Access to finance

Information about the sources of finance available to SMEs.

While big companies generally resort to financial markets to generate investment, small businesses only have access to finance through limited sources.

Bank loans

Before lending, banks estimate the relative risks of businesses, anticipating their growth and ability to repay. They will refuse a loan when it represents a potentially high risk and low return, which is often the case for smaller loans.

A third party can make it easier for a bank to grant a loan through a guarantee scheme, in which it covers part of the risk taken by the bank.

Equity

Small companies that present too high of a risk for banks and are unable to secure loans can raise capital by selling equity in the business.

Investors will provide risk capital to small, innovative businesses with potential for high growth if they anticipate a substantial profit from their share in the company.

Loan/equity combinations

Also called mezzanine finance or quasi-equity, combinations of loan and equity are often used to finance expansion or transfer of ownership for mature companies, where risks for investors are easy to assess.

Three parties are involved in transfers of ownership: the investor, providing the cocktail of loan and equity; the seller, who generally receives cash, and the buyer, who gets a significant percentage of company shares and an acceptable level of company debt.

Although the complexity of this financing means it is usually available only for transactions above €5 million, mezzanine finance is increasingly involved in smaller transactions.

Subsidies

To encourage companies to focus their efforts on certain areas of business activity, such as innovation and the environment, the EU and national governments offer incentives in the form of subsidies, typically co-financing activities within projects.

Source: European Commission