Access to finance for SMEs

Access to finance for SMEs

Eurostat statistics show that five out 10 businesses don’t survive the first five years.

Eurostat statistics show that five out 10 businesses don’t survive the first five years.

One of the most pressing challenges that many start-up businesses or SMEs in general tend to face is access to finance and in Malta it is more acute because we tend to over-rely on bank finance. I see it in my consultancy work on a daily basis: entrepreneurs and businessmen have a good product or service and healthy revenue streams but they struggle to scale-up the business or make necessary capital expenditure investments to maintain their competitive position due to having little or no access to finance.

In fact, Eurostat statistics show that five out 10 businesses don’t survive the first five years; which to my mind is odd, given that micro to medium enterprises in Malta amount to circa 99 per cent of all local companies (circa 60,000 businesses) and contribute about 65 per cent of total GDP. This means that the engine room of our economy has a 50 per cent chance of faltering and I suspect sometimes merely because of a lack of financing. Logic has it, therefore, that if one ameliorates access to finance for micro SME businesses it should help our economy leaps and bounds.

Why is access to finance difficult? I think it varies from business to business but commonly it’s due to entrepreneurs having a lack of collateral, no or little track record, the conservative instinct of bankers clashing with the ‘animal spirits’ of entrepreneurs, a higher than normal credit risk profile or plain old bank-imposed restrictions. Not to mention the fact that venture capital, business angels and the like, are still a bit extraterrestrial in Malta.

This may be about to change thanks to a business friendly JEREMIE. I recently attended an information session co-organised by Malta Enterprise, the European Investment Bank, Bank of Valletta and the GRTU where the Joint European Resources for Micro to Medium Enterprises (JEREMIE) was explained to a room-full of people.

From what I can understand, the whole point of JEREMIE is to improve access to finance for start-up businesses and or SMEs. The total available funds, which will be re-cycled over the long-term, are €51.04 million and have a maturity period of anything between one to 10 years.

The intended use is for capital investments (overdrafts are not eligible) and specifically for businesses related to the ICT industry, manufacturing, green energy, wholesale and retail, professional, scientific and technical services, Gozo as an ecological island and the arts and entertainment.

For the record, JEREMIE is not intended for the fishing, agriculture, construction, real estate and transport industries since they benefit from other funds.

As a business consultant, I like this financial product since the declared statement of intent of BoV (the local financial intermediary managing this fund) is to spread the money among small businesses; meaning that the multiplier effect should kick in lower down the business chain.

In fact, the intention is to loan out on average anything in the region of €20,000 to €100,000 per business. For correctness sake, the actual loan amount can be as high as €500,000 but the intention is to deal in smaller amounts.

This means that the money will permeate down to possibly 510 businesses across various industries rather than a few large enterprises which to my mind makes perfect sense. Moreover, a business doesn’t necessarily need to have collateral (meaning no legal or notarial fees), and if it does the hurdle rate will be around the region of 25 per cent (meaning reduced legal or notarial fees), and if you do have collateral you can opt instead to benefit from very low interest rates (anything in the region of zero per cent – two per cent plus above the base rate). You could even benefit from both, namely very low interest rates and minimal collateral requirements.

Naturally, it pays to have a short, well reasoned and articulated business plan, in order to stand a better chance of winning the banks support and obtaining an advantageous deal. In my opinion entrepreneurs are very often good at driving their business forward (getting things done), understanding latent demand for a new product or service or anticipating as yet unarticulated customer needs but lack the craft to explain all this to their bank.

You definitely need to be able to clearly articulate the reasons why your customer value proposition is compelling to your customers. You need to be able to explain why your profit formula works. In short, you need to be able to clearly explain the mechanics of your business model. You also need to be able to explain how and why the capital expenditure you are proposing will improve your business’ competitive position.

Let’s not forget the economic recovery we were all hoping for after the recession is now looking a bit anaemic and banks will only back the most promising business proposals. They will be looking for innovative, forward looking business ideas; at proposals that invest in growth industries; at investments in people that have 20:20 strategic foresight.

I am reliably informed that BoV has apparently already received applications worth circa €25 million; so if you are interested, don’t hang around but apply quickly. For the record JEREMIE applies to both BoV and non-BoV clients, double-funding EU restrictions apply and I am only advising that one looks into this financial package because I think it might be of interest to readers of The Times Business.

Mr Fenech is managing director of Fenci Consulting Ltd..

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