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17.2.3.  Business funding in the EU

    Many European SMEs experience financing problems. They have less equity capital than their counterparts in the United States or Japan and they are more dependent than large firms on direct institutional finance (bank overdrafts, short and long-term loans), which is more expensive. The Commission noted that the situation could be improved easily by providing them with effective advice regarding both their management methods and their relations with their financial backers [COM/93/528]. It also suggested improving coordination and communication between the various European, national, regional and local programmes aimed at strengthening the financial position of SMEs. The risk capital action plan (RCAP), adopted by the Cardiff European Council in June 1998, encourages venture capital investments by the structural funds and other capital markets, particularly in the seed and start-up phases, which have traditionally been the weakest links of the financing cycle in Europe [COM/2001/605 and COM/2002/563]. Community Guidelines on State Aid to Promote Risk Capital Investments in Small and Medium-sized Enterprises set out the criteria the Commission applies in the compatibility assessment of the risk capital measures in accordance with Article 87 (3)(c) of the EC Treaty (Article 107 § 3.c TFEU) [see section 15.5.1].

    The European Investment Bank (EIB) through its Global Loans and the European Investment Fund (EIF) are the financial institutions of the EU in support of SMEs [see section 7.3.3]. The EIF’s activity is centred upon two areas, venture capital and guarantees. EIF’s venture capital instruments consist of equity investments in venture capital funds and business incubators that support SMEs, particularly those that are early stage and technology-oriented. EIF’s guarantee instruments consist of providing guarantees to financial institutions that cover credits to SMEs. Both instruments implemented by the EIF for SMEs are complementary to the Global Loans provided by the European Investment Bank to financial intermediaries in support of SME financing. EIF’s instruments are implemented in the context of the multiannual programme for enterprise and entrepreneurship (2001-05) [see section 17.2].

    Through the leverage effect of its venture capital and guarantee instruments, the European Investment Fund is able to contribute to the development of SMEs in the EU Member States and the candidate countries in the framework of the Europe 2020 strategy [see section 7.3]. The EIF does not invest in SMEs directly, but instead always works through financial intermediaries. These intermediaries are given full delegation of activity. The EIF is not involved in individual investment/credit decisions. SMEs in search of finance are requested to contact an EIF intermediary in their country/region for information on eligibility criteria and application procedures. The EIF's engagement plays a catalytic role in the creation of investment funds, because it has the effect of attracting other investors and bestows to these funds the critical size allowing them to launch their investment activities.

    SMEs are particularly interested in the possibility of EU funding under the common regional policy. According to Regulation 1303/2013 [last amended by Regulation 2015/1839 and Decision 2014/190], laying down common provisions for all the 'European Structural and Investment Funds' (ESI Funds) [see section 12.3], where financial instruments support financing to enterprises, including SMEs, such support shall target the establishment of new enterprises, early stage-capital, i.e. seed capital and start-up capital, expansion capital, capital for the strengthening of the general activities of an enterprise, or the realisation of new projects, penetration of new markets or new developments by existing enterprises, without prejudice to applicable Union State aid rules, and in accordance with the Fund-specific rules [see section 12.1.2]. Such support may include investment in both tangible and intangible assets as well as working capital within the limits of applicable Union State aid rules and with a view to stimulating the private sector as a supplier of funding to enterprises. It may also include the costs of transfer of proprietary rights in enterprises provided that such transfers take place between independent investors. In order to ensure that resources allocated to financial instruments in favour of SMEs achieve an effective and efficient critical mass of new SME debt finance, it should be possible to use those resources in the entire territory of the Member State concerned regardless of the categories of region therein.

    On the basis of Regulation 1301/2013 on the European Regional Development Fund [see section 12.3.3], the ERDF may support the following investment priorities enhancing the competitiveness of SMEs by: (a) promoting entrepreneurship, in particular by facilitating the economic exploitation of new ideas and fostering the creation of new firms, including through business incubators; (b) developing and implementing new business models for SMEs, in particular with regard to internationalisation; (c) supporting the creation and the extension of advanced capacities for product and service development; and (d) supporting the capacity of SMEs to grow in regional, national and international markets, and to engage in innovation processes. In order to support these investment priorities, The ERDF can support the following activities: (a) productive investment which contributes to creating and safeguarding sustainable jobs, through direct aid for investment in SMEs; and (b) productive investment, which contributes to the above investment priorities.

    The economic and financial crisis has led to a lowering of the level of investments within the Union. Investment has fallen by approximately 15 % since its peak in 2007. Comprehensive action is required to reverse the vicious circle created by a lack of investment and by increasing disparities between regions, and to reinforce confidence in the Union economy, while incentives for creating an investment-inducing environment in Member States could boost economic recovery. To this end, a Regulation establishes a European fund for strategic investments (EFSI), an EU guarantee and an EU guarantee fund [Regulation 2015/1017]. In addition, this Regulation establishes a European investment advisory hub (EIAH) and a European investment project portal (EIPP). This Regulation provides for the Commission to conclude an agreement with the European Investment Bank (EIB) on the EFSI and an agreement with the EIB on the implementation of the EIAH Agreement, i.e. the legal instrument whereby the Commission and the EIB specify the conditions laid down in this Regulation. The purpose of the EFSI is to support, in the Union, through the supply of risk-bearing capacity to the EIB, the following: (a) investments; and (b) increased access to financing for entities having up to 3 000 employees, with a particular focus on SMEs and small mid-cap companies.

    The Business and Innovation Centres (BICs), set up by the Commission and public and private regional partners are designed to promote business creation and expansion by providing a comprehensive programme of services (training, finance, marketing, technology transfer, etc.) to SMEs which are developing innovative technology-based projects [Special report, see section 12.2.3].

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