Good for Business

To facilitate access to finance, the European Commission published in June 2012 a practical guide providing information on how to access over €50 billion of public finance available for EU-27. The Commission also launched a European wide training campaign for the Enterprise Europe Network to help SMEs get access to finance. SMEs can contact one of 600 Enterprise Europe Network partners, who will be able to provide information on EU and national sources of finance. Vice President Tajani will discuss with the SME envoys possible elements for an entrepreneurship action plan which the Commission aims to table after the summer break 2012 to encourage the creation of new businesses and jobs. The plan intends to address obstacles, which hinder would-be entrepreneurs to set up their own business. It will also include measures to make the option of becoming his or her own boss a more widespread option.

European Commission Vice President Antonio Tajani, responsible for enterprise and industry policies, said: "If we want to stimulate growth in Europe, it is from our SMEs that we must start. Entrepreneurial potential in Europe is not fully exploited: 45% of all Europeans would like to become their own boss if they could, but only an average of 10% is actually self-employed today. If we could raise this percentage, we could have millions of new innovative and creative enterprises which would rejuvenate Europe’s economic basis, make it more robust, more job-generating and more resilient to stormy economic".

Practical guide for SMEs to help access to funding

To facilitate access to finance, the European Commission published in June 2012 a practical guide for SMEs providing information on how to access over €50 billion of public finance in the EU-27 states. It presents over 120 national or regional financing programs and provides key information helping SMEs to apply for the different programs in terms of characteristics, terms, conditions and contact information.

At the same time the Commission published an evaluation of public financing programs in 5 member states (Germany, France, the UK, Poland and Sweden) to exchange good practice and assess which programs work best and could be used in other countries. The evaluation highlights that public financing programs need to have a clear scope and be flexible so that there can be changes if required such as during the present economic crisis.

-                      More general information on “Quick guide to funding”: 

http://ec.europa.eu/enterprise/policies/finance/guide-to-funding/indirect-funding/index_en.htm

-                      Access to the EU financial instruments, European Investment Fund and/or to locate banks or venture capital funds that provide finance in EU states:

http://www.eif.org/what_we_do/where/index.htm

More than 600 Enterprise Europe Network partners advise on access to finance

Staff members of more than 600 partners of the Enterprise Europe Network were trained on access to finance so that they can now better advise SMEs finding the right financing provider. The Commission has established the Enterprise Europe Network to help SMEs to become more competitive, to internationalize and to find business and technology partners.

The network is represented in 51 countries with 600 partner organizations. SMEs wishing to access finance, can contact the nearest member of the Enterprise Europe Network, who will be able to provide information on EU and national sources of finance.

More information:

http://portal.enterprise-europe-network.ec.europa.eu

Action plan to “activate” entrepreneurial potential

The European Commission is preparing an Entrepreneurship Action Plan – to be published at the end of 2012 – that will address areas where the entrepreneurial potential of citizens can be unleashed and where key bottlenecks can be overcome and obstacles to entrepreneurial activities removed. Possible areas of action include:

• Facilitating Transfers of business: Each year, 150,000 companies with 600,000 jobs are lost due to the fact that owners retire or move on to other activities.
• Efficient bankruptcy procedures and offering second chance: As 96% of all bankrupts are honest (e.g. due to late payments), faster and more affordable procedures for winding up business and for discharging them from bankruptcy could stimulate the creation of businesses.
• Young people – the entrepreneurs of the future: Young people start more companies when they have gone through an "entrepreneurship" program during primary or secondary education.
• Women – the largest untapped pool of entrepreneurial potential in Europe: Women face a number of difficulties in running a business and constitute only a third of the self-employed in the EU.
• Seniors – keep business knowledge active: Citizens above 50 bring valuable know-how and experience to start and run a company.

EU Action Plan: helping SMEs access more financial resources

The EU Action Plan to improve access to finance for SMEs (originated at the end of 2011) presents various EU policies and measures to make access to finance easier for Europe's 23 million SMEs. It covers actions to improve the venture capital market and facilitate access to financial resources. It contains also financial products to ease access to bank lending, for an amount of at least € 20 billion allocated to SMEs from the new Multiannual Financial Framework.

A survey published in December 2011 showed that difficult access to finance was among the top concerns (15%) of SMEs. Almost two-thirds (63%) of the EU SMEs who applied for a bank loan during the last six months received the whole amount they asked for. However, 11% of the applications were rejected and 17% received less than they applied for. In addition 4% declined the loan offer from the bank because they found the conditions unacceptable. So about one third of the SMEs did not get the finance they had planned for (for more details see below).

Reference: Press Release, MEMO/11/879, 7 December 2011

Proposed actions to improve access to finance

The Commission will reinforce its loan guarantee and venture capital facilities under the Program for the Competitiveness of Enterprises and SMEs (COSME). These loan guarantees are used in cases where the entrepreneur or the small enterprises do not have sufficient collateral to offer and the bank will not provide a loan. 90% of the beneficiaries have 10 or less employees and this is the category that has most difficulties to get a loan. The average guaranteed loan is about €65 000.

Guarantees for loans will be extended to the expanding cultural and creative sectors and increased resources will also be available for microfinance, Additional financing for research- and innovation driven enterprises will be provided under Horizon 2020. All together these initiatives will amount to €3.5 billion.

The European Investment Bank will maintain its SME loan activity at a sustained pace, close to the 2011 level and in line with its funding capacity. The volume of SME loans in 2011 has reached about €10 billion.

Under the Cohesion Policy 2014-2020 the effectiveness of the financial instruments will be enhanced, by extending their scope and by rendering their implementation frameworks more flexible. A close coordination between COSME program and EU states’ measures can be achieved through a new possibility to pool resources

The Commission will facilitate access to EU financial instruments by reinforcing the financial advisory capacity of the Enterprise Europe Network bringing together 600 business support organisations and providing a single online portal on EU financial instruments. The European bank federations have declared that they will promote actions among their members to reinforce information about EU financial instruments.

The Commission will improve the monitoring of SME lending in order to better assess the impact of measures in support of SMEs' finance and the new capital requirements applicable to banks.

The Commission will facilitate access to capital markets by encouraging better information to SME about the possibilities of stock exchange listing as well as better analyses and research on listed medium sized enterprises. See Press Release, IP/11/1513, 7 December 2012 below.

Proposed regulatory measures to improve access to finance. Together with this Action Plan the Commission is adopting a regulation on Venture Capital Funds, that should enable a true integration of the venture capital market in Europe and strengthen the supply of venture capital;

The Commission is adopting a regulation on Social Entrepreneurship Funds, designed to allow funds investing in social enterprises to raise funds and invest across Europe;

The Commission has put forward a series of regulatory proposals designed to improve SMEs' access to capital markets. These include measures to make more visible SME markets (in the Markets in Financial Instruments Directive) and SME shares (in the Transparency Directive). Further, the Commission is proposing to reduce the costs and the burden for SMEs (Transparency and Prospectus Directive), by simplifying and reducing reporting requirements. The aim is the increase larger SMEs’ use of capital markets to facilitate growth.

The Commission is also making the European financial system more stable, through legislation proposed to increase capital requirements for banks (the Capital Requirements Directive implementing the Basel Agreement in Europe). The proposal includes a review clause to look at SME lending and to test the possibilities to reduce the current SMEs risk weights by one third in relation to the current situation.

The Commission encourages EU member states to accelerate the implementation of the Late Payments Directive in advance of the transposition deadline of March 2013. Late payments are costly for European businesses, amounting to some € 1.1 trillion in terms of delayed turnover.

Current EU Financial instruments for SMEs

The financial instruments (loan guarantees and venture capital) of the Competitiveness and Innovation Framework Program (CIP) with a budget of €1,1 billion will enable financial institutions in the member states to provide about €30 billion of new finance for more than 315 000 SMEs.

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 and mezzanine finance to SMEs. This will help SMEs with limited or no collateral to obtain loans. 90% of the beneficiaries have 10 or less employees and this is the category that has most difficulties to get a loan. The average guaranteed loan is about €65 000.

The high growth and innovative SME facility (GIF) contributes to the establishment and financing of SMEs. GIF provides risk capital – usually in the order of millions of euros – for innovative SMEs in their early stages and risk capital for SMEs with high growth potential in their expansion phase.

The CIP financial instruments are managed by the European Investment Fund through national and regional financial intermediaries (banks and venture capital funds) in the Member States of the European Union. A list of the CIP financial intermediaries by country can be found at: www.access2finance.eu

In 2008-2011, the European Investment Bank (EIB) provided around €40 billion of lending for SMEs, which benefitted more than 210 000 SMEs. In 2009, the EIF launched the €1 billion Mezzanine Facility for Growth to be invested in hybrid debt /equity funds throughout Europe, for high growth SMEs and midcaps, with a view to playing a catalytic role in this market segment. In 2011 the EIB group has increased its Risk Capital Mandate to €5 billion and extended the scope to include co-investing with business angels.

See:  http://www.eib.org/about/news/eib-loan-for-smes.htm

In the field of Cohesion Policy, the Commission has adopted measures to provide assistance to enterprises through equity investments, guarantees and loans under structural funds. In the current financial period the measures are estimated to amount to at least €3 billion.

In order to provide better access to loan finance a specific Risk Sharing Instrument (RSI) is being created under the EU's Seventh Framework Program for Research (FP7) Risk-Sharing Finance Facility as of 2012. It is expected to unlock a further €6 billion of loans until the end of 2013, including up to €1.2 billion for SMEs and up to €300 million for research infrastructures. The RSI will provide partial guarantees to financial intermediaries through a risk-sharing mechanism, thus reducing their financial risks encouraging them to provide lending between €25 000 and €7.5 million to SMEs undertaking research, development or innovation activities. (See IP/11/1505)

A pilot scheme concerning loan guarantees to research – and innovation-driven enterprises – the Risk Sharing Instrument – will start in January 2012.

 One third of the SMEs did not get the finance they had planned for. In general, the SME respondents in Europe consider that the conditions of bank financing worsened during the previous 6 months of 2011 in terms of the interest rate and other costs, collateral and required guarantees. However the most pressing problem continues to be finding customers (24%).

Forms of financing used by SMEs

30% of companies are using bank loans and 40% are using bank credit line or overdraft facilities. Bank loans are also the most widely preferred external financing solution to realise firms' growth ambitions (63%).

Generally it is the larger (both in terms of staff and turnover) and older enterprises that are more likely to get the external finance that they request.

Younger and smaller firms are more likely to get only some of the finance they requested, and, indeed, to be rejected outright. The highest rejection rate was among the micro companies employing less than 10 people (16%) and among SMEs active between 2 and 5 years (24%).

Regarding equity financing, it was used by 7% of the SMEs and the main challenge concerning this source of financing is the lack of investment readiness or financial knowledge.

The data for the survey was developed together by the European Commission and the European Central Bank; a joint survey is conducted and published every two years. The survey on the access to finance of SMEs was conducted between 22 August 2011 and 7 October 2011 covering a sample of more than 15,000 firms across a total of 38 countries – the European Union, the European Free Trade Association as well as other countries participating in the Entrepreneurship and Innovation Program. The report provide information on the financial situation, financing needs, access to financing and expectations of SMEs, compared with large firms, in the six preceding months. The full report is available at:

http://ec.europa.eu/enterprise/policies/finance/data

New EU fundraising rules: boosting venture capital for SMEs and easing access to credit. Access to finance is essential to enhance the competiveness and growth potential of SMEs. In the context of the current crisis, marked by a fall in lending to the real economy, it is increasingly difficult for such companies to access loans. For this reason the European Commission has presented in December 2011 a strategy to promote better access to finance for SMEs with an EU Action Plan (see MEMO/11/879) which includes increasing financial support from the EU budget and the European Investment Bank and a proposal for a regulation setting uniform rules for the marketing of venture capital funds.

The new regulation will make it easier for venture capitalists to raise funds across Europe for the benefit of start-ups. The approach is simple: once a set of requirements is met, all qualifying fund managers can raise capital under the designation "European Venture Capital Fund" across the EU. No longer will they have to meet complicated requirements which are different in every Member State. By introducing a single rulebook, venture capital funds will have the potential to attract more capital commitments and become bigger.

In addition to the measures presented last week, including €1.4 billion of new financial guarantees under the Program for the Competitiveness of Enterprises and SMEs: COSME 2014-2020 (See Press Release IP/11/1476), the European Investment Bank will keep its SME loan activity at a sustained pace, close to the 2011 level of €10 billion.

Commission’s opinion

European Commission Vice President Antonio Tajani, responsible for Industry and Entrepreneurship, said: “Easing access to finance for SMEs is priority number one to get out of the crisis. Our Action Plan underlines that Europe is doing its utmost to improve SMEs' access to finance. We aim to strengthen our EU financial instruments for SMEs and to improve their access to finance markets.”

Internal Market Commissioner Michel Barnier said: "We need more venture capital in Europe. By helping companies become more innovative and competitive, venture capital will create Europe's companies of the future. In order to support the most promising start-ups, venture capital funds must become bigger and more diversified in their investments. Today's proposals will help develop this emerging market."

Reference: Press Release, IP/11/1513, 7 December 2011

SME Action plan. Europe's economic success depends largely on the growth of small- and medium- sized enterprises (SMEs) achieving their potential. SMEs contribute more than half of the total value added in the non-financial business economy and provided 80% of all new jobs in Europe in the past five years. The European Commission is presenting in an Action Plan the various policies that it is pursuing to make access to finance easier for Europe's 23 million SMEs and to provide a significant contribution to growth. Proposed regulatory and other measures aim at maintaining the flow of credit to SMEs and to improving their access to capital markets, by increasing the visibility to investors of SME markets and SME shares, and by reducing the regulatory and administrative burden.

Venture capital for SMEs. Venture capital, which provides early finance to start-ups, forms an important source of long-term investment to young and innovative small- and medium-sized enterprises (SMEs). However, small fund sizes and only being able to provide low levels of capital have prevented them from playing a more important role in start-up financing. As a result, SMEs continue to depend on short-term bank loans. But in the context of the current crisis, marked by a fall in lending to the real economy, it can be very difficult for such companies to access this type of loan.

Evidence examined by the Commission shows that a company with long-term venture capital investors is more successful than a company that needs to rely on short-term finance from banks. This is commonly attributed to the rigorous screening that a venture capital fund undertakes prior to investing in a company. But the average European venture capital fund is small and far beneath the optimal size necessary for a diversified investment strategy to make a meaningful capital contribution to individual companies and thereby produce real impact. While the average venture capital fund in the European Union contains approximately €60 million, a U.S. counterpart has a fund size of €130 million on average.

Economic studies show that venture capital funds can make a real difference for the industries they invest in once their size reaches approximately €280 million.   

See:  Lerner J., Pierrakis Y., Collins L. and Biosca A.B., "Atlantic Drift – Venture Capital performance in the UK and the US”, Research report June 2011, Section 4.1.

 Furthermore, U.S. venture capital funds invested around €4 million on average in each company; whereas European funds could only muster investment volumes of €2 million on average per company. Early-stage capital investments in the U.S. were on average €2.2 million per company while early-stage capital contributions in the EU were on average €400 000 per company.

Bigger venture capital funds mean more capital for individual companies and will give the funds the ability to specialise in particular sectors such as information technology, biotechnology or health care. This is turn should help SMEs have a more competitive edge in the global marketplace.

See also MEMO/11/879;

More information: http://ec.europa.eu/enterprise/policies/finance/index_en.htm

Key elements of the proposal on venture capital. The proposal lays down a uniform "single rule book" governing the marketing of funds under the designation "European Venture Capital Funds". A "European Venture Capital Fund" is defined by three essential requirements:

1. It invests 70% of the capital committed by its sponsors in SMEs;

2. it provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and

 3. it does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted).

All funds that operate under this designation must abide by uniform rules and quality standards (including disclosure standards to investors and operational requirements) when they raise funds across the EU. The "single rule book" will ensure investors know exactly what they get when they invest in European Venture Capital Funds.

The proposal creates a uniform approach for the categories of investors which are eligible to commit capital to a "European Venture Capital Fund". Eligible investors will be professional investors as defined in the 2004 Markets in Financial Instruments Directive (MiFID – see IP/04/546) and certain other traditional venture capital investors (such as high net-worth individuals or business angels). The uniform rules on venture capital investors will make sure that marketing can be tailor-made to the needs of these investor categories.

The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. This is a marked improvement over the existing rules in the area of asset management, in particular the 2011 Alternative Investment Fund Managers Directive (AIFMD – see MEMO/10/572) as the existing passport provided under AIFMD is only applicable to managers whose assets under management are above a threshold of €500 million. In addition, the rules of the AIFMD create a legal framework typically aimed at hedge funds and private equity firms, and are less suitable for the typical venture capital fund which would get a tailor-made regime. The proposal on Venture Capital is to pass through the European Parliament and the Council of Ministers for negotiation and adoption under the simple legislative procedure. See also MEMO/11/880.

For more information: http://ec.europa.eu/internal_market/investment/venture_capital_en.htm