ACCESS TO FINANCE. of SMEs in the euro area, European Commission and European Central Bank (ECB), November 2013.

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1 ACCESS TO FINANCE Improving access to finance is essential to restoring growth and enhancing competitiveness. Investment and innovation are not possible without adequate financing. Difficulties in accessing finance are one of the main obstacles obstructing the growth of businesses, particularly small and medium sized enterprises (SMEs). Bank lending remains the most important source of external financing for SMEs 1 and the second one for large corporations 2. Furthermore, SMEs have few alternatives to it. They cannot easily access capital markets directly and the European venture capital markets are underdeveloped. Improving access to capital markets is therefore crucial to increase EU s competitiveness 3. Access to finance remains one of the top concerns for SMEs 4. Debt financing has become more expensive and difficult to obtain, in particular in countries most hit by the crisis, and for higher risk projects and borrowers 5. Besides, late payment of invoices has deteriorated the liquidity of businesses and therefore intensified their financing needs. 1. Key statistical indicators 1.1. Bank lending The flow of new bank loans has dropped sharply in many Member States, and is likely to stay subdued due to the combined effect of tighter bank credit conditions and lower demand. Although banks have received significant funding support from Central Banks, in particular in the euro area, many have sought to strengthen their balance sheets in order to regain access to market funding. Also the reduction in the spread between bank lending rates to companies and the yield for the 5-year sovereign bond 6 might have decreased the interest of banks in financing private sector in some Member States, thus generating crowding-out effect. 1 85% of loans to SMEs in the past two years were provided by banks. Source: Survey on the access to finance of SMEs in the euro area, European Commission and European Central Bank (ECB), November Behind leasing and factoring. 3 Cf. Commission Communication COM(2012) 582 A stronger European industry for growth and economic recovery Industrial Policy Communication Update. 4 Access to finance was the second most pressing problem mentioned by SMEs in the Survey on the access to finance of SMEs in the euro area, European Commission and ECB, November For further details, see also the SMAF indicator developed by the European Commission, which provides an indication of the changing conditions of SMEs access to finance over time for Member States. 6 Statistical Data Warehouse, European Central Bank. 1

2 The continuing economic uncertainty has kept loan volume growth negative on the back of lower demand and tighter lending conditions (see figure 1). In the euro area, net lending conditions further deteriorated in The deterioration has been going on since the second half of 2007, with a lessening of the negative trend between 2009 and the first half of Figure 1. Loans to non-financial corporations in the euro area ( billion, quarterly data) ECB/Commission On the demand side, the persistently weak level of economic activity, high uncertainty, low confidence and the need to reduce the high debt levels have continued to weigh on borrowing. On the supply side, there has been a tightening of credit standards for bank loans to non-financial firms. However, the additional tightening has been less pronounced over last year than in previous periods, which may indicate a nearby stabilisation in credit conditions for firms 7. From a cross-country perspective, financial markets in the euro area progressed steadily towards integration in the years following the introduction of the single currency. This was reflected among others in a convergence of interest rates for private sector loans. However, with the start of the crisis, the banking sector and financial markets gradually fragmented along national borders. These borders separated countries on the basis of their perceived capacity to cope with a banking crisis. Although the level of fragmentation has receded in some markets, like that for bank funding, it remains high for the lending to non-financial corporations, as reflected in the widening of interest rate differentials (see figure 2). This underlines the need to complete the single market for financial services, breaking the vicious circle between sovereign risk and bank risk. 7 Source: Survey on the access to finance of SMEs in the euro area, European Commission and ECB, November

3 Figure 2.Interest rates for one-year loans up to EUR 1 million ECB/Commission SMEs are especially strongly dependent on banks ability to provide loans, since most of them do not have access to market financing as an alternative. In the recent period, credit conditions have remained tighter for SMEs than for large firms, as reflected in the higher interest rates (see figure 3) and loan rejection rates for the former. Figure 3. Interest rates for one-year loans 8 (January ) E CB/Commission 8 Loans up to EUR are used as proxy for loans to SMEs, and those over EUR 1 million a proxy for loans to large enterprises. 9 The figure shows the latest data available for Greece and Malta, which correspond to August 2013 and October 2013 respectively. 3

4 Beyond the aggregate volumes and average interest rates, the situation of individual firms is perceived differently on the ground. According to the ECB/Commission survey 10 on access to finance, the situation is particularly worrying in Romania, Cyprus, the Netherlands, Ireland and Greece, although for the latter two the situation has improved with respect to 2011 (see figure 4). Figure 4. SMEs access to bank loans ECB/Commission, Commission calculations based on responses to six questions 1.2. Non-bank lending Equity financing is essential for innovative firms that have the potential for rapid growth and are willing to accept outside equity investors. These firms are a small minority of all firms, but can grow into large companies. Overall, equity financing is used by 5 % of European SMEs 11. As concerns venture capital, the deteriorating economic outlook and the sovereign debt crisis have negatively impacted on its availability. The amount of venture capital as a percentage of GDP has decreased in most Member States, although there are significant differences across countries (see figure 5). The situation is especially acute in Bulgaria, 10 The ECB/Commission survey on access to finance collects information from SMEs on their perception and experience of bank lending. A composite indicator is constructed on the basis of the responses to the following questions: net increase in the need for bank loans in the past six months; not applying for a loan in the past six months for fear of rejection; applying for a loan in the past six months but being rejected, or rejecting the offer because of too high costs; net improvement in the availability of loans in the past six months; net increase in the size of bank loans in past six months; net improved willingness of banks to provide a loan in past six months. 0 indicates the worst possible situation and 1 the best possible one. 11 Only 5% of EU SMEs had used equity financing in the period from August to October This was slightly lower than the 2011 level of 7%. Source: Survey on the access to finance of SMEs in the euro area, European Commission and ECB, November

5 Greece and Slovakia. At EU level, in 2012, the total amount of capital raised by venture capital funds (3.6bn) and the amount invested by these funds (3.2bn) decreased on a yearly basis, by 31% and 14% respectively. As regards exits, trade sale, write-off and sale to another private equity firm were prominent last year with almost non-existent IPOs. Figure 5. Venture capital as % of GDP (2012) Source: EVCA, Eurostat 1.3. Payment times of public authorities Late payments in commercial transactions can also cause financial problems and uncertainty for suppliers, particularly small businesses. In the public sector, the average time it takes public authorities to pay their bills has deteriorated between 2008 and 2013 (see figure 6). There are four Member States where the payment time of public authorities is a pronounced problem: Italy (average payment time of 170 days), Greece (159 days), Spain (155 days) and Portugal (133 days). The situation in Spain and Italy has worsened considerably since

6 Figure 6. Payment times for public authorities, duration/ delays in days The Late Payments Directive foresees a maximum duration of 30 days Source: European payment index, Intrum Justitia 2. Policy responses 12 Coordinated efforts by the Member States are needed to improve the access to finance, including learning from good practices, and constantly monitoring actions with the aim to shift resources to those that work best. Public resources have already been mobilised to sustain investment in innovation, especially by SMEs. However, only by unlocking private funds can we ensure the level and sustainability needed to finance investment by EU companies. With regard to bank lending, the deleveraging of the financial sector has an impact on access to finance. Besides actions aimed at the banking system, countries have also introduced policies to improve access to finance, in particular creating or expanding loan guarantee schemes. The effectiveness of these measures can only be measured over time. Lower bank lending is clearly weighing on economic growth, but the overall impact will also depend on the availability of alternative sources of funding and the policy responses. In this respect, Member States have adopted various measures that could foster alternative financing mechanism but their impact will be seen over time. Action is also required to ensure that an open, safe and competitive financial sector channels funds to long-term financing. This is a complex and multidimensional task which 12 For further details, please refer to the Staff Working Documents of each Member State. See also the SME Performance Review tool developed by the European Commission, which monitors and assesses countries' progress in implementing the Small Business Act, including on access to finance, on a yearly basis. 6

7 requires a range of responses and initiatives and touches upon a number of cross-cutting factors, including corporate governance, accounting, taxation and legal environments 13. Member States have been adopting several measures to fight late payments. As of mid- March, the twenty-eight Member States have communicated the transposition 14 of the Late Payment Directive 15 which had to be transposed by 26 March Fourteen of them are complete and correct. Portugal, Greece, Spain and Italy have all adopted plans to deal with the stock of arrears. 13 The Commission adopted on 27 March 2014 a Communication on Long-term financing of the European economy, cf. COM(2014) 168. The Communication presents a set of actions to mobilise private sources of finance, make better use of public finance, further develop European capital markets, improve SMEs access to financing, attract private finance to infrastructure and enhance the framework for sustainable finance. 14 Partial transposition in the case of Germany. 15 Directive 2011/7/EU on combating late payment in commercial transactions. 7