Most businesses in Europe rely on bank loans for their external financing. Borrowing can be difficult for small and medium-sized enterprises (SMEs) however, particularly if they lack collateral or if they do not have a long enough track record or credit history. Between 400,000 and 700,000 SMEs are unable to obtain a loan from the formal financial system.
To help small businesses obtain loans from banks, guarantees (provided by public, private, or mutual guarantee institutions) can help compensate for a lack of collateral or creditworthiness by reducing the banks’ risk.
Since 1998, the EU has used financial instruments to increase the volume of finance available for small businesses. Through the Competitiveness and Innovation Framework Programme (CIP) alone, over 340,000 small businesses benefited from the guarantees provided by the financial instruments.
An important piece of legislation is the EU Capital Requirements Directive. It defines the capital that banks have to set aside against lending and requires them to provide information for both banks and their customers.