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Access to financing for businesses
EU financial support is available for European businesses, directly or indirectly. The EU thus supplements national mechanisms and widens their scope.
Setting up one’s own business and developing its activity requires considerable financing. Although their first investors are generally family members or friends, entrepreneurs often have to resort to other sources of financing. However, access to appropriate financing often proves difficult, particularly for small and medium-sized enterprises (SMEs), as financial players are unwilling to take the risk that such businesses represent. The consequent market shortcomings compromise European entrepreneurship and, as a result, European growth.
It is therefore essential to ensure a more favourable financial environment for businesses, particularly SMEs. Some of the market shortcomings can best be remedied by the Member States. The European Union supplements and widens the scope of national mechanisms by offering European businesses financial support mainly indirectly (financial instruments) but sometimes also directly (other types of financial support).
The Community financial instruments facilitate access for businesses, in particular SMEs, to equity loans or financing. Businesses do not receive the Community financing directly but via a financial intermediary.
The financial instruments fall within the scope of the Framework Programme for Innovation and Competitiveness (2007-2013) and, more specifically, of its Entrepreneurship and Innovation Programme, which ensures the continuity of the multi-annual programme for businesses and entrepreneurship, in particular for SMEs (2001-2006). 510 million euros had been allocated under the multiannual programme and 3.6 billion euros have been allocated under the Framework Programme.
The financial instruments provide indirect financial support to European businesses. The European Investment Fund (EIF) covers the management side on behalf of the Commission. It acts through financial intermediaries, banks and investment funds, thereby guaranteeing proximity financing.
Injection of equity
Initial investment and the ongoing injection of equity are essential if a business is to tap into its growth and innovation potential. However, SMEs often face an equity gap.
The Community financial instruments therefore encourage the supply of equity to SMEs, particularly innovative SMEs, by investing in specialised venture capital funds which in turn provide equity to SMEs. The investments can also take the form of investment funds or arrangements promoted by informal investors, business incubators or business angels.
Under the Multiannual Programme for Enterprise and Entrepreneurship, the ETF (European Technology Facility) start-up facility supports innovative businesses and rapidly developing start-ups. This facility focuses mainly on seed capital.
The High Growth and Innovative SME Facility (GIF) ensures the continuity of the ETF start-up facility within the framework of the Entrepreneurship and Innovation Programme. The GIF facilitates the supply of seed and start-up capital for young SMEs. It introduces a new element by also offering “follow-up” capital during the expansion stage for high-growth, innovative businesses. It thus helps businesses to market their products and services and encourages them to innovate.
Bank credit and guarantee systems
Loans provide an advance of funds that are often essential for business establishment or development. However, SMEs and innovative businesses often cannot offer sufficient guarantees to obtain a loan. This situation is aggravated by the increasing reluctance of financial institutions to take risks (“Basel II” regulatory framework).
The Community financial instruments therefore encourage financial institutions to grant loans to businesses, in particular SMEs and innovative businesses, using guarantee instruments based on risk-sharing. They thereby increase the loan facility available to businesses.
The SME guarantee mechanism, for instance, facilitates access to debt financing, i.e. loans and leasing. It guarantees loans for developments linked to information and communication technologies (ICT), which are considered to be high risk. This mechanism also offers guarantees for micro-credits to encourage financial institutions to grant loans of less than 25 000 euros, which involve high risk and low profitability. In addition, it provides guarantees for the acquisition of shareholdings or for equity investments in SMEs.
The SME guarantee mechanism was introduced under the Multiannual Programme and has been continued under the Entrepreneurship and Innovation Programme with a new securitisation instrument for debt finance portfolios which will help to mobilise additional loan financing for SMEs.
The financial instruments also strengthen the capacity of financial intermediaries, particularly in the new Member States, thereby stimulating the venture capital available to innovative businesses and businesses with growth potential.
The seed capital action of the Multiannual Programme and the capacity building instrument of the Enterprise and Innovation Programme support investment funds by improving their technical and technological potential and helping with the recruitment of specialised staff.
The Structural Funds provide an important source of financing for businesses, particularly SMEs. In fact, businesses make a crucial contribution to achieving the objective of reducing development disparities between regions and promoting economic and social cohesion in the European Union.
The European Regional Development Fund (ERDF) supports development and structural adjustment in regional economies by helping small businesses and promoting entrepreneurship. The purpose of the Joint European Resources for Micro-to-Medium Enterprises initiative (JEREMIE), to become operational in 2007, is to improve access for small and medium-sized businesses to financing in the least developed regions, thereby encouraging the creation of new businesses, particularly in innovative sectors. The initiative offers loan guarantee systems and also equity and venture capital financing.
Financing under the Structural Funds is made available through the national or regional authorities. Under the JEREMIE initiative, financing can be accessed through financial intermediaries, banks and investment funds, and in particular through the EIF and the European Investment Bank (EIB).
Businesses can also have direct access to European financial support when it is to be used for the achievement of specific objectives. The Community programmes therefore offer the possibility of direct financing in the fields of research and innovation (the Sixth and Seventh European Community Framework Programmes for Research), environment and energy (see section entitled “Incentives and Environment Subsidies”), education and training (Socrates and Leonardo da Vinci) and health and safety.
If they meet the criteria laid down by the programme in question, businesses can make a direct application for financial support to the European Commission department responsible for the programme.
For more information, see the Access to Finance website of the Directorate-General for Enterprise and Industry of the European Commission.