Financing SME Growth
It is essential to guarantee small and medium-sized enterprises (SMEs) better access to debt and equity finance and thus allow them to achieve their potential. The objective for the European Union (EU) and the Member States is to create the conditions which will make it possible to triple early-stage investment by 2013.
Communication from the Commission to the Council, the European Parliament, the European Economic and Social committee and the Committee of the Regions of 29 June 2006 - Implementing the Community Lisbon Programme: Financing SME Growth - Adding European Value [COM(2006) 349 final - Not published in the Official Journal].
The challenge of financing for small and medium-sized enterprises (SMEs)
Improving access to finance for SMEs, and more specifically initial investment and the ongoing injection of equity, is essential if an SME is to tap into its growth and innovation potential. However, a large number of SMEs in the EU face an equity gap. 2. When their initial funds have been exhausted, entrepreneurs have to obtain external finance to develop their project. Financing SMEs is, however, often considered too risky on account of the low rates of return, particularly during the seed phase. There is thus a serious lack of business angels and venture capital funds that are willing to invest in young innovative SMEs.
The inability to obtain early-stage investment prevents many SMEs reaching a size where they can attract expansion capital, thus stunting their growth.
SMEs, as sources of innovation and job creation, are the engines of European growth, and giving them the opportunity to start up, develop and achieve their potential makes a vital contribution to the Lisbon process.
Boosting SME financing
The European Commission suggests different measures to boost financing for SMEs.
Raising more venture capital investment
Encouraging venture capital investment involves the establishment of an internal market for venture capital. The aim is to overcome the fragmentation of the venture capital market and allow the various operators to invest across borders without incurring unfavourable tax treatment.
More attention should also be paid to the exit strategy (the point at which the venture capitalist can recover his capital by giving up his share). As initial public offerings of stock provide a natural exit route for venture capital investors, it is essential to make European growth stock markets more liquid and efficient.
The EU should also develop a growth and investment culture. Successful entrepreneurs should therefore be encouraged to invest in turn and become business angels.
Developing debt finance for SMEs
The EU should encourage traditional bank finance for innovation. A round table between banks and SMEs will be organised in order to improve the scope for long-term banking relationships, promote microfinance (loans of less than 25 000) and "mezzanine finance" (hybrids of loans and equity), and also evaluate the advantages of tax relief systems for young innovative companies.
Strengthening the EU contribution to SME financing
The EU needs to devote more resources to SME financing.
The main existing Community instruments in this respect are the Competitiveness and Innovation Framework Programme (CIP) (2007-2013), the JEREMIE (Joint European Resources for Micro to Medium Enterprises) initiative, under the EU's regional policy and the Seventh Research Framework Programme (2007-2013).
The EU has also reviewed its regulations on State aid for risk capital funds, particularly to help innovative SMEs.
Introducing better governance at national level
It is also up to the Member States to ensure that the regulatory and fiscal environment favours SME access to debt finance and venture capital. Some Member States have already been successful in doing so. It is therefore essential to identify and spread good practices.
It is also recommended that the Member States draw up support schemes for entrepreneurs to make them aware of investor concerns and prepare them on how to present their projects better.
The European Commission will present a report on the progress made in SME financing in 2009 that will feed into the reporting on progress with the renewed Lisbon strategy.
For more general information, please consult the summary on access to financing for businesses.