|Equation||(# firms or entrepreneurs) x ($ Additional average annual entrepreneur’s earnings) x (# total firm-years of operation after loan)|
|Explanation||Estimates for start-up and existing businesses should be conducted separately. Start-up and existing businesses have different survival rates and may also show different sales and earnings profiles.
In the case of microcredit programs, the estimation of benefits do not include any assumption about the effectiveness of the lending model used by the microcredit institution. For example, microcredit models may include different types of loans (individual or group lending), loan caps, the relative importance of loans to business scale, or underwriting policies, among many other lending practices and policies. The Constellation Fund collects information on these characteristics but does not conduct new evaluations to generate new knowledge about the effectiveness of lending technologies.
Additional average annual entrepreneur’s earnings: This is the difference in the average annual earnings before and after the microloan. This information is provided by the grantee. In some cases, business sales or revenues are the only data available (as opposed to profits or net earnings). In those cases, we suggest using a 10 percent margin of profit over gross revenues to proxy net personal earnings. All dollar values should be discounted to present value.
Technical note on estimation of earnings: Pre-loan earnings are used as the counterfactual state. This assumption may cause some estimation bias for repeat borrowers. First-time borrowers tend to experience greater relative increases in profits, especially for newer businesses. We suggest computing benefits by type of borrower (new or repeat borrowers), or by including a number of previous loans in a regression estimation. See Diaz (2013) for an econometric application.
Total number of firm-years of operation after loan: This is the sum of the years of operation of all firms. We include up to six years of benefits after loan is received. The six-year timeframe is based on survival rates data for firms in Minnesota that show that after six years the survival rate falls below 50% (The Constellation Fund’s own estimations based on data from the U.S. Bureau of Labor Statistics, 2013).For example, if the microcredit program has given loans to three firms with the following number of years operations after the loan:
Note: discount to present value if benefits are assumed to last for more than 3 years.
|References||Diaz, J. Y. (2013). Impact of technical assistance and microcredit among rural households in El Salvador. Retrieved from the University of Minnesota Digital Conservancy, http://hdl.handle.net/11299/148729.
Rossman, S., Theodos, B., Brash, R., Gallagher, M., Hayes, C., & Temkin, K. (2008). Key findings from the evaluation of the Small Business Administration’s Loan and Investment Programs. Urban Institute. Retrieved from https://www.urban.org/research/publication/key-findings-evaluation-small-business-administrations-loan-and-investment-programs.
The U.S. Bureau of Labor Statistics. (2013). Business employment dynamics: Establishment age and survival data, Minnesota, Table 7: Survival of private sector establishments by opening year. Retrieved from https://www.bls.gov/bdm/mn_age_total_table7.txt