||Green Paper on Entrepreneurship - July 2003
The Commission touched on a theme of great importance and up-to-datedness when it drafted the Green Paper on Entrepreneurship in Europe. The NEFI partners thank the Com-mission for this valuable initiative which allows all interested parties to reflect upon various aspects of entrepreneurial activities so important to the European economy, its competitive-ness and its future development. We are convinced that the activities of SMEs are vital for the realisation of the objectives as defined by the European Council in Lisbon in 2000, hence, for the development of the European Union into a dynamic knowledge-based econ-omy with more and better jobs and greater social cohesion.
Due to their role as a network of SME-specialised financial institutions the NEFI partners will concentrate their remarks and comments on financial issues related to SMEs.
II. Currently debated aspects of SME financing
In its Green Paper the Commission regards access to finance as fundamental for the estab-lishment and the existence of SMEs. However, the topic is only given minor attention. NEFI therefore aims to raise some of the most important currently debated aspects of SME financ-ing. Our general understanding is that the provision of specialised financial services to SMEs should cover all stages in the life-cycle of an enterprise, from its start to its growth phase until its eventual transfer.
Financing of start-ups needs special instruments
In order to meet the Lisbon goals, setting up new businesses - which is very important for the European economy in terms of innovation and job creation - should be more actively promoted by the Commission. Especially in the risky field of seed financing additional direct support measures, such as guarantees, are needed.
In addition, easy access to microfinance is essential for the creation of new enter-prises. In most member states various micro loan programs like those of the NEFI partners are already being successfully applied. The main characteristic of these schemes is that they are designed for well-defined target groups, which are start-ups with viable survival prospects. In this context the guarantees extended by the EIF also serve as a useful incentive for banks in the member states to extend loans to less at-tractive target groups like micro enterprises.
In parallel with facilitated access to finance and alleviation of administrative formalities and tax reductions, business start-ups need additional support. Experience shows, that chances of start-ups to survive can be considerably increased through business support and advice.
Securing access to finance for SMEs through mezzanine capital (in the sense of subordinated loans)
As the Commission observed in the Green Paper, access to appropriate finance is getting more difficult for SMEs. One of the reasons is the changing environment in the financial landscape, among others the Basel II process, which leads to a more di-verse risk assessment in business loans. To solve these problems, the Green Paper stresses the importance of the promotion of Venture Capital instruments, which is un-doubtedly necessary. However, this should not lead to the assumption that more Venture Capital or other new financing products could solve the general problem of ac-cess to finance for the majority of SMEs. This is even more important as the great majority of SMEs belongs to more "traditional" sectors with only moderate growth op-portunities. Investments in those “ordinary businesses” generally do not meet the re-turn on equity expectations that Venture Capital providers usually have. In addition, many traditional SMEs fear too much interference in their business activities by exter-nal equity providers. To overcome financing problems which the majority of SMEs are facing one possible solution could be broader provision of mezzanine finance (in the sense of subordinated loans). With this promotional instrument the SMEs´ solvency ratio could be improved without interfering in the management of an enterprise. At the same time the scope for further credit financing is widened. Mezzanine products are already being applied successfully by most NEFI partners and we are committed to applying them on a broader scale in the future.
New financing schemes to support the transfer of businesses are needed As it is estimated that about one third of all enterprises in the EU will transfer ownership within the next 10 years, which probably means 610,000 enterprises and 2.4 million jobs will be at stake per annum, the topic “transfer of businesses” has great impact on the existence and the development of the European economy. The NEFI partners are therefore of the opinion that the topic “transfer of businesses” should have similar importance and status in public policies as is the case with support for the creation of new businesses. Above all, the transfer of an established business is often the start-up of a new one from the viewpoint of the buying entrepreneur. The provision of adequate financing packages is therefore vital for the realisation of the transfer, even more so as the structure of the financing is often complicated due to its “project finance” nature.
NEFI partners would therefore like to draw the Commission’s attention to this important issue. In order to secure the survival of established enterprises and at the same time to secure employment, concrete actions to facilitate the financing of business transfer are urgently needed. NEFI will provide the Commission with additional information about the experiences gained in the NEFI member states with promoting the financing of business transfer.
III. Financing experiences of the NEFI partners
The present economic cycle with the collapse of Venture Capital markets and the structural changes in the banking sector make the SME financing environment turbulent. Above all, in times of unstable framework conditions the expertise of specialised SME financiers like NEFI and their risk-sharing role in the national banking systems are needed. With their long-term perspective of financing and their objective of SME development promotion they stabilise these turbulences and secure access to finance to SMEs.
In order to be able to provide the various means of financing needed by SMEs the NEFI institutions have already used various EU support measures e.g. the instruments of the Multiannual Programme (MAP). These guarantees have been proven to be key factors in improving access to finance for SMEs, especially in fields that banks find less attractive. Guarantees will gain even more importance as the traditional risk mitigation with the provision of collateral is losing importance.
Besides the support measures NEFI institutions are at the same time dependent on a suitable framework set by the European Commission, e.g. the state aid rules. One of our major concerns in this connection is the current EU reference rate system which seems to be quite inflexible. A more differentiated system adjusted daily according to market conditions would greatly facilitate the tasks of promotional institutions.
NEFI is ready to intensify its dialogue with the EU Commission on SME financing to provide the Commission with valuable information on our promotional experiences which encompass different financing cultures in Europe. This is all the more important against the background of NEFI’s planned enlargement to include the Accession Countries.
IV. Future needs for the promotion of SMEs on a European level As the NEFI partners have already used different EU support measures for financing SMEs in their home countries NEFI would like to take the opportunity to give the Commission some ideas for the future. As a general principle, NEFI proposes to take into account best practices in EU Member States and to make use of the specific know-how of national institutions pro-moting SMEs when creating new instruments or new initiatives. Already successful initiatives in EU countries might be easily adaptable to design EU-wide support schemes, thus avoiding “reinventing the wheel”. NEFI gladly offers its expertise on best practices and developments in financing SMEs to the EU institutions.
NEFI proposes to
- Raise the budget of a subsequent new MAP. With the enlargement of the European Union, NEFI partners fear that the budget of a “new” MAP may not be sufficient to support SMEs in the old and new Member States.
- Extend guarantees and broaden their scope. Guarantees are a cost-efficient, flexible instrument with high leverage for the provision of SME financing, both for loans and equity. EU-backed guarantees should particularly be provided to facilitate the succession of companies in European countries and to stimulate SME investments in innovation and technology. EU-backed guarantees should be flexible and easily embeddable for intermediaries in the Member States.
- Provide loan subsidies as an alternative to grants. The provision of guarantees is not always the most appropriate instrument in all NEFI member states. Subsidising loan interest rates has also proven to be an effective promotional instrument for SMEs. As tradi-tional loan finance will remain the most important source of external finance for SMEs in the future, interest-subsidised loans should be considered as an alternative particularly to grants, which are still a very common feature of EU financial aid programmes. By using EU budget resources for subsidising loan interest rates, the overall volume of financing made available to SMEs could be multiplied.
- Support the internationalisation of SMEs in the enlarged European Union. Currently, support at EU level to help SMEs to internationalise is insufficient. New initiatives should draw on the lessons learned from previous EU schemes (JOP, JEV) and be tailored to the needs of an enlarged European Union. Such new initiatives should include grant elements where appropriate as well as more advanced tools like interest-subsidised loan schemes, guarantees or equity investments.
- Foster investments in the Accession Countries. Existing instruments like the SME Guarantee Facility of the MAP should be handled with greater flexibility, giving intermediaries from all EU countries access to EU guarantees directly when providing loan finance to SMEs in the AC. As regards the SME Finance Facility II set up in 2000, its scope should be ex-tended to investments in environmental and climate protection (example given: investments in housing insulation).
- Facilitate SME participation in the area of research and development. A large part of SME support at EU level is provided outside the MAP and its financial aid instruments. One significant source for SMEs is the recently launched 6th Framework Programme (2002-2006) for promoting research, development and innovation in Europe. Due to the rela-tive complexity of transnational research projects eligible for EU co-financing, SMEs may find it too difficult to participate and obtain funding. The European Commission should explore ways and means of facilitating access to EU funding for SMEs, and should also look at how national SME financiers could play a stronger complementary role in ensuring sound overall financing of European R&D projects with SME participation.
- Try innovative ways of channelling EU funding for SMEs. EU support programmes usually formulate common objectives and also determine the mechanisms and instruments (i.e. grants) which have to be applied uniformly in all Member States (top-down approach). Alternative ways of using EU budget funding for supporting SMEs could be envisaged allowing - within the frame of common objectives defined at EU level - own initiatives by national promotional institutions in the Member States (bottom-up approach). The EU could delegate the concrete design of schemes and the selection of instruments regarded as appropriate to national institutions. EU funding could thus be utilised in a more flexible way, supporting measures specifically tailored to the needs of target groups in each Member State.
Brussels, June 2003