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EU Access to Finance Days: Helping to shape an SME-friendly financing market

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Credit availability for non-financial businesses in the eurozone is now at its lowest point since the beginning of the credit crunch, according to the latest figures from the European Central Bank.

Small- and medium-sized enterprises, on which the EU relies for 85% of new jobs in the private sector, are particularly badly affected by this decline as they cannot invest or extent their businesses as long as conditions for credits remain so difficult. Therefore, the European Commission is taking action to rapidly bridge the market gap in the provision of SME financing by providing €3.5 billion of additional funding for SMEs each year from 2014 to 2020, using the new Competitiveness of Enterprises and SMEs programme (COSME).For COSME to be successful is it vital that an effective partnership between EU institutions and the financial organisations that provide SMEs with access to credit is created. This is why Vice-President Antonio Tajani, commissioner for enterprise and industry, will launch today (31 October) in Rome a series of events -  the 'EU Access to Finance Days' - to explain how COSME's new financial instruments will work and to encourage reputable financial market operators to become COSME intermediaries.'EU Access to Finance Days' will be organised in all EU capitals from autumn 2013 to the end of 2014. The next event will take place in Vilnius, Lithuania on 5 November 2013.Prominent speakers at today's "Access to Finance Day" in Rome include Flavio Zanonato, Italian Minister of Economic Development; Dario Scannapieco, Vice-President of the European Investment Bank; Luigi Federico Signorini, Vice-Director-General of the Bank of Italy; Giovanni Sabatini, Director-General of the Italian Banking Association; Aurelio Regina, Vice-President of Confindustria; and Richard Pelly, CEO of the European Investment Fund. The event will also present the SME-focused activities of the European Investment Bank and other EU programmes that support SMEs.

What is the new COSME programme? What will it offer SMEs?

Vice President Tajani underlined today that the Programme for the Competitiveness of Enterprises and SMEs (COSME), which will run between 2014 and 2020, is the first ever European Commission programme that is exclusively dedicated to supporting SMEs. COSME is first and foremost an instrument to improve access to finance for SMEs, support their internationalisation and improve their access to markets.

COSME will largely continue the successful activities of the current Competitiveness and Innovation Framework Programme (CIP), but aims to better respond to SMEs' needs, by targeting the more vulnerable categories of small businesses that are currently underserved by the market.

60% of COSME's estimated budget of €2.3 bn will be dedicated to financial instruments, providing guarantees and venture capital, with the aim of encouraging the flow of credit and investment into the SME sector. COSME will provide a guarantee facility for SME loans of up to €150 000, with a focus on SMEs that would otherwise have difficulty accessing finance. COSME's equity facility will stimulate the supply of venture capital, with a particular focus on the expansion and growth phase of SMEs.

COSME support will be delivered to SMEs via reputable financial intermediaries in participating countries - such as banks, leasing companies, mutual guarantee societies or venture capital funds - in order to ensure that credit is as easy to access as possible. In order to cater for the diversity of the SME financing market in Europe, COSME will allow financial intermediaries to create individual products that best suit the needs of SMEs in their particular market.

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The COSME budget will also maintain many of the same successful programmes already in place, including co-financing for the European Enterprise Network, with its more than 600 offices in the EU and beyond. COSME will also support internationalisation of SMEs, Erasmus for Young Entrepreneurs, entrepreneurship education, IPR Helpdesks and the reduction of administrative burdens.

What are COSME's expected impacts?

The impact of the programme will be enormous. COSME-backed financial instruments should result in an annual increase of €3.5 billion in additional lending to and/or investment in EU companies. Each year, COSME is expected to contribute to an increase in the EU’s GDP of €1.1 billion, and assist 40 000 firms in creating or saving 30 000 jobs and launching 1 200 new business products, services or processes.

Typical SME recipient: Less than 10 staff, €65 000 credit granted

Under the previous European Commission programme to support competitiveness (CIP), loan guarantees were used to stimulate lending to entrepreneurs or small enterprises that normally would not have sufficient collateral to obtain a loan. Ninety percent of the 220 000 SMEs from across Europe that were CIP's beneficiaries up to the end of 2012 had 10 or fewer employees; precisely the category that finds it most difficult to obtain a loan.

But thanks to CIP, the average guaranteed loan these small companies received was about €65 000. By the end of December 2012, CIP's financial instruments had mobilised over €13 billion in loans and more than €2.3 billion in venture capital. Comparable benefits will be achieved under COSME, slighted moderated by the fact that COSME will particularly target SMEs that without its support would have difficulty in accessing external finance.

Accessing financing is extremely difficult for SMEs

Surveys show that the EU's SMEs are to a very large extent dependent on bank loans for their external financing and that they have very few alternatives: 30% of companies are using bank loans and 40% bank credit lines or overdraft facilities. For 63% of SMEs bank loans are also the most preferable external financing solution to realise firms' growth ambitions. In the economic downturn banks have become more risk-averse, asking for higher risk margins and offering more demanding conditions.

Difficult access to credit is among the top concerns (15%) of SMEs: according to the latest survey by the European Commission about one third of SMEs did not get the finance they had planned for. The latest European Central Bank (ECB) data indicate that overall lending to the non-financial private sector remains weak.

Why we need a specific programme to support SME financing

Despite their importance to the economy, SMEs face particular challenges in the area of access to finance, mostly because of information asymmetries. While SMEs are able to build strong business cases for the creation and expansion of their businesses, lenders tend to be ill-equipped to assess the risks associated with the business models of SMEs and tend to resort to lending decisions based purely on balance sheet figures. But many SMEs do not have strong enough balance sheets to meet bank lending approval criteria, especially if the value of the SME is held in intellectual property, a sound client base or other means which cannot be captured by financial reporting.

The consequences of the debt crisis have also disproportionately affected lending to SMEs. Compared to larger corporations, SMEs have always faced structural problems in the area of access to finance. But these issues have been exacerbated by the financial crisis. Over the last two years, according to statistics from the ECB, almost one-third of the SMEs applying for bank loans were refused or ended up getting less than they requested.

Financial intermediaries are a vital lifeline

The EU uses both legislation and the limited EU budget to counteract the current overwhelming reluctance to invest in and lend to SMEs. Two general approaches are taken, first to support the provision of SME loans – thus improving access to credit - and second to stimulate investment in SMEs, for example via co-investments with venture capital funds.

Access to credit assistance is channelled through selected financial intermediaries. These include banks, lessors, mutual guarantees societies, microfinance providers and venture capital funds. The EU guarantees part of the risks they undertake and experience shows that participation in EU access to finance programmes means that they provide more SME loans than they would do otherwise. This approach also generates a high leverage effect: the CIP programme found that every €1 spent by the EU on guarantees used by financial intermediaries making loans to SMEs resulted in €30 being made available to the beneficiary company.

Apart from this multiplier effect, using financial intermediaries also offers other benefits: a policy impact, as participating financial intermediaries subscribe to strong SME credit enhancing conditions and therefore contribute to the pursuit of EU policies; and also access to institutional "know-how" in the form of the existing expertise of financial intermediaries.

How else will SME financing be supported by the EU?

COSME will be complemented by financing for research-and innovation-driven enterprises under the Horizon 2020 programme. Numerous measures will also be implemented by the EIB Group (the European Investment Bank and the European Investment Fund) as well as will be provided within the framework of European Structural and Investment Funds or under Programme for Employment and Social Innovation and will be linked to the specific policy objectives.

Agreement on Basel III will ensure continued bank loans to SMEs
The European Commission has also proposed legislation to improve the efficiency of financial markets. Agreement has been reached on the review of the Capital Requirements Directive, Basel III (see MEMO/13/338).

The new framework will make banks more solid. In order to ensure an appropriate flow of credit to SMEs in the current difficult economic context, the new rules will introduce a reduction in the capital charges for bank exposure to SMEs, through the application of a 0.76 supporting factor. This will provide credit institutions with an appropriate incentive to increase the available credit to SMEs. The better financial stability of our banks, targeted by Basel III, will therefore not result in credit restriction for most small businesses.

Better integration of the venture capital market

A Regulation on European venture capital funds adopted in April 2013 (REGULATION (EU) No 345/2013) will enable venture capitalists to operate more efficiently within the EU. With the help of a European passport fund managers can market their funds across the EU. This will facilitate cross-border fundraising and create a genuine internal market for venture capital funds.
See also: MEMO/13/209

Improving SME access to capital markets

By helping to attract more private investments the European Commission also seeks to develop a framework for efficient, diversified and improved long-term financing for SMEs. One of the solutions is to improve SME access to capital markets: investors could be encouraged to make more investments in SMEs through more visible SME markets and more visibly listed SMEs and mid-caps.

Two recent proposals to attract investors through more visible SME markets and more visible listed SMEs:

• A proposal for the Markets in Financial Instruments Directive (MiFID) to sustain the development of stock markets specialized in SMEs. (see IP/11/1219 and MEMO/11/716)
• A proposal for a modification of the Transparency Directive to give better information on listed SMEs.

EU actions to date to increase lending to SMEs

As at 31 December 2012, the EU's Competitiveness and Innovation Framework Programme had mobilised more than €15 billion to finance SMEs.
• With a budget of €1.1 billion, the CIP programme has already helped to mobilise over €16 billion for SMEs across Europe.
• SME guarantee facility (SMEG); thanks to its guarantee schemes, CIP has already helped over 220 000 SMEs to access over €13 billion in loans.
• The high growth and innovative SME facility (GIF): CIP-funded investments in venture capital funds, already supported investment in over 300 fast growing SMEs of more than €2.3 billion.

How the CIP works

The CIP Programme (running from 2007-2013) has helped SMEs to find finance they need to operate, develop or grow at different stage of development.
CIP aims at making funding for SMEs easier through the development of the most relevant channel for SME external finance: a bank loan. This is of paramount importance for the vast majority of SMEs. The programme also provides measures focused on the particular needs of SMEs with high growth potential, for which equity investments can be a more suitable source of finance.

The CIP financial instruments are managed by the European Investment Fund through national and regional financial intermediaries (e.g. banks and venture capital funds) in the EU Member States. The architecture of the programme mobilises financial institutions to provide additional finance to SMEs.

Loan guarantees: EU-backed loans available to SMEs

• Younger and smaller firms are more likely to get only some of the finance they requested from the lending institution (financial intermediary), and, in many cases, to be rejected outright. Support is available in the form of loans backed by the EU.
• Guarantees offered to banks give SMEs access to bank loans
• under SME Guarantee Facility (SMEG) a lending institution can receive EU guarantee if it intends to lend to SMEs. With an EU guarantee bank can lend to more risky category of clients (young companies, entrepreneurs without a credit history, sufficient collateral, etc.) or simply lend more to SMEs.

Improved access to equity finance:

• Small-scale, highly-innovative companies involve a category of risk, which can rarely be accepted by traditional finance providers and as such need a tailored support – other than bank loan.
• Half of the CIP resources devoted to SME access to finance are invested by the European Investments Fund in venture capital funds that, in turn, invest in start-ups and SMEs with high growth potential.
• The high growth and innovative SME facility (GIF) provides capital – usually in the order of millions of euro – for innovative SMEs in different stages of development.

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