Sources of financing for SME’s1 in the Visegrad countries23 March 2020 | 08:16 | Focus News Agency
Les Nemethy is CEO of Euro-Phoenix (www.europhoenix.com/), a Central European corporate finance firm, and author of Business Exit Planning (www.businessexitplanningbook.com/).
Access to finance is a high-stakes issue when it comes to SME development. Large corporations typically have much better access to capital, whereas in many countries it is the SME’s that generate more jobs and create more local wealth.
This article will look at financing methods and trends for SME’s over the past few years, typically utilized in the Visegrad Four (“V4”) countries.
The following exhibit indicates that it is only a minority of companies that consider access to finance to be a problem, and that recently access to finance is becoming less of an issue.
Exhibit 1: Proportion of SME’s that consider access to finance as a major concern3
While it was one of the top challenges for SME’s at the beginning of the decade, by 2019 access to finance was a secondary concern. Availability of skilled staff and managers, finding customers and reducing costs were of greater concern. Better SME access to finance is a direct result of the improvement in economic conditions since 2013, and lower interest rates throughout Europe.4.
The exhibit below compares sources of financing relevant to SME owners and their relative utilization by country:
Exhibit 2: Relevant sources of financing for SMEs in V4 countries in 20195
Credit lines6 and leasing were the most used sources of financing during the past few years; they provide flexibility and target precise financing needs. Bank loans (e.g. where repayment terms are fixed) are not only slightly less frequently used by SME’s, being less flexible than credit lines.
Grants have a surprisingly large usage by SME’s in the V4, with Hungarian SME’s having a substantial lead. The Hungarian Government has decided to channel a large share of their EU structural funds towards SME’s.
It is perhaps surprising that equity financing accounts for such a tiny share of SME financing throughout the V4, whereas equity financing represents on average 11% of SME financing in the EU. Equity financing is a relatively new financing method in Central Europe (beginning only in the 1990’s) and is typically concentrated in few countries (e.g. Poland or Hungary) and attractive sectors (e.g. healthcare and information technology) where attractive returns on investment are attainable.
According to SAFE survey 20197 , trade credits are a substantial source of SME financing in Poland.
Factoring still has a perception as being a financing method used only in distress situations or as a last resort. As this perception diminishes in the V4, factoring is likely to catch up to the EU average. Factoring is much more used by SME’s in Western Europe. It is also used by larger companies (e.g. 250+ employees) in Central Europe involved in export activities. 8.
Use of financing by SME’s is shown in the following exhibit, with fixed investments and working capital taking the lead:
Exhibit 3: Uses of financing in SME’s in V4 countries in 20199
SME’s in Central Europe use very little equity financing. One might speculate about the reasons for this. Perhaps the heavy use of grant funding is a substitute for equity. Or perhaps the relatively low interest rates and availability of debt diminishes the need for equity, (although this would not explain why there is so much more equity used elsewhere in Europe).
SME’s in Central Europe are perhaps missing an opportunity here: buoyant financial markets are the most opportune time to create an equity reserve, so that companies may avail themselves of excellent opportunities that present themselves during recession or depression, or just to provide a buffer to help survive a downturn.
1. Small and Medium-sized Enterprises: Companies that have less than 250 employees and ?50 Million turnover according to the European Commission
2. Called also V4 Countries, it’s a regional group of four Central European countries that includes Czech Republic, Hungary, Poland, Slovakia, which are members of NATO and EU
3. European Central Bank – Access to Finance of Enterprises (SAFE) survey 2019
4. Refers to the 28 members of the European Union
5. European Central Bank - SAFE survey 2019
6. Credit lines include bank overdrafts and credit overdrafts, (e.g. constitute an arrangement between bank and customer that establishes a maximum loan amount a customer can borrow (credit limit). It may be offered as a facility and is accessible at any time as long as it does not exceed the credit limit
7. European Central Bank – Access to Finance of Enterprises (SAFE) 2019 survey 2019
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