Evaluating impacts on assessibility of finance
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Scope
Does the option affect access to finance?[1]
Definition
Access to finance is a problem mainly concerning SMEs. A Commission Communication on "Access to finance of small and medium-sized enterprises (SMEs)" points out that Europe's small businesses need more efficient pan-European financial markets, more equity investment, and a sharper public policy focus on early-stage finance. Focussed public action to close gaps in the availability of market finance for small businesses helps to promote entrepreneurship in Europe. Both the Commission and the Member States already share SME financing risks with the private sector, but more needs to be done.
Improving access to finance is an important aspect of fostering entrepreneurship in Europe. The role of the public sector should primarily be to improve the general framework conditions of finance and take limited direct action only when market failures warrant it. Experience has shown that best results in SME finance are achieved when the public sector works with the markets and acts as a catalyst to encourage their development.[1]
Result
To efficiently promote entrepreneurship in Europe, further European, national and regional public sector actions should be focussed on three areas of SME finance: improving the framework conditions; focussing on early-stage financing, in particular loan guarantees and microlending; and increasing equity in SME balance sheets.
Completing the single market and removing obstacles to growth will continue to be priorities for the Commission, and developing financial markets will be a particular challenge in the accession countries because they suffer from a very low level of equity investments and bank lending. These countries merit special attention, as otherwise underperforming financial markets will hamper entrepreneurship and growth.[1]
The persistent gap in early stage finance calls for further joint action by the private and public sectors. Easily and widely available loan guarantee instruments that share risk between the private and public sectors effectively address SMEs' difficulties in getting bank loans. Microlending can provide start-ups with a decisive help and loan guarantees should be used efficiently in order to lower the collateral requirements. Using national financial intermediaries and national programmes makes it possible to tailor financial instruments to the different financing traditions, providing additional leverage to programmes targeted at the financing gap in early stage SME finance.
As retained earnings are the best form of financing growth and investment, Member States are asked to review whether their tax laws inhibit company growth by taxing retained earnings more than distributed profits. For entrepreneurial growth companies, liquid and well-functioning venture capital markets are essential.[1]
The problems of finance facing start-up businesses require long-term solutions involving the public sector. Most Member States have programmes and institutions that aim to close the gap in early-stage SME finance caused by high risk and high overhead costs. Efficient public support mechanisms need to be simple, accessible and tailored to local conditions. This can only be achieved by using local banks and venture capital funds as intermediaries as happens with the Community financial instruments.
Bank lending will remain the main source of outside financing for SMEs. Experience from the EU financial instruments shows that loan guarantees are a very efficient way to use limited public funds and directly address the problems of insufficient collateral and/or intangible assets. European guarantees have helped banks to lend to 130 000 SMEs, the vast majority with fewer than ten employees. To improve the conditions of bank lending, the Commission has facilitated ongoing discussions about a code of conduct for credit institutions and SMEs. It has also produced a report on best practices in microlending. The Community financing institutions, the European Investment Bank (EIB) and the European Investment Fund (EIF) provide important support to SMEs' access to finance.[1]
The increasing risk awareness of banks has led them to expand the use of internal rating of SMEs, which will gradually lead to a rating culture where SMEs need to signal their creditworthiness to the banks, regularly discuss their credit standing and deliver timely information.
A stronger equity capital base can help SMEs to get bank loans, although formal venture capital investments are an option only for entrepreneurial growth companies. In addition to developing European venture capital markets, promoting the possibilities provided by business angels and business angel networks should continue to receive attention at regional, national and European level.[1]
Further information
EC related information:
Small and Medium Sized Enterprises Observatory
Other information:
Indicators:
The following Eurostat Structural Indicators (Economic Reform) are relevant to address the key question:
- Convergence of interest rates by type of loan[1]
The following Eurostat Sustainable Development Indicators (Economic Development) are relevant to address the key question:
Relevant data is also available in the OECD statistics database under the heading:
See also
References
This text is for information only and is not designed to interpret or replace any reference documents. The text is partially adapted from:
European Commission, Enterprise and Industry Policy: Access to finance