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EIB launches new loans for SMEs

Date: 03/10/2008

EIB devotes EUR 30bn to SMEs in Europe in the form of new loans granted via commercial banks

At the request of the European Union’s Finance Ministers at the informal Council held in Nice on 12-13 September 2008, the European Investment Bank Group (EIB Group) is modernising and strengthening its support for Europe’s small and medium-sized enterprises to help mitigate the effects of the current credit crisis.

On 23 September, the EIB’s Board of Directors adopted an initial series of measures:

  • The EIB will earmark EUR 15bn over the period 2008-2009 for loans to small and medium-sized enterprises in Europe granted via commercial banks, as part of an overall package of EUR 30bn by 2011. This constitutes a substantial increase over its usual lending in this sector. The EIB therefore plans to do more but also to do better: it has developed a new lending formula called EIB loan for SMEs, which will still be deployed via commercial banks, but will be simpler, more flexible and more transparent, so benefiting a greater number of SMEs. These new arrangements follow the broad consultation of SME market players carried out by the EIB in 2007-2008.
  • Subsequently, by the end of the year, the EIB will offer the intermediary banks more sophisticated risk-sharing products designed to reach market segments that commercial banks have difficulty penetrating (i.e. SMEs for which the risk is considered too great or the security provided is judged insufficient).

The EIB loan for SMEs:

Specifically, who is eligible for new EIB loans for SMEs, and to finance what kind of projects? And what is the procedure for obtaining an EIB loan for SMEs? What follows is a practical guide to the new measures adopted on 23 September by the EIB's Board of Directors.

  • Who is eligible for an EIB loan for SMEs?
All autonomous firms with fewer than 250 employees. Subsidiaries and holding companies of industrial groups are not eligible as these EIB loans are reserved for small and medium-sized enterprises.
  • To finance what?

EIB loans for SMEs can support all types of investment or expenditure necessary to grow a small business. Hence, the investment can be:

  • tangible, i.e. the purchase of plant or real estate. In principle, the purchase of land is ruled out unless it is vital for the investment while the purchase of agricultural land is totally excluded.
  • intangible, such as the financing of expenditure directly related to research and development, building up or taking over distribution networks, including in another EU Member State, the filing or acquisition of patents or the costs incurred in the transfer of an enterprise enabling the continuation of economic activity (where the buyer and the enterprise up for sale are SMEs and the amount required to finance the transfer does not exceed EUR 1m).
  • the permanent increase in working capital required to develop an expanding SME.

In practically all sectors of the economy:

EIB loans for SMEs can support investment in any economic sector except arms, gambling, tobacco, activities involving animal testing, activities whose environmental impact cannot be mostly mitigated or offset, sectors that are morally or ethically controversial (such as human cloning) and pure property development.

Also excluded are purely financial transactions (e.g. company takeovers) with the exception of transfers of businesses in the specific circumstances described above.

  • For how much and on what terms?

EIB loans for SMEs can support investment for any amount ranging from very small projects to investments costing up to EUR 25m. EIB finance can be obtained for loans of generally between 2 and 12 years. The actual length of the loan will depend on the economic life of the project financed. The maximum amount provided by the EIB may not exceed EUR 12.5m per loan.

EIB loans for SMEs will be provided throughout the European Union via commercial banks, which will be responsible for evaluating each loan application submitted by a SME. For most operations, it will be entirely up to the intermediary bank to decide whether or not to grant a loan to the SME. The EIB’s participation serves to enhance the financial terms of such loans and the EIB will ensure that the SMEs concerned are clearly informed of these favourable terms.

For certain operations, the EIB can also share the risks with the banking partner or provide mezzanine finance. The practical arrangements for these two options will be spelt out at a later date.

  • Whom to contact?

Over a hundred banks in the 27 Member States of the European Union already work regularly with the EIB. Please find their regularly updated contact details for each country (see link below).

  • When will the new EIB loans for SMEs be available?

The first EIB loans for SMEs under this new arrangement will be available in a number of countries at the beginning of October. They will be announced separately.

  • How will SMEs benefit from the new EIB loans?

The EIB is the bank of the European Union. Thanks to its Statute and shareholders, the 27 Member States, it has the best possible rating on the capital markets (AAA). The EIB can therefore borrow funds on the capital markets on favourable terms, which it passes on in the loans that it grants, in particular to SMEs via intermediary banks. These banks undertake to inform the SMEs specifically and individually (e.g. in an information letter) of the EIB’s involvement and its impact on the financial terms of the loan received.

  • Will the new EIB loans for SMEs be available in all EU countries?

Yes, the EIB loans for SMEs can support investment in the 27 EU Member States.

  • Where will the EUR 30bn to be made available by the EIB to SMEs come from?

The EIB is a policy-driven bank which places no burdens on either the budget of the European Union or the taxpayers of the Member States. It borrows funds on the capital markets independently (over EUR 50bn in 2007). It therefore acts to tap savings in support of the policies of the European Union, raising significant volumes of financing at a global level for use in the development of the European economy.

New products being prepared

Subsequently, by the end of the year, the EIB will offer the intermediary banks more sophisticated risk-sharing products designed to reach market segments that commercial banks have difficulty penetrating (i.e. SMEs for which the risk is considered too great or the security provided is judged insufficient). Three types of measure will be developed:

  • loans where risks are shared with the banks, with the EIB guaranteeing part of the total risk taken on by the intermediary bank;
  • loans where the EIB takes a risk on the beneficiary SME directly, in parallel with the intermediary bank; and
  • mezzanine products for high-growth SMEs or “gazelles”. Through its subsidiary the European Investment Fund (EIF), the EIB Group will provide participating loans, which are like quasi-equity and enable “gazelles” to increase their ability to obtain bank credit without necessarily having to open up their capital or provide substantial security (the participating loan being converted into shares only if the company is unable to repay the loan).

Finally, the EIB and the European Commission will work together to establish a pan-European microcredit fund aimed at very small enterprises. This fund will allow loans to be granted, through around 30 European microfinance institutions, for the creation and development of very small enterprises, as well as to provide technical assistance to such companies. This will focus in particular on companies located in sensitive areas.

Background

The EIB: financing partner for SMEs for the last 40 years
 
The EIB Group has been financing SMEs since 1968, with its Governors – the 27 Finance Ministers of the European Union – making this one of its five operational priorities in 2005.

Until 2007, the EIB Group’s activities in the SME sector comprised three types of product, provided through more than 200 commercial banks and almost 300 private equity funds in the 27 Member States of the European Union:

  • EIB credit lines to commercial banks for the medium or long-term financing of physical investment by SMEs: this lending activity had an annual volume of almost EUR 5bn and reached some 50 000 SMEs per year.
  • Venture capital: since 2000, the EIF has invested EUR 4.4bn in 273 private equity funds, which acquire stakes in SMEs, primarily innovative small businesses with high growth potential (Lisbon Strategy). These funds have enabled more than 800 000 SMEs to be started up across the European Union since 2001.
  • Bank guarantees, also provided by the EIF. 190 operations have been carried out allowing the partial guarantee of EUR 11.6bn of commitments for bank loans to SMEs. By sharing commercial risks with banks in this way, the EIF shifts the risk, reducing the level of reserves that banks have to accumulate under Basel II. This indirect financial lever stimulates the banking market for SMEs.

The EIB: a miracle solution?

No, the EIB cannot provide a cure-all. However, during this period in which most Member States have little room for manoeuvre and the banking sector is faced with a major financial crisis, the EIB Group can provide flexible and effective additional support. The Bank is owned by the Member States but places no burdens on either the budget of the European Union or the taxpayers of the Member States, borrowing funds on the capital markets (more than EUR 50bn in 2007) independently and without guarantees being provided by the Member States. It therefore acts to tap savings in support of the policies of the European Union, raising significant volumes of financing at a global level for use in the development of the European economy.