Facilitating the access to finance and risk capital for SMEs and midcaps

European Parliament Meeting: Discussion on the subject, “Overcoming the Energy Price Dilemma – SMEs at the crossroads”. (EP Audiovisual Services).

As they say better late than never. The EU Commission decided to relax the rules regulating the granting of state aid to SMEs and midcaps. This initiative relates to easing the terms of high risk equity financing of companies with perceived high-growth potential during their early growth stages. In normal financial circumstances high risk capital financing is being conducted by specialised private firms, which count on high returns to their investments in promising start-ups.

However in the present conjuncture, companies in their early stages of development are almost completely cut off from any source of financing. For one thing the banks avoid according new loans even to well established SMEs and midcaps. Almost all Eurozone lenders are fighting to comply with the new and stricter capital adequacy rules and liquidity obligations. Consequently they keep reducing their overall loan balances. As a result the high risk capital affiliates of the banks have been either closed down or neutralised. At the same time the private high risk capital companies have become much more reserved in their investment strategies, and their activities have been restricted to some highly specialised sectors. Overall the appetite for risk has been drastically reduced in the Eurozone.

No financing for start-ups

It is also true that in general the SMEs and the midcaps rely mainly on bank loans for their development. Unfortunately in the crisis hit Eurozone countries, those loans are today almost non-existent. According to a survey conducted by the European Central Bank and the Commission, in recent years more than one third of SMEs have been unable to get the finance required. As mentioned above the situation in this front is much worse in the south of Eurozone. In such an environment even SMEs with real strong growth potential and soundly based investment plans cannot find adequate financing.

At the same time the government entities specialising in high risk capital financing are bound with the severe state aid restrictions, imposed by the EU’s completion laws. It is exactly at this friction point that the new Commission initiative is aimed at introducing new rules. The idea is to relax the regulative restrictions, in order to unblock the financial stalemate for promising start-ups.

Worse than expected

In reality the situation is much worse. Due to the on-going recession in the real economy, most SMEs and more frequently than not, are faced with adverse prospects in their traditional activities. At the same time they are unable to realise their well-conceived and promising plans in new products and markets, due to the complete lack of financing. In view of that the “Commission is reacting boldly to changing market realities. Recognising that the market failure in access to finance is much wider than previously expected, the Commission will set up a simple, flexible and generous state aid framework for the provision of risk finance to SMEs and midcaps”.

To this effect on 15 January 2014, the “European Commission will adopt the new Risk Finance Guidelines that will replace the Risk Capital Guidelines. The new risk finance state aid rules will allow for a more rapid and generous disbursement of risk finance aid to SMEs and midcaps”. According to the Commission this initiative will prove to be an “important contribution to the European Union’s efforts to re-launch economic growth during difficult times for many SMEs”.

In this context, the Commission has undertaken to reform the State aid rules, inter alia, with the aim of facilitating access to finance and risk capital.