EU funding opportunities for small and medium-sized enterprises

EU funding opportunities for small and medium-sized enterprises

A. Definition The SME definition currently in force in Community law is that adopted with the Recommendation 96/280/EC. This definition is important because it identifies enterprises which can benefit, on grounds of their reduced dimension, of particular exceptions under State aid rules, Regional policy and RTD programmes, as well as of specific support measures. In order to update the SME definition following economic and market developments, the European Commission has launched a series of consultations among the interested parties. The results of these consultations should lead to a general overhaul of the definitions in the forthcoming months. The main change affects the amount of the balance sheet/turnover: Number of Existing definition Update proposals employees (Recommendation less than 96/280/EC) MEDIUM-SIZED 250 Balance sheet Turnover Balance sheet Turnover ENTERPRISE 27 million 40 million 43 million 50 million SMALL 50 5 million 7 million 10 million 10 million ENTERPRISE MICRO- 10 27 million 40 million 2 million 2 million ENTERPRISE The most important criterion for defining SMEs, the number of employees, remains unmodified. Owners and their families, if they represent part of the staff, will be included in the employees number, while trainees and vocational training students will be excluded. Financial ceilings will be raised in order to favour SMEs investments. Another relevant point concerns the independency of SMEs: in order to benefit from SMEs support schemes, enterprises must be independent, i.e. not part of a larger company structure. The data needed to assess an enterprise s autonomy come mainly from accounting sources. The definitions proposed by the Commission are as follows: - autonomous: no more than 25% of the capital or voting rights is hold by another business which is not itself a SME. - linked to other enterprises: a parent or subsidiary of another company, status which is defined by the ownership of the board s voting rights. - partner: enterprise holding between 25% and 50% of another firm s capital or voting rights. According to this scheme, more favourable treatment should be reserved for partner enterprises in order to foster co-operation and the creation of clusters of SMEs. Besides that, the Commission may extend the category of autonomy to SMEs whose capital is owned (from 25% to 50%) by certain types of investors such as public investment corporations, venture capital investors, regional development funds and universities, provided they are not linked to the enterprise. 1

B. Access to finance As regards funding opportunities for business, there are three main players at EU level: - the European Commission - the European Investment Bank (EIB) - the European Investment Fund (EIF) Following re-organisation of the European Commission, in January 2000 the Directorate General for Enterprise was established. Its responsibilities cover the whole field of enterprise policy, with a special focus on SMEs, as they represent the backbone of European economy and employment. The European Commission implements a series of measures to achieve the goal of strengthening the competitiveness of European firms: support to business, networking, exchange of best practices. Among these measures, one key objective for the DG Enterprise is to improve the financial environment for SMEs. The European Investment Bank is the European Union s financing institution. It offers various financial facilities to support projects developed by SMEs, including direct and individual loans and venture capitals. The European Investment Fund is the European Union s specialised institution for the financing of Small and Medium sized Enterprises. EIF action is focused on two types of activity, venture capitals and guarantees. Venture capital instruments consist of equity investments in venture capital funds that support SMEs, particularly those that are early stage and technology-oriented, whereas guarantee instruments provide guarantee to financial institutions that cover credits to innovative and high-growth SMEs. Together, the European Investment Bank and the European Investment Fund form the socalled EIB Group, whose principal role is to boost the competitiveness of the European industry through the diversified support provided for the activities of SMEs (medium and long-term loans, venture capital and guarantees). In this context, the EIB continues to promote smaller businesses through its medium and long-term global loan financing, whilst all venture capital activities are concentrated within the EIF, thereby making it one of the leading sources of venture capital within the Union. It is important to underline that neither the European Commission nor the EIF, nor the EIB invest in SMEs directly, as they target financial intermediaries. In practice, the European Investment Fund (the main actor for SMEs financing) invests or provides suitable guarantees not for individual businesses, but for the intermediaries that themselves supply finance or support to SMEs, be it bank agencies, venture capital raisers or local funds. Therefore, business managers looking for EU funding for their enterprise should not apply directly to the European Commission, the EIB or the EIF; instead, they should contact the intermediaries selected by the EIF, who are listed on its website: www.eif.org. In some cases, the useful contact point may also be the local bank manager. Besides the financial institutions who collaborate with the EIF, another helpful source of information is represented by the Euro Info Centres (EIC), a network of expertise and advice providers disseminated throughout the 15 member states of the European Union. Euro Info Centres mission is to act as an interface between the European Union and SMEs at local level. As EU programmes are often managed on a decentralised basis by regional authorities, EIC can provide contact details of the nearest local authority, to which applications may be addressed directly. 2

C. List of available programmes Programmes managed by the EIF The European Investment Fund operates through two different investment channels: 1. guarantee instruments 2. venture capitals 1. Among guarantee instruments, specific EIF products consist of tailor made guarantee operations such as credit insurance, credit enhancement and structured transactions. These products are not offered to counter-parties on an individual basis but as part of a portfolio deal. The beneficiaries are financing institutions such as banks, leasing companies, mutual guarantee funds, guarantee institutions, etc. http://www.eif.org/pg/eif_prod.htm Besides specific EU products, the EIF implements two programmes on behalf of the European Community: a) SME Guarantee Facility b) Growth and Environment scheme a) The SME Guarantee Facility is an initiative aiming at stimulating the supply of loans to SMEs by risk-sharing with financial intermediaries through counter-guarantees or coguarantees. This initiative consists in four windows: - a1. Loan Guarantees: for SMEs with growth potential and fewer than 100 employees facing difficulties in accessing finance because of the high risk they represent - a2. Micro-credit Guarantees: up to a ceiling of 25,000 per loan, for micro enterprises with up to 10 employees - a3. Equity Guarantees: facility available to intermediaries operating an equity guarantee scheme, with a maximum cover of 500,000, to help SMEs having a weak financial structure - a4. ICT Loan Guarantees: support for small firms (up to 100 employees with priority given to firms up to 50 employees) to finance investments in ICT equipment, software and relevant training http://www.eif.org/pg/ec_prod.htm b) The Growth and Environment scheme helps financial institutions investing in environmentally-friendly SMEs http://www.eif.org/pg/ec_prod/ges/index.htm To give an idea of the volume and scope of the guarantees provided through these initiatives, hereafter the results of the Loan Guarantee scheme at the end of 2001: As of 31 December 2001, there are 23 intermediaries active in 12 countries. Aggregate EIF Guarantee amount committed: 2.1 billion Estimated underlying loan volume supported: 8 billion Number of SMEs supported: 92,408. 3

2. The EIF s venture capital instruments consist of equity investments in venture capital funds that support SMEs, particularly those that are in their early stages of development and those that are technology-oriented. There are two sources of funding: a. Capital from the EIB group, which represents the bulk of EIF s investments b. Capital from the European Community, allocated under two different specific programmes: B1: European Technology Facility (ETF) Start-up scheme B2: Seed Capital Action a) The EIB Group gathers resources from both the EIF and the European Investment Bank. These resources are assigned under two distinct programmes: A1: the Amsterdam Special Action Programme (ASAP) A2: the Innovation 2000 Initiative (i2i) The reserve set up for the EIB Group amounts to 2 billion. Both the ASAP and i2i actions aim to support investments promoting the information society, research and development, innovation and competitiveness as well as human capital. The EIB Group usually seeks for a minority position between 10% and 35% of the total capital committed in a fund. http://www.eif.org/vca/eib_group.htm b) Programmes implemented by the EIF on behalf of the European Commission: - B1: EFT Start-up scheme: this scheme adopts higher risk profiles than the EIB Group operations. It targets various venture capital funds with a minority position between 10% and 25% of the total committed capital. The maximum amount invested in a fund is 10 million. Beneficiaries must in turn provide risk capital for SMEs in their startup phase (eligible firms must have been established less than five years before the fund s first investment). http://www.eif.org/vca/ec_resources/startup/index.htm - B2: Seed Capital Action: this instrument is aimed at the long-term recruitment of additional investment managers to increase the number of qualified personnel within the fund or business incubator in which the EIF has invested. The grant covers the recruitment and training costs for enlarging the pool of experts dealing with the analysis of seed capital investments. http://www.eif.org/vca/ec_resources/seed/index.htm Programmes managed by the European Commission, DG Enterprise Although the European Commission has outsourced the management and implementation of most of its support programmes for SMEs to the EIF, it controls directly a specific initiative, the Joint European Venture (JEV). JEV is a support mechanism assisting SMEs wishing to expand and create new economic activities by means of a partnership with at least another enterprise from a member state of the European Union + Norway. The Community contribution covers some of the expenses necessary to set up the joint-venture (market surveys, preparation of the legal framework, business plan ). The maximum 4

contribution per project amounts to 100,000, covering up to 50% of the eligible expenses and up to 10% of the total investment. As the objective of the programme is to favour the creation of new activity, transfer or purchasing of existing business is not eligible. Moreover responsibility in the joint venture must be equally shared; therefore the limit of participation of a single firm in the activity is fixed at 75% of the ownership. The funds are granted by the European Commission through a network of intermediaries. The list is available at: http://www.europa.eu.int/comm/enterprise/entrepreneurship/financing/jev.htm Programmes for innovation and RTD projects managed by the European Commission, DG Research The development of innovation through research and ICT oriented initiatives represents an important part of the enterprise policy of the European Commission. A specific Directorate exists within the DG Enterprise dealing with the promotion of innovation. All the relevant information on this topic has been centralised on the web through the Community Research and Development Information Service (CORDIS): www.cordis.lu. As regards financing for innovation, some initiatives exist at EU level to foster technological development for SMEs, whereas the most important instrument implemented by the European Union in the field of research policy is the 6th Framework Programme (FP). Among specific support programmes managed by the Innovation Unit of the European Commission, two of them are aimed at financing technologically innovative SMEs: - I-TEC Pilot Project - Eurotech Capital The I-TEC Pilot Project is an initiative to encourage early stage investments in technologically innovative SMEs. It is implemented by the European Commission in collaboration with the EIF. The Commission provides risk capital participation in young SMEs (not older than 3 years) through investments in specialised venture capital funds. The funds in return must invest at least 25% of the new capital raised in innovative SMEs. Investments are meant not to replace obligations or commitments of the company, neither to refund its debts, but to finance the development of new activities or the introduction of new methods or systems of production based on innovative technology or products. The Commission finances up to 50% of the operating costs of the funds with a maximum amount of 500,000 in total. The Eurotech Capital action aims to reduce the equity gap for trans-national high technology projects undertaken by SMEs and stimulate capital investment through a network of European venture capitalists willing to invest in such opportunities. Eurotech Capital addresses large funds with a minimum capital of 50 million. A recent scheme proposed by the European Commission in order to foster better circulation of information about access to private innovation financing for SMEs and to create better tools for knowledge exploitation is the Gate2Growth Initiative: http://www.gate2growth.com/g2g/g2g_welcome.asp. Gate2Growth is a web portal bringing together entrepreneurs, investors, service providers and other interested parties into a network supported by the European Commission. Gate2Growth helps relevant players in the 5

field of SMEs financing to improve their capacity to assist entrepreneurs by networking and exchanging experience and good practice at European level. These include early stage technology venture capital investors, managers of technology incubators, managers of industrial liaison and technology transfer offices linked to universities and research centres, academics in entrepreneurship, finance research and teaching. In addition to EU-supported programmes, the EUREKA network supports innovation, research and development in 31 European countries and with the participation of non-european organisations. EUREKA s objective is to bring R&D effects on the market and to create a better circulation of knowledge through the multiplying effects of co-operation. http://www.eureka.be/ifs/files/ifs/jsp-bin/eureka/ifs/jsps/publichome.jsp Besides these initiatives, the main EU programme devoted to research policy is the 6th Framework Programme, which is operational since December 2002. The principal difference with regard to the 5th FP consists in the notion of European Research Area (ERA), which is the main objective of the new programme. To achieve this goal, the European Union has committed itself to break down the remaining barriers that hinder scientific collaboration within Europe in order to get the best possible results out of the available resources - whether human, material or financial. One of the aims of the establishment of the ERA is to make SMEs benefit from the results of research and boost their competitiveness in the global market. The key instruments of the 6th FP are the integrated projects, the networks of excellence and the specific targeted research projects to which SMEs are invited to participate as active partners. Moreover, collective research projects are envisaged, whose aim is to enable associations and similar organisations to lead research projects for the collective benefit of their SME members. In total, 15% of the budget earmarked for the 6th FP (i.e. about 1,8 billion) will be reserved for SMEs. The first call for proposals within the 6th FP was issued on 17 December 2002. The Information Society Technologies (IST) priority addresses research areas that may be relevant for the music industry sector such as the development of mobile and wireless systems, networked audiovisual systems and home platforms and technology-oriented access to cultural heritage. A second call for proposals will follow next June, and it will contain a specific action line dedicated to the promotion of research on cross-media content for leisure and entertainment. The CHART (Clearing House for Artists Rights Transactions) project, developed by KEA European Affairs on behalf of IMPALA, was submitted for evaluation under the 5th FP as an IST project. It was marked 4 out of 5 by a pool of expert evaluators. Its aim is to develop a system for rationalising licensing practices in the field of Intellectual Property Rights, focusing on digital delivery of music content. IMPALA is considering re-presenting the CHART project under the 6th FP. Other EU programmes There is a large variety of EU programmes supporting SMEs in every field of their action, ranging from regional policy to education and training, culture and environment. We provide here a list, as exhaustive as possible, of the interventions of the European Union in favour of SMEs, with a link to the website where further and more detailed information is available. Structural Funds (Local and regional development) http://www.europa.eu.int/comm/dgs/regional_policy/index_en.htm Structural Funds intervention in favour of SMEs is designed to reduce disparities in development and promote social cohesion within the European Union. The European Commission 6

co-finances regional and horizontal operations in the member states through programmes directed by DG Regional Policy. Programmes: - European Regional Development Fund (ERDF), the main regional development financing instrument, targeted to regions classified as objective 1 (regions lagging behind in development) and objective 2 (areas undergoing economic and social conversion). - Cohesion Fund, for member states (E, P, EI, GR) lagging behind with regard to infrastructures. - INTERREG III, for trans-frontier regional programmes. - URBAN II, for urban development. Employment and social affairs http://www.europa.eu.int/comm/dgs/employment_social/index_en.htm - European Social Fund (ESF), the main financial tool through which the European Union translates into action its employment strategy. Its objective is to strengthen economic and social cohesion, through the programme EQUAL. Education and training http://www.europa.eu.int/comm/dgs/education_culture/index_en.htm - LEONARDO, programme financing initial vocational training projects, enabling beneficiaries to take part to traineeship abroad. Culture and audiovisual http://www.europa.eu.int/comm/dgs/education_culture/index_en.htm - Culture 2000, framework programme covering different aspects of cultural action (performing arts, cultural heritage, book promotion, architecture ) through the financing of specific events with international ambition or co-operation agreements. - MEDIA+, the EU support programme for the audiovisual industry. It provides financing for the development, distribution and promotion of audiovisual works as well as training projects for professionals of the audiovisual sector. Information Society http://www.cordis.lu/econtent - econtent, programme aiming at encouraging the production and distribution of European digital content. It targets especially content owners and creators, packagers and designers, publishers and distributors, net service companies, rights trading actors. The econtent programme supports multinational and cross-border projects including accompanying measures, best practices, awareness raising actions and dissemination. The last call for proposals was launched on 20 December 2002. It sets a double deadline: 21 March 2003 for demonstration projects and accompanying measures and 28 May 2004 for feasibility projects, under a continuous submission scheme. The indicative budget of this call for proposals is 29 million. 7

Enlargement http://www.europa.eu.int/comm/enlargement/index.htm - PHARE programme. The PHARE programme is the main pre-accession financial aid granted from the EU to applicant countries from Central and Eastern Europe in order to help them preparing for joining the European Union. The programme was established in 1989 and it has been oriented above all towards the support for infrastructure investment. After 1997, the programme PHARE is used as pre-accession instrument, together with the programmes SAPARD for agriculture and INPA for environment and transport. PHARE s support for development and economic and social cohesion is gradually turning into a form of Objective 1 structural fund, in order to familiarise accession countries with EU regional development programmes. Within the general framework of the programme (whose main objective is to foster social and economic cohesion through institution building), specific facilities exist for the support of SMEs in the candidate and accession countries. - A strong input to investments in ex-communist countries (Central European Countries, ex-soviet Republics, Balkan countries) is given by the European Bank for Reconstruction and Development (EBRD, www.ebrd.com). This institution finances projects aimed at creating a market economy and mobilises significant foreign direct investment beyond its own financing. External Relations http://www.europa.eu.int/comm/dgs/external_relations/index_en.htm The DG External Relations manages a series of international co-operation agreements and programmes covering different world areas. Priority is given to Mediterranean countries, Latin America, South-East Asia and ex-ussr countries. Programmes: - AL-INVEST, programme supporting the internationalisation of European and Latin American SMEs through co-financing of co-operation projects promoted by chambers of commerce, professional and industrial associations and other relevant public or private institutions - Asia IT&C: support programme in the field of information and communication technologies between Europe and South-East Asia countries. The programme encourages co-operation activities and networking for the development of European ICT applications in the fields of agriculture, education, health, transport, society, tourism, intelligent manufacturing and electronic commerce - ASIA-INVEST, programme supporting the development of EU-South-East Asia trade and investment flows, business co-operation agreements, awareness actions for investment opportunities - MEDA: programme fostering economic transition and regional integration in the Mediterranean area. The long-term objective is to create a Mediterranean free-trade area. Besides administrative, social and cultural issues, opportunities are open for an improvement of business relations between the EU and Mediterranean countries - TACIS: programme aimed at supporting the transition process to democracy and market economy in Central Asia countries (ex-ussr republics and Mongolia), through co-operation and twinning between the EU and partner organisations. IMPALA, January 2003 INDEPENDENT MUSIC COMPANIES ASSOCIATION www.impalasite.org Tel +32-2-289 26 00 Contact person: Gianluca Monte 8