helping smes to access finance in the european union

8/14/2019 Helping SMEs to access finance in the European Union

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Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union


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Helping SMEs to access nance in the European Union2

2 Excluded from EIB nancing or global loan nancing are: (i) land acquisition; (ii) second-hand assets; (iii) war mate-rial of any type; (iv) non-generated intangible assets such as patents acquisition; (v) current assets and operatingcosts; (vi) tobacco industry and trade; (vii) gambling. Other sectors might be excluded in accordance with the EU cooperation strategy for each country.

The EIBs activity spans all economic sec-tors with few exceptions. Due to economicconsiderations or ethical standards,a few sectors or investment types areexcluded 2 from EIB eligibility. Moreover,in line with EU legislation, EIB operationsadhere to regulatory restrictions in somesensitive sectors.

All projects f inanced by the EIB must com-ply with Community legislation in thefields of competition, procurement andenvironmental regulation.

The EIBs SME financing has a tangible

dimension. Between 2001 and 2005,nearly half (EUR 25.4 billi on) of theEUR 54.9 billion in global loans signedby the EIB with some 200 partner banksbenefited SME investment projects.

Over the past five years, the EIFs activitiesin support of SMEs have translated intoEUR 2.13 billion of signatures for equity

participations in 146 operations andEUR 7.3 billion in the form of SME creditguarantees, granted to around 114 banksor specialist institutions.

Financing SMEs is a local business: SMEsneed direct access to financial partnerswith high quality local and sector infor-mation who are able to monitor changingdemands closely and carry out appraisalsof proposed projects.

With around 1 300 staff, mostly basedin Luxembourg, the EIB is not equippedto deal directly with the thousands of

SMEs spread throughout the EU. Instead,through its global loans, it relies on anetwork of commercial banks that are indirect contact with customers.

The EIBs interventions in favour of SMEsare therefore based on partnership withfinancial intermediaries, whereby theEIB provides improved financing terms

derived from its ability to raise funds onthe capital markets at keen rates (AAA) andlong maturities. Intermediaries undertaketo inform the final beneficiaries and passon to them the advantages offered by EIBcredit lines. EIB funds are also attractivefor their comparatively long maturities.Compared with access to other types of resources, EIB funds are also characterisedby a high degree of versatility associated,

There is an important SME

dimension to many EIBfinancing activities:

Social and Economic Cohesion: in 2005 global loans continuedto cater for assisted areas: 66% of total signatures in the EU-25 and63% in the EU-15.

Implementation of the Inno-vation 2010 Initiative (i2i) 3: onepillar of i2i is support for entre-preneurship by financing inno-vative SMEs and investing viathe EIF in venture capital fundsproviding innovative SMEs withequity resources.

3 At the Lisbon European Council of March2000, the European Union set itself thestrategic goal of establishing a competi-tive, knowledge-based economy capableof sustainable economic growth with moreand better jobs and greater social cohesionby 2010. The EIB Group is a major player inimplementing the Lisbon agenda, in co-operation with the European Commission.The objective under its Innovation 2010Initiative is to lend EUR 50 billion to foster innovation over the current decade.

The European Investment Bank


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ing SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

Helping SMEs to access nance in the European Union 3

in particular, with their availability overtime and flexibility of drawdown in termsof amount and range of currencies.

EIB global loans

First devised by the Bank in the late 1960sto contribute to the financing of smalland medium-scale ventures in indus-try and the service sector, global loansare medium to long-term lines of creditthat the EIB extends to an intermediary a bank or financial institution whichin turn uses the funds to suppor t invest-ment projects of limited scale 4.

SME global loans generally target enter-prises with fewer than 250 employees forinvestments of between EUR 40 000 andEUR 25 million, with loans of up to 50%of eligible project costs, i.e. between

EUR 20 000 and EUR 12.5 million. Lowerallocation limits can be applied in operationsdesigned to support micro-enterprises.

All global loan financing can be cumula-tive with other EU support instruments(e.g. grants) for SMEs or small-scale infra-structure, but must comply with maxi-mum EU support ceilings.

Global loans can be deployed as tar-

geted instruments. To support itsprimary objective of promoting invest-ment in less favoured areas, the EIB hasset up global loans specifically aimed atassisted regions (e.g. the eastern Lnderof Germany) or dedicated to specificpolicy areas (e.g. the environment andR&D). The Bank has also carried out anumber of securitisation operations

to complement its traditional globalloans in Italy, Spain, France, Germanyand Portugal.

Supporting firms as theygrow: a new EIB instrumentfor mid-cap companies

In January 2005, the EIB adopted the Com-missions Recommendation 5 setting newcriteria for the definition of SMEs, whichnotably resulted in a reduction of thethreshold from 500 to 250 employees. This new definition had the effect of wid-ening the bracket of medium-sized com-panies. To facilitate the financing of these

companies, while also enabling othermedium-sized companies to benefit fromEIB financing, the EIB has launched a newproduct mid-cap loans designed forfirms with more than 250 and fewer than3 000 employees.

This new instrument consists of a line of credit granted to a financial intermedi-

ary, which generally assumes the finalbeneficiary risk, as in the case of globalloans. Mid-cap financing can go up to50% of eligible project costs for invest-ments usually between EUR 25 million

and EUR 50 million, generally resultingin loans of between EUR 12.5 million andEUR 25 million. The procedures in placefor approving projects financed by mid-cap loans are streamlined and thereforefaster and better suited to the size of theprojects than those applying to opera-tions financed by a stand-alone directloan to final beneficiaries.

In contrast to SMEs, the projects of mid-

cap companies are not automatically eli-gible for EIB financing and must meet atleast one of the EIBs lending priorities: inparticular, economic and social cohesion,i2i or environmental protection.

Long-standing cooperationwith the banking sector

The EIBs banking partners must meetstringent requirements in terms of finan-cial soundness. When allocating EIBfinance, they evaluate projects in accord-ance with contractual criteria laid downin liaison with the Bank and take on themanagement of the loan. The lending

4 Global loans may also be directed to the nancing of small infrastructure projects, typically those of municipalitiesor other local authorities, where the loan maturities o ered by the EIB are particularly well suited to nancing in thissector.

5 The new de nition of SMEs is laid down in Commission Recommendation 2003/361/EC of 6 May 2003 (OJ L 124,20.5.2003, pag. 36). In accordance with Article 2 of the Recommendation, the Bank applies only the criterion of thenumber of employees: fewer than 250 except in elds governed by the various rules on State aid.


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decision rests with the intermediaries,who are responsible for assessing, pricingand assuming the credit risk on individ-ual SMEs and their respective investmentprojects.

Over the years, the EIB has developedfinancing arrangements with commercialbanks, leasing companies and medium tolong-term banks such as savings, provin-cial or cooperative banks, real estate andmortgage banks.

The most relevant aspect of EIB inter-mediated lending is the structural impacton both the availability and pricing of term loans to SMEs. In this context, it isimportant for the EIB to cooperate with alarge number of banking partners.

In diversifying the range of its inter-

mediaries, the EIB encourages compe-tition, making banks more willing to putforward the best possible offer, and pro-motes the transfer of favourable lendingterms to final beneficiaries.

The EIB requires intermediaries to ensurethe transparency of global and mid-caploans by informing the final beneficiary of the EIBs involvement. In return, this alsocontributes to encouraging competition

between intermediaries and to enhanc-ing the impact of the EIBs favourablefinancial terms on final beneficiaries.

In 2004, the Bank adopted the valueadded framework for global loans in theEU, aimed at monitoring more effectivelythe contribution of this instrument to theBanks key objectives as presented in theCorporate Operational Plan. The valueadded framework endeavours to main-tain the highest quality of intermediariesand ensure that the EIB financial advan-tage is appropriately transferred to finalbeneficiaries. Value added considerationsalso apply to mid-cap loans.

Strong and diversified backing for SMEs in new Member States:the SME Finance Facility

The SME Finance Facility is a programme financed jointly by the Commission,the European Bank for Reconstruction and Development (EBRD), the EIB andthe Council of Europe Development Bank (CEB) in association with Kreditanstaltfr Wiederaufbau (KfW). The objective of the SME Finance Facility is to inducefinancial intermediaries (banks, leasing companies and investment funds) toexpand and to maintain in the long term their financing of SME operations ineight Member States that joined the EU in May 2004 (Czech Republic, Estonia,Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) and in Bulgaria and Roma-nia. Cyprus, Croatia, Malta and Turkey may eventually also become eligible. Bythe end of 2005, EUR 112 million in loans and close to EUR 9 million in grants hadbeen allocated to financing some 900 small and medium-scale projects underglobal loans in the above new Member States. In addition, the EIB together withthe Commission supported 67 small-scale infrastructure projects through theMunicipal Finance Facility and the Municipal Infrastructure Facility.


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"" Works to support keyEU policies in favour of economic growth and

employment in Europe;

"" Promotes SME finance asSMEs have the potential toimprove economic growthand integration;

"" Supports innovation byincreasing overall invest-ment and private sec-tor involvement in majorresearch and develop-ment projects;

"" Makes investments on amarket basis in order togenerate an appropriatereturn;

"" Carries out its activity inthe 25 Member Statesand the Accession andAcceding Countries, plusthe EFTA countries underEuropean Commissionmandate.

E

I

F

The European Investment Fund

The European Investment Fund (EIF) is afinancing body of the European Unionestablished to support small and medium-sized enterprises, to increase their com-petitiveness and to foster innovation andtechnology in Europe. The EIFs sharehold-ers are the European Investment Bank (62%), the European Commission (30%)and some 20 public and private financialinstitutions (8%) from across the EU-25.

EIF support for SMEs

The EIF finances SMEs by taking stakes inventure capital and private equity funds,

in particular European high tech, early-stage investments.

About 40% of the EIFs investments areearly-stage and 56% are tech-related,primarily ICT and life sciences, while theportfolio is balanced by buyout, develop-ment and generalist investments.

The EIF also provides indirect supportto SMEs by guaranteeing and counter-

guaranteeing portfolios of SME loans

and securitised loan and lease portfolios.Counter-parties include banks, leasingcompanies, guarantee institutions andmutual guarantee funds.

The EIF provides technical assistance inthese two areas on a fee basis for regionalbodies, development organisations andthe European Commission.

JEREMIE

In October 2005, the EIB Group, the Euro-pean Commission and the European Bank for Reconstruction and Development

(EBRD) jointly launched the JASPERS andJEREMIE initiatives. The aim of these pro-grammes is to help beneficiary countriesto utilise the structural and cohesionfunds and invest them in good projects,and to increase access to finance in theregions to encourage more businessstart-ups and new ventures.

JEREMIE has a particularly important SMEdimension, being a process whereby the

Member States and regions will be able to


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Preparatory Action

Three key dates are:

"" 30/06/2007: the latest date bywhich a contract with a PCI may

be signed;"" 30/06/2009: the latest date by

which all projects must havereached completion;

"" 31/12/2009: the latest date by whichthe Preparatory Action facility willterminate.

use part of their structural funds throughthe European Investment Fund (EIF) inorder to obtain a set of financial prod-ucts specifically engineered for micro,small and medium-sized enterprises.Instead of using grants as such, it will bepossible to transform part of the grantsinto financial products. These will then berolled over (reimbursed and used again)rather than simply granted once.

These products will include equity, ven-ture capital, guarantees, loans and tech-nical assistance and will allow a multipliereffect on the budget. For each euroof budget, the sum of financing prod-ucts available could range from 2 to 10euros. The targeted SMEs will range fromlife sciences start-ups to medium-sizedenterprises operating in more traditionalsectors of the economy.

Through this partnership, regions will beable to benefit from the EIFs experiencein all areas of investment concerned, butalso from its large network of international,national and local financial institutionsdealing with SME finance, as well as fromthe ability of the EIB Group (as well as otherIFIs) to leverage additional funding.

The EIF will work with the full back-up

of the EIB and its lending capacity, butalso as a federator of all other sources of finance from other international, nationalor local financial institutions, investmentfunds, micro-credit agencies, etc., bothpublic and private.

Preparatory Action: supportfor SMEs in the new financialenvironment

The Preparatory Action is the latest exam-ple of reinforced EIB-European Commis-sion cooperation aimed at facilitatingSMEs access to financing in the ten newMember States.

The EUR 2 million facility managed by theEIF on behalf of the EIB Group particularlytargets micro-lending and will be used forgrants to finance technical assistance (TA)to small and medium-sized enterprises. This must be coupled with an EIF guaran-

tee or an EIB global loan.

The facilitys objectives include:

""that staff from the participating creditinstitutions (PCIs) should become famil-iar with the concept of lending to SMEsand its implications for their business;

""that the volume of PCI loans extendedto SMEs should be larger than atpresent;

""that the loans extended to SMEsshould have longer maturities thanat present;

""that the number of SME clients of PCIsshould be larger than at present.

Eligible institutions

A PCI is defined as a credit institution,including commercial banks and creditcooperatives. Included are locally regis-

tered, licensed or incorporated entitiesand also subsidiaries or branches of EUbanks. Whenever practicable, preferencewill be given to regionally based PCIs.

The EIF and EIB will select PCIs in accord-ance with their respective internal guide-lines and their assessment of the PCIscapacity to participate in the facility. Cri-teria taken into consideration will includefinancial strength, creditworthiness, oper-ational capability, regional presence andtrack record in SME lending.

It should be noted that banks alreadyparticipating in the European Commis-


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sions SME Finance Facility may not, inprinciple, participate in the Prepara-tory Action.

Eligible projects

In order for potential projects to beassessed, the PCI should contact theEIB or EIF for loan or guarantee applica-tions respectively, and should be readyto provide on request a description of the project, its objectives and its justi-fication.

Funding resulting from an EIB global loanor an EIF guarantee must be used to pro-vide loans to SMEs making investments infixed assets and long-term working capi-tal. This may involve new projects or themodernisation or expansion of existingbusinesses in sectors such as manufactur-

ing, agribusiness, hotel, tourism, energysaving and the environment, construc-tion, trade and services.

In addition, the following criteria apply:

""Eligible enterprises are SMEs with amaximum of 249 employees, a maxi-mum annual turnover of EUR 50 mil-lion and/or a maximum annual balancesheet of EUR 43 million.

""Preference should be given to small(< 50 persons; balance sheet/annualturnover < EUR 10 million) and microenterprises (< 10 persons; balance sheet/annual turnover < EUR 2 million).

""Eligible SMEs must have majority pri-vate ownership and control, or be inthe final stage of privatisation. Theymust not conduct business in the fol-lowing areas: gambling, real estate,banking, insurance or financial inter-mediation or the manufacture/supplyof (or trade in) arms, or activities on theEIFs or EIBs exclusion lists.

"" The average size of investmentsfinanced under the Preparatory Actioncannot exceed EUR 25 000.

Technical assistance Technical assistance (TA) will only befinanced in conjunction with an EIF guar-antee (with a maturity of a minimum of 18 months) or an EIB loan. It will be pro-

vided by external consultants to PCIs and/or leasing subsidiaries controlled by PCIsto strengthen administrative, credit andmanagement capabilities for loans (inparticular micro-loans) or financial leasesin favour of SMEs.

Activities eligible for TA include:

""installation of management informa-tion systems specifically geared toSME portfolios;

""training of PCI staff in supporting SMEsand in the appraisal, supervision andadministration of loans extended toSMEs;

""introduction and implementationof the related organisational andmanagerial procedures and practicesinvolved; or

""circulation of information to SMEsregarding the facility and, in particu-lar, micro-lending.


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helping smes to access finance in the european union

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