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Banking Union: making credit accessible to all European SMEs

Nicholas Zylberglajt
16.04.2014 - 11:45
Ilkka Lavas

Access to financing is one of the main concerns eurozone SMEs have. Indeed 16% of them have indicated experiencing difficulties in getting funding.

This slows down the economic recovery, generates more obstacles to job creation and hits European competitiveness at its heart.

And the situation is even worse for crisis-hit countries like Greece, Portugal, Spain, Ireland or Italy, who see their SMEs facing high interest rates when looking for credit.

By creating a Banking Union at the European level, we are helping SMEs to lower their borrowing costs.

A Banking Union to promote a sustainable economic recovery

The creation of a Banking Union can seem very abstract. But it provides solutions to very concrete issues and has one major objective: putting banks at the service of the real economy in a system that has been improved.

By creating a Banking Union at the European level, we are helping SMEs to lower their borrowing costs

We saw it during the crisis: uncoordinated national reactions to the failure of banks led to an extremely fragmented situation in the European Single Market when it comes to funding and lending. Fixing the banking sector is thus a pre-condition to a sustainable economic recovery.

Cheap loans help to develop successful business ideas and create jobs

Ilkka Lavas is a Finnish entrepreneur who describes himself as a 'media and IT enthusiast'. Ilkka worked in a large Finnish media firm which once considered buying City Magazine, a magazine which was on the verge of bankruptcy. But his company eventually gave up on the project; they did not see any future for the magazine.

Then Ilkka had an idea: as an entrepreneur, he was going to buy City Magazine and make it a player on the market. He calculated he needed 300 000 euros to make his project reality. So he started to knock on banks’ doors.

Only 24% of Finnish SMEs consider access to finance as a very pressing problem whereas 61% of Greek SMEs considers this to be a real issue

“I have been working as an entrepreneur for more than 15 years, alongside my job at the media company. So I have a good network of banks and business angels. Also, I have a positive record on business projects, so it was not hard to obtain a loan.”

Indeed, Finland benefits from very low interest rates. Only 24% of Finnish SMEs consider access to finance as a very pressing problem whereas 61% of Greek SMEs considers this to be a critical issue. How did this impact Ilkka's business projects?

In the end I obtained a personal investment loan with a 1.5% interest rate and three loans directly for my company with 4% interest rates. I think the interest rate of my personal investment loan is pretty reasonable, but not the ones for my company Ilkka Lavas

“In the end I obtained a personal investment loan with a 1.5% interest rate and three loans directly for my company with 4% interest rates. I think the interest rate of my personal investment loan is pretty reasonable, but not the ones for my company." 

Today Ilkka’s business is thriving and is becoming one of the top 10 websites in Finland; he is looking for people to hire. In other words, getting cheap funding for his project enabled Ilkka to build a successful business that will create jobs.

High interest rates hamper SME growth and hiring

Ilkka thinks he got a bad deal at the bank, but he didn't hear Lúcio Machado’s story, a Portuguese entrepreneur who owns an auto repair company.

“It is very difficult to get a loan to start an SME in Portugal, especially since the crisis erupted. Banks are not willing to take risks, because they simply cannot afford it. But I eventually got a loan from a bank: 150 000 euros with an 8.5% interest rate. These interest rates are a huge burden as they reduce margins for my company."

Right now, I cannot consider expanding my business and hiring more people. High interest rates have surpassed the cost of my personnel, making it the third item of expenditure I have to deal with monthly, just after the cost of labour and taxes Lúcio Machado

About 67% of employment in the non-financial business economy is provided by SMEs. However, it is for large firms that the financial situation remains more favourable.

“Right now, I cannot consider expanding my business and hiring more people. High interest rates have surpassed the cost of my personnel, making it the third item of expenditure I have to deal with monthly, just after the cost of labour and taxes.”

We can clearly see through Lúcio’s experience that high borrowing costs have a negative impact on fighting unemployment.

A Banking Union to guarantee the same opportunities for all European SMEs

An entrepreneur in Portugal or in Finland is still an entrepreneur.

We believe that they should have the same opportunities to develop their business ideas and create jobs. And this is what the Banking Union will enable, i.e. the same framework conditions for all.

The main elements of the Banking Union have been adopted, now banks must concentrate their efforts in supporting entrepreneurs like Ilkka or Lúcio

Since the explosion of the crisis in September 2008, many efforts have been made, to begin with by citizens and taxpayers.

But we have not remained idle. As the European Commission puts it, since 2010 nearly 30 sets of rules to ensure all financial actors, products and markets are appropriately regulated and efficiently supervised have been under discussion. Much of these have already been adopted.

We have restored the stability of the banking sector and have given more security to depositors.

The main elements of the Banking Union have been adopted, now banks must concentrate their efforts in supporting entrepreneurs like Ilkka or Lúcio. With an improved system in place, they should be able to borrow money with the same conditions, at a reasonable price. And they should be able to create jobs for people.

We believe in people. #believeinpeople

Interviews conducted by Sophie Dupin de Saint-Cyr

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