Domestic SMEs are considerably more dependent than their European counterparts on bank overdrafts, credit lines or credit card facilities, according to a survey carried out by the Central Bank of Malta in conjunction with the European Commission and the European Central Bank.
In 2014, more than 70 per cent of Maltese SMEs used these types of financing compared with around 37 per cent in the EU.
This is hardly the best way forward, the survey suggests, as banks typically charge higher interest rates on these forms of financing, compared with bank loans.
In the EU as a whole, SMEs were charged a median interest rate of five per cent between April and September 2014, while local SMEs were charged 5.7 per cent, at the higher end of the EU range.
Compared with their European counterparts, domestic SMEs also stand out as the most dependent on internal financing, such as retained earnings or proceeds from the sale of assets.
This trend is reflected very differently across the EU. For example, more than a quarter of SMEs in Malta, Ireland and Estonia use retained earnings to finance operations and investments – while fewer than two per cent of firms in Portugal do.
On the other hand, domestic SMEs are much less reliant on leasing or hire purchase facilities than the average European SME.
The survey suggests that the use of internal financing increases steadily with firm size and is more frequently resorted to by innovative firms compared with less innovative ones.
This could be linked to the risky nature of these enterprises, which makes it more difficult to obtain external financing owing to the uncertain nature of the business venture, and ultimately, the profits outcome.
Maltese SMEs are more reliant on external financing for inventory and working capital, while in the EU this is less noticeable. They are also more likely than the average EU SME to use such funding to develop or launch new products, refinance or pay off their debts, or utilise them for hiring and training or employees.
The percentage of domestic firms that mentioned access to finance as their more pressing problem has increased from 4.7 per cent in 2011 to 11.5 per cent in 2013. This, however, remains below the EU average of 14 per cent.
The report was compiled by CBM senior research economist Brian Micallef.