No longer are smaller businesses considered as reactive and peripheral forces in terms of innovation, employment and productivity.SMEs prevail in their contribution to the GDP of the world economies. The countries with a high percentage of SMEs tend to exhibit a relatively equal distribution of income. Therefore, SMEs may cause higher social stability in their local environmental setting. There are more than ninety-nine per cent of all businesses worldwide which are SMEs with less than 250 members of staff. Within the European Union there are more than 19 million SMEs, which provide employment for more than 74 million citizens. In aggregate, they are providing two out of three of the private sector jobs of the EU labour market. What might possibly be even more intriguing is that nine out of ten SMEs are actually micro-enterprises with less than 10 employees.
It may be argued that SMEs are the true back-bone of the European economy, as they are responsible for wealth and economic growth, along with their key role in innovation, research and development. The perceived importance of SMEs in Europe is reiterated at the political level as well. For instance, in a recent communication, the European Union’s Enterprise and Industry Division has reiterated the importance of improving access to finance for SMEs. It is hoped that the small and medium sized enterprises (SMEs) will drive the recovery in Europe. On the 2nd May the European Commission / European Investment Bank (EIB) joint report maintained that their support for SMEs has reached €13 billion in 2012. In addition, the Commission-funded guarantees have helped to mobilise loans worth more than €13 billion, boosting nearly 220,000 small businesses across Europe. This latest report covers the results of the current funding schemes as well as the new generation of financial instruments for SMEs. It transpired that the financial resources for SMEs were significantly enhanced through the €10 billion increase in the EIB’s capital.
During a meeting of the SME Finance Forum, on the eve of an Informal Competitiveness Council on the 2nd and 3rd of May in Dublin, the European Commission launched a new single online portal on all EU financial instruments (for SMEs) and an information guide to promote SMEs’ stock listings. The Commissioner for Industry and Entrepreneurship held that access to finance of SMEs remains difficult and it is still one of the main reasons for the current economic downturn. Therefore, EU authorities will boost loan guarantees to SMEs under the new COSME programme (as from 2014). Every euro dedicated to guarantees will possibly have the power to stimulate 30 euros in bank loans. Almost 220,000 SMEs profited from the Commission’s Competitiveness and Innovation Framework Programme (CIP) programme. CIP was able to stimulate more than €15 billion of financing for SMEs, so far. With a budget of €1.1 billion (CIP) has helped to mobilise over €13 billion of loans and €2.3 billion of venture capital for SMEs across Europe. Under its SME guarantee facility, CIP has helped nearly 220,000 SMEs to access loans. These loan guarantees are used where the individual entrepreneur or the small enterprises do not have sufficient collateral. In many cases, banks will not provide them with a loan (debt financing).
More than 90% of the beneficiaries of loan guarantees are micro-enterprises, with less than 10 employees. Such enterprises struggle to raise their capital. They find themselves in an equity gap, where it is very difficult to acquire finance to operate efficiently. Although banks are key providers of finance for most small firms through the provision of loans, unsecured bank finance is very limited. Therefore, the SMEs’s growth into viable investment opportunities may be severely restricted. Cashflow-based lending is relatively rare and growing businesses rarely have unused security available. Despite the changing debt market, one of the main reasons why small businesses fail to get the debt finance they need; is their inability to provide adequate collateral. Even small businesses with high growth potential can experience difficulty in raising relatively modest amounts of risk capital, which is inevitably required to fund their ambitions for growth. Moreover, the external forces and potential threats in the business environment may impact harder on the small businesses than on the larger corporations. For instance, changes in government regulations, tax laws, labour legislation and interest rates may usually affect a greater percentage of expenses for the smaller businesses than they do for their larger counterparts.
Europe is responding to the contentious issues facing SMEs by providing a mix of flexible financial instruments under programmes such as the Competitiveness and Innovation Framework Programme (CIP), Progress Microfinance, the Risk Sharing Instrument (FP7), EIB loans and Structural Funds.
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