12/02/09 | SMEs and entrepreneurship

Giving SMEs the credit they need

SMEs are often referred to as the 'backbone' of the European economy. This is not surprising considering that they represent 99% of businesses and two-thirds of private sector jobs. Owing to the pivotal economic role they play, they are a critical target of recent economic stimulus packages in the EU.

The major €200-billion recovery plan agreed by the EU in December 2008 recognised SMEs as key to rebuilding Europe's economic growth and safeguarding jobs. Measures targeted at SMEs include improving their access to bank credit and speeding up reforms under the Small Business Act, which aims to improve the overall approach to entrepreneurship, deepen the "think small first" principle in policy-making and help SMEs tackle the remaining problems which hamper their development.

In addition, the European Investment Bank (EIB) has launched a €30-billion loan package for SMEs to be distributed through banks up to 2011, as well as a separate micro-credit initiative set up for very small enterprises. The release of funds within the financial instruments of the EU's Competitiveness and Innovation Programme will be enhanced,

To provide SMEs with additional support, the European Commission also agreed in December to raise the threshold on state aid to allow Member States to provide up to half a million euros in direct assistance to enterprises within the framework of programmes approved by the Commission.

Injecting fresh blood

However, evidence suggests that SMEs are facing an increasingly tight squeeze on their credit, as banks, the main source of credit for smaller firms, become more risk averse. According to data gathered by Eurochambres, the association of European chambers of commerce, some 30% of SMEs face liquidity problems.

It was against this backdrop that the round table on access to finance, which brought together SME representatives and bankers, was hosted by the European Commission in Brussels on 21 January 2009.

"Working capital is the blood that allows businesses to operate on a day-to-day basis, while sustaining investment in innovation and human resources is essential to ensure that SMEs stand ready to fully benefit when recovery comes," said Enterprise and Industry Commissioner, Vice-President Günter Verheugen, who urged banks to get the liquidity provided to them by governments to SMEs as soon as possible.

Participants welcomed the quick response of the EU and Member State governments to the financial crisis which has reduced the impact of the credit crunch on smaller enterprises so far. While welcoming efforts to maintain the solvency of the financial markets, SME representatives said that credit had not yet fully trickled through to businesses. "Huge amounts of public money are being pumped into banks… but banks still haven't translated this into tangible benefits for SMEs," said Arnaldo Abruzzini, secretary-general of Eurochambres.

"European policy-makers must be praised for quickly responding to the crisis and trying to redress the situation in the past [few] months. Without their intervention, financial markets would have probably ground to a halt and access to finance for SMEs would have been further reduced," noted Andrea Benassi, the secretary-general of UEAPME, the European craft and SME organisation. "However, much remains to be done, especially in Member States with less supportive banking structures."

Supply v demand

The assembled bankers insisted that their commitment to SMEs had not faltered. "Co-operative banks have not reduced their supply of credit to SMEs. The problem is more the demand for credit," said Hervé Guider, the general-manager of the European Association of Co-operative banks, a network of 4 500 co-op banks across Europe. "Recession and economic gloom do not encourage SMEs to invest and be innovative."

For example, data from co-operative banks in Italy indicate a rise in credit volume of 9% in 2008 compared with the previous year. These data also showed that the interest rates offered by co-operative banks in Italy were below average. In the Netherlands, some banks even reported an increase of 15% in the volume of loans in the SME segment.

Moreover, some banks have escaped relatively unscathed from the financial crisis. For instance, savings banks, whose business model is built on a strong deposit base, have been affected more by the economic downturn than the credit crunch. According to surveys in Austria, Germany and Spain, savings banks predicted some decline in lending volumes, due to deferred investment decisions, but a growth of over 7% in lending to SMEs in 2008. However the dramatic reduction in economic activity that occurred in the last quarter of 2008 has further increased uncertainties.

Commercial banks noted that all the customers who borrow from them had been hit by the financial crisis and, in many cases, larger companies had suffered more from the drying up of credit than SMEs.

The assembled bank representatives stressed that current changes in their business models meant that SME financing was increasingly becoming a core activity.

Uncharted waters

The participating policy-makers and stakeholders agreed that the emerging economic crisis is taking Europe into uncharted waters. The Hungarian MEP Edit Herczog - who sits on both the European Parliament's Internal Market and Consumer Protection Committee and its Industry, Research and Energy Committee - noted that the European Commission had put solutions on the table and now Member States need to be proactive in making use of them.

Vice-President Verheugen concluded that it was crucial, despite the climate of economic uncertainty, that SMEs did not cut their investments in research and development and innovation. The situation requires extreme vigilance and continuous monitoring amid more recent signals of a possible deterioration as the economic crisis unfolds.

The text only of the articles can be republished as long as the source of the article is quoted: Enterprise & Industry magazine (http://ec.europa.eu/enterprise/magazine/index_en.htm), © European Union, 2008 - 2012