Problems in accessing finance have long been identified as a major barrier for entrepreneurs trying to start or grow small businesses. Over recent years, the European Commission has put in place a range of financial instruments, managed by the European Investment Bank group, to stimulate private-sector lending and investment in small and medium-sized enterprises (SMEs). Over €1 billion will be made available through the Competitiveness and Innovation framework Programme in the years 2007-13, and the leverage effect of this funding should result in some 400 000 SMEs benefitting from lending or equity investment that would not otherwise be available. The EU is also mobilising other policy instruments, such as the Structural Funds, to improve the funding conditions for SMEs across Europe. The European Investment Bank has increased its lending to SMEs to €30 billion for 2008-2011. And the European Commission continues to work with Member States and stakeholders to remove the barriers which hinder small firms seeking finance in Europe.

The 2008 banking crisis is widely feared to have led to a credit crunch, with many banks unable or unwilling to increase their lending to small business. In fact, many small businesses might expect to see the conditions on their existing credit arrangements tightened. In particular, overdraft facilities - on which many small companies rely to overcome the difficulties caused by late- (and non-)paying customers - could become more restricted. But is this wide-spread impression borne out by the real experiences of small business in Europe?

To find out businesses' experiences in accessing finance since the economic crisis hit, the European Commission, in partnership with the European Central Bank launched a Eurobarometer survey. Chief executives or finance directors from some 9 000 enterprises of all sizes across Europe were surveyed in June and July 2009. This survey is intended to be the first of a regular series charting the changing financial environment facing business.

Not easy

The majority of companies surveyed agreed that the general economic outlook had deteriorated since the beginning of the year. One in two had seen turnover and/or profits fall in that period. Medium-sized companies (those with between 50 and 249 employees) were the most likely to report a drop in turnover and/or profits, whereas those reporting a rise were most often large companies. Companies which reported introducing at least one form of innovation in the past year were more likely to have improved their financial performance than 'non-innovative' firms.

Asked about the biggest immediate problem they face, 29% of companies cited difficulties in finding customers in the current environment. On the other hand, 16% - little more than half as many - were most concerned about gaining access to finance. In Greece and Croatia, more than one-quarter of managers named access to finance as their most pressing problem. The companies for which access to finance was most likely to be an immediate problem tended to have relatively low turnover, and to have been established between two and nine years ago.

Debt instruments from banks are the most popular form of external funding used. Some 30% had used overdrafts or credit lines from banks, while 26% had used longer-term bank loans. Leasing or hire purchase was used by 23% of respondents while 16% made use of trade credit. On the other hand, very few companies - other than in Sweden - had received equity investments.

External funding

Some 22% of respondents stated that they had applied for a bank loan (either new or renewed) in the first half of 2009. And only 7% cited 'possible rejection' as a reason why they had not sought a bank loan. Of those that applied, more than half (55%) received all that they asked for, while a further 15% received a lower amount. Likewise, of those which applied for trade credit from suppliers, 60% received all that they asked for and a further 21% received a lower amount.

Amongst those that had sought external financing in the preceding six months, almost half (46%) thought that bank loans had become more difficult to obtain, while one-third (34%) thought there had been no change. While three-quarters of managers surveyed agreed that bank loans were relevant to their company, almost half reported that there had been no change in their company's need for loans in the six-month period.

Turning to their future financing needs and the investment readiness of businesses, 59% of managers felt confident that they would be able to talk to banks and obtain the credit they needed to support their business. In comparison, although half thought equity investors were not relevant to their business, less than 40% of the remainder felt confident in talking to potential equity investors or venture capital firms and obtaining desired result.

Asked what their preferred source of external funding for future growth would be, almost two-thirds of managers cited bank loans (currently the most common source of external funding). A further 13% would seek loans or credit from other sources, while just 6% would seek equity investment as a preferred route to support growth. In terms of the amounts sought, 23% were likely to seek less than €25 000, with 36% expecting to seek between €25 000 and €100 000.

Useful input for analysis and action

This survey will help policy-makers to assess the specific difficulties faced by small businesses in different countries and with different characteristics. In particular, the survey results can be used to identify key areas of action regarding SMEs' access to finance, including innovative growth-oriented enterprises. For the European Central Bank, the survey will provide complementary information concerning the effects of monetary policy and financial market developments on SMEs in the euro area. Future regular surveys will chart the development of the situation in access to finance over time.

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