Businesses in need of cash

28th of November 2011
Businesses in need of cash

The banks stand accused of starving SMEs of the finance they need for their own futures and to help get Europe back on its feet. Hartley Milner explores how the money-supply crisis is impacting on smaller businesses and what is being done to help them. 

Europe is looking to rally its vast army of small to medium size enterprises in the fight back from the deepest and most destructive financial crisis since the 1930s. In return, businesses are calling on politicians to better equip them for the fray with tax cuts, less restrictive regulation and red tape, help with training, job creation and finding new markets, and measures to promote innovation and entrepreneurship.

But by far their loudest shout is for improved access to finance. Credit streams are fast drying up as the banks are battered by sovereign debt worries and the rising cost of servicing their own borrowing. Any money they do release tends to favour larger firms, which are seen as a safer bet.
Figures from the European Commission show the proportion of unsuccessful loan applications rose between 2007 and 2010 in 19 of the 20 member states for which data is available. With the banks’ woes deepening across the continent, indicators only point to the lending crisis deepening.

So it comes as no surprise that surveys show growing pessimism among Europe’s SMEs, which make up more than 99 per cent of the region’s business community. They accuse the banks of stifling their growth, bringing on cash flow headaches and costing jobs, as well as holding back the recovery.

One small company that went to its bank but was shown the door is HC&MS, which employs 12 people servicing 16 regular cleaning contracts in south-east England. Operations director Darren Grace said times were “tight”, but the company was in control of its cash flow and solvent, though it has had to lose one employee. It faces familiar challenges in our industry – having to find cash for cleaning products, fuel, advertising, accountancy, etc, with less work coming in.

In August, the firm applied to Lloyds TSB for a loan of almost 12,000 euros to finance an advertising campaign and equipment upgrade. “The bank said they were not prepared to lend to us because we had been with them for under a year, even although our accounts showed that we were a profit-making company,” Grace explained. “I asked to apply again in two months when we would have been with them for a year, but they said we couldn’t re-apply for six months. I think they were just placing hurdles in front of us.

“As a small business we do want to grow, but it is frustrating when we are held back. We don’t have the means to finance expansion and that’s why we look to the banks. But the banks have gone from one extreme to the other. They lent large sums of money to people who had no way of paying it back and now they’re depriving decent, hard working small businessmen of the means to expand."

Bank pledges

Lloyds TSB told the ECJ that small businesses were at the core of its activities. Emile Abu-Shakra of its commercial division said: “We are absolutely confident that we are lending to businesses, though there are good reasons why we are not able to provide the original type of funding requested from time to time. Even then, we may be able to look at alternative forms of finance.”

The bank pledges to help 100,000 start-ups every year with funding and other support in line with its small business charter. In the year to June, it had actually backed 167,000 new ventures.
But more help is urgently needed, according to Andrea Benassi, secretary general of the European Association of Craft, Small and Medium-sized Enterprises.

“SMEs across Europe are very heterogeneous, ranging from very traditional, family-run businesses to high-tech and fast growing enterprises and start-ups. To address their specific financing needs, there is no ‘one size fits all’ answer,” he said. “Therefore, a broad range of tailored financial programmes and instruments is needed to provide targeted support to Europe’s SMEs and help to improve their access to finance.”

The European Commission says it is responding to these calls with initiatives to guarantee loans from financial institutions. These include the Competitiveness and Innovation Framework Programme (CIP), which has a budget of more than one billion euros to provide access to finance for up to 400,000 SMEs until 2013.

More than 140,000 loans have been handed out since the programme got underway in 2007, the majority going to help start-ups, the Commission says.

Richard Pelly, chief executive of the European Investment Fund (EIF) which manages the programme, said: “Every euro of funding under the CIP guarantee facility has translated into 17 euros of SME loans; this is a good indicator for the broad impact of the programme which should be maintained in the next financial framework.”

The Joint European Resources for Micro to Medium Enterprises initiative enables member states to use their structural EU funding to finance small and medium-sized businesses via equity, loans or guarantees through a ‘revolving’ holding fund. To make this sustainable, loan repayments to financial intermediaries are recycled to provide further lending.

A more recent stimulus, the First Loss Portfolio Guarantee, has already had an impact on lending, according to the EIF, and it says it is now launching a risk-sharing pilot scheme to meet the financing needs of highly innovative SMEs and expanding its range of venture and growth capital instruments.

The EC is also seeking to grow Europe’s network of 75,000 ‘business angels’, who invest their own money and experience in start-ups they find promising. The angels invested three billion euros in 2006 alone.

Funding and support for entrepreneurs were key features of European SME Week last month. Conferences, workshops, exhibitions and advice sessions were held across 37 countries in line with the Small Business Act for Europe. Since the act was adopted in 2008, the Commission says “considerable” progress has been made to help businesses, with measures including public authorities required to pay suppliers within 30 days.

Other EU funding sources include:

•The Seventh Framework Programme for Research and Development – support for applied research and the commercialisation of the results

•PROGRESS programme (to 2013) – micro-credit for small firms and people who
have lost their jobs and want to start their own businesses

•Grants – for projects or organisations that promote the interests of the EU or contribute to the implementation of EU programmes or policies.

For more about EU funding, go to


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