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Small business funding in Europe: opportunities and challenges

As one of the world's up-and-coming innovation hubs, Europe is an attractive destination for young entrepreneurs looking to start small businesses. But, since insufficient funds are one of the common challenges associated with start-ups, it's important to know what Europe can do for these entrepreneurs and what options they have at their disposal compared to the United States.

Map Europe

For many years, Europe has been known for its conservative funding and lending market, but, as Fintech innovations are making their way into every aspect of the business world, entrepreneurs now have more multiple options to choose from. From the classic EU-funded solutions to the new alternative lending platforms, small businesses owners are now more empowered to do business in Europe and can access the funding that matches their long-term needs and goals.

EU funding for European Startups and Entrepreneurs

One first solution for small European startups comes from the EU itself, which has initiated a number of programs for this category of entrepreneurs. Financial support can come in the form of grants, loans, guarantees, equities, subsidies and prizes, with the additional option of direct purchases from SMEs through public contracts. Almost everyone can apply for one of these programs and it goes without saying that the business needs to be 100% legitimate to gain funding from the EU or one of their partner institutions. In terms of fields with the highest chance of succeeding, there are no strict requirements, but considering the EU's mission to align economic growth with sustainable actions, some industries are likelier to be successful. Examples include: renewable energies, urban development, start-ups that promote social inclusion or humanitarian work, finance and tech innovation. The main programs that start-up owners can apply for include InnovFin and COSME, which are both aligned with the EU's Horizon 2020 objectives.

European Venture Capital funds are still insufficient

Business funding

Venture capital funds are another solution for startups, but, compared to the U.S., where investors are ready to write big checks, especially for tech companies, Europe doesn't seem to have the same availability of VC funds. There is no clear data available on European VC funds, but, according to a recent estimate, most companies have trouble raising capital in the order of millions. Experts forecast that the growing number of US investors expanding on the European market could trigger a growth in VC funding and things will change in the following 10 years.

The rise of alternative funding

The availability of commercial loans for start-up owners has always been famously low due to traditional lending criteria used by banks, but this is slowly starting to change in Europe. Pushed forward by FinTech innovations, banks are starting to have more flexible criteria, but alternative funding stands out as the main solution for small business owners.

The changing loan landscape

The process of getting a business loan has changed dramatically compared to the previous generation of entrepreneurs. If in the past small business owners were at the hands of traditional banks and often had to give up their innovative ideas, now, the vast availability of commercial loan allows them access to flexible financial solutions. This change is mostly due to FinTech and Big Data, which help lenders conduct a thorough risk assessment. As a result, the lending market has changed considerably throughout Europe, becoming more flexible and more accessible. The UK, France, and Germany are leading the way in terms of FinTech innovation, but Scandinavia is quickly catching up. For example, the Swedish loan market is being disrupted by innovative start-ups who offer an alternative to traditional banks. Compared to France, where banks have only lost 10% of consumer finance values, Sweden is a key market for FinTech players, according to a McKinsey study.


Business funding

Although it may not always have the same efficiency rate as commercial loans, crowdfunding is a rising trend among European start-ups. Popularized by platforms such as Kickstarter and Indiegogo, crowdfunding is a viable option for many startups, especially the ones activating in creative industries (music, game development, board games, etc.). However, one major limitation of crowdfunding is that security regulations vary from country to country and some member states do not have a legal framework for this. For example, crowdfunding is a relatively simple, streamlined process in countries like the UK and the Netherlands, but startups in Central or Eastern Europe will face some challenges along the way.

P2P lending platforms

Small business owners who do not want to obtain a loan from a bank or a loan company also have P2P lending at their disposal. Similarly to crowdfunding, P2P lending platforms are based on the help of the platform's users, but this time, the users are usually investors looking to broaden their portfolio. So, for example, if you are an individual looking to start a home business and needs help with buying equipment or manufacturing a product, you can post about in on P2P lending platforms and get a reply from individuals and businesses.

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