Alexia Hengl tell us about the measures being put in place to ensure entrepreneurs have better access to finance

Do you have an innovative idea to develop? Do you want to start a new business? Then it’s time to find the money... but how? And where? After you’ve worked on your project and understood that it could be a viable business, your parents and friends probably invested in you, but now you might now have to find an investor or simply get money from a bank.

Simple? No! At least, that's what the data about SMEs’ access to finance tell us.

It is considered that most start-ups manage their transition from start-ups to SMEs relying, at a very first stage, on equity financing, the initial capital being provided by the family, friends and business angels.

Since 2008 access to finance has been one of the biggest problems for businesses and the situation gets worse every day. Even though this problem pervades all kinds of enterprises, the situation is far more difficult for SMEs as they do not issue bonds or sell their equities on the market as larger companies do.

In the euro area, companies face very different situations when it comes to borrowing money. Even if the interest rate on a loan is based on the European Central Bank set interest rate, in reality, local situations and policies vary a lot across the European Union. Once, the gap between the interest rate set by the ECB and what companies had to pay was fairly stable.

Consider a hypothetical loan of €500,000 - we can be certain that it will cost more to companies in Italy and Spain than to their colleagues in France or Germany. And apart from the difficulty in obtaining the loan from the bank, differences at the national level will result in a fluctuation of interest rates from three to six percent in Spain and Italy. Moreover, SMEs in countries such as Spain, Italy and France appear to face a financing gap above the euro area average. In its survey on the access to finance of SMEs , the European Central Bank (ECB) reports that between five and nine percent of SMEs at the euro area level have an increased need for bank loans and bank overdrafts. It has been seen that, generally, financial resources diminish more rapidly for small businesses than for larger ones in times of economic crises. Between 2009 and 2013, almost 25 percent of SMEs in the euro area faced some problems when applying for a loan, where the rejection of the loan had been reported as being the most significant factor that hindered an SMEs’ expansion and growth.

According to the European Commission, and based on the aforementioned ECB survey, only onethird of SMEs that apply for credit receive the full required amount. In Greece, for example, only one third of SMEs applying for credit receive the full amount, whereas in Italy and Spain the average is one company out of two. On the contrary, more than four out of five German companies succeed in obtaining credit, with an average that exceeds 80 percent of submitted requests.

To boost its economy, the European Commission published two communications on long-term financing of the European Economy and on Crowdfunding, in March 2013 after the European Council called for a European ‘industrial renaissance’. Building on the results of the Green paper on long-term financing published in March 2013, the European Commission now presents a set of concrete actions to develop long-term financing measures by mobilising nonbank sources and alternative forms of financing for SMEs.

The EC communication on longterm financing identifies a set of actions to tackle many of the current problems of the financial system by providing a well-defined action plan affecting the vast majority of stakeholders.

With regard to banks, for example, the Communication establishes that the European Commission will assess the effects of the new Capital Requirements Regulation (CRR) on long-term financing in 2014 and 2015. The EC wants to assess whether the CRR, that entered into force in June 2013, and that sets various prudential requirements for investment firms (such as requirements on initial capital and own funds) and, along with the Capital requirements Directive IV, (CRD IV), requires banks to hold higher levels of capitals to be able to absorb potential losses and sudden liquidity shocks. This could affect the capacity of EU banks to lend at long maturities.

Insurance companies, pension funds and private savings account will not be left behind; the European Commission will verify, in the second half of 2014, a number of incentives to stimulate long-term investments by insurers, create a single market for personal pensions to funnel pension savings for long-term investments and verify the opportunity of introducing an EU savings account.

The Commission is also planning to assess whether the EU project Bond Initiative (PBI) that was designed to attract private finance for the realisation of infrastructure projects in the sector of transports (TEN-T), energy (TEN-E) and information and communication technology (ICT) can be improved and extended beyond the sectors previously identified.

With regard to SMEs, and to support their much-needed access to finance, the European Commission envisages that the European Structural and Investment Fund (ESIF) could invest up to €100 billion of public funds in support of European enterprises and that a major part of it should be channelled to SMEs in the form of subsidies for start-ups, investments in Research and Technology Development (RTD), innovation and ICT.

To channel funds to long-term financing, the EC will also focus on corporate governance through the possible revision of the Shareholder Rights Directive and the publication of a recommendation to improve the quality of corporate governance reporting with a specific focus on environmental, social and governance information (ESG).

Accounting standards, with a focus on SMEs, (for example, through the possibility to enable simplified accounting standards for the consolidated financial statement of listed SMEs) along with the tax and legal environment (for example, with regard to early restructuring of viable businesses and a real second chance for honest bankrupted entrepreneurs) are critical elements of the future actions of the EC as listed in the March Communication.

All these actions and measures will certainly improve the financing environment for businesses. But we will have to wait and see how the new European Parliament and the new Commissioners will further these plans and initiatives...