Maltese SMEs often complain of a lack of financing options –the 100 per cent take up of the JEREMIE loan guarantee product a year ahead of its planned duration provides a clear indication of the type of financial instruments needed to address this financing gap. Chris Meilak and Daniel Debono report on the findings of a study on access to finance in Malta conducted for the Malta Business Bureau by Ernst & Young.
With only about 50 locally based firms being classified as ‘large’, Malta can be described as essentially a small business economy. SMEs are the backbone of the Maltese economy, and need continuous access to finance to expand their operations and continue generating jobs. However, a proven financing gap due to lack of providers of risk capital tends to slow down this growth path. This gap seems to be magnified further due to the size of the local market and its unique characteristics.
The study shows that the smaller the business and the ‘younger’ it is within its lifecycle, the more problematic it is to obtain the required financing
A study undertaken by the Malta Business Bureau in collaboration with Bank of Valletta plc and launched in April provides further evidence that bank financing remains the main (and in some cases the only) source of finance for SMEs in Malta. This emerged from a survey carried out among 100 local SMEs and complemented by consultation with various public and private stakeholders.
The report outlines that among the surveyed companies own financing (90 per cent of respondents), bank overdrafts (70 per cent) and bank loans (50 per cent) emerged as the main sources of SME financing, with only four per cent using third party equity. However, since commercial banks are lenders and not investors, they are unable to cover all sectors and lifecycle stages and as a result other sources of finance are still required by SMEs in certain critical lifecycle stages. The study shows that the smaller the business and the ‘younger’ it is within its lifecycle, the more problematic it is to obtain the required financing. Additionally, about a quarter of interviewed firms applied for national/ EU grant schemes.
Member states are being invited by the European Commission to consider complementing existing grant funding with innovative financial instruments. The MicroCredit JEREMIE loan guarantee product in Malta is an example of this type of instrument. Launched in April 2011 it has already been fully allocated. Through this instrument, Bank of Valletta plc, which won the tender to administer it, leveraged on a loan guarantee of €8.8 million provided by the European Investment Fund (EIF) to create an available loan portfolio of about €51 million.
With the EIF covering 75 per cent of credit losses at facility level, and payments by the EIF being capped at 23 per cent of total fund, this loan guarantee allowed participating SMEs to benefit from lower collateral requirements and lower pricing. As mentioned during the recent public launch of this report, these areas are two of the main concerns of local entrepreneurs.
On the other hand, and from a public interest point of view, the benefits of this type of instrument compared to grants are clear – apart from a direct multiplier effect of about six times (i.e. €8.8 million directly generate €51 million), the loan amount is likely to be complemented by additional investment from the applicants. Moreover, interest paid and loan re-payments can be re-injected back into the fund for them to be eventually reallocated to additional SME beneficiaries.
Hence, these instruments create the right incentives for financial intermediaries and beneficiaries to efficiently and effectively use public resources, while reducing the administrative burden often associated with grant implementation and monitoring. The EIF loan guarantee also allows the bank to classify as ‘bankable’ applicants who would generally find it difficult to access bank financing under normal commercial conditions – this is the particularly the case, for instance, with a number of start-ups. As a result, about 40 per cent of the 500 SME applicants in the Malta JEREMIE product were start-ups.
Apart from this type of loan guarantee product, other options could include equity guarantees, seed capital type of loans, or risk-sharing/ co-investment through equity. While the framework to blend these financing instruments with grants and to tackle any state aid implications needs to be analysed in further detail, the positive experience with the Malta JEREMIE product is a clear sign that this is the way forward in the next EU programming period, especially when taking into consideration the implications on SME co-financing rates of Malta’s shift to a non-assisted region.
The MBB report’s recommendations include an extension of the current loan guarantee financial instrument (both by size and eligible sectors), a further consideration of other types of financial instruments, as well as the possibility of blending these instruments with grants (such as 25 per cent own financing, 25 per cent grant pre-financed through a bridge loan, and the remaining 50 per cent through a bank loan, preferably under a loan guarantee scheme), and the potential adoption of a multiple instrument approach.
At the same time, the MBB is aware that grant type of funding will continue to remain vital for local SMEs, especially for some specific sectors/ start-ups. In this area, a number of survey respondents called for greater access, a rationalisation of the application process, as well as faster selection and disbursement processes. Additionally, the take up for any innovative financial instruments requires further investor readiness and start up programmes.
The results of this study show that although a range of assistance programmes and initiatives already exist for Maltese SMEs, a number of local SMEs still require access to a broader range of support than what they already have access to. Innovative financial instruments could complement grant funding and would allow the business community and authorities to tap the benefits of both sources of finance.
Chris Meilak is a manager at Ernst & Young’s valuation and business modelling sub-service line. Daniel Debono is an executive at the Malta Business Bureau, co-ordinating initiatives related to business competitiveness.