a five-year program administered by the U.S. Department of Labor, certain displaced workers will be able to start their own businesses using unemployment benefits.

Guidelines allow states to provide allowances equal to, but in lieu of, regular unemployment benefits. Self-employment assistance (SEA) participants are exempt from state rules requiring them to be available for work, to be actively searching for work and to accept their first job offer. States cannot count income earned from self-employment if it disqualifies people for aid. To receive SEA allowances, individuals must be eligible for regular unemployment insurance (UI) benefits and must have been identified as needing additional employment services such as business training.

The states' worker profiling system must identify claimants likely to remain employed long after their regular UI benefits have been exhausted. It also requires UI claimants to participate in re-employment services such as job search assistance and re-training programs.

SEA participants must be enrolled in state-approved self-employment courses such as entrepreneurial training or business counseling. These programs can be offered by private or public agencies. The participants must be actively engaged in activities related to creating businesses and becoming self-employed. Research is being conducted on how this requirement is affected by the nondiscrimination provisions in the Americans with Disabilities Act. If an SEA participant fails to attend or complete training, he cannot be disqualified from receiving his regular unemployment insurance benefits.

Results Mixed in Washington State Pilot

Starting a business isn't the ticket out of unemployment for everyone. Interim results from a federal demonstration project in Washington state indicate that training for self-employment has mixed results.

The Self-Employment and Enterprise Development (SEED) demonstration-the first federally sponsored self-employment pilot program-ran in six Washington communities, both urban and rural, from September 1989 through March 1991.

Forty-two thousand newly unemployed people were invited to apply for participation in the project. About 4.6 percent applied and 3.6 percent (1,500) were accepted. Applicants were assigned randomly to a "treatment group" or a control group. The treatment program waived the requirement to look for work, trained participants in starting a business and paid benefits equal to regular unemployment insurance. Members of the group who completed all requirements became eligible for a lump-sum payment equal to their remaining benefits.

The control group received normal unemployment insurance benefits and job search assistance.

The interim report released in April shows that after 21 months SEED support increased by 25 percent the likelihood of being self-employed, accelerated the startup of a new business by six months and increased earnings from self-employment over the 21-month period by about $3,000.

However, those in the control group were more apt to have gone back into the workforce and earned more income in the 21-month period. The SEED participants who did not go into their own businesses took a month longer to return to work and earned about $2,500 less because of it.

SEED participants were more likely to be employed by about 5 percent and more likely to be employed longer by about two months. However, total earnings did not differ.

Observers say such programs may be useful tools for promoting the rapid re-employment of the unemployed. Whether they are cost effective remains unanswered and will be addressed in the final report due late this year.

Karen Johnson specializes in employment and training issues for NCSL. The case studies on Montana, Vermont and North Carolina in this article came from The Corporation for Microenterprise Development, a non-profit group based in St. Paul, Minn.