Sector News
European SMEs Suffer From ‘Fragmented’ Finance Rules

Small and medium-size enterprises in Europe suffer from barriers preventing them from “shopping around” for funding, according to the Association of European Chambers of Commerce: Eurochambres. An article in the Telegraph “SME funding ‘held back by EU rules’” says Eurochambres has told the European Commission that SMEs will continue struggling to gain access to funding for start-ups and expansion, unless restrictions are removed. They have claimed SMEs face a harsh investment climate due to “fragmented” rules for lenders and borrowers and a lack of “risk culture.”

Because of a mismatch between the services provided by European banks and the needs of firms, SMEs are now reluctant to use banks as a source of finance. Instead, according to a post in Business Brains, companies across the 28 member states are seeking alternative funding through grants and peer-to-peer lending. However Eurochambres, which represents more than 20 million businesses across Europe, says this isn’t enough to meet the needs of SMEs.

Vice-president of Eurochambres Miguel Valls Maseda commented: “It is clear that many entrepreneurs face huge problems in trying to acquire the type of finance they need at the time when they need it most.” He added that such “asymmetry” must be addressed by the EU’s leaders for the new term.

According to Eurochambres’ press release, SMEs also face three other main difficulties such as slowness of decision-making processes for debt or equity financing, regulatory barriers to acquiring financing from other member states, and tax regimes that discourage investment.

They have made a number of recommendations to the European Commission. Their primary recommendation is to create a genuine single market, not just for finance, to ensure growth and better support for entrepreneurs seeking investment. The market would also put in place more equity-friendly tax regimes and would aim to create a more entrepreneurial and risk-taking culture in the long term.

Other recommendations included providing guidance to SMEs on financing options, especially given a climate where options will become increasingly fragmented. Investment-readiness support via intermediaries should also be open to companies. Eurochambres also told the EC to address regulatory obstacles to acquiring and offering cross-border financing to make a single market available for both investors and entrepreneurs. Lastly, they suggest working with member states to provide more equity investment-friendly tax regimes.

In the UK alone, about £1.25 billion was lent to small firms in September, up 55 percent on the year before. With SME demand for credit increasing as European economies recover from the economic slump, will we see more of these trends across Europe? If the billions that were borrowed prior to the downturn are coming up for repayment, surely the banks will have more to invest? But with restrictions on their lending abilities – will they just make loans too expensive for the SME? Or simply not have enough to fulfil their needs? The European Central Bank’s six-month survey from April to September this year reported “The percentage of SMEs reporting access to finance as their main problem remained broadly unchanged at 13% …  SMEs reported a smaller increase in their need for bank loans and overdrafts in net terms, but a somewhat higher need for trade credit … SMEs reported an improvement in the availability of bank loans and falling interest rates in net terms. However, all sizes of company signalled that they were subject to more stringent collateral and other requirements. Of the 30% of euro area SMEs that applied for a loan in this survey round, 65% were successful, while 13% reported an outright rejection (up from 11% in the previous round).

Enter the era of en-masse, non-high street lending challengers?