Strategic context for SME and mid-cap finance

The EIB channels finance for SMEs and mid-caps through local financial intermediaries under specific contractual conditions. The intermediaries’ knowledge of and relationships with companies in their local area should improve access to finance for SMEs and mid-caps which make strong contributions to EU growth and employment but typically face constraints in terms of high borrowing costs and demanding collateral requirements.

Recovery in the European economy is reflected in a general improvement of the economic and financial situation of SMEs.[1] On the question of impaired access to finance as an impediment for SMEs, the latest EC/ECB SAFE survey, suggests that this has become less important compared to other factors such as competition, availability of skilled staff, market uncertainty, regulation, and energy costs. However, there are still disparities across regions and company size. This is confirmed by the results of the second round of the EU-wide survey on Investment and Investment Finance (EIBIS17).[2]

SMEs are more bank-dependent than larger companies, and have a more restricted range of collateral types which are acceptable to commercial banks. They suffer from greater information asymmetry and, given this more limited access to information, the commercial banks’ evaluation of the credit risk tends to lead to higher costs of borrowing. SME lending is also more costly for banks, as set-up and monitoring costs, which are analogous to fixed costs, have to be recovered over the smaller loans generally associated with SME lending. There are substantial differences from country to country, and from sector to sector. In general, smaller and younger firms, as well as innovative firms and those with a higher proportion of intangible assets, tend to have the most difficulty in raising finance for development and expansion.

One lesson that has been learnt from the financial crisis is that the corporate sector in Europe ̶ particularly small firms ̶ is too dependent on external finance provided by banks. As part of the recovery process, many banks had to reset their balance sheets and make adjustments to meet new regulatory requirements, and optimise their capital management. These actions all tended to limit the supply of financing for their SME clients. However, there are mechanisms by which investment funds can reach developing SMEs, particularly in the current liquid environment. Credit guarantee schemes can be effective in these circumstances. Similarly, securitisations, non-bank intermediated sources such as mini-bonds, private debt, financing from fin-tech companies and, of course, venture capital, are all instruments which can be used to enhance the overall competitiveness of the EU economy. All of these are areas of interest for the EIB.

Given the market imperfections that continue to impede and impair financing for smaller companies, and the lingering impact of the crisis on different segments of SME financing in several countries, there remains a clear need for public sector policy support. With this in mind, the Bank has been using external mandates to enhance its support to SMEs, with EFSI being a case in point.

[1]For a detailed overview of the different market segments of SME financing, see the EIF’s latest “European Small Business Finance Outlook”.

[2]EIB (2017), “EU overview of the EIB group survey on investment and finance”