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Memo/10/167

Brussels, 06 May 2010

Latest trends in SMEs access to finance and EU financial instruments

This memo informs on latest trends in SMEs access to finance (part 1) and on the financial instruments under the Competitiveness and Innovation Framework Programme (part 2).

1. Latest trends in SMEs access to finance

April 2010 World Economic Outlook

  • The April 2010 World Economic Outlook suggests that the worst of the economic recession has been left behind and most European countries will register positive growth this year and next, albeit a modest one (euro area: 1.0% in 2010 and 1.5% on 2011).

  • Banks still face considerable challenges: a large amount of short-term funding will need to be refinanced in the near future. More and higher-quality capital will likely be needed to satisfy investors in anticipation of upcoming more stringent regulation. In such an environment, the recovery of private sector lending is likely to be slow and uneven.

April 2010 ECB Bank Lending Survey

  • The latest Bank Lending Survey (BLS) of the European Central Bank (ECB) indicates a very modest net tightening of credit standards on loans to enterprises in the first quarter of 2010 in the eurozone. However, 83% of surveyed banks kept their tight conditions unchanged (as in the previous quarter).

  • The BLS results also point to weaker net demand for loans in the first quarter of 2010. Net demand for loans to enterprises was negative (-13%, as against -8% in the fourth quarter of 2009). The gradual recovery of loan demand by enterprises that started a year ago seems to have weakened. Banks, nonetheless, expect net loan demand from enterprises to turn positive in the second quarter of 2010.

  • In another ECB survey on the access to finance of eurozone SMEs, 18% of enterprises reported a rejection of their bank loan application, up from 12% in the first half of 2009, and 2% desisted from taking up the loan offer for considering the price too expensive. SMEs in the services and construction sectors were the least successful when applying for a bank loan.

  • Furthermore euro area SMEs reported that the most pressing problem for them was finding customers (28%), followed by access to finance (19%).

  • Country to country differences continue to exist in access to finance. Among the four largest euro area countries, the situation in Spain remained worse than in Germany, France and Italy. While SMEs in all euro area countries reported on balance further deterioration in the availability of bank loans, Spanish SMEs continued to be the most negative.

Venture Capital

  • Venture capital had a difficult 2009. The economic crisis has clearly taken a toll on the sector. According to preliminary figures for 2009, in all three categories – fundraising, investment and exits - a substantial deterioration is expected. Especially the early-stage segment, which is crucial for innovation, seems to be suffering. Compared to 2009, investments in 2010 are now down by a third. The immediate outlook for venture capital activity in Europe remains bleak.

2. Financial Instruments of the Competitiveness and Innovation Framework Programme

Nearly one third of the budget of the Competitiveness and Innovation Framework Programme (CIP, 2007-2013) is allocated to financial instruments that aim to facilitate SMEs' access to finance. They complement financial schemes at national level. With a total budget of over €1.1 billion for the period 2007-2013, the CIP Financial Instruments should enable financial institutions to provide about €30 billion of new finance for up to 400 000 small and medium businesses in Europe. These instruments, which are part of the Entrepreneurship and Innovation Programme under CIP, address SMEs' needs for financing at various stages of development. They cover areas of the market where there are few private investors, mainly the seed, start-up, expansion and business transfer phases. These instruments increase the investment volumes of risk capital funds and provide guarantees for lending to SMEs.

1. The financing process

  • The CIP financial instruments are implemented by the European Investment Fund (EIF) through selected financial intermediaries.

  • EIF manages the programme on behalf of the Commission with the aim reaching as many growing SMEs as possible.

  • Small businesses can contact selected national financial institutions to get access to investments or guaranteed lending.

  • For venture capital, EIF invests in funds focused in early and expansion stage or specialised sectors, particularly eco-innovation. EIF is usually a cornerstone investor.

  • For guarantees, the EIF establishes risk-sharing arrangements with intermediaries that provide finance directly to SMEs, such as banks, or with intermediaries that issue guarantees for the benefit of lending institutions.

  • A list of the CIP financial intermediaries by country can be found at: www.access2finance.eu

2. Risk capital for innovative and high-growth SMEs

  • The high growth and innovative SME facility (GIF) contributes to the establishment and financing of SMEs and reduces the lack of equity capital in the markets. GIF provides:

  • Risk capital for innovative SMEs in their early stages (GIF1) - EIF can usually invest 10-25% of the total funds raised by the intermediary venture capital fund. There might also be co-investment in funds and investment vehicles promoted by business angels.

  • Risk capital for SMEs with high growth potential in their expansion phase (GIF2) - EIF can invest 7.5-15% by the total funds raised of the intermediary venture capital fund.

The EIF can invest, exceptionally, up to 50% in GIF1 and up to 25% in GIF2 for new funds likely to have a particularly strong catalytic role. In both cases, the maximum commitment for a single fund cannot exceed €30m and the funds have to make investment decisions based on normal commercial criteria. A part (more than € 160 million) of the overall budget of this facility is specifically earmarked for the support of eco-innovation oriented investment funds.

3. More debt finance for SMEs (loan guarantees)

  • The SME guarantee facility (SMEG) provides guarantees to encourage financial institutions to make more debt finance available to SMEs by reducing their exposure to risk. SMEG provides co-, counter- and direct guarantees to financial intermediaries providing loans, mezzanine finance and equity to SMEs. SMEG covers:

  • Guarantees for debt financing via loans or leasing: the goal is to support SMEs with growth potential. The aim is to reduce SMEs' difficulties in accessing finance either due to the perceived higher risk or to the lack of sufficient collateral.

  • Guarantees for microcredits: guarantees for loans of up to € 25 000 to micro-enterprises with up to 9 employees, particularly for entrepreneurs starting a business. Financial intermediaries may also receive some support to partially offset the high administrative costs of microloans.

  • Guarantees to cover equity and quasi-equity investments in SMEs: they guarantee investments providing seed capital, capital in the start-up phase, mezzanine financing or risk capital operations to support businesses with up to 249 employees. The aim is to reduce particular difficulties encountered by SMEs with a weak financial structure, or those arising from business transfers.

  • Guarantees to support securitisation structures: guarantees can also be provided to support securitisation structures to assist financial intermediaries in mobilising debt finance for SMEs. The financial intermediary is obliged to use a significant part of the freed resources for new SME financing.

4. Other EU Financial Instruments

In addition to the Competitiveness and Innovation Framework Programme, other EU initiatives aim to facilitate SMEs' access to finance as well:

3. European SME Week 2010 - Promoting and supporting entrepreneurship

  • The European SME week 2010 is designed to promote and support entrepreneurship. Hundreds of events are being organised in 37 countries for European SME Week 2010, which will take place between 25 May and 1 June. This initiative will showcase the support available to business at the European, national, regional and local level.

  • Events for 2010 have been organised to help SMEs and micro-firms share experiences and develop their businesses. Fairs, conferences and workshops, among other things, will provide information on European, national and local authority support programmes that are designed to help growing SMEs and those planning to start a business.

  • There is also a special focus on promoting entrepreneurship as a career option, especially for younger people. Some countries will run company open days, which will provide an insight into the challenges and rewards of running a business.

  • First held in 2009, European SME Week is now central to the European Commission’s actions to support small and medium-sized enterprises, particularly through the EU’s Small Business Act (SBA). Adopted in 2008, the Act calls on the Union and its Member States to develop an environment “within which entrepreneurs and family businesses can thrive and entrepreneurship is rewarded”.

More information on European SME week 2010

http://ec.europa.eu/enterprise/policies/entrepreneurship/sme-week/

European Small Business portal

http://ec.europa.eu/enterprise/policies/sme/index_en.htm


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