EUROPEAN SEMESTER THEMATIC FICHE ACCESS TO FINANCE

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1 EUROPEAN SEMESTER THEMATIC FICHE ACCESS TO FINANCE Access to finance is key to business development. Investment and innovation are not possible without adequate financing. A difficulty in getting finance is one of the main obstructions to the growth of many businesses, particularly small and medium sized enterprises (SMEs). Access to finance remains an important concern for SMEs. It is cited as the most pressing problem in Cyprus, Greece and Slovenia; and as the least pressing in Sweden, the Czech Republic and Denmark 1. Financial flows to SMEs are increasing but remain subdued. Besides, important differences in financing conditions for SMEs between Member States continue to exist. Comparing different types of enterprises, particularly micro-enterprises and more innovative businesses consider their financing as the most pressing problem Key statistical indicators 1.1. Bank lending Bank lending remains the most important source of external financing for SMEs 3 in the EU and the second one for large corporations 4. Furthermore, SMEs have few alternatives to it since, due to their size, they cannot easily access capital markets. Over the last year there has been an overall improvement in bank financing conditions and loans are increasing (see Chart 1). On average, SMEs perceive bank loans to be available. Bank lending rates have been trending downwards since the third quarter of last year. The average loan duration remains stable and loan amounts are increasing overall Source: Survey on the access to finance of enterprises (SAFE), European Commission, European Source: Survey on the access to finance of enterprises (SAFE), European Commission, European Bank loans remain the primary form of external financing for 62% of SMEs. Cf. SAFE, European Commission, European Behind leasing and factoring. Thematic fiches are supporting background documents prepared by the services of the Commission in the context of the European Semester of economic policy coordination. They do not necessarily represent the official position of the Institution.

2 Chart 1: Loans to non-financial corporations in the euro area (EUR billion, quarterly data) Loan flows to non-fin. corporations ( billion) Loans flows to non fin. Corp. Bank Lending conditions over the previous 3 months Balance of opinion on lending conditions Yet, SMEs consider that collateral requirements imposed by banks have increased in all EU countries, with the highest average increase in Cyprus, Greece and Slovenia 5 and there is a slight overall increase in the rejection of bank loans applications by SMEs 6. The difficulties of accessing bank loans are particularly affecting smaller and younger companies. The highest rejection rate (20%) is among micro enterprises employing fewer than 10 people. In addition to the problem of loan applications being rejected, some businesses receive less financing than requested or decline loan offers due to their high costs and/or tight conditions. As a result, over a quarter of SMEs do not get most of the financing they ask for from their banks (see Chart 2). 5 6 Source: Survey on the access to finance of enterprises (SAFE), European Commission, European The highest rejection of loan application is reported by SMEs in the Netherlands (39%), Lithuania (36%), Greece (27%), Latvia (30%) and Slovenia (24%). Cf. Survey on the access to finance of enterprises (SAFE), European Commission, European 2

3 Chart 2: SMEs not receiving most of the amount of bank loan requested (as % of total SMEs requesting bank loans) 7 From a cross-country perspective, financial markets in the euro area progressed steadily towards integration in the years following the introduction of the single currency. This was reflected among others in a convergence of interest rates for private sector loans. However, with the start of the crisis, the price trends in the banking sector and financial markets diverged across national borders. These divergences separate countries on the basis of their perceived capacity to cope with a banking crisis. Although the level of fragmentation has recently diminished, it remains very high. Bank lending rates now show less dispersion across Member States but significant spreads remain (see Chart 3). Interest rates for oneyear loans up to EUR 1 million of over 5% are reported in Portugal, Cyprus and Greece, while SMEs in France, Belgium and Luxembourg reporting rates around 2% (see Chart 4). 7 Source: Survey on the access to finance of enterprises (SAFE), European Commission, European 3

4 Chart 3: Interest rates for one-year loans up to EUR 1 million With the exception of micro companies, SMEs have reported a net fall in interest rates 8. Yet, the data shows that financing conditions remain tighter for SMEs than for larger firms, as reflected in the higher interest rates paid by the former (see Chart 4). Chart 4: Interest rates for one-year loans 9 (February 2015) 8 9 Source: Survey on the access to finance of enterprises (SAFE), European Commission, European Loans up to EUR are used as proxy for loans to SMEs, and those over EUR 1 million a proxy for loans to large enterprises. 4

5 1.2. Non-bank lending There has been an increase in the issuance of corporate bonds 10, partly reflecting a favourable market environment due to lower interest rates. Yet, bonds have mainly been issued by large firms and have been concentrated in larger markets. Equity financing is essential for innovative firms that have the potential for rapid growth and are willing to accept outside equity investors. These firms are a small minority, but have the potential to grow into large companies. Overall, equity financing is used by 3 % of European SMEs. Innovative SMEs use equity financing more often than non-innovative enterprises 11. The absence of an equity investment culture, differences in information between companies and investors, a fragmented market and high costs resulting from these deficiencies seem to be among the main reasons for a lower level of venture capital funds in some Member States. Despite some improvement, activity levels in this field are still very low. At EU level, in 2013, the total amount of capital raised by venture capital funds (EUR 4.0 bn) and the amount invested by these funds (EUR 3.4 bn) increased on a yearly basis, by 3% and 6% respectively. Around 90% of all venture capital fund managers are concentrated in eight Member States 12. In relative terms, as a percentage of GDP, there are also significant differences across countries (see Chart 5). The venture capital markets are least developed in Romania, the Czech Republic and Slovakia. Trade sale, write-off and sale of quoted equity were the most prominent exit routes for venture capital 13. Chart 5: Venture capital as % of GDP (2013) 14 Source: EVCA/Eurostat Cf. Financial integration in Europe 2015, European 4% of innovative versus 2% of non-innovative enterprises. Source: Survey on the access to finance of enterprises (SAFE), European Commission, European The United Kingdom, Germany, Sweden, Denmark, Finland, Netherlands, France and Spain. Source: EVCA Yearbook European Private Equity Activity, European Private Equity and Venture Capital Association. The graph shows the latest data available for Estonia, Latvia, Lithuania, Slovenia and the Slovak Republic, which corresponds to No data was available for Cyprus, Croatia and Malta. 5

6 Crowdfunding is also emerging as an important complement to other sources of finance. Although its size is still low compared to traditional forms of financing, crowdfunding is rapidly growing. However, the market is concentrated in a few countries, with the United Kingdom playing a pivotal role. While the issuance of corporate bonds has increased, in particular in the high-yield segment, that increase is concentrated in countries where there has been a more stable flow of bank loans. Only few countries facilitate issuance of SME-bonds, mainly through national or regional stock exchanges Payment times of public authorities Late payments in commercial transactions can also cause financial problems and uncertainty for suppliers, particularly small businesses. In the public sector, the average time it takes for public authorities to pay their bills has deteriorated between and in many Member States (see Chart 6). There are four Member States where the payment time of public authorities is a pronounced problem: Italy (average payment time of 165 days), Greece (155 days), Spain (154 days) and Portugal (129 days). The situation in Spain and Italy has worsened considerably since. Chart 6: Payment times for public authorities, duration/delays in days Contract (days) Delay (days) The Late Payments Directive foresees a maximum duration of 30 days FI EE DK DE SE LV PL AT UK CZ IE NL RO SI LT HU SK BG FR HR BE CY PT ES EL IT Source: European payment index, Intrum Justitia. 6

7 2. Policy responses 15 Member States have taken several policy measures to enhance SMEs' access to finance, with varying results. Most of the regulatory activity has taken place in those countries where bank lending to SMEs worsened more during the crisis. The most widespread measure has been enhancing and strengthening loan guarantee systems, mainly through broadening their scope and increasing the allocation of public funds into such guarantee schemes. Other and less widespread policy measures at national level have addressed: further developing corporate bond markets and alternative markets for SMEs; facilitating the securitisation of SME loans; easing the access and transfer of financial information; developing a regulatory framework for crowdfunding; and enhancing the public venture capital sector. In parallel, development finance institutions are being set up in various Member States. At European level, the Commission is working on the creation of a Capital Markets Union to help bring about a more diverse supply of finance to SMEs by complementing bank financing with deeper, more developed capital markets. Relevant measures like improving access to credit information and facilitating securitisation should support national action to improve access to finance for SMEs as outlined above. Furthermore, a new European Fund for Strategic Investments (EFSI) is being set up and will allocate a quarter of its resources to support risk finance for SMEs and mid-cap companies 16. This should help SMEs overcome capital shortages by providing higher amounts of equity, as well as additional guarantees for high-quality securitisation of SME loans For further details, please refer to the Country Report of each Member State, See also the SME Performance Review tool developed by the European Commission, which monitors and assesses countries' progress in implementing the Small Business Act, including on access to finance, on a yearly basis. Following a February decision by the Board of Governors of the European Investment Bank (EIB), small and medium-sized companies (SMEs) across Europe should be able to benefit from the first funds from the new European Fund for Strategic Investments (EFSI) by summer