SMEs in Europe: An Overview

Abstract

Small and medium-sized enterprises (SMEs) are the backbone of the EU economy: they represent 99.8 % of EU companies, almost 60 % of GDP (total value added) and almost 70 % of the total workforce. Stefano Fontana describes the European SME landscape and also the new funding channels and actors that are rapidly entering the EU SME funding market: private loan and bond funds, selective and diversified funds (both equity and debt), and e-platforms.

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2.1 Introduction

In his Principles of Economics, first published in 1890, Alfred Marshall concluded that, in an industrial society, profit is achievable not only through capitalistic enterprise, but also through alternative economic systems. Profit, in particular, becomes possible through the distribution of a multitude of firms, each of which is specialized in a given phase of the production process. The beneficial effects of a similar process would be measurable not only in economic terms, but also in terms of the enhancement of living standards, triggering a sort of virtuous cycle among workers, thus creating a community based on general scientific and technical knowledge aimed towards productivity. Hence, large and small businesses would be able to prosper by interacting within their local territory. Expanding opportunities for small and medium-sized enterprises (SMEs) has been subject to different interpretations in economic literature over time, such expansion being considered as both essential to the survival of SMEs and an obstacle to the flexibility of the firms themselves.

There have been many studies of SMEs based on the contributions of classics: for example, Rostow (1960), Chandler (1962), McGuire (1963) and Greiner (1972). These studies have as a common denominator a vision of the small business not as a finished entity but, rather, as a mandatory phase in a natural and ineluctable process of growth, in which a small business can grow or, alternatively, become extinct.

A different approach appeared in the 1970s. The economic crisis, with the managerial and organizational distress of many large companies that had become too imposing and marked by officialism, led to a revaluation of the small business model. It came to be considered as a more flexible form of organization and, therefore, particularly suitable to function in a more complex and turbulent social-economic environment. In 1973, Small is Beautiful. A Study of Economics as if People Mattered by E.F. Shumacher strongly echoed this. The book criticized the Fordistic development of capitalism as materialistic, efficiency-minded and oriented towards an idolatry of excess. The focus of the book was on the economic development of underdeveloped countries that did not need complex organizations and high capital technology as much as they needed intermediate and appropriate technology.

In addition to the theories mentioned above, which could be defined as “extreme”, since the 1980s various studies have formulated a third theory that identifies SMEs as stable and independent entities having distinct and typical characteristics, structures and managerial mechanisms (Churchill and Lewis 1983).

It appears misleading to consider SMEs as “immobile” in present-day economic and social contexts, where globalization and rapid technological development render competition more and more aggressive as the interaction between economic actors becomes increasingly articulate and turbulent.

Virtuous SMEs, capable of facing the continuous challenges of the market and conquering their own enclave, are not static entities in an ever-evolving world. On the contrary, they are organizations that identify and follow paths of growth and affirmation while maintaining their reduced size.

SMEs account for 95 % of companies, provide 60–70 % of employment opportunities and generate a large portion of new work posts in the economies of OECD countries.

Studies show that the development of SMEs is linked tightly to economic growth. For example, Beck et al. (2005) reveal the robust positive relation between the two. According to Ayyagari et al. (2007), in high-income countries SMEs contribute, on average, up to 50 % of the gross national product (GNP).

SMEs possess specific strong and weak points that require appropriate policies. With the appearance of new technologies and globalization, the importance of many activities of economies of scale has decreased, while the potential capability of small businesses has risen.

However, many of the problems that SMEs traditionally face – lack of funds, difficulty in the use of technology (optimization), limited managerial skills, scarce productivity, normative confinements – have worsened in a globalized, dynamic and technology dominated environment.

On one hand, large companies reduce and commission various activities; on the other, the relevance of SMEs to the economy is expanding. In addition, the competition linked to the rise of these businesses heavily influences the increase in productivity and the consequent economic growth.

This process implies a great mobility of work posts, which is, itself, a fundamental aspect of the competitive process and structural change. Less than half of small start-ups survive for more than five years, and only a small number is able to become part of the group of companies that are leaders in innovation.

2.2 European Commission Definition of SMEs

There are multiple definitions of SMEs. However, rarely do these definitions differentiate between micro (artisan), small and medium-sized enterprises, thus creating more than a little confusion.

The notion of SMEs has been an object of study for the European Commission since the beginning of the 1990s.

In a single market with no internal boundaries, it becomes essential that pro-SME policies have a common definition for reasons of consistency and efficiency. A single definition also limits the incidence of distortion in competition, given the evident interaction between the requirements of SMEs and the opportunity for the organizations that satisfy these requirements to access community and national benefits to promote and assist their development.

In 1996, the Commission adopted Recommendation 96/280/CE, April 3, 1996, which established the first common definition of SMEs. This definition has been extensively applied in a variety of contexts, both community and national. Nevertheless, the definition has also shown various weaknesses, leaving space for both interpretive difficulties and the elusive practices of a few, mostly large enterprise groups, regardless of the traceability to the concept of an SME comprising the elements of a single company.

Given such weaknesses, the European Commission modified the critiques and parameters of the definition of SMEs in Recommendation 2003/361/CE May 2003, which replaced its predecessor Recommendation 96/280/CE, April 3, 1996.

The new definition entered into force on January 1, 2005; it is applied to all policies, programs and measures relating to SMEs put into effect by the Commission.

The new definition is the result of in-depth discussions between the Commission, the Member States, business organizations and experts, and even two consultations carried out on the Internet.

The changes introduced reflect the economic developments that have taken place since 1996 and a growing awareness of the specific obstacles that SMEs find themselves facing.

The document is particularly important in the light of the fact that the new regulation will directly influence all future actions by the community legislator. Particularly, it will play a significant role in the tricky subject of forms of aid to states, the next structural funds program, and the rules of accounts and budgets of all European businesses.

The new definition is more appropriate for the various categories of SMEs, affording greater consideration to the different liaisons between companies. Furthermore, the definition helps to promote innovation and favors partnerships while ensuring that public programs concentrate only on companies truly in need of aid. The Recommendation essentially extends the concept of enterprise to all entities that exercise an economic activity regardless of its juridical form. Such an extension addresses some interpretative doubts relative to the nature of enterprise for those businesses that carry out an artisan activity, or individual or family-run activities.

Recommendation 2003/361/CE states that a business may qualify as small or medium-sized if it meets the criteria regarding autonomy, staffing levels and financial turnover.

Autonomy: An enterprise is defined “autonomous” if it is neither associated with nor linked to another business – that is, if it does not control (or is not controlled by) other companies.

Staffing levels:

• A micro enterprise should have fewer than 10 employees;

• A small enterprise should have fewer than 50 employees;

• A medium-sized enterprise should have fewer than 250 employees.

Financial turnover:

• A micro enterprise should have an annual turnover or a total annual balance (which corresponds to the total of the company’s assets) of less than €2 million;

• A small enterprise should have an annual turnover or a total annual balance of less than €10 million;

• A medium-sized enterprise should have an annual turnover or a total annual balance less than €43 million.

In summary: in micro, small and medium-sized enterprises, the criteria regarding staffing levels and annual turnover are cumulative, in the sense that both must coexist.

The criteria governing the definition of “actual” employees are essential in determining into which category an SME fits. This criterion depends on whether personnel is full-time, part-time or seasonal, and includes the following categories:

• employees;

• the people that work for the company – i.e. employees that, according to national legislation, are considered as the other employees of the company;

• owners and management;

• partners who conduct a regular activity within the company and that benefit from the financial advantages that derive therefrom.

Not considered as part of the work force are those who benefit from an apprenticeship contract or students with internship contracts. In addition, no record is made of the duration of maternity or family leave.

With regard to the financial status of a business, the annual turnover is determined by deducting all relevant outgoings from the sum obtained during the year of reference for the sale of products and for services rendered. Turnover does not include tax on additional value (IVA [Impuesto al Valor Agregado]/VAT [Value Added Tax]) or other indirect taxes. Another relevant change concerns the new notion of independence; only an independent enterprise can qualify as an SME: no other company may control more than 25% of an SME, either directly or indirectly. This is particularly important because it is defined more precisely and because it includes partnerships in the concept of independence. It was not clear how partnerships would be viewed prior to the establishment of the new definition.

2.3 US Small Business Administration Definition of SMEs

In the United States, the definition of SMEs varies according to the sector in which a company operates. The US Small Business Administration (SBA) determines the variable thresholds, which generally include the following parameters:

• fewer than 500 employees; or

• an annual turnover of less than US$5 million.

Depending on the sector, the range for employees may vary from 50 to 1500 and the turnover could vary anywhere between US$750 thousand and US$38.5 million.

2.4 Other Definitions of SMEs

On an international level, multilateral institutions do not share a specific definition of an SME. As evidenced in Table 2.1, the maximum number of employees can vary between 50 and 300. If one analyzes profit, this varies between US$3 million and US$15 million.

2.5 The OECD Study

Based on an analysis conducted on OECD information concerning the various definitions of an SME (with exclusive reference to the parameter of the employees), 33 out of 34 participating countries (Australia excluded) yielded the following results: 24 countries use the European Community definition (i.e. all EU countries in addition to Mexico, Switzerland and Turkey). The remaining seven countries (Canada, Colombia, South Korea, Israel, New Zealand, Russia, Thailand) use their own national definitions, each of which differs from the others (see Table 2.1).

Table 2.1 SME definitions

In short, the definition of SMEs proposed by the EU primarily uses the criteria of quantity (employees, turnover, assets). In the USA, on the other hand, what is essential in defining SMEs is the number of employees, with the exception of non-productive sectors.

2.6 The SMEs Business Environment in Europe

The EU-28 is represented by countries which have adhered to a unique economic and political partnership, based on 28 countries with a combined population of 507 million inhabitants in 2014 (Croatia joined the EU as of July 1, 2013) which account for most of the continent (see Table 2.2).

Table 2.2 Eurostat population change

The list of member countries and their respective gross domestic product (GDP) at market prices from 2008 to 2013 is presented in Table 2.3.

Table 2.3 GDP at market prices

In the EU, SMEs comprise the majority of businesses, and are a primary employment resource and a stimulus for development. In 2014, SMEs in the EU-28 area totaled approximately 21.3 million, with 886 million workers and with an added value of €3.5 trillion. Tables 2.4, 2.5 and 2.6) show, respectively, the number of companies, number of employees and added value present in the EU-28 zone from 2008 to 2014.

Table 2.4 EU-28 number of enterprises

Table 2.5 EU-28 number of employees

Table 2.6 EU-28 gross value added

At first glance, it is possible to deduce from Tables 2.4, 2.5 and 2.6 that the most numerous type of SME is the micro enterprise, which makes up 90 % of the total of companies. In addition, micro enterprises account for approximately 28 % of personnel employed in all enterprises and generate 21 % of added value produced by all companies.

The added value generated by SMEs in the EU-28 has returned to its level prior to the financial crisis that began in 2008 and, in the period 2013–2014, grew by 2.8 %. Similarly, the number of people in employment registered an increase of 0.16 %, while the number of SMEs diminished by 0.23 %. However, changing the trend of the previous period (2012–2013), the number of businesses dropped by 0.90 %. Table 2.7 summarizes these data.

Table 2.7 Annual growth in SME performance indicators 2012–2014

2.7 A Comparison between the EU-28, Japan and the USA

Having presented the EU-28 data, we are able to conduct a brief analysis in order to compare European SMEs to those of Japan and the United States. The comparison is also significant in light of the fact that the economies of these countries are quite similar. In short, there are 20.6 million non-financial SMEs in the EU-28 with approximately 87 million employees, 18.2 million with 487 million employees in the USA and around 3.9 million with 33.5 million employees in Japan.

If the number of companies were to be determined by the GDP, it is possible to see that the EU-28 and USA are much closer than one would think in terms of the number of businesses (1.65 and 1.63 per million of GDP, respectively). Japan on the other hand, has only 0.85 of businesses per million of GDP. If, however, the number of employees is considered over GDP, the result differs; Japan has the highest number of employees per million of GDP (7.24) compared with, respectively, 6.80 and 4.36 employees per million of GDP of the EU-28 and USA.

2.8 A Brief Analysis of Sector Trends in the Period 2008–2013

According to the Eurostat classification, the major sectors are:

• Manufacturing;

• Construction;

• Retail and wholesale;

• Accommodation/food;

• Business services;

• Others.

The EU-28 SME construction sector, which represents 11 % of added value for SMEs and 12 % of the workforce within the businesses, experienced a strong decline in 2008–2013. In 2013, added value was 21.7 % lower than it had been in 2008, employment had dropped by 18 % and the number of businesses dropped by 10.1 %.

The manufacturing sector is performing below its levels in 2008, with a drop in added value of 2.9 % in 2013 compared with 2008. Employment had decreased by 9.9 % and the number of businesses had dropped by 5.3 %. Today, the manufacturing sector provides employment for more than 17 million people and generates 21 % of added value to SMEs in Europe.

The added value of the SMEs in the retail and wholesale sector rose by 3.1 %, while employment and the number of businesses remained the same in 2008–2013. This sector alone accounts for 26 % of the SME workforce and represents 22 % of added value produced by SMEs in the EU.

Conversely, the SME business services sector grew significantly between 2008 and 2013, with a rise in added value of 7 %, a 5.4 % increase in employment and 10.2 % growth in the number of businesses during that period.

Business services produce approximately 13 % of added value for SMEs and employ approximately 9 million people (11 %).

Last, but definitely not least, the accommodation/food sector shows the strongest growth (10.4 % added value and 6.0 % employment) among the five specific sectors illustrated in the present work, as can be seen in Figs. 2.1, 2.2 and 2.3.

Fig. 2.1

Number of enterprises 2008–2013 percentage change (Source: Our elaboration on Eurostat data.)

Fig. 2.2

Value added 2008–2013 percentage change (Source: Our elaboration on Eurostat data.)

Fig. 2.3

Employment 2008–2013 percentage change (Source: Our elaboration on Eurostat data.)

2.9 The Major Problems Confronting European SMEs

After presenting the framework of the quantitative nature of SMEs, we should mention the European Commission study, Survey on the Access to Finance of Small and Medium-sized Enterprises (SAFE), 2013. The study was conducted on 37 European countries including the 28 Member States (EU) and 17 Eurozone countries and had previously been undertaken in 2009 and 2011. Table 2.8 presents a summary of the most persistent problems that European SMEs find themselves facing.

Table 2.8 Persistent problems reported by SMEs

Table 2.9 SMAF index (EU = 100, 2007) per country

Table 2.10 SMAF debt finance sub-index (EU = 100, 2007) per country

Table 2.11 SMAF-equity finance sub-index (EU = 100, 2007)

Table 2.12 SME forms of funding

Table 2.13 SME leverage

Table 2.14 GDP trends

Table 2.15 Number of SMEs in manufacturing sector

Table 2.16 SMEs in manufacturing sector (%)

Table 2.17 Distribution by employee and size

Table 2.18 SMEs access to finance

The main issue tackled by European SMEs appears to be the “search for clients”, followed by the issue of access to funding. The latter appears stable over time, while the problem of market shares is subject to a slight 2 % decrease compared with 2011. The difficulties in terms of the apparent similar percentage are the necessity of having skilled managers, aspects tied to standards (this last element has increased considerably since 2011) and competition. Last, but equally important, is the issue of labor costs. The focus will now have to be on how to access the various sources of funding. We shall not discuss these issues here, as they are not strictly pertinent to the purpose of our study.

In terms of impact, regardless of the fact that governments have increased support measures favoring SMEs throughout the financial crisis, SMEs in most countries apparently have not yet witnessed improvement (at least considering the results of the research).

Although various public aid measures are in place to facilitate SME access to funding, ensuring this access for SMEs is still difficult.

With regard to access to various sources of funding, Table 2.9 illustrates the variations in the general SME Access to Finance (SMAF) Index¹ for Member States in the period 2007–2013. In total, 24 countries showed an improvement in their access to financial circles throughout the entire period analyzed. In particular, Latvia, Lithuania, Estonia, France and Ireland experienced significant difficulty regarding funding. The Member States which registered deterioration in their SMAF Index score compared with their original position in 2007 were Cyprus, Greece and Romania. The only countries to have a constant index value superior to 110 were Sweden, Germany, France and Austria. It is important to point out that although Sweden registered a deterioration, it remained one of the strongest states in terms of access to funds, with scores superior to the EU-28 average throughout the entire 2007–2008 period.

The SMAF debt finance sub-index is composed of indicators based on the use of diverse sources of debt funding, the perception of SMEs on sources of funding through loans, and true interest rate data on debt. Analysis of the SMAF sub-index reveals that the value of the index applied to the EU-28 Member States has increased by nine points since 2007. The result slightly improves for countries in the Eurozone. Luxemburg, France and Austria represent the countries with the highest sub-index values, while Greece, Cyprus and Romania find a less favorable framework for debt financing. (See Table 2.10.)

If, on the other hand, we consider the “funding as a form of personal assets” sub-index (taking as a reference the volume of investments and the number of offers/beneficiaries), Ireland, Estonia, Denmark, Holland and Finland perform best, while Luxembourg, Greece and Spain, according to this sub-index, have fewer opportunities to access sources of funding based on equity. The EU-28 sub-index value is 103, thus indicating a slight improvement since 2007. Sixteen countries have improved their performance, according to the sub-index of personal asset based financing in the period 2007–2013. (See Table 2.11.)

In the 2013 European Commission study Survey on the Access to Finance of Small and Medium-sized Enterprises (SAFE), the Analytical Report shows the results of the research on the extent of the utilization of the various forms of financing available for companies. According to the study, internal funds were a principle source of funding for 26 % of EU SMEs in 2013. Additional sources of funding continued to be widely used by SMEs: in particular, current bank accounts (39 %), leasing/renting, purchasing/factoring (35 %), commercial credit (32 %), and bank loans (32 %). Approximately 1 in 7 (15 %) SMEs resorted to other loans from linked companies and/or stockholders, 13 % used subsidized bank loans, 5 % used their own assets and a few (2 %) resorted to subordinated loans. (See Table 2.12.)

In relation to the issue of access to funds, the relationship between the indebtedness of micro, small and medium-sized enterprises of European SMEs must be underlined. The relationship indicates a company’s asset structure, in addition to providing a good idea of the financial lever employed. A low percentage implies that a company is less dependent on loaned money. In general, the higher the percentage of borrowed funding, the higher the risk to which a company is exposed. When, therefore, the relationship is high, a business has a higher debt than its assets. This infers that the company will be subject to higher obligations with regard to the reimbursement of capital and interest, which may become a significant cash outflow.

It ought not to be forgotten that a high leverage level may have a considerable impact on taxation: the higher the level, the higher the interest costs; this impacts the income statement, thus bringing about a decrease in income taxation. A contained level of indebtedness may also reveal that a company has the opportunity to make responsible use of the financial lever as an instrument of business growth, rather than taking advantage of the situation.

Data are reported in Table 2.13.

Table 2.13 is organized on a descending scale of the highest level of indebtedness in relation to medium-sized businesses (column 2);it transpires that this is Italy, with 70.3 %. This “achievement” is also relates to Italian small and micro businesses. At the opposite end of the scale, Estonia has the lowest level of indebtedness, approximately 48.2 % in relation to the country’s medium-sized businesses. It can be deduced that, on average, companies operating in these countries finance an average of 50 % or more of their activity through equity.

2.10 SMEs in EU: A Comparison Analysis of France, Germany, Italy, the Netherlands, Spain, Sweden and the United Kingdom

The focus of this section is the manufacturing sector, which accounts for over 99 % of SMEs. Under analysis are the countries that make up 70 % of EU-28 GDP:

• France;

• Germany;

• Italy;

• The Netherlands;

• Spain;

• Sweden;

• United Kingdom.

Although the countries selected belong to the EU, there is a strong heterogeneity in their economic, social and institutional contexts:

• France – a country with a large centralized state;

• Germany – a country leader in industry;

• Italy and Spain – two Mediterranean countries,;

• Sweden – a country whose economic policies engender a specific industrial setting;

• United Kingdom – an important, yet anomalous, organization; and

• The Netherlands – a country that may be small in size but that has a very high degree of openness towards internationalization.

This chapter presents a rather harsh consideration of the period 2008–2014 for Europe; first, it suffered the effects of the collapse of Lehman Brothers and, subsequently, the crisis of the sovereign debt. Table 2.14 presents the actual GDP trends of selected states during that period.

Table 2.15 details the number of companies operating in the manufacturing sector and Table 2.16 reflects the percentage of SMEs in relation to the total number of manufacturing companies. SMEs represent a very high proportion of the manufacturing sector – over 99 %.

It is interesting to observe that Italy has the highest number of small and medium-sized businesses. In 2008–2011, this figure was almost double the number of SMEs in Germany, Spain, France and the United Kingdom.

In respect of the number of businesses, Spain has suffered the highest loss in terms of percentage in the period 2008–2014 period (−19.10 %), followed by Italy (−14.30 %) and the United Kingdom (−7.12 %). Conversely, as shown in Fig. 2.4, several countries presented a positive result over the same period: France (+8.02 %), Sweden (+10.06 %), Germany (+12.76 %), and the Netherlands (+19.10 %).

Fig. 2.4

Number of SMEs per country (Source: Our elaboration on Eurostat, National Statistical Offices, DIW econ, London Economics.)

Growth is tied to the development of commercial and financial globalization, which, in addition to rapid technological developments, has significantly broadened opportunities for SMEs. The fragmentation of the increasingly decentralized and outsourced productive processes of large companies facilitates the emergence and development of small organizations in new and often distant markets, where they carry out complex and sophisticated activities. In this scenario, SMEs seem to have an organizational structure particularly appropriate in a globalized framework because they are able to unite specialized productivity, good technical competence and maximum organizational flexibility. A thorough understanding of these processes requires an in-depth analysis of the make-up of the SME sector. This sector not only has a strong presence of micro enterprises, but also characterized by the heterogeneity of the individual countries. Table 2.17 presents the percentage of workers employed according to classification by size of business (2014 data) in the manufacturing sector.

Italy has the highest percentage of workers employed in micro enterprises (46.0 %) while, conversely, the country has the lowest percentage of workers employed in large enterprises (20.2 %) (see Fig. 2.5). The UK is in the reverse position, where the lowest proportion of workers are employed in micro enterprises (18.3 %), while large companies employ almost 48 % of the countries work. Figure 2.5 presents these data.

Fig. 2.5

Percentage of workers in micro enterprises (Source: Eurostat, National Statistical Offices, DIW econ, London Economics.)

The performance of SMEs in the countries under study here, taking as a reference point the EBITDA/Net Turnover index (which represents the amount of revenue generated per € of turnover, is presented in Fig. 2.6, which reflects the trends of the Index from 2008 to 2013.

Fig. 2.6

EBITDA/net turnover (Source: Our elaboration of BACH data.)

Figure 2.6 presents data, by country, in relation to the revenue per € of turnover achieved by SMEs. If 2013, the last year for which data is available, is taken as a reference point, the highest average earnings were achieved in the Netherlands (22.06 %) and Germany (9.74 %). SMEs in Italy, France and Spain all converged on a value of approximately 7 % in 2013.

As to the profitability of SMEs, analyzing the trends in return on equity (ROE) for 2008–2013, it is possible to make a distinction between two groups of countries. The first group is composed of France, Germany and the Netherlands, the second comprises Italy and Spain.

Figure 2.7 shows how the difference between these two groups was evident throughout 2013. The difference between these two groups of countries averages around 8 %.

Fig. 2.7

Return on equity (ROE) (Source: Our elaboration of BACH data.)

SMEs are also specific in their funding structure. For external financing, SMEs resort to banks more often than large companies do; however, the risk of their not obtaining funds is greater. As previously pointed out, the SMEs in the countries under study show an evident disequilibrium between internal funds (equity) and external funding (see Fig. 2.8).

Fig. 2.8

Financing structure of SMEs (Source: Our elaboration of Survey on the Access to Finance of Small and Medium-sized Enterprises (SAFE), Analytical Report 2013.)

Let us now examine a few indicators in relation to funding structure. The first indicator is the Asset/Equity ratio, which is an indicator of the financial leverage of a company. The indicator in question has been determined for SMEs in France, Germany, Italy, Netherlands and Spain.

As demonstrated in Fig. 2.9, for all countries under study in 2008–2013, the index trend registered a slight decrease. Italy and France were the countries where SMEs had higher leverage. The most virtuous SMEs were those found in the Netherlands. Another important indicator is the ratio between EBITDA² (earnings before interest, taxes, depreciation and amortization) and financial charges. Similar indices express the ability of the business to provide adequate cover for the financial costs tied to administrative and financial policies. Given that the EBITDA is calculated net of operative funding provisions and gross of depreciation, it is representative of the flow of circulating capital deriving from operational management (see Fig. 2.10).

Fig. 2.9

Assets to equity ratio (Source: Our elaboration of BACH data.)

Fig. 2.10

EBITDA/interest of financial debt (Source: Our elaboration of BACH data.)

The index registers a general increase with the exception of Dutch SMEs, which reached, on average, a maximum value compared with SMEs in other countries. The Netherlands achieved a figure equal to 691 % in 2011, which then decreased to 643 % in 2013. During the same period, following a static trend, French SMEs reached, on average, the highest value equal to 661 % (compared with SMEs in the other countries). Italian and Spanish SMEs show a performance gap compared with the SMEs of other countries, although more contained than the other indicators previously analyzed.

In interpreting the data on the shares of loans relative to SMEs, it is important to emphasize that large companies are usually less dependent on bank financing than are SMEs and that they benefit from the ability to obtain financing directly through the market. SMEs usually have far fewer funding sources available and thus are more vulnerable to the changing conditions of the credit market.

Therefore, in theory, a rise in the quota of loans to SMEs may be attributed to their more favorable access to bank credit compared with large companies. This however, may also be a result of large companies making greater use of non-banking financial instruments.

An increase in the number of loans granted to SMEs may be a reflection of financial and strategic trends and opportunities put into action by large companies, rather than easier access to funding for SMEs. This seems to be the case for Italy, Spain and the United Kingdom. Spain is the country with the highest amount of funding distributed to SMEs: a value that increased from 40 % to 34 % between 2007 and 2013. In the United Kingdom, the increase in the amount of loans given to SMEs over the period does not necessarily indicate an easier access to debt, as the overall volume on loans decreased (OECD, Financing SMEs and Entrepreneurs 2015)³ (see Fig. 2.11). By contrast, Dutch SMEs showed the lowest values, decreasing from 7 % to 5 % in the period 2008–2013.

Fig. 2.11

Business loans, SMEs as a percentage of total business loans (Source: Our elaboration of OECD, financing SMEs and entrepreneurs 2015 data. *Data for the Netherlands available only for 2008; **Data for Sweden are not available for 2013.)

From the point of view of risk management undertaken by commercial banks, it is understandable that banks adopt a more selective approach in credit supply during a period of recession in order to preserve the quality of assets on their financial statements. In general, though, the restrictive credit measures are a difficulty SMEs must face, as banking institutions consider SMEs to be a higher insolvency risk, as opposed to large companies. The banking institutions are also wary of SMEs due to their being unable to transition easily from bank credit to other forms of external funding.

Figure 2.12 below illustrates the trend of the cost of money maintained by SMEs in the 2007–2013 period.

Fig. 2.12

Interest rate, average SMEs rate (Source: Our elaboration of OECD, financing SMEs and entrepreneurs 2015 data. *Netherlands and UK data not available for the year 2007.)

For the majority of countries during the period 2007–2010, SMEs found themselves having to face harsher, more restrictive credit conditions compared with large companies. These difficulties, as demonstrated in Fig. 2.11, have taken the form of higher interest rates, shorter terms and more requests for guarantees. Figure 2.11 should be read and analyzed in conjunction with Fig. 2.12, in which the average spreads between interest rates applied to large companies and those applied to SMEs are underlined (see Fig. 2.13).

Fig. 2.13

Interest rate spread (between average SME and large % firm rate) (Source: Our elaboration of OECD, financing SMEs and entrepreneurs 2015 data. *Netherlands and UK data are not available for the years 2007–2010; **UK data is not available for 2007.)

Two facts should be mentioned in order to illustrate this point. First, SMEs tend to face higher costs for bank funding. A simple comparison between small loans (typical of SMEs) and larger loans (typical of larger companies) demonstrates that, in the countries under study, SMEs paid an average of 1.60 % additional base rate; there were higher peaks in Italy and Spain, where spreads in 2007–2013 reached values of 3.6 % and 1.53 %, respectively.

Listed below are a few considerations regarding access to finance according to the Small Business Act for Europe (SBA)⁴ document:

• Rejected requests for funding and unacceptable financing offers (percentage of funding requested by SMEs);

• Access to public financial support, including guarantees (percentage of those interviewed that referred to an impoverishment);

• Availability of banks in granting a loan (percentage of those interviewed that referred to an impoverishment);

• Funding costs for loans with reduced payment compared with high payment (%);

• Total time employed to be paid (days);

• Loss of unpayable credit (percentage of overall turnover);

• Investments in risk capital (percentage of GDP);

• Index of legal rights strength.

See Table 2.18 for the data for the countries under study.)

As demonstrated in Table 2.18, particular attention should be paid to the elevated percentage of the rejection of loans requested by SMEs. SMEs in the most important Eurozone countries (with the exception of Ireland, where access to funding is difficult regardless of size) regularly face more obstacles to funding than large businesses. There are structural reasons why this occurs: SMEs are less readily identifiable; their business capability is often difficult to evaluate because their financial statements are less detailed; and, usually, SMEs generally have a brief credit history. In addition, there are higher fixed costs of evaluation and monitoring. These circumstances translate into higher transaction costs – in particular, those deriving from asymmetrical information.

In periods of economic recession, it is inevitable that the sources of credit for small businesses tend to drain more rapidly than those destined to large companies, thus hindering SME activity and investment to a greater extent.

The situation described above is what occurred during the Eurozone crisis. The merit of SME financial health and credit deteriorated to a greater degree than those of large companies, and the prolonged period of economic weakness has had a further negative impact on SME issues of information asymmetry.