Horizon 2020 and access to risk finance for SMEs

July 17, 2014

Funding Scheme: 2014-07-16

Amorce:

One of the main challenges faced by innovative SMEs lies in the access to risk finance to support the development of an innovative product, service or process. Unlike large companies, SMEs usually lack large reserves of capital to fund innovative projects by themselves, which make them heavily dependent on external funding (venture capital, seed capital, crowdfunding, grants, loans etc.) to support their development.

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Applying for grants to finance SMEs research and development activities

The EU regulation allows for a flexible use of public grants (so-called non-refundable aid) to support research and innovation projects with a strong technological risk, where the grant of State aid or European aid does not translate in a substantial distortion of competition. Among European grants most often mobilized to finance the research and innovation phases of innovative companies, one may include grants provided through the Horizon  2020 programme as well and subsidies granted by the managing authorities of European Regional Development Fund (ERDF) Operational Programmes. The use of such subsidies often occurs between applied research and validation of project stages (technology readiness levels 3 to 8).

Financing the market uptake of an innovation: SMEs and the Death Valley of innovation

With the view to limiting distortions of competition, EU regulation generally forbids providing non-repayable aid (grants) to companies for financing the market end of the innovation chain. This drying of subsidies is particularly critical with the entry into the “pre-commercialisation” phase or “industrial” phase of an innovative product, process, or service. This stage, which follows on the research and development phase, is commonly referred to as the “valley of death”, when the end of the eligibility for grants, combined with the reluctance of banks to intervene prior to the commercialization phase of a product, is hindering the capacity of SMEs to raise funding to accelerate growth and reach a critical mass. Thus, many business stumble crossing the famous valley of death, during the phase following a company’s start‐up and prior to the commercialization of an innovation, when the market is entered, and when the turnover of the company remains low and access to private capital severely restricted. The problem, also referred to as “equity gap”, is such that many innovations are either blocked dying in the “prototype” phase, or relocated by the redeeming of European start-ups by large foreign groups. What is the response of the Horizon 2020 programme to address this market failure?

The European Investment Bank’s response to equity gap: Loan services and equity facility

The range of instruments mobilized by the European Investment Fund (EIF) and its majority shareholder, the European Investment Bank (EIB), to fund and support innovative SMEs in crossing the Death Valley can be split into two distinct types of interventions: interventions in the form of capital (equity) and interventions in the form of loans (debt facility). For clarity, the following section focuses exclusively on interventions carried out as part of the Horizon 2020 programme under the “access to risk finance” strand of the “Industrial leadership” Pillar.

Loans services and debt finance: the Risk-Sharing Finance Facility and the Risk-Sharing Instrument

– The Risk-Sharing Finance Facility (RSFF): This facilty, intended for innovation-performing public bodies and companies with over 500 employees, offers loans and hybrid or mezzanine finance of between EUR 7.5 million and EUR 300 million. The instrument is implemented by the EIB and the EIF, and is delivered both directly by the EIB (check the EIB website if you are interested) and also by financial intermediaries (European banks) selected by the EIF. Financial intermediaries will be guaranteed against a proportion of their potential losses by EIB and/or EIF (for each default, the bank will receive 50% of the amount of the loan outstanding). The guarantee will allow financial intermediaries to charge more affordable interest rates to their clients.

– The Risk-Sharing Instrument (RSI) : The RSI aims to encourage banks to provide loans and leases of between €25 000 and €7.5 million to SMEs and smaller mid-sized firms undertaking research, development or innovation, with loan periods of from two to seven years, and with the risk finance covering investments in assets (tangible or intangible) and/or working capital. The European Investment Fund (EIF) will implement this facility by providing direct guarantees to financial intermediaries (such as banks), who will extend the actual loans to final beneficiaries. The guarantee will cover up to 50% of intermediaries’ potential losses. EIF will also offer counter-guarantees to financial intermediaries (such as guarantee institutions) providing risk protection to banks extending loans to R&I-driven SMEs and small midcaps.

Last but not least, it is worth noticing that grants provided within the frame of the RSI and the RSFF can be combined public grants (Horizon 2020 grants, ERDF grants) and other types of loans

You’re an innovation-performing SME and interested in accessing loans backed by the EIF guarantee? The following institutions have been selected as financial intermediaries for implementing the RSI, get in touch with them: 

– France : Banque Publique d’Investissement ; Banque Populaire caisse d’épargne
Autria : Austria Wirtschaftsservice, UniCredit Bank Austria AG
– Bulgaria : First Investment Bank
– Czech Republic : Česká spořitelna, Komercni banka
– Denmark: Nordea Bank Denmark (Dannemark)
– Germany: Deutsche Bank
– Hungary: IKB Leasing
– Ireland: Allied Irish Banks
– Italy: Banco Popolare; Cassa di Risparmio di Cento (CR Cento) ; Credito Emiliano (CREDEM) Credemleasing; Credito Valtellinese; Deutsche Bank Italy; ICCREA BancaImpresa
– Netherlands: ABN AMRO
– Poland: Deutsche Bank Poland; Raiffeisen-Leasing Polska S.A.; Bank Pekao SA
– Portugal: Banco BPI, Banco Espírito Santo
– Spain: Deutsche Bank España ; Bankinter
– Sweden: Sparbanken Öresund
– Turkey: Halkbank (Turkiye Halk Bankasi A.S.)

Equity finance

Also within the frame of the “access to risk finance” strand of the Horizon 2020 programme, the European Investment Fund is investing in European risk-capital/venture-capital funds with the view to spur investors into supporting SMEs trapped in the equity gap. To date, the EIF has already taken up equity participation more than 200 risk capital funds across EU Member states and associated countries. The scheme shall allow the EIF to channel risk finance towards innovation-performing SMEs whose projects include a European added value, notably with respect societal challenges (e,g projects in connection with renewable energies, health, security, sustainable transports etc.). The list of risk capital funds with EIF participation is available on access2eufinance.ec.europa.eu.