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# 52014SC0105

**COMMISSION STAFF WORKING DOCUMENT Long-Term Financing of the European Economy Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on Long-Term Financing of the European Economy /\* SWD/2014/0105 final \*/**

  

Overview of EU initiatives to support SMEs’ access to finance

Introduction

SMEs’
particular dependence on bank funding has made them suffer the most during the
crisis.  They are still finding it challenging to obtain loans, particularly in
the periphery economies.  For example, according to the latest ECB survey on
the access to finance of SMEs[1],
only 33% of SMEs that apply for credit in Greece receive the full amount and
only 50% do so in Spain and Italy (compared to a 65% average in the euro area
and 87% in Germany)[2].

A
key issue is facilitating the transition from start-up to SME to mid-cap i.e. a
transition across the so-called “funding escalator” (see Figure 1).

Figure 1 Funding escalator

Source: adapted from NESTA
“Reshaping the UK economy” (2009)

As
they progress through the business life cycle, SMEs use a combination of
financing sources including bank debt and mezzanine finance, external equity
from business angels as well as venture capital or private equity from funds
and the capital markets. While debt finance remains the predominant form of SME
financing, it is difficult to obtain bank loans before companies are able to
generate profits and a positive cash flow. In the early stages of their
development, SMEs are typically dependent on equity financing. Initially
capital may be provided by family, friends and eventually business angels. At a
later stage, in order to scale-up, growing and innovative companies will
typically seek funding from venture capital and private equity funds. Once these
funds have taken the SME onto its next level of development, they will look to
the capital market and an Initial Public Offer (IPO) as one of their exit
options, in addition to trade finance and sale to other venture capital or
private equity funds.

SMEs
often find it challenging to transit from one mix of financing sources to
another mix that would enable them to grow further. Between different stages of
growth, companies face “financing gaps” (i.e. in accessing a different set or
type of investor) and “education gaps” (i.e. in terms of the skills,
organisational capability and professional advice needed to transition across
the escalator).

The importance of SMEs
to Europe’s economic success prompted the Commission to adopt in December 2011
a wide-ranging Action Plan to improve access to finance for SMEs[3]. 
The Action Plan set out priorities in three main areas:

1. Improving the regulatory framework for SMEs;

2. Facilitating access to finance for SMEs from the EU budget; and

3. Using the Commission’s coordinating role to exchange best practices
and develop a number of other measures to improve the environment for SMEs.

This annex presents how
the key actions have been implemented and covers also additional SME
initiatives taken since 2011.

1.         Improving
the regulatory framework for SMEs

The EU financial
regulation has been adapted considerably in the last three years to facilitate
the financing of SMEs:

·
The Capital Requirements
Regulation (CRR) and the Capital Requirements Directive IV (CRD IV)[4] of 27 June 2013 include a correcting factor
that lowers the capital requirements related to credit risk for exposures to
SMEs.

·
The revised MiFID is creating a dedicated
trading platform labelled "SME growth market" to make SME markets
more visible and liquid.

·
The Market Abuse Regulation (MAR) adapts the
disclosure requirements for issuers on SME markets to their needs.  For
instance, the issuers on such markets will be subject to tailored rules for the
requirement to draw up lists of insiders.  The Regulation allows inside information
to be published by those SME growth markets, on behalf of issuers whose
financial instruments are admitted to trading on SME growth markets. Issuers on
SME markets will also benefit from the clarification of the scope of the
reporting obligations in relation to managers' transactions and the new
provisions with respect to the thresholds which trigger the obligation to report
such manager's transactions.

·
The Commission delegated act[5]
of 30 March 2012 to the amending Prospectus Directive[6] has implemented
proportionate disclosure regimes aiming to increase the efficiency of the
Prospectus regime by reducing administrative burdens for issuers where they
were considered to be disproportionate. The reduction of disclosure
requirements has been carefully calibrated in order to reach the right balance
between the reduction of the administrative burden for the issuers and the need
to preserve a sufficient level of investor protection, not to discourage
potential investors from investing and not to hinder confidence in relation to
the issuer. The proportionate disclosure regimes have also taken into account
the amount of information already disclosed to the markets.

·
The revised Transparency Directive[7]
of 22 October 2013 abolishes the requirement to publish quarterly financial
information with the aim to reduce the administrative burden for listed
companies and encourage long term investment.

·
The revised Accounting Directive[8]
of 26 June 2013 simplifies the preparation of financial statements for small
companies. In addition, the Directive provides for a specific simplified
accounting regime for micro-undertakings, allowing Member States to exempt
companies from producing certain notes to their financial statements or from
presenting year-end cut-offs. This micro-regime also makes it possible to
produce simplified balance sheet and profit and loss accounts and might allow a
simplified filing system for micro-undertakings.

·
The new legal framework for European Venture
Capital Funds and European Social Entrepreneurship Funds[9] of 25 April 2013 creates
a special EU passport for fund managers investing in start-up SMEs and social
businesses. As of the beginning of December 2013, 23 fund managers had applied
for a EuVECA registration.

·
The Commission proposal of 26 June 2013 for a
new investment fund framework – European Long-Term Investment Funds (ELTIF)
targets investors who wish to invest into companies and projects for the long
term. To ensure that ELTIFs invest their money in clearly identifiable
long-term asset classes, they must invest a substantial proportion of their
portfolio in unlisted companies or projects, infrastructure or other real
assets that need long-term capital to develop.

2.         EU initiatives to support access
to finance for SMEs
2.1       Initiatives
in the context of the European Structural and Investment Funds

On
the basis of data available so far for the period 2007-2013, it is expected
that the ESIF could invest up to Euro 100 billion of EU public funds in support
of enterprises for the 2014-2020 MFF of the EU. A major part of this support is
expected to be channelled to SMEs, through investment subsidies for start-ups
and expansion, investment in RTD, innovation and ICT. A substantial and
increased share of this support, compared to previous periods of the EU
cohesion policy, is expected to be delivered through Financial Instruments
offering basically loans, guarantees or equity support for SMEs.

Financial
instruments represent a resource-efficient way of deploying resources in
pursuit of the Europe 2020 Strategy objectives. In the light of the current
economic situation and the increasing scarcity of public resources, financial
instruments are thus expected to play an even stronger role in the 2014-2020
programming period.

The
legislative texts in force for the ESIF 2014-2020 provide for more
possibilities and options offered to Member States and managing authorities
with a view to enlarging the possibilities and enhancing the use of financial
instruments in delivering the objectives of ESIF. In this context, it is
envisaged that Member States and managing authorities may provide a financial
contribution to the following financial instruments:

a) financial
instruments set up at Union level, managed directly or indirectly by the
Commission, such as  COSME or Horizon 2020 (the so called joint instruments
such as the proposed SME initiative);

b) financial
instruments set up at national, regional, transnational or cross‑border
level, managed by or under the responsibility of the managing authority. These
encompass the so called off the shelf instruments and tailor-made
instruments.

In
the context of the off the shelf instruments, which should be
ready-to-use for a swift roll-out already in 2014 and compliant with State Aid
rules, the Commission prepared a set of  pre-defined financial instruments to
enable a wider use of those supported by ESI funds in a more standardised way.

At
least three of the envisaged off the shelf instruments
target specifically SMEs:

(1) Loan
for SMEs based on a portfolio risk sharing loan model (RS Loan);

(2) Guarantee
for SMEs (Capped guarantee);

(3) Equity
Investment fund for SMEs and start-up companies based on a co-investment model
(Co-investment Facility).

2.2       Other
EU financial instruments for SMEs in the current MFF (2014-2020)
2.2.i     Financial instruments under
COSME

The
financial instruments under COSME build upon instruments established under the
Competitiveness and Innovation Framework Programme CIP (2007-2013).

Equity
instruments

COSME
provides an Equity Facility for Growth (EFG) to enhance the supply of risk
capital to SMEs in their growth and expansion phases. The facility is
demand-driven and operates through direct investments in intermediary risk
capital funds that provide equity and mezzanine finance.

Debt
instruments

The
COSME programme envisages under its loan guarantee window two products: a
capped guarantee and a securitisation instrument.

Capped
Guarantee under COSME

The
capped guarantee product will provide counter-guarantees for guarantee schemes,
including, where appropriate, co-guarantees as well as direct guarantees for
any other financial intermediaries. The guarantees envisaged will aim at
reducing the particular difficulties that viable SMEs face in accessing finance
due to either their perceived high risk or their lack of sufficient available
collateral.

Individual
guarantee agreements with a financial intermediary will have a maximum duration
of 10 years. The capped guarantee is provided for free, with a maximum guarantee
rate of 50% and a maximum cap rate of 20%. Individual loans will have a minimum
duration of 12 months.

Securitisation
under COSME

The
securitisation instrument under COSME is envisaged as a securitisation of SME
debt finance portfolios, which will mobilise additional debt financing for SMEs
under appropriate risk-sharing arrangements with the targeted institutions.
Support for transactions will be conditional upon an undertaking by the
originating institutions to use a significant part of the mobilised capital or
the resulting liquidity for new SME lending in a reasonable period.

The
amount of the additional debt financing will be calculated in relation to the
amount of the guaranteed portfolio risk individually for each originating
institution, subject to its negotiations with the entrusted entity.

2.2.ii    Horizon 2020 Financial
instruments

Horizon
2020 is the EU's framework programme to support research and innovation in the
years 2014-2020. A part of the Horizon 2020 budget, approx. EUR 2.8 billion,
will be dedicated to financial instruments facilitating access to risk finance,
implemented through the financial markets and supporting lending to and equity
investments in research, development and innovation intensive corporates,
entities or projects. More than one third of this budgetary allocation is envisaged
for SME access to risk finance.

The
Work Programme for the Access to Risk Finance part of Horizon 2020 for the
years 2014 and 2015 foresees three instruments focusing on SMEs: Equity
Facility for R&I, Technology Transfer Financing Facility Pilot and
SMEs (equity) & Small Midcaps R&I Loans Service.

Equity
instruments

The
Equity Facility for R&I succeeds and refines the GIF-1 scheme under
CIP[10],
and is part of a single equity financial instrument supporting the growth of
enterprises and their R&I activities (which integrates the intervention by
Horizon 2020 and COSME). It is designed to improve access to risk finance by
early-stage research and innovation-driven SMEs and small midcaps through
supporting early-stage risk capital funds that invest, on a predominantly
cross-border basis, in individual enterprises. It will be a purely
demand-driven facility implemented by the European Investment Fund[11].

As
a window of this equity facility, a dedicated pilot scheme for co-Investments
with business angels in innovative ICT firms is foreseen. This pilot scheme
will co-finance investments by business angels in innovative SMEs and small
midcaps that are aiming to commercialise new ICT-related products and services
with potential co-investors such as family offices and equity crowd-funders.

Another
equity facility, the Technology Transfer Financing Facility Pilot will
co-finance investments made by existing technology transfer (TT) funds and
vehicles. It will focus on TT undertaken via the creation of new companies and
the licensing of intellectual property (IP), and concentrates on the
proof-of-concept, development and early commercialisation stages of the TT
process. While it will focus on the pre-SME stage and the very early stages of
the corporate life cycle, it can also be seen as an SME support measures as it
broadly aims to support financing projects that are likely to become SMEs.

Debt
instruments

SMEs
& Small Midcaps R&I Loans Service succeeds and
refines the FP7 RSI pilot under the RSFF in FP7,[12]
and is part of a single debt financial instrument supporting the growth of
enterprises and their research and innovation activities. It targets research
and innovation-driven SMEs and small midcaps requiring loans of between EUR
25 000 and EUR 7.5 million. The European Investment Fund will implement
this instrument,[13]
which will be delivered by financial intermediaries (such as banks), who will
extend the actual loans to final beneficiaries. Financial intermediaries will
be guaranteed against a proportion of their potential losses by EIF, which will
also offer counter-guarantees to guarantee institutions.

The
uncapped guarantee under the FP7 RSI successor will cover the first loss piece
(20%) for free and envisage the guarantee rate of up to 50%.

In
addition, the Loans Service for R&I will offer loans and hybrid or
mezzanine finance for R&I projects emanating from large firms and medium
and large midcaps; universities and research institutes; R&I
infrastructures (including innovation-enabling infrastructures); public-private
partnerships; and special-purpose vehicles or projects. It may also marginally
finance SMEs, but they will not be the primary target group.

3. Other measures to improve the SME
environment

The Commission has used its
coordinating role to develop or facilitate a number of other measures to
improve the business environment for SMEs:

In
December 2012 the Commission launched a single online portal on all EU
financial instruments. The EU
finance portal provides easy and up-to-date information on how
entrepreneurs and SMEs can access over €100 billion of EU financing from
various EU programmes.[14]

·
In May 2013 the Commission launched a targeted information campaign to promote SME listings and
stimulate investors’ interest in SMEs and mid-caps. To this end the Commission
published a web-based information guide for SMEs on how to go public.[15] In
addition, the Commission, together with leading European stock exchanges and
EuropeanIssuers, launched the “European Small and Mid-Cap Awards” in November
2013 to promote the benefits of a stock listing.[16]

·
In October 2013 the Commission launched a series of
information events in all Member States – the "EU Access to Finance
Days". The events will help to explain how the new EU financial
instruments will work and to encourage reputable financial market operators to
become EU financial intermediaries.

·
In December 2013 the Commission finalised a
study on market practices and policies on SME rating. The study provides an
overview of the bank practices in rating/scoring SMEs and policies that public authorities
have taken to promote the transparency of SME rating in the banking sector and
the supply of such feedback to SMEs.

·
In January 2014, the Commission adopted the Risk
Finance Guidelines[17] that provide guidance to Member States on how to set up programmes
that support SMEs' and midcaps' access to finance.

[1] ECB Survey on the Access to Finance of
SMEs in the Euro Area, April 2013 to September 2013, see http://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201311en.pdf?acff8de81a1d9e6fd0d9d3b38809a7a0

[2] Some data is timidly improving.  For
instance more than 60% of SMEs in Ireland report full success in obtaining a
loan compared to just over 30% in the preceding six months, while in Spain this has also improved from 40% to just over 50%. Nevertheless, important differences
in access to credit continue to exist and they cannot be explained only be
differences in prevailing economic conditions, but are also due to the
fragmentation of the banking sector. This has affected mainly SMEs, who have
had to rely more heavily on domestic financial institutions.  The Banking Union
is an essential measure to overcome the increasing fragmentation of financial
markets.

[3] COM(2011) 870

[4] Regulation 575/2013 of the European
Parliament and of the Council of 26 June 2013 on prudential requirements for
credit institutions and investment firms and amending Regulation 648/2012 and
Directive 2013/36/EU of the European Parliament and of the Council of 26 June
2013 on access to the activity of credit institutions and the prudential
supervision of credit institutions and investments firms, amending Directive
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC

[5] Commission Delegated Regulation (EU) No
486/2012 of 30 March 2012 amending Regulation (EC) No 809/2004 as regards the
format and the content of the prospectus, the base prospectus, the summary and
the final terms and as regards the disclosure requirements

[6] Directive 2010/73/EU of the European
Parliament and of the Council of 24 November 2010 amending Directives
2003/71/EC on the prospectus to be published when securities are offered to the
public or admitted to trading and 2004/109/EC on the harmonisation of
transparency requirements in relation to information about issuers whose
securities are admitted to trading on a regulated market

[7] Directive
2013/50/EU of the European Parliament and of the Council of 22 October 2013
amending Directive   2004/109/EC of the European Parliament and of the Council
on the harmonisation of transparency requirements in relation to information
about issuers whose securities are admitted to trading on a regulated market,
Directive 2003/71/EC of the European Parliament and of the Council on the
prospectus to be published when securities are offered to the public or
admitted to trading and Commission Directive 2007/14/EC laying down detailed
rules for the  implementation of certain provisions of Directive 2004/109/EC

[8] Directive 2013/34/EU of The European Parliament and of The
Council of 26 June 2013 on the annual financial statements, consolidated
financial statements and related reports of certain types of undertakings,
amending Directive 2006/43/EC of the European Parliament and of the Council and
repealing Council Directives 78/660/EEC and 83/349/EEC

[9]  Regulation (EU) No 346/2013 of the
European Parliament and of the Council of 17 April 2013 on European social
entrepreneurship funds

[10]    See http://ec.europa.eu/cip/eip/access-finance/index\_en.htm

[11]    Subject to the successful conclusion of negotiations.

[12]    See http://www.eif.org/what\_we\_do/guarantees/RSI/index.htm

[13]    Subject to the successful conclusion of negotiations.

[14] http://access2eufinance.ec.europa.eu

[15] http://ec.europa.eu/enterprise/policies/finance/risk-capital/going-public/index\_en.htm

[16] http://ec.europa.eu/enterprise/policies/finance/risk-capital/european-small-and-mid-cap-awards/index\_en.htm

[17] OJ C 19 of 22.1.2014.

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