Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping

ng SMEs to access finance in the European Union

Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

The European Investment Bank

The EIBs activity spans all economic sectors with few exceptions. Due to economic
considerations or ethical standards,
a few sectors or investment types are
excluded 2 from EIB eligibility. Moreover,
in line with EU legislation, EIB operations
adhere to regulatory restrictions in some
sensitive sectors.
All projects financed by the EIB must comply with Community legislation in the
fields of competition, procurement and
environmental regulation.
The EIBs SME financing has a tangible
dimension. Between 2001 and 2005,
nearly half (EUR 25.4 billion) of the
EUR 54.9 billion in global loans signed
by the EIB with some 200 partner banks
benefited SME investment projects.
Over the past five years, the EIFs activities
in support of SMEs have translated into
EUR 2.13 billion of signatures for equity

participations in 146 operations and

EUR 7.3 billion in the form of SME credit
guarantees, granted to around 114 banks
or specialist institutions.
Financing SMEs is a local business: SMEs
need direct access to financial partners
with high quality local and sector information who are able to monitor changing
demands closely and carry out appraisals
of proposed projects.
With around 1 300 staff, mostly based
in Luxembourg, the EIB is not equipped
to deal directly with the thousands of
SMEs spread throughout the EU. Instead,
through its global loans, it relies on a
network of commercial banks that are in
direct contact with customers.
The EIBs interventions in favour of SMEs
are therefore based on partnership with
financial intermediaries, whereby the
EIB provides improved financing terms

Excluded from EIB financing or global loan financing are: (i) land acquisition; (ii) second-hand assets; (iii) war material of any type; (iv) non-generated intangible assets such as patents acquisition; (v) current assets and operating
costs; (vi) tobacco industry and trade; (vii) gambling. Other sectors might be excluded in accordance with the EU
cooperation strategy for each country.

derived from its ability to raise funds on

the capital markets at keen rates (AAA) and
long maturities. Intermediaries undertake
to inform the final beneficiaries and pass
on to them the advantages offered by EIB
credit lines. EIB funds are also attractive
for their comparatively long maturities.
Compared with access to other types of
resources, EIB funds are also characterised
by a high degree of versatility associated,

There is an important SME

dimension to many EIB
financing activities:
Social and Economic Cohesion:
in 2005 global loans continued
to cater for assisted areas: 66% of
total signatures in the EU-25 and
63% in the EU-15.
Implementation of the Innovation 2010 Initiative (i2i)3: one
pillar of i2i is support for entrepreneurship by financing innovative SMEs and investing via
the EIF in venture capital funds
providing innovative SMEs with
equity resources.

Helping SMEs to access finance in the European Union

At the Lisbon European Council of March

2000, the European Union set itself the
strategic goal of establishing a competitive, knowledge-based economy capable
of sustainable economic growth with more
and better jobs and greater social cohesion
by 2010. The EIB Group is a major player in
implementing the Lisbon agenda, in cooperation with the European Commission.
The objective under its Innovation 2010
Initiative is to lend EUR 50 billion to foster
innovation over the current decade.

 Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

in particular, with their availability over

time and flexibility of drawdown in terms
of amount and range of currencies.

EIB global loans

First devised by the Bank in the late 1960s
to contribute to the financing of small
and medium-scale ventures in industry and the service sector, global loans
are medium to long-term lines of credit
that the EIB extends to an intermediary
a bank or financial institution which
in turn uses the funds to support investment projects of limited scale4.
SME global loans generally target enterprises with fewer than 250 employees for
investments of between EUR 40 000 and
EUR 25 million, with loans of up to 50%
of eligible project costs, i.e. between
EUR 20 000 and EUR 12.5 million. Lower
allocation limits can be applied in operations
designed to support micro-enterprises.
All global loan financing can be cumulative with other EU support instruments
(e.g. grants) for SMEs or small-scale infrastructure, but must comply with maximum EU support ceilings.
Global loans can be deployed as targeted instruments. To suppor t its
primary objective of promoting investment in less favoured areas, the EIB has
set up global loans specifically aimed at
assisted regions (e.g. the eastern Lnder
of Germany) or dedicated to specific
policy areas (e.g. the environment and
R&D). The Bank has also carried out a
number of securitisation operations

to complement its traditional global

loans in Italy, Spain, France, Germany
and Portugal.

Supporting firms as they

grow: a new EIB instrument
for mid-cap companies
In January 2005, the EIB adopted the Commissions Recommendation5 setting new
criteria for the definition of SMEs, which
notably resulted in a reduction of the
threshold from 500 to 250 employees.
This new definition had the effect of widening the bracket of medium-sized companies. To facilitate the financing of these
companies, while also enabling other
medium-sized companies to benefit from
EIB financing, the EIB has launched a new
product mid-cap loans designed for
firms with more than 250 and fewer than
3 000 employees.
This new instrument consists of a line of
credit granted to a financial intermedi-

Global loans may also be directed to the financing of small infrastructure projects, typically those of municipalities
or other local authorities, where the loan maturities offered by the EIB are particularly well suited to financing in this
sector.
5
The new definition of SMEs is laid down in Commission Recommendation 2003/361/EC of 6 May 2003 (OJ L 124,
20.5.2003, pag. 36). In accordance with Article 2 of the Recommendation, the Bank applies only the criterion of the
number of employees: fewer than 250 except in fields governed by the various rules on State aid.

ary, which generally assumes the final

beneficiary risk, as in the case of global
loans. Mid-cap financing can go up to
50% of eligible project costs for investments usually between EUR 25 million
and EUR 50 million, generally resulting
in loans of between EUR 12.5 million and
EUR 25 million. The procedures in place
for approving projects financed by midcap loans are streamlined and therefore
faster and better suited to the size of the
projects than those applying to operations financed by a stand-alone direct
loan to final beneficiaries.
In contrast to SMEs, the projects of midcap companies are not automatically eligible for EIB financing and must meet at
least one of the EIBs lending priorities: in
particular, economic and social cohesion,
i2i or environmental protection.

Long-standing cooperation
with the banking sector
The EIBs banking partners must meet
stringent requirements in terms of financial soundness. When allocating EIB
finance, they evaluate projects in accordance with contractual criteria laid down
in liaison with the Bank and take on the
management of the loan. The lending

Helping SMEs to access finance in the European Union

Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

decision rests with the intermediaries,

who are responsible for assessing, pricing
and assuming the credit risk on individual SMEs and their respective investment
projects.
Over the years, the EIB has developed
financing arrangements with commercial
banks, leasing companies and medium to
long-term banks such as savings, provincial or cooperative banks, real estate and
mortgage banks.
The most relevant aspect of EIB intermediated lending is the structural impact
on both the availability and pricing of
term loans to SMEs. In this context, it is
important for the EIB to cooperate with a
large number of banking partners.
In diversifying the range of its intermediaries, the EIB encourages competition, making banks more willing to put
forward the best possible offer, and promotes the transfer of favourable lending
terms to final beneficiaries.
The EIB requires intermediaries to ensure
the transparency of global and mid-cap
loans by informing the final beneficiary of
the EIBs involvement. In return, this also
contributes to encouraging competition
between intermediaries and to enhancing the impact of the EIBs favourable
financial terms on final beneficiaries.
In 2004, the Bank adopted the value
added framework for global loans in the
EU, aimed at monitoring more effectively
the contribution of this instrument to the
Banks key objectives as presented in the
Corporate Operational Plan. The value
added framework endeavours to maintain the highest quality of intermediaries
and ensure that the EIB financial advantage is appropriately transferred to final
beneficiaries. Value added considerations
also apply to mid-cap loans.

Helping SMEs to access finance in the European Union

Strong and diversified backing for SMEs in new Member States:

the SME Finance Facility
The SME Finance Facility is a programme financed jointly by the Commission,
the European Bank for Reconstruction and Development (EBRD), the EIB and
the Council of Europe Development Bank (CEB) in association with Kreditanstalt
fr Wiederaufbau (KfW). The objective of the SME Finance Facility is to induce
financial intermediaries (banks, leasing companies and investment funds) to
expand and to maintain in the long term their financing of SME operations in
eight Member States that joined the EU in May 2004 (Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) and in Bulgaria and Romania. Cyprus, Croatia, Malta and Turkey may eventually also become eligible. By
the end of 2005, EUR 112 million in loans and close to EUR 9 million in grants had
been allocated to financing some 900 small and medium-scale projects under
global loans in the above new Member States. In addition, the EIB together with
the Commission supported 67 small-scale infrastructure projects through the
Municipal Finance Facility and the Municipal Infrastructure Facility.

 Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

The European Investment Fund

The European Investment Fund (EIF) is a

financing body of the European Union
established to support small and mediumsized enterprises, to increase their competitiveness and to foster innovation and
technology in Europe. The EIFs shareholders are the European Investment Bank
(62%), the European Commission (30%)
and some 20 public and private financial
institutions (8%) from across the EU-25.

and securitised loan and lease portfolios.

Counter-parties include banks, leasing
companies, guarantee institutions and
mutual guarantee funds.

""W orks to support key

EU policies in favour of
economic growth and
employment in Europe;
""Promotes SME finance as
SMEs have the potential to
improve economic growth
and integration;

The EIF provides technical assistance in

these two areas on a fee basis for regional
bodies, development organisations and
the European Commission.

EIF support for SMEs

About 40% of the EIFs investments are

early-stage and 56% are tech-related,
primarily ICT and life sciences, while the
portfolio is balanced by buyout, development and generalist investments.

In October 2005, the EIB Group, the European Commission and the European Bank
for Reconstruction and Development
(EBRD) jointly launched the JASPERS and
JEREMIE initiatives. The aim of these programmes is to help beneficiary countries
to utilise the structural and cohesion
funds and invest them in good projects,
and to increase access to finance in the
regions to encourage more business
start-ups and new ventures.

The EIF also provides indirect support

to SMEs by guaranteeing and counterguaranteeing portfolios of SME loans

JEREMIE has a particularly important SME

dimension, being a process whereby the
Member States and regions will be able to

The EIF finances SMEs by taking stakes in

venture capital and private equity funds,
in particular European high tech, earlystage investments.

E I F

JEREMIE

""Supports innovation by
increasing overall investment and private sector involvement in major
research and development projects;
""Makes investments on a
market basis in order to
generate an appropriate
return;
""Carries out its activity in
the 25 Member States
and the Accession and
Acceding Countries, plus
the EFTA countries under
European Commission
mandate.

Helping SMEs to access finance in the European Union

 Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

use part of their structural funds through

the European Investment Fund (EIF) in
order to obtain a set of financial products specifically engineered for micro,
small and medium-sized enterprises.
Instead of using grants as such, it will be
possible to transform part of the grants
into financial products. These will then be
rolled over (reimbursed and used again)
rather than simply granted once.
These products will include equity, venture capital, guarantees, loans and technical assistance and will allow a multiplier
effect on the budget. For each euro
of budget, the sum of financing products available could range from 2 to 10
euros. The targeted SMEs will range from
life sciences start-ups to medium-sized
enterprises operating in more traditional
sectors of the economy.
Through this partnership, regions will be
able to benefit from the EIFs experience
in all areas of investment concerned, but
also from its large network of international,
national and local financial institutions
dealing with SME finance, as well as from
the ability of the EIB Group (as well as other
IFIs) to leverage additional funding.
The EIF will work with the full back-up
of the EIB and its lending capacity, but
also as a federator of all other sources of
finance from other international, national
or local financial institutions, investment
funds, micro-credit agencies, etc., both
public and private.

Preparatory Action: support

for SMEs in the new financial
environment
The Preparatory Action is the latest example of reinforced EIB-European Commission cooperation aimed at facilitating
SMEs access to financing in the ten new
Member States.

Preparatory Action
Three key dates are:
""3 0/06/2007: the latest date by
which a contract with a PCI may
be signed;
""30/06/2009: the latest date by
which all projects must have
reached completion;
""31/12/2009: the latest date by which
the Preparatory Action facility will
terminate.

The EUR 2 million facility managed by the

EIF on behalf of the EIB Group particularly
targets micro-lending and will be used for
grants to finance technical assistance (TA)
to small and medium-sized enterprises.
This must be coupled with an EIF guarantee or an EIB global loan.
The facilitys objectives include:
""that staff from the participating credit
institutions (PCIs) should become familiar with the concept of lending to SMEs
and its implications for their business;
""that the volume of PCI loans extended
to SMEs should be larger than at
present;
""t hat the loans extended to SMEs
should have longer maturities than
at present;
""that the number of SME clients of PCIs
should be larger than at present.

Eligible institutions
A PCI is defined as a credit institution,
including commercial banks and credit
cooperatives. Included are locally registered, licensed or incorporated entities
and also subsidiaries or branches of EU
banks. Whenever practicable, preference
will be given to regionally based PCIs.
The EIF and EIB will select PCIs in accordance with their respective internal guidelines and their assessment of the PCIs
capacity to participate in the facility. Criteria taken into consideration will include
financial strength, creditworthiness, operational capability, regional presence and
track record in SME lending.
It should be noted that banks already
participating in the European Commis-

Helping SMEs to access finance in the European Union

Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union

sions SME Finance Facility may not, in

principle, participate in the Preparatory Action.

Eligible projects
In order for potential projects to be
assessed, the PCI should contact the
EIB or EIF for loan or guarantee applications respectively, and should be ready
to provide on request a description of
the project, its objectives and its justification.
Funding resulting from an EIB global loan
or an EIF guarantee must be used to provide loans to SMEs making investments in
fixed assets and long-term working capital. This may involve new projects or the
modernisation or expansion of existing
businesses in sectors such as manufacturing, agribusiness, hotel, tourism, energy
saving and the environment, construction, trade and services.
In addition, the following criteria apply:
""Eligible enterprises are SMEs with a
maximum of 249 employees, a maximum annual turnover of EUR 50 million and/or a maximum annual balance
sheet of EUR 43 million.
""Preference should be given to small
(< 50 persons; balance sheet/annual
turnover < EUR 10 million) and micro
enterprises (< 10 persons; balance sheet/
annual turnover < EUR 2 million).
""Eligible SMEs must have majority private ownership and control, or be in
the final stage of privatisation. They
must not conduct business in the following areas: gambling, real estate,
banking, insurance or financial intermediation or the manufacture/supply
of (or trade in) arms, or activities on the
EIFs or EIBs exclusion lists.

""T he average size of investments

financed under the Preparatory Action
cannot exceed EUR 25 000.

Technical assistance
Technical assistance (TA) will only be
financed in conjunction with an EIF guarantee (with a maturity of a minimum of
18 months) or an EIB loan. It will be provided by external consultants to PCIs and/
or leasing subsidiaries controlled by PCIs
to strengthen administrative, credit and
management capabilities for loans (in
particular micro-loans) or financial leases
in favour of SMEs.
Activities eligible for TA include:
""installation of management information systems specifically geared to
SME portfolios;
""training of PCI staff in supporting SMEs
and in the appraisal, supervision and
administration of loans extended to
SMEs;

Helping SMEs to access finance in the European Union

""i ntroduction and implementation

of the related organisational and
managerial procedures and practices
involved; or
""circulation of information to SMEs
regarding the facility and, in particular, micro-lending.

 Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union Helping SMEs to access finance in the European Union