EU access to finance for SMEsBrussels, 25 January 2016

Monica Salgado FernandezEC, DG GROWTH – Internal Market, Industry, Entrepreneurship and SMEs

SMEs…

• EU definition: <250 employees, turnover < €50 mill and/or annual balance < €43 mill (small <50 empl.; micro <10 empl.)

• some 23 million SMEs in the EU• Represent 99% of all businesses in Europe –

91% are microenterprises• employ more than 90 million people (67% of

total employment), 85% of new jobs

Key for achieving a smart, sustainable and inclusive growth – EUROPE 2020

EU - Putting SMEs first…

• Principle: “Think small first” - SMEs’ interest in legislation at the very early stages of law and policy-making

• SME-test: part of impact assessments -evaluating legislative proposals’ effects on SMEs

• Consultation of SME stakeholders: indispensable at the EU/national/regional level

• SME Envoy: acts as an interface between SMEs and EU institutions (EU and MS)

• Provisions in legislation: to avoid disproportionate burden on SMEs

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Significantly decreased lending in the EUR zone since financial crisis

Source: ECB monthly statistics of new loans with a maturity of more than 1 year and up to € 1 mio (up to € 250,000)

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• Access to finance continues to be a pressing issue (13% at EU level, 11% for Belgium)

• Total reported loan rejection rates for SMEs in the EU: 13% (8% did not apply for fear of rejection)

• EU rejection rates by sector of activity:o Industry: 8%o Construction: 12%o Trade: 14%o Services: 15%

Loan rejection rates at EU level are high but sector is not a significant

determinant ….

Source: EC-ECB SAFE Survey - November 2014

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• Loan rejection rates by company size: 1-9 employees: 20%10 – 49 employees: 13%50 – 249 employees: 6%

• Loan rejection rates by company age: Less than 2 years: 30%2 years or more but less than 5 years: 27%5 years of more but less than 10 years: 15%10 years or more: 11%

… but company size and age is

Source: EC-ECB SAFE Survey - November 2014

In comparison:250 + employees: 3%

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Insufficient availability of funding also applicable to equity

Source: EVCA 2013

Why EU intervention needed?

Market failures

•information asymmetry•transaction costs•market fragmentation

Demonstration effect

•encouraging more private investments

•complementing national/regional schemes

Financial crisis

•risk-aversion of banks/investors•supply/demand gap for loans/ guarantees for SME growth/RDI

SMEaccess to finance

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EU Financial instruments for SMEs

• Part of the EU toolkit for over a decade• Efficient way of spending the EU budget - leverage• Broad range of interventions:

• Guarantees to mutual guarantee societies and banks lending to SMEs• Equity participations for early and growth stage investments

• Common features:• Aim to increase access to finance for SMEs• Delivered via financial intermediaries on behalf of the European

Commissionmutual guarantee societies, banks, funds, etc.

• Operated by the EIB/EIF

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Helping businesses at every stage

Graph adapted from Cardullo: Technological entrepreneurism. Note that there are no agreed and fast definitions for most of the concepts used in SME finance.

TIME

REV

ENU

E

Seed and start-up Expansion

Strategic investors (IPO), public markets, banks

Valley of death

Entrepreneur, family, friends,business angels, public sources

Venture capital funds, business angels

Early expansionPre-seed,

technology transfer

R&D funding,public grants

Setting up a company

Breakevenpoint

Likelyinvestors

Serious lack of outsideinvestors in the early stages

VC market fragmented along national lines

Too many small illiquid growth stock markets

Late expansion

Policyproblems

EU Financial Instruments 2014-2020

Infrastructure

Horizon 2020Equity and Risk Sharing Instruments

(EUR 2.7 bn, including at least EUR 1.5bn for SMEs)

Horizon 2020Equity and Risk Sharing Instruments

(EUR 2.7 bn, including at least EUR 1.5bn for SMEs)

European Structural and Investment

Funds

EU level (central management)

National/regional instruments (shared management)

Off-the shelf FIsTailor made FIs

Significant higher amounts than

currently!

European Structural and Investment

Funds

EU level (central management)

National/regional instruments (shared management)

Off-the shelf FIsTailor made FIs

Significant higher amounts than

currently!

Competitiveness & SME (COSME)

Equity & guarantees(EUR 1.4 bn)

Competitiveness & SME (COSME)

Equity & guarantees(EUR 1.4 bn)

Connecting Europe Facility (CEF)Risk sharing (e.g. project bonds) and equity

instruments

Connecting Europe Facility (CEF)Risk sharing (e.g. project bonds) and equity

instruments

Employment and social innovation

(EaSI)(EUR 192m)

Employment and social innovation

(EaSI)(EUR 192m)

Creative EuropeGuarantee Facility

(EUR 121m)

Creative EuropeGuarantee Facility

(EUR 121m)

Erasmus+Guarantee Facility

(EUR 517m)

Erasmus+Guarantee Facility

(EUR 517m)

Shared Management with MS - ESIF (Common

Provisions Regulation)

Centrally managed by COM (Financial Regulation)

Research, Development Innovation

Growth, Jobs and Social Cohesion

EFSI

SME Window

(SMEs and small mid-

caps)

Infrastructure and

Innovation Window

SME Window

(SMEs and small mid-

caps)

Infrastructure and

Innovation Window

How do EU financial instruments work in practice – overview

COSME Programme (2014-2020)First European Programme which is only dedicated to the support of SMEs

Total budget of €2.5 billion of which 60%(~ €1.4 billion) supports financial instruments

Debt and equity financial instruments for SMEs:

Loan Guarantee Facility (LGF)

Equity Facility for Growth (EFG)

=> Both part of a single EU debt/equity financial instrument for enterprises’ growth and R&I

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Support those SMEs which would otherwise not obtain financing (concept of additionality)

Debt: focus on higher risk SMEs

Equity: focus investments into risk capital funds which target SMEs in their growth and expansion phase

Overall target: Provide support to up to 330 000 SMEs; provide up to € 25 billion in financing

COSME financial instruments

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Loan Guarantee Facility (LGF) with three implementing mechanisms:

1. Guarantees and counter-guarantees for financial intermediaries providing higher risk financing to SMEs

2. Guarantees for the mezzanine tranche of securitisation transactions of SME loan portfolios coupled with a clear contractual undertaking to build up a new SME loan portfolio

3. EU SME Initiative for the pooling of resources from structural funds and COSME (uncapped guarantees)

Targeted risk-sharing instruments for SMEs under COSME (Debt)

Details of the Loan Guarantee Facilityfree of charge, first loss guarantee(Guarantee rate: ≤50%, cap rate: ≤20%)free of charge, first loss guarantee(Guarantee rate: ≤50%, cap rate: ≤20%)

newly originated transactions with a higher risk profile (e.g. start-ups, less collateral, longer maturity)newly originated transactions with a higher risk profile (e.g. start-ups, less collateral, longer maturity)

Working capital, investment loans, subordinated loans, bank guarantees, leasingWorking capital, investment loans, subordinated loans, bank guarantees, leasing

min. 12 months (transaction) – max. 10 years (guarantee)min. 12 months (transaction) – max. 10 years (guarantee)

Capped portfolio guarantees

Strict focus on additionality

Wide range of interventions

Duration

Principal amount ≤ € 150,000: for any type of SME> € 150,000: for SMEs not eligible in principle under Horizon 2020 (InnovFin) – verification through checklist

≤ € 150,000: for any type of SME> € 150,000: for SMEs not eligible in principle under Horizon 2020 (InnovFin) – verification through checklist

Guarantee terms Guarantee payment upon default, with pro-rata sharing of recoveriesRepayment schedule: fixed or revolving

Guarantee payment upon default, with pro-rata sharing of recoveriesRepayment schedule: fixed or revolving

Equity Facility for growth (EFG)

Investments into financial intermediaries providing equity or quasi-equity to SMEs in their growth and expansion stagePossibility of joint investments with the InnovFin SME Venture Capital Facility of Horizon 2020 into multi-stage funds

Targeted financial instruments for SMEs under COSME (Equity)

Details of Equity Facility for GrowthEligible final recipient ≥50% into SMEs with headcount: <250 employees

Turnover: ≤€50m or balance sheet: ≤€43m≥50% into SMEs with headcount: <250 employeesTurnover: ≤€50m or balance sheet: ≤€43m

Growth & expansion stage ≥50% into businesses that already established a product and generate revenues≥50% into businesses that already established a product and generate revenues

Business angels Funds co-operating with business angels are eligible as long as minimum criteria are metFunds co-operating with business angels are eligible as long as minimum criteria are met

Investment period Long-term investments (5 to 15 year positions)Long-term investments (5 to 15 year positions)

Cross-border investments Funds must contribute to the creation of a pan-European VC marketFunds must contribute to the creation of a pan-European VC market

EU contribution EU contribution: 7.5-25% of total commitment (max. 30mill). At least 30% private investors; inv. based on pari-passu

EU contribution: 7.5-25% of total commitment (max. 30mill). At least 30% private investors; inv. based on pari-passu

Possibility of joint investments with the early-stage equity facility of InnovFin (Horizon 2020) into multi-stage funds (pro-rata funding)

Possibility of joint investments with the early-stage equity facility of InnovFin (Horizon 2020) into multi-stage funds (pro-rata funding)

InnovFin (Horizon 2020)

Reporting requirementsQuarterly reporting

Information about Financial IntermediaryShare of EU contribution (e.g. guarantee/cap rate or EU investment)Performance of financial instruments (e.g. volume, leverage) Called guarantees/impairment of equity investmentsSME transactions (number, size, sector, turnover, scoring)

Annual report

EIF publication requirementsList of (sub-) financial intermediaries (guarantee cap or investment amount)List of final recipients (for LGF only recipients which receive > €150 000)

unless it harms

commercial

interests

Each Financial Intermediary shall:Inform SMEs that financing is made possible through the

financial backing of the EU under COSME

Create a dedicated section on its website or a clear link to this information regarding the type of financing offered, investment focus, description of eligibility criteria and information on the application procedure to be followed

Include in any press release that the Financial Intermediary has benefitted from the support of the EU under the COSME programme

Visibility requirements

How to apply for EU FinanceFinancial institutions invited to apply by Sept 2020

Single EU Debt Financial Instrumentwww.eif.org/what_we_do/guarantees/single_eu_debt_instrument/index.htm

Single EU Equity Financial Instrumentwww.eif.org/what_we_do/equity/single_eu_equity_instrument/index.htm

Businesses invited to apply for EU financeAccess to finance portal: www.access2finance.eu

For further informationEnterprise Europe Networkhttp://een.ec.europa.eu/

Find EU finance for your business

www.access2finance.eu

Get support - Enterprise Europe Network

http://een.ec.europa.eu/

Internacionalisation Portal

https://webgate.ec.europa.eu/smeip/

http://ec.europa.eu/growth/index_en.htm

Thank you!