Market Gaps on Access to Finance

Ernst & Young Limited Regional Business Centre Achille Ferris Street Msida MSD 1751, Malta Tel: +356 2134 2134 Fax: +356 2133 0280 Email: ey.malta@mt.ey.com Web: www.ey.com

12 April 2013 MBB Assessment Study - Market gaps in access to finance and the feasibility of new financing instruments in the EU addressing the credit needs of Maltese businesses To the Malta Business Bureau, In accordance with the terms of our engagement agreement dated 29 November 2012, our work related to the provision of an Assessment Study on market gaps in access to finance and the feasibility of new financing instruments in the EU addressing the credit needs of Maltese businesses. The letter of engagement was signed following the submission of our proposal to the MBB in response to a public request issued by the MBB and further discussions with the MBB on the scope and nature of the Study.

We understand that the Study is required to inform the MBB, its members and interested parties of the potential local scope for additional financial instruments and initiatives addressing the finance gaps experienced by local businesses. This Study was addressed to the MBB with the above Purpose in mind. The MBB are authorised by us to use the Study and publicly disseminate the contents thereof to third parties, provided that this does not prejudice us, our clients, any of the participants in this Study and any third parties. To this end, we do not accept any third party liability.

This Study was prepared before the approval of the 2013 Malta Budget and the approval of the EU Budget for 2014-2020. We have relied on information provided to us through a survey with SMES and various stakeholder meetings, and information that was publicly available before 15 March 2013.

We would like to thank the MBB, Malta Chamber, MHRA, Bank of Valletta, Malta Enterprise, the Ministry for Finance, the Ministry for Resources and Rural Affairs, the Planning and Priorities Coordination Division, representatives of the agricultural and fisheries sector, financial services representatives, and respondents to the SME survey, for their valuable contribution and cooperation throughout the course of this Study.

Ernst & Young Limited Regional Business Centre Achille Ferris Street Msida

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Malta Business Bureau – Market gaps in access to finance April 2013

Table of contents List of tables and figures ............................................................................................................... 5 Abbreviations .............................................................................................................................. 6 Glossary of terms ......................................................................................................................... 7 1.

Introduction ....................................................................................................................... 8 1.1 Study objectives ........................................................................................................... 9 1.2 Organization of study .................................................................................................... 9 2.

Study background ............................................................................................................. 10 2.1 The role of SMEs in the EU and in Malta......................................................................... 10 2.2 Why access to finance ................................................................................................. 11 2.3 SME policy in the European Union................................................................................. 12 2.4 SME initiatives in Malta ................................................................................................ 13 2.4.1 The Small Business Malta Act ................................................................................... 13 2.4.2 Malta Enterprise support measures ........................................................................... 14 2.4.3 Other assistance schemes in Malta............................................................................ 18 2.4.4 Venture capital in Malta ........................................................................................... 19 3.

Financing needs of Maltese SMEs ....................................................................................... 22 3.1 Firm lifecycle financing needs ...................................................................................... 22 3.1.1 The pre-seed and seed stage .................................................................................... 22 3.1.2 Start-up stage ......................................................................................................... 23 3.1.3 The emerging-growth stage...................................................................................... 23 3.1.4 The development-growth stage................................................................................. 24 3.1.5 The expansion-growth stage..................................................................................... 24 3.2 Small size constraints .................................................................................................. 25 3.3 Traditional sources of finance ....................................................................................... 26 3.3.1 Loans..................................................................................................................... 26 3.3.2 Trade credit and factoring ........................................................................................ 26 3.3.3 Leasing and hire-purchase ....................................................................................... 27 3.4 Non-traditional sources of finance ................................................................................ 27 3.4.1 Business angels ...................................................................................................... 27 3.4.2 Venture capital ....................................................................................................... 27 3.4.3 Microfinance ........................................................................................................... 28 3.4.4 Mezzanine Finance .................................................................................................. 28 3.4.5 Public issue of own shares or bonds .......................................................................... 29 3.4.6 Crowd funding ........................................................................................................ 29 3.5 Financing instruments for SMEs ................................................................................... 30 3.5.1 Rationale for innovative financial instruments ............................................................ 30 3.5.1.1 Pursuit of EU policy objectives .......................................................................... 31 3.5.1.2 Increasing efficiency and effectiveness of public resources .................................. 31 3.5.1.3 Promoting enhanced performance and financial discipline ................................... 31 3.5.1.4 Multiplier effect of the EU budget...................................................................... 31 3.5.2 Innovative financial instruments in the 2007-2013 Programming Period...................... 33 3.5.2.1 EU level risk capital/equity instruments ............................................................. 33 3.5.2.2 EU level debt instruments (guarantees/risk sharing) ............................................ 33 3.5.2.3 Instruments combining equity and debt support ................................................. 34 3.5.2.4 Structural Funds .............................................................................................. 35 3.5.3 JEREMIE / MicroCredit scheme................................................................................. 35 3.5.4 Innovative financial instruments for the 2014-2020 financial framework ..................... 37 3.5.5 Improved regulatory framework for venture capital .................................................... 40 4.

Study methodology ........................................................................................................... 41 4.1 SME survey ................................................................................................................ 41 4.1.1 Sample size ............................................................................................................ 41 4.1.2 Data gathering techniques ....................................................................................... 41 4.1.3 The Questionnaire ................................................................................................... 42 4.1.4 The Interviewers ..................................................................................................... 42

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4.2

Stakeholder consultation ............................................................................................. 42 Survey results .................................................................................................................. 43 5.1 Respondent demographics ........................................................................................... 43 5.2 General Characteristics................................................................................................ 44 5.2.1 Q1: Who are the owners of your firm? ....................................................................... 44 5.2.2 Q2: Can you kindly provide an indication of the current source/s of your funding? ......... 45 5.2.3 Q3: How would you rate your company’s ability to raise finance? ................................. 47 5.2.4 Q4: Have you ever used/ applied for any of the following sources of finance? ................ 48 5.2.5 Q5: What was the reason for your request being rejected/ only partially met/ your decision not to proceed further? ........................................................................................... 50 5.2.6 Q6: Would you apply for any of the below types of financing if offered locally? .............. 51 5.2.7 Q5: What is the size of the last loan, of any kind, that your firm has obtained in the last two years?........................................................................................................................... 52 5.2.8 Q6: What did you use this last loan for?..................................................................... 53 5.2.9 Q6: Do you see any other important funding instruments emerging in the future? ......... 54 5.2.10 Q7: What are your expectations regarding assistance to be designed in the next financing period covering 2014 - 2020? ................................................................................ 54 6.

Local potential for new financial instruments....................................................................... 56 6.1 Mapping by economic sectors....................................................................................... 56 6.1.1 Mapping by firm lifecycle ......................................................................................... 61 6.2 Financial instruments funded by ESF, EARDF and EMFF .................................................. 65 6.2.1 Social enterprises.................................................................................................... 65 6.2.2 Agri-food processing firms ....................................................................................... 68 6.2.3 Fisheries and aquaculture ........................................................................................ 70 6.3 Best practice examples ................................................................................................ 72 7.

Reference list ................................................................................................................... 81 8.

Appendix A: Survey (English) ............................................................................................. 83 9.

Appendix B: Survey (Maltese) ............................................................................................. 88 10. Appendix C: Data tables .................................................................................................... 93 5.

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List of tables and figures Table 1: Share of SMEs .......................................................................................................... 10 Table 2: JEREMIE Parameters ................................................................................................ 36 Table 3: Distribution of firms by lifecycle and economic sector .................................................. 44 Table 4: Firm Owners............................................................................................................. 45 Table 5: Respondents that were interested in types of finance, distributed by lifecycle ................ 52 Table 6: Mapping of financial instruments with selected local economic sectors .......................... 57 Table 7: Mapping of financial instruments with Malta SME firm lifecycle ..................................... 62 Table 8: Mapping of financial instruments with local social enterprises ....................................... 67 Table 9: Mapping of financial instruments with local agri-food processing firms .......................... 69 Table 10: Mapping of financial instruments with local enterprises in the fisheries and aquaculture 71

Figure 1: Business Life Cycle .................................................................................................. 22 Figure 2: SME development and funding instruments ............................................................... 25 Figure 3: Comparison of grants and revolving instruments ........................................................ 32 Figure 4: Number of Employees .............................................................................................. 43 Figure 5: Annual Turnover in Malta for 2011 ........................................................................... 44 Figure 6: Current sources of finance ....................................................................................... 46 Figure 7: Firm's Ability to raise finance ................................................................................... 47 Figure 8: Use of different Sources of finance ........................................................................... 48 Figure 9: Reasons for not using sources of finance ................................................................... 49 Figure 10: Discontinued Applications ...................................................................................... 51 Figure 11: Interest in applying for sources of finance ............................................................... 52 Figure 12: Size of loan ........................................................................................................... 53 Figure 13: Use of last loan ..................................................................................................... 53 Figure 14: Other funding options ............................................................................................ 54

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Abbreviations CF CIP EAFRD EBAN EC EIB EIF EMFF ERDF ESF EU GAPSE IB JEREMIE Malta Chamber MBB MFF MHRA NSO PPCD SBA SME

Cohesion Fund Competitiveness and Innovation Framework Programme European Agricultural Fund for Rural Development European Business Angel Network European Commission European Investment Bank European Investment Fund European Maritime and Fisheries Fund European Regional Development Funds European Social Fund European Union General Accounting Principles for Small Entities Intermediate Body Joint European Resources for Micro to Medium Enterprises Malta Chamber of Commerce, Enterprise and Industry Malta Business Bureau Multiannual Financial Framework 2014-2020 Malta Hotels and Restaurants Association National Statistics Office Planning & Priorities Coordination Department Small Business Act Small to Medium Enterprises

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Malta Business Bureau – Market gaps in access to finance April 2013

Glossary of terms Bank loan Bank overdraft Bonds Business Angels Convertible Bond Co-operative bank Credit Card Overdraft Credit Line Debt Developmentgrowth stage Emerginggrowth stage Factoring

Financial instruments GAPSE

Guarantee

Leasing/ HirePurchase Participating loan

Pre/Seed Stage Revolving Loan Fund Securitised Mezzanine Finance Seed Funding

Share/ Equity

Start up Stage Subordinated loan Syndicated loans Trade Credit

Capital borrowed from the bank, whereby a loan is granted for a specific period, usually at a set rate of interest. This form of financing tends to be more expensive than an overdraft.

Negative balance on a bank account with or without specific penalties. This source of financing is of a short term liability and is intended to assist the business temporarily. Very often, the overdraft is not for a specific amount of money since the business is given a maximum level of cash it may draw against the overdraft.

Debt investment in which an investor loans money to an entity that borrows the funds for a particular period of time at a fixed interest rate (the coupon).

Can be a firm/ affluent individual that provide capital for a business start-up, usually in exchange for convertible debt or ownership equity.

Hybrid instrument that pays interest like a normal bond. However it also gives the investor the option to ‘convert’ the bond into shares of the company at some date in the future.

Financial entity which belongs to its members, who are at the same time the owners and the customers of their bank.

Negative balance on the credit card. If one’s credit card account balance exceeds one’s credit limit, the credit card issuer will likely charge an over-the-limit fee.

Pre- arranged loan that is readily available and can be used, in full or in part, at one’s discretion and with limited advanced warning. Its main advantage is that it is flexible when compared to a normal loan.

Amount of money borrowed by one party from another By this stage, the firm would be fully functional and established. The business's focus is on maintaining loyal customers and strengthening both its product and market position.

In this stage a firm would start to register its first profits and the company would begin growing, as is reflected through the hiring of additional employees.

Factoring is offered within an agreement between the factor and a seller. Under this agreement, the factor purchases the seller’s accounts receivable and assumes the responsibility for the debtor’s financial ability to pay. Many businesses factor their invoices to pay bills, take advantage of early payment discounts, increase sales and to fund their business’ growth.

Instruments which provide equity/risk capital, debt instruments (such as loans or guarantees to financial intermediaries), or a combination of both equity and debt GAPSE is a scaled down pragmatic version of International Financial Reporting Standards. It eases the burden of small businesses in drawing up their financial statements without compromising the quality of financial reporting A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. Hence only in the case of default is money actually being spent.

This is a method of buying goods through making instalment payment over time. Under this type of contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.

This is a lending arrangement that requires the involvement of multiple lenders. A loan of this type is used when financing through a single entity would place too great a demand on the resources of the lender. Each of the lenders is deemed to be an investor in the project funded with the proceeds from the loan.

Subsequently, each lender receives a portion of the profits generated as a result of the project.

This is the earliest stage of a business's life and includes activities such as transforming the initial idea into the development of a business plan, a prototype, and setting up the company A RLF is a fund from which loans are made for multiple SME projects. The fund gets its name from the revolving aspect of loan repayment, where the central fund is replenished as individual projects pay back their loans, creating the opportunity to issue other loans to new projects.

Mezzanine Finance is a collective term for hybrid forms of finance and has features of both debt and equity.

The most common forms of mezzanine finance include the subordinated loan, participating loan, profit participation and convertible bonds.

When an investor purchases part of a business as part of an early investment meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, angel funding and crowd funding (i.e. networking by individuals to pool their resources, usually via the internet, to finance an entity). This term can be applied to any finance raised at the outset of a new venture to allow for development. At this stage the risks involved in investment may be too high for venture capital investment.

A share is a unit of ownership in a company or financial asset. When one purchases a share, he/she is not entitled to manage the business if the ownership represents a minority shareholding, however he/she is entitled to a distribution of dividends from the company’s profits, if any are declared.

The main focus of this stage turns towards introducing this product to the market. The company has just been formed, the product has been created, and it is being market tested and prepared for market entry.

Loans subordinated to senior creditors such that should the borrowing company fail, this loan will be repaid only after all other debt and loans have been settled.

This is a loan which is offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. The borrower could be a corporation, a large project, or sovereignty. Therefore this type of loan is less applicable to SMEs. Trade credit is extended to the enterprise by suppliers who let it buy now and pay later. This happens every time a business takes delivery of materials, equipment or other valuable without paying cash on the spot.

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1.

Introduction The Malta Business Bureau (MBB) acts as a direct link between the Maltese business community and the European Union (EU) by representing the members of the Malta Chamber of Commerce, Enterprise and Industry (Malta Chamber) and the members of the Malta Hotels and Restaurants Association (MHRA) in Brussels and Malta. The MBB provides business advisory services with regards to evolving EU legislation and policies which may hinder business development and growth by providing tailor-made guidance. In this respect, the MBB is interested in understanding and gauging the existing market gaps that hinder the opportunity for micro, small and medium-sized enterprises (SMEs) in Malta to access finance, and the feasibility of new EU financing instruments addressing the credit needs of Maltese business. This Study is aimed at both Maltese and EU policy makers, as well as the members of the respective MBB parent organisations.

SMEs are the engine of the Maltese economy. They employ about two-thirds of the private sector workforce, and contribute more than half of the country’s value added. This situation is similar to all countries in the EU, where SMEs provide an essential source of jobs, create entrepreneurial spirit and innovation, and foster competitiveness.

Easier access to finance is needed for these enterprises to be continuously able to expand their operations and therefore generate additional jobs. One of the commonly identified main issues small businesses encounter is a financing gap where SMEs are unable to raise enough capital to support their business venture. There are multiple causes for such access to finance obstacles – some are cyclical while others are of a more structural nature, such as the information asymmetry that inevitably exists between suppliers and demanders of funds.

Maltese SMEs also experience this gap, and this scarcity in finance may actually be magnified due to the small size of the domestic market, and the lack of providers of risk capital and/ or lenders.

Specifically, the inability of Malta’s SMEs to raise capital may stem from a number of reasons, including a non-existent venture capital market, limited presence of business angels, adverse collateral requirements and debt pricing. Malta’s small size also makes the capital market not economically viable for small ventures. As a result commercial banks remain the main (and in the case of some sectors the only) source of finance despite not providing risk capital. Such retail banks are, however, unable to provide extensive support because they are fundamentally lenders not investors, especially since they have to ensure that the depositors’ funds are adequately safeguarded.

Within this context, the EU has always put SME assistance at the forefront of its agenda. With the new 2014-2020 Programming Period, the EU is pushing towards complementing grant funding with other forms of interventions, especially innovative financial instruments such as loans, equity and guarantees. Under the new common provisions covering all five EU funds, financial instruments are being advocated to support investments which are expected to be financially viable but which do not give rise to sufficient funding from market sources. These common provisions also take into consideration a combination of financial instruments and other forms of support, including grants 1.

This shift is influenced by the contractionary fiscal policy being adopted by most Member States’ governments, as well as the experience to date with such instruments. The main advantage of financial instruments is their multiplier effect, whereby risk coverage (in the case of loans and guarantees) or risk participations (in the case of equity) induces investors to invest, and whereby the repayments of capital or interest and proceeds of an investment can be reused for the instrument in subsequent cycles. In addition, such instruments require less administrative controls compared to grants.

In Malta, take-up for the various grant schemes and for the JEREMIE loan guarantee financial instrument have in general been satisfactory. However, given the reduction in ERDF funding and the 1

European Commission (2012), Elements for a Common Strategic Framework 2014-2020: ERDF, ESF, CF, EAFRD and EMFF; European Commission (2012), Financial Instruments in Cohesion Policy

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potential reduction in grant co-financing rates following Malta’s move from an Objective 1 country to a non-assisted region, the potential for various financial instruments, not only loan guarantees, needs to be further explored. The experience of JEREMIE in Malta shows that the same number of enterprises can be assisted with a lower amount of resources, thus increasing efficiency and effectiveness of public funding.

1.1

Study objectives The objectives of this study are to: a)

Assess the existing market gaps for Malta-based SMEs (according to different segments and different firm lifecycles) to obtain financing beyond the traditional bank facilities; AND

b)

Establish the feasibility or otherwise of a wide array of financial instruments not currently available on the Maltese credit market.

This study adopts a mix of qualitative and quantitative research tools, including telephone interviews, one-to-one interviews with key stakeholders and desktop research.

1.2

Organization of study This report is structured as follows: Chapter 1 provides an introduction to the Study, including the main scope and objectives of this Study Chapter 2 sets the background for this Study, including an assessment of SMEs, related policies and SME-related initiatives, in both the EU and in Malta Chapter 3 discusses in greater detail the financing needs of SMEs, including an analysis by firm lifecycle, and related sources of finance Chapter 4 presents the Study’s methodology, namely a survey amongst SMEs and stakeholder consultation Chapter 5 presents the results of the survey Chapter 6 builds on the results of the survey, the desktop research and the stakeholder consultation to establish the feasibility (by market segment) of other financial instruments not currently available on the Maltese credit market. This chapter also delves into the local market potential for more SME support through revolving instruments funded by the European Social Fund (ESF), the European Agricultural Fund for Rural Development (EARDF), and the European Maritime and Fisheries Fund (EMFF). Finally, this chapter concludes this Study by providing best practice examples from other Member States which can be applied to the local context.

Appendices A, B and C provides information on the survey

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2.

Study background This section provides the context within which this Study is being prepared. Specifically, this section provides background information on the importance of SMEs for both the EU and the Malta economies. This section also details a number of SME-related initiatives.

2.1

The role of SMEs in the EU and in Malta The growth of SMEs is a key driver of EU growth given that Europe’s 23 million SMEs currently contribute more than 50% of the total value added in the non-financial business economy and about two-thirds of total employment. In addition, SMEs provided 80% of all new jobs in Europe in the past five years2. Small businesses are particularly important since they bring into the markets innovative products or techniques to the market.

The role of SMEs in Malta is even more pronounced. In Malta almost all businesses (c. 99.9%) fall under the EC definition of an SME3. Moreover, Malta accounts for the largest share of micro-firms out of all firms in the EU, since micro-firms represent 95 out of every 100 local businesses. These micro-firms account for slightly more than one third of the private sector employment. In fact, with an average of about 3 persons per business, Malta is referred to by the EC as being “quintessentially a small business economy”4. Malta’s SMEs contribute to about two-thirds of total value added, which is notably higher than the EU-27 average of c. 58% as shown in Table 2 below. Micro enterprises contribute circa 26% of total Malta GDP. Table 1: Share of SMEs Number of Enterprises - 2011 Malta EU27 Number Share Share Micro 28,468 95.1% 92.2% Small 1,170 3.9% 6.5% Medium 239 0.8% 1.1% SMEs 29,877 99.9% 99.8% Large 44 0.1% 0.2% Total 29,921 100.0% 100.0%

Employment - 2011 Malta EU27 Number Share Share 39,922 34.4% 29.6% 24,211 20.9% 20.6% 24,290 20.9% 17.2% 88,423 76.3% 67.4% 27,535 23.7% 32.6% 115,958 100.0% 100.0%

Value Added - 2011 Malta EU27 Billion (€) Share Share 1.0 26.3% 21.2% 1.0 14.7% 18.5% 1.0 23.6% 18.4% 3.0 64.5% 58.1% 2.0 35.5% 41.9% 5.0 100.0% 100.0%

Source: European Commission (2012), Annual Report on EU SMEs; European Commission (2012), SBA Fact sheet 2012 – Malta Note: Estimates for 2011, based on 2005-2009 figures from the Structural Business Statistics Database (Eurostat) 5 2

European Commission (2011), An action plan to improve access to finance for SMEs

3

According to the EC, an enterprise must meet the stipulated headcount and satisfy either the ‘annual turnover’ or the ‘balance sheet total’ criterion in order to be considered an SME. Category

Employees

Annual turnover EUR

Balance sheet total EUR Micro <10 ≤ €2 million ≤ €2 million Small <50 ≤ €10 million ≤ €10 million Medium <250 ≤ €50 million ≤ €43 million Source: European Commission (2003), EU Recommendation 2003/361 concerning the definition of micro, small and medium-sized enterprises, pg. 14 OR

This SME definition is linked to eligibility, as well as nature and size of support under many EU business-support programmes, including many of those outlined in this report. Moreover, companies classified as SMEs could be exempted from state aid/unfair competition considerations when benefitting from support programmes. In some cases SMEs also benefit from fewer/ simpler administrative requirements or reduced fees for EU administrative compliance when compared to their larger counterparts.

4 European Commission (2012), SBA Fact Sheet 2012 - Malta 5 These estimates have been produced by Cambridge Econometrics. The data cover the ‘business economy’ which includes industry, construction, trade, and services (NACE Rev. 2 sections B to J, L, M and N). The data does not cover the enterprises in agriculture, forestry, fishing or the largely non-market services such as education and health. The advantage

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2.2

Why access to finance Various European and national reports have shown that to sustain the contribution provided by SMEs to the European and Maltese economies, these SMEs need to be assisted in achieving their growth potential. At the same time SMEs are known to often face significant difficulties in meeting their financing needs6. The EU has set the facilitation of access to finance for SMEs as one of its key priorities in its Europe 2020 vision, the EU's growth strategy for the coming decade.

According to the European Central Bank (ECB)’s 2012 survey on Access to Finance of small and medium-sized enterprises in the euro area (SAFE), “Access to finance” was a key concern for a large number of euro area SMEs (18%), and was only second to “finding customers” as the dominant concern for euro area SMEs (27% of SMEs mentioned this as their most pressing business problem).

Other areas such as “Competition” and “Availability of skilled staff or experienced managers” were mentioned somewhat less frequently (11% and 13%, respectively). Younger firms also claimed to have bigger access to finance issues than their larger and more established counterparts7.

On the other hand, the 2012 SAFE Malta report shows that access to finance is only a concern for 4.6% of respondents8. Additionally, over 50% of Maltese respondents claimed that their largest source (by usage) of financing were the ‘traditional’ bank sources of financing, primarily bank overdraft, credit line or credit cards overdraft and bank loans9. Financing instruments were generally deemed ‘irrelevant’ to local SME business needs.

Malta based respondents to an additional survey on access to finance carried out by the General Retailers and Traders Union (GRTU) in January 2012 ranked access to finance as their fifth most pressing problem facing them. When asked to identify the sources of finance for any planned capital investment, most referred to use of own funds (including internal profits) and bank financing. Most were also satisfied with the external financing being used, and were aware of schemes that help finance investments through loans at lower collateral and guarantees, even though only 20% actually made use of such schemes10.

of using Eurostat data is that the statistics from different countries have been harmonised and are comparable across countries. The disadvantage is that for some countries these data may be different from data published by national authorities.

6 SMEs are a riskier sector than larger corporate, as the profitability ratio, activity ratio and ability to pay interest expen ses are generally higher in larger corporations. Data available at the European Banking Authority also show that the probability of default is on average 55% higher for the SME retail portfolio than in the corporate one and 72% higher than in the entire asset class. On the other hand, data from the ECB Bank Lending Survey show that lending constraints are shared by both large and smaller firms, but since 2007 the tightening of lending standards has been stronger for smaller firms than large firms (European Banking Authority (2012), Assessment of SME proposals for CRD IV/CRR).

7 European Central Bank (2012), Survey on the access to finance of small and medium-sized enterprises in the euro area – April to September 2012. This survey also shows that the economic and financial situations related to the ongoing (2012) crisis are more likely to hit younger firms: SMEs up to 5 years old mentioned “Finding customers” and “Access to finance” similarly often as their most pressing problem. For large firms, “Access to finance” (mentioned by 14%) was less of an issue, while “Finding customers” (22%) and “Competition” and “Cost of production or labour” (16%) were their dominant concerns.

8 European Central Bank (2012), SAFE tables – 2011 (Excel file). In a Eurobarometer survey carried out in 2009, 8% of Maltese respondents said that access to finance was their most pressing problem. The EU27 average in this survey was 16% (European Commission (2009), Eurobarometer: Access to finance – analytical report).

9 In the above Eurobarometer survey, Malta registered the highest response in relation to bank loans as the most preferred external financing to realise growth ambitions (86% vs. 64% for EU27) (Ibid).

10 GRTU (2012), Access to finance. In a 2008 survey carried out through a joint collaboration between BOV and GRTU among a number of GRTU members, only 57% of SMEs surveyed said they had sufficient financing to see their projects through. 78% of those interviewed made use of overdrafts as their predominant type of financing (compared to the EU15 average of 49%; Times of Malta (2008), Banks geared to serve SMEs better).

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Additionally, although Maltese data for a number of indicators is not available, the 2012 EC SBA fact sheet for Malta (based on 2011 data and forming part of the EC’s annual Member State SBA fact sheets11), shows an improvement in the available “access to finance” indicators from the 2010/2011 edition, with Malta scoring above the EU average in all the indicators below, namely: Access to public financial support including guarantees (% of respondents that indicated a deterioration): Malta: 15%; EU-average: 22% Willingness of banks to provide a loan (% of respondents that indicated a deterioration) Malta: 19%; EU-average: 27% Relative difference in interest rate levels between loans up to EUR 1 million and loans above Eur 1 million: Malta: +11%; EU-average: +19% This data shows that far fewer SMEs in Malta are reporting deterioration in access to public financial support or in the banks’ willingness to provide loans. Also, the differential between small loans of less than EUR 1 million and larger ones above that threshold is smaller in Malta (11%) than in the EU on average (19%). According to the SME fact sheet, this latter indicator suggests that the mark-up which the SMEs have to pay for bank loans is smaller in Malta than in most other EU Member States, but this is probably a reflection of the small absolute size of Maltese firms.

2.3

SME policy in the European Union The EC aims to promote successful entrepreneurship and improve the business environment for SMEs, to allow them to realise their full potential in today's global economy. The EC works on broad policy issues affecting entrepreneurship and SMEs across Europe, and assists SMEs through networks and business support measures. It also helps existing and potential entrepreneurs to grow their businesses, giving special attention to women entrepreneurs, crafts and social economy enterprises.

The EC’s Small Business Act for Europe (EC SBA), launched in 2008, embodies the EU's commitment to SMEs and entrepreneurship. Member States have committed to implementing the SBA alongside the EC in an effort to make the EU a better place to do business. The EC SBA encompasses a host of policy areas targeted at SMEs which could be undertaken at an EU-wide level as well as Member State level. It aims to improve the overall approach to entrepreneurship, permanently adopting the ‘Think Small First’ principle in policy making, from regulation to public service, and to promote SMEs’ growth by helping them tackle the remaining problems which hinder their development. The ‘Think Small First’ principle requires that legislators take SMEs’ interests into account at the very early stages of policy making in order to make legislation more SME friendly12.

Since SMEs have to be supported at the local level, the EC also helps Member States and the regions to develop policies aimed at promoting entrepreneurship, assisting SMEs at all stages of development, and helping them to access global markets. The identification and exchange of good practices are key elements of this policy.

One of the key priorities set out in Europe 2020, as well as in the Commission's Single Market Act and the SBA, is to facilitate access to finance for SMEs. The EC acknowledges that SMEs are to a very large extent dependent on bank loans for their external financing13, and therefore suitable alternatives should be put at their disposal. The EC aims to counteract this reality by putting into place a number of “access to finance” initiatives, including financial instruments to benefit enterprises14. The EC acknowledges that challenges remain in this regard, particularly given that 11

European Commission (2011), Review of the “Small Business Act” for Europe

12

European Commission (2008), “Think Small First” – A “Small Business Act” for Europe European Commission (2011), An action plan to improve access to finance for SMEs 14 European Commission (2011), Review of the “Small Business Act” for Europe. Other initiatives relate to the Temporary State Aid Framework (in place until 2011), which helped in unblocking bank lending to companies and encouraging companies to continue investing in the future, in the wake of the financial and economic crisis; and the SME Finance Forum, 13

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

access to finance is largely in the hands of the individual Member States. Hence it suggests that additional initiatives be undertaken, including the exploitation of capital markets and encouraging investment through fiscal policies, investing revenue in equity, boosting public SME finance schemes and devoting particular attention to financing the first growth phase of firms15.

2.4

SME initiatives in Malta In Malta, the main sources of finance available to SMEs relate primarily to traditional sources such as bank overdrafts and bank loans, apart from personal savings and financing obtained from family or friends. Most companies are also eligible for assistance through national/ EU funds. It is only the larger/ more advanced companies that are able to deviate from the traditional sources of finance and tap the bond and equity markets, investor funds and informal venture capital/ private equity funds. The following sub-section provides further detail on incentives related to SMEs in Malta.

2.4.1 The Small Business Malta Act Maltaâ&#x20AC;&#x2122;s SME policy is largely based on EU SME policy, primarily through the adoption of the Small Business (Malta) Act (2011), which includes various specific SME measures such as: Ensuring that all new proposed legislation has been adequately vetted to identify potential impact on enterprise and suitable measures taken to mitigate or remove any identified negative impacts especially on the smaller firms, as far as possible through an SME test or impact assessment.

Ensuring a more user friendly legislation particularly where this requires compliance from businesses through various measures such as a standstill period between publication and coming into force of such legislation focused information campaigns, and the preparation of User Guidelines.

Setting up a dedicated consultative body, the Enterprise Consultative Council, to assist government in the formulation and implementation of enterprise policy and to discuss and propose measures addressing problem areas effecting businesses. The Council, set up in 2010, is made up of both Government agencies and employers representative bodies.

Setting up of a Regulators Forum (College of Regulators) to advise government on formulation and review and implementation of regulatory policy.

Requiring public sector entities whose services are primarily intended for businesses to undertake regular independent surveys of customer satisfaction in order to constantly improve their service delivery.

Centralising online business information to provide a central repository of all information required by businesses on government provided services and government imposed requirements.

The Maltese SBA also makes reference to the SME Envoy, tasked to oversee the implementation of the initiatives of the SBA.

set up in 2010 as a permanent forum to bring together several players within the SME field, monitoring the market situation, bringing about policy initiatives that address practical obstacles faced by SMEs in obtaining credit.

15

European Commission (2012), SBA Fact Sheet - Malta 2012

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2.4.2 Malta Enterprise support measures Malta Enterprise (ME) has been active in providing assistance to Maltese firms. In conjunction with the launch of the SBA in Malta, a one-stop shop was set up in 2012 to provide enterprises with access to 50 different government services. This business support centre, named Business First, is hosted at ME. In addition, ME has assisted SMEs through a mix of tax credits, loans, grants and a number of “access to finance” support measures (co-financed through the EU and/or national funds), including: Investment tax credits (Jan 2008 – Dec 2013) - credits are available to selected sectors16 and provide tax credits to support investment and job creation, focusing on attracting new investment projects and promoting expansion or diversification of existing enterprises. The tax credits are calculated as a percentage of either the investment undertaken or the wage costs of new jobs directly created as a result of an investment project, with the applicable percentages for SMEs ranging from 40% (medium) to 50% (small).

Soft loans (existing aid) – soft loans support enterprises through loans at low interest rates for part financing investments in qualifying expenditure, on the basis that the activities of a qualifying company17 may contribute to the development of the Maltese economy as per the objectives of Government. The assistance represents up to 75% of qualifying expenditure, capped at €2.3 million, with minimum interest chargeable of 2.5% below the ECB base rate.

Loan interest subsidy (existing aid) – this tool aims to help increase the competitiveness and innovative capacity of enterprises by supporting the acquisition of tangible and intangible capital assets that lead to a more effective and efficient production and supply of service/s.

The maximum loan is capped at €7 million, with maximum interest subsidy of 3% on the bank lending rate. The same eligible qualifying companies as per the soft loans support measure apply.

Loan guarantees (existing aid) – these guarantees facilitate access to finance to assist enterprises in the acquisition of capital assets that will lead to a more effective and efficient production and supply of service/s. The assistance can represent up to 75% of a loan taken up by a qualifying company to finance qualifying expenditure, and is capped at €2.3 million.

Again, the same eligible qualifying companies as per the soft loans and loan interest subsidy support measures apply.

Interest rate subsidy for hotels, accommodation facilities and restaurants (Oct 2010 – Dec 2013) - this scheme supports hotels, restaurants and holiday accommodation providers in upgrading their operations and product offering so as to provide new and improved services.

These investments are necessary to enhance the competitiveness of such enterprises and upgrade the tourism sector. Such assistance is capped at €630,000 in the case of hotels, guesthouses and hostels, and €45,000 in the case of snack bars, restaurants and farmhouses. The interest rate subsidy varies from 1% to 3%.

Energy efficiency loans (May 2011 – Dec 2013) – this scheme relates to soft loans (up to €400,000 covering up to 80% of the total eligible project costs) granted to hotels, guesthouses, hostels, farmhouses, snack bars and restaurants to implement energy saving solutions and to invest in solutions for the generation of energy from renewable non-fossil energy sources. The loan period is limited to five years and the applicable interest rate is 1.5% over the discount rate charged by local commercial banks.

Equity Financing Programme (2009) – investor readiness programme to support local businesses with the development of their business proposals and to help with their initial investor search18.

Tax credit for the development of digital games (2013) – a one-time tax credit equivalent to 100% of the total subcontracted costs incurred for the development of an eligible digital game, up to a maximum of €15,00019.

16

All enterprises engaged in manufacturing, ICT, R&D, eco-innovation and waste treatment, biotechnology, audiovisual productions, tertiary education in science and technology, private healthcare services, logistics operations by undertakings that create 50 new jobs (FTE), and that include part-transformation that adds value to the product.

17 All qualifying companies engaged in manufacturing, industrial services, biotechnology, call centre activities and R&D. 18 Times of Malta (2009), Equity financing for expanding companies

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In addition, ME has implemented a number of grant schemes specifically targeted at SMEs, including20: ERDF Innovation Actions (Innovation and Environment) grant schemes21 (Jan 2010 – Dec 2013) – these two schemes are available to selected sectors. The Innovation scheme aims to stimulate innovation within SMEs by supporting the development of innovative processes, products and services. The Environment scheme aims to support SMEs by supporting the adoption of environmentally friendly measures that go beyond legal requirements.

ERDF e-Business Development grant (Jan 2010 – Dec 2013; no calls are currently available) – this incentive, available to selected sectors, is designed to assist SMEs to make better use of Information and Communication Technologies (ICT) to improve efficiency, add value to their products and services, and to innovate their processes.

ERDF Small Start-up Grant Scheme (Jan 2010 – Dec 2013; no calls are currently available) – the scheme, available to new enterprises in selected sectors22 having less than 50 employees, part-finances costs incurred by small enterprises in their first 3 years of operation. This scheme will support operational costs incurred during the setting-up period of start-up enterprises, including wage costs and rental or lease of equipment and production facilities.

Innovative Start-ups Programme (May 2010 – Dec 2013) – this scheme is aimed at selected sectors23 and relates to business ideas having the potential to develop an innovative product or service, and eligible companies may quality for support on start-up advisory services, business incubation, grants to cover costs related to investments in tangible and intangible assets, and access to finance.

Micro Guarantee scheme (Jun 2012 – Dec 2013) – this scheme is aimed at facilitating access to debt finance required for the acquisition of tangible investments, intangible assets and working capital linked to such acquisitions, for smaller business undertakings employing not more than 20 persons. This scheme provides eligible undertakings with access to new loans of up to €100,000 which may be used to finance projects leading to business enhancement, growth and development. The scheme is made possible through the collaboration of participating banks that provide the loan facilities covered by the scheme at favourable conditions, subject to their own lending criteria24. ME does not require any security from the beneficiary in respect of the guarantee that will be issued to the bank.

However, the bank granting the loan may require that the beneficiary secures up to 10% of the loan amount.

Exploratory award (Sept 2010 – Dec 2013): this award supports SMEs in preparing technical dossiers to participate in EU funded programmes issued by the EC. The assistance provided supports the enterprises during the application process and covers the preparation and submission of technical proposals for projects under the EC’s Seventh Framework Programme (FP7) and the CIP. This award scheme provides assistance in the form of a cash grant and is applicable to selected sectors25.

19

MaltaToday (2013), €15000 tax credit for development of digital game www.maltaenterprise.com 21 It should be noted calls for applications for assistance for a number of these (primarily ERDF) schemes are currently closed.

22 High value-added start-ups in manufacturing, ICT, RD&I, waste treatment and environmental solutions and biotechnology.

23 SMEs engaged in manufacturing, ICT development activities, R&DI, waste treatment, eco-innovations and environmental solutions; biotechnology and other start-up enterprises proposing innovative products and services.

24 Banks are not committed to lend on the basis of the Letter of Intent issued by ME. 25 SMEs engaged in manufacturing, maintenance, repair and overhaul of equipment, engines, plant and machinery, pleasure crafts and yachts, heavy equipment and aircraft; ICT development activities, software development and ICT enables services 20

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SME Development Grant (Sept 2010 - Dec 2013) – this incentive is aimed at assisting SMEs in the first time participation in trade fairs or in acquiring technical assistance from external experts. Assistance is provided on actions to diversify, establish new markets, increase competitiveness, develop new products and services, and consolidate existing market share.

Through this incentive eligible enterprises are provided with part financing. The selected sectors are the same as those applicable for the Exploratory Award.

In addition to SME-specific support measures, other ME enterprise support measures are equally applicable to SMEs and include26: ERDF Energy Grant Scheme (Jan 2010 – Dec 2013; no calls are currently available) – scheme designed to assist enterprises to make use of alternative energy technologies.

ERDF International Competiveness Grant Scheme (Jan 2010 – Dec 2013; no calls are currently available) – scheme to support enterprises to tap into new international markets.

This incentive supports enterprises to extend their activities in new markets or to introduce a new service or product in an existing market. This assists enterprises reduce their dependence on the local market and facilitate the exploration of inter-regional cooperation opportunities by reducing the risk involved in expanding into new markets.

Business Advisory Services (Feb 2009 – Dec 2013) – this scheme is designed to provide enterprises with customised mentoring services that suit their particular requirements. The business advice offered can address a number of areas key to the development and growth of the enterprise, such as adopting innovation management techniques, improving competitiveness and optimising energy utilisation. It is applicable to most enterprises 27 and is capped at €2,500 pa.

MicroInvest Scheme (Jan 2010 – Dec 2013) - provides tax credits to support micro enterprises employing less than 10 people and the self-employed invest in their business, innovate, expand, implement compliance directives and/ or develop their operations. Micro enterprises and self-employed are supported through a tax credit representing a percentage28 of the eligible expenditure and wages of newly recruited employees and/ or apprentices. It is also applicable to most enterprises29. This scheme was referred to as an example of “best practice” in the EC’s SBA Fact Sheet for Malta covering the period 2010/1130. The 2013 Budget considered extending this scheme for a further two years and extending eligibility to businesses employing up to 30 people.

CREATE (Jan 2010 – Dec 2013) – this tax credit provides an incentive to support creative businesses31 whose economic performance is directly linked to the creative talent of those involved in the business. Further support is provided to help the development of creative communities in specific artistic zones. Costs related to the development and publication of creative work is eligible for aid under this incentive.

(excluding gaming and telecommunications); R&DI; waste treatment, environmental solutions and eco-innovations; biotechnology and other start-up enterprises proposing innovative products, services and process development.

26 www.maltaenterprise.com 27 All enterprises except for public entities, voluntary organizations, enterprises engaged in fisheries, agriculture, processing of agricultural products which are classified to fall under specific cases and companies in difficulty.

28 40% for Maltese firms or 60% for Gozo firms, in both cases capped at €25,000 29 All enterprises employing not more than 9 persons and with a turnover not exceeding €2 million, and excluding public entities, voluntary organizations, enterprises engaged in fisheries, agriculture, processing of agricultural products which are classified to fall under specific cases and companies in difficulty.

30 European Commission (2011), SBA Fact Sheet – Malta 2010/11 31 All creative enterprises except for restaurants, cafeterias, retail and wholesale, cinemas, provision of premises, equipment and facilities, and other logistical support

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Trade Promotion (Sept 2010 – Dec 2013) – this incentive supports enterprises32 to establish international business contacts. Aid is provided to enterprises participating in international trade fairs or trade promotion events for the launch of a new product or existing products in a new market.

Network Support: Business Networks (Jan 2008 – Dec 2013) – this scheme provides cash grants to support business networks made up of between 3 and 10 independent enterprises working together to achieve a specific business objective.

Network Support: Development Networks (Jan 2008 – Dec 2013) – this scheme provides part-financing of eligible costs related to development networks that bring together at least 10 enterprises operating within the same sector33 or having complimentary activities for the purpose of achieving collaborative and collective development.

Quality+ (Jan 2012 – Dec 2013) – deduction from taxable income to encourage selected SMEs34 to improve the quality of their products, services and processes by achieving quality certifications and quality marks, environmental certifications, franchise licences and licences required for participation in a value chain.

Get Qualified – tax credits of up to 80% on the fees paid are available to support individuals who embark on personal development on their own initiative. These tax credits are available to individuals undertaking courses in selected sectors35.

Business Development Scheme (Jan 2008 – Dec 2013) – this scheme provides assistance to high value added projects/ enterprises to set up in Malta, and is therefore targeted at Foreign Direct Investment (FDI).

ME also provides assistance to enterprises targeted at R&D initiatives, including: Grants to support enterprises in undertaking preparatory technical feasibility studies Grants to support SMEs in temporarily engaging highly qualified experts R&D tax credits Collaborative R&D grant scheme for enterprises carrying out a research project in collaboration with other enterprises under the EUREKA and EUROSTARS pan-European initiatives ERDF R&D Grant Scheme for enterprises carrying out industrial research and/ or experimental development activities Grant to support the setting-up, expansion and animation of innovative clusters and collaborations promoting industrial research and experimental development.

Tax Exemption on Royalty Income from Patented Intellectual Property ME also manages the Kordin Business Incubation Centre (KBIC), where a formal incubation period ranging between a minimum of one year and a maximum of three years is set. The target industrial group focuses on engineering design and development of equipment systems, renewable energy resources, biotech projects, and other innovative projects.

The 2013 Budget Speech also announced the B.START initiative to further encourage start-ups and to incentivise established businesses concerns to invest in seed capital in new companies. Through this scheme, established business concerns will be given a reduction in tax up to a maximum of €30,000 on capital investment in new enterprise approved by ME, thus creating an opportunity for crowd funding36.

32

All enterprises engaged in manufacturing, industrial services, ICT, biotechnology, or in other innovative or high value adding operations. Enterprises excluded include enterprises engaged in fisheries, agriculture, processing of agricultural products which are classified to fall under specific cases and companies in difficulty.

33 Same sector eligibility for Network Support grant schemes as that of the Trade Promotion incentive.

34 All SMEs except for voluntary organizations, enterprises engaged in fisheries, agriculture, processing of agricultural products which are classified to fall under specific cases, companies in difficulty and enterprises engaged in real estate, gambling, financial services and/ or insurance, trading or manufacture of arms and military equipment.

35 Aviation industry, chemical and pharmaceutical industries, economics and statistics, financial services, crafts and creative industries, ICT, business process outsourcing, and industrial electromechanical engineering 36 Ministry for Finance (2013), Budget Speech 2013

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2.4.3 Other assistance schemes in Malta Aside from the various schemes offered by ME, additional assistance is also available to SMEs in Malta through: Invex (Office of the Prime Minister) – this scheme targets cultural and creative enterprises and organisations, providing long-term strategic support to improve their products, services and internal organisational structures. It also supports organisations seeking to enhance their professional capacities and portfolio by way of organisational growth, research, business and audience development, technological investment and international partnerships. Selected organisations may benefit from a three year funding period, based on a 3-year business plan.

MicroCredit scheme - launched in 2011 with a fund financed under the Joint European Resources for Micro to Medium Enterprises (JEREMIE) from EU Structural Funds, this is the first Loss Portfolio Guarantee vehicle set up in Malta to grant SMEs and self-employed loans of up to €500,000 at advantageous interest rates and considerably lower collateral requirements. 20% of the fund was earmarked for firms with fewer than 10 employees and a turnover of not less than €2 million. The financial institution awarded the tender, namely Bank of Valletta plc (BOV), is to provide €51 million in new loans over a period of 36 months to small businesses, through a guarantee agreement for €8.8 million with the European Investment Fund (EIF). This scheme was referred to as a “best practice” example in the EC’s SBA Fact Sheet for Malta covering the period 201237. The MicroCredit/ JEREMIE scheme is explained in greater detail in Section Error! Reference source not found..

The Employment & Training Corporation (ETC) provides assistance through a number of schemes and initiatives to incentivise businesses to invest in their workforce. These include: Enhancing Employability through Training Programme – this programme, which is part financed by the European Social Fund (ESF), aims to reintegrate registered unemployed or inactive individuals into the labour market, as well as provide further training in the field of basic skills, office related subjects, IT, technical courses and care working courses amongst others.

Traineeships - Traineeship is a dual system of occupational skill development programme comprising both on-the-job training and off-the-job training. It is targeted at new labour market entrants, unemployed clients or employees involved in restructuring exercises. This flexible training solution to address skill shortages is offered to employers willing to recruit as part of a traineeship. The content and occupational standards are set after consultation with the employer and lead to certification. During the traineeship programme, trainees are paid the equivalent of 80% of the minimum wage.

Training Subsidy Scheme – this scheme is intended to encourage constant training and development amongst the self-employed, employees of micro enterprises which employ 10 persons or less, employees of NGO's and Local Councils, and jobseekers who are registering for work. It provides financial assistance for off-the-job training expenses. The financial assistance is a grant equivalent to 75% of the training costs, up to a maximum amount of €1,000 per individual.

Training Aid Framework (TAF) - The TAF is intended to promote access to training of persons actively participating in the Maltese labour market. This programme also aims to increase and/or improve the skills of persons employed. The TAF provides financial assistance to employers in the form of part-refund of training costs incurred by private owned companies when they train their employees38.

37 38

European Commission (2012), SBA Fact Sheet – Malta 2012 This scheme is currently on hold

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Apprenticeships – through this programme, apprentices learn through a combination of onthe-job and off-the-job training. Apprenticeships are available across a wide range of industries and allow for two levels, the Technician Apprenticeship Scheme and the Extended Skill Training Scheme.

Other general national initiatives which have potential benefits for SMEs include: Public procurement (2011) – the e-procurement initiative, streamlined to cater for all types of procurement (supplies/services/works), significantly reduced the size and simplifying the requirements. In fact, thanks to electronic procurement, the complete purchasing cycle up to the e-evaluation stage is carried out electronically, resulting in considerable savings to economic operators and Government alike, making it even easier for smaller enterprises to participate in public procurement.

GAPSE (2009) - adoption of General Accounting Principles for Small Entities (GAPSE) in order for small businesses to file abridged set of financial statements, thus removing the difficulties in preparing financial statements.

National Enterprise Support Awards (2009) - scheme launched by the Ministry of Finance, the Economy and Investment (MFIN) to identify and reward initiatives that promote entrepreneurship or put in place measures that support businesses.

Entrepreneurship through Education Scheme (2012) – scheme jointly co-ordinated between MFIN and the Ministry of Education, Employment and the Family (MEEF) to promote the growth and development of entrepreneurial spirit through the education system. This scheme is particularly relevant for the local community considering the results of a 2012 Eurobarometer survey on entrepreneurship showing that 61% of Maltese would rather be employees than self-employed (EU27 average: 58%)39. The reason behind this lack of willingness to be self-employed seems to be the underlying fear of bankruptcy (43% of respondents). 37% were discouraged by the risk of losing their property/ home, while 33% were discouraged by the risk of irregular income. 17% of respondents said they had started a business or are planning to start one (EU average: 23%; Malta figure in 2009: 8%).

The 2013 Budget Speech also referred to the setting up of an action plan for the training on entrepreneurship from primary to tertiary educational level to prepare students for careers in business40.

Malta Tourism Authority – the MTA is also responsible for implementing a number of sustainable tourism project schemes, such as the Grant Scheme for Tourism Projects by Enterprises 2007 – 2013.

2.4.4 Venture capital in Malta Although formal venture capital schemes are currently not available in Malta, a number of past initiatives aimed at filling this financing gap are outlined below41: Investment Finance Bank (1991-1993): the IFB administered a €4.7 million (i.e. MTL 2 million) loan facility which was provided by the EIB for venture capital initiatives in Malta. A couple of projects benefitted from this facility at the time. The financing mechanism was generally through preference shares, with the bank being granted representation on company’s Board of Directors.

Technology Venture Fund (TVF; 2001-2003) – provided through the then Institute for the Promotion of Small Enterprises Limited (IPSE) and the Malta Development Corporation (MDC), the TVF was set up to support the development of technology and innovation within SMEs. The aim of the TVF was to part-finance the setting up of innovative enterprises and 39

European Commission (2012), Entrepreneurship in the EU and Beyond. This trend seems to be evident in 19 out of the 27 EU countries, who also said that they would prefer to be employees. This is the case particularly in Sweden (74%) and Finland (73%); European Commission (2012), Eurobarometer: Entrepreneurship – Malta country report 40 Ministry for Finance (2013), Budget Speech 2013 41 Interviews with stakeholders as well as desktop research have shown that these initiatives did not lead to any assistance being granted to SMEs through their envisaged mechanisms.

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hence enhance the chances of success during the start-up phase of a business venture in selected sectors42 through seed capital. The fund also aimed at investing in established businesses seeking a capital injection for innovative projects43. The initial seed capital put forward by Government amounted to c. €2.3 million (i.e. MTL 1 million), with further funding envisaged from the EU and the private sector (including international venture capital partner/s). Apart from initial funding, the fund was also planning to assist in mediation between SMEs and banks, share potential credit risks with banks, and co-operate with transnational bodies. About 10 applications from prospective start-ups were initially received, but only a couple of applicants were eventually assisted and this fund did not proceed further due to administrative difficulties. The fund was initially intended to be managed by the MDC, with the eventual intention of forming the fund as an independent entity, and potentially achieving public listing. It was envisaged that the fund would be selffinancing from interest earned on preference shares and from the redemption of all preference shares, and that it would break-even despite the inevitable losses from certain failed investments. The establishment of a business angel network was also taken into consideration. Apart from the applications received, interest in TVF was also shown by a UKbased asset management firm/ fund manager, who was willing to develop and manage the fund.

Malta Business Angels Network (MBAN; 2003) – a local network set up through a private initiative to establish the idea of formal equity investment in Malta. The MBAN was set up in November 2003 with its core function being to match Maltese entrepreneurs starting their new venture, or seeking growth finance, with successful local entrepreneurs who actively seek to invest equity capital and bring entrepreneurial know-how and experience to enterprises with growth potential. MBAN provided them with the formal framework to do so more effectively by facilitating start-up ventures, often considered to be high-risk investments, and matching them to the right business angel. The entrepreneur must in return be ready to offer a share of his business in return for equity finance44.

Technology Innovation Fund (2004-2005) – In an attempt to revamp the previous work carried out on the TVF, it was renamed as the Technology Innovation Fund, re-offering seed capital for start-up enterprises, preferential equity capital and the possibility of collaborative agreements between industry and University.

Malta Venture Capital plc (2006) – Government set up a venture capital fund through its investment arm Malta Investment Management Company Limited (MIMCOL), with the intention of licensing it as a collective investment scheme. The company's aim was to fill the gap in the economy's financing systems and assist entrepreneurs to find the required finance to embark on projects and start up operations. It also aimed to encourage the Maltese private sector to provide finance on a small scale but at high risk to regenerate Maltese private enterprise, and provide finance for innovative processes and ideas and new technologies. Government initially injected around €2 million, with the remaining capital intended to be obtained from private investment45. The board of directors of this fund was composed of government officials, bank representatives, and members from the business community including key local businessmen.

In addition, the University of Malta set up a Research, Innovation and Development Trust in 2012 with an initial capital of €500,000 invested by Government46. Though not a venture capital fund, this trust is intended to allow individuals and companies to donate money to the trust fund either by earmarking their donations for specific projects or allowing the board of trustees to manage the funds. Donations to the fund are tax deductible.

42

Biotechnology, IT applications, multimedia activities, software development, e-Business and e-Commerce, environment and waste management, energy, marine applications, education and entertainment, and health 43 Ministry for Economic Services (2001), Budget Speech 2002; Times of Malta (2002), Lm 1m technology venture fund launched 44 Times of Malta (2004), European business angels to converge in Malta 45 Times of Malta (2006) Malta venture capital set up with Lm 10m authorised capital 46 Times of Malta (2011), University appeals for private donations to new research fund; Times of Malta (2012), Malta Freeport Terminals funds University research

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Reasons for the limited success of the above venture capital initiatives are various, and based on stakeholder consultation relate to low quality sales pitches by potential start-ups, lack of willingness to dilute ownership47, potential past experiences of failed local mergers, high expectations of entrepreneurs, administrative difficulties and the fact that our small size facilitates informal approaches to venture capital.

47

European Central Bank (2012), SAFE tables – 2011 (Excel file). For 80% of Maltese respondents, an equity injection from third parties as an additional source of financing was never relevant to their firm. The EU27 average was c. 79%, mainly due to the responses provided by a number of other countries (> 70% for Austria, Bulgaria, Czech Republic, Germany, Ireland, Italy, Latvia, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and the UK). A greater responsiveness to third party equity was observed in the Nordic countries (non-EU Norway – 26%, Denmark and Sweden – 35%), Lithuania (46%) and France (48%).

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3.

Financing needs of Maltese SMEs Access to finance to support the steady expansion of business operations is a challenge for all businesses. Moreover the smaller the business and the “younger” it is within its lifecycle, the more problematic it is to obtain the much needed credit lines. This is especially the case for SMEs in Malta.

This section provides an overview of the main access to finance issues typically encountered by SMEs in Malta, and the source of finance which are available to meet such needs. In terms of financing issues, this section also discusses aspects related to Malta’s small size, as well as issues arising from firms’ current lifecycle stage.

3.1

Firm lifecycle financing needs There are various classifications of firm lifecycle, with the most common steps referring to an initial stage, start-up stage, and growth stage. These stages are very similar to the stages of product growth, starting with an inspirational stage (pre-seed and seed) and followed by a market entry stage (start-up), and growth stage (emerging/ development/ expansion). In some cases, the lifecycle would continue with maturity/ decline / exit, while in other businesses the cycle would repeat itself through new ideas to develop new markets/ products. This is especially relevant in innovative and technology-driven industries.

The different lifecycle stages will impact access to finance and could be the difference between expanding or not. The following sub-sections describe the main stages of the firm lifecycle and their related access to finance difficulties for Maltese SMEs. Figure 1: Business Life Cycle

IDEA

TRANSITION

START-UP

Business Life cycle MATURITY

GROWTH

EXPANSION

3.1.1 The pre-seed and seed stage Any business starts with the idea and involves the development of whatever product or service this business is going to provide. Founders will begin developing a prototype, create a business plan, conduct market research, and seek advisers and mentors to help them get started.

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In terms of funding, since the product or service is still at an embryonic stage, the initial financing needs typically involve small amounts - only that which is necessary to develop the initial product.

Typically in Europe, many business founders start by taking personal loans or using personal funds, though some apply for government grants or special programmes that provide seed funding. In Malta, the initial seed financing would be available through the use of personal savings, where available, as well as funds from family and/ or friends. As mentioned in Sections 2.4.2 and 2.4.3, these founders can also tap certain small start-up grant schemes, even though these schemes are generally available for selected industries with higher growth/ value added potential. Commercial banks in Malta are unlikely to provide assistance at this stage since the risk is still high and the idea still uncertain. Likewise, there are no formal venture capital funds or other risk-based financial instruments which are currently targeted at seed companies in Malta.

3.1.2 Start-up stage Once the product has been created and the business exists as a legal entity, then the market will subsequently be tested and adjustments might need to be made according to feedback received. In terms of financing, the firm is still relying, in all likelihood, on its initial seed funding sources to keep it going (personal savings, family and friends), and is probably not yet profitable. For this reason, those running the business must be very careful not to use up their available funds too quickly. In Malta, apart from the initial seed funding, SMEs in the start-up phase might again be eligible for grant assistance as discussed in Section 2.4.2.

Though less risky and uncertain than in the earlier seed stage, commercial banks in Malta might still deem SMEs in this start-up stage as “non-bankable clients”. By definition, start-ups have an above average risk profile – this is added to potentially low collateral coverage which renders them less attractive for credit granting by banks. The MicroCredit/ JEREMIE initiative outlined briefly earlier in this report is aimed at filling in this gap by providing a safety cushion for the commercial bank implementing the MicroCredit scheme in the form of an EIF-backed guarantee. As a result, the bank is more likely to extend loan financing to start-ups. In fact, c. 40% of JEREMIE successful applicants as at December 2012 had initiated operations within a period of less than 24 months. However, in terms of local private equity funding, there currently still exists a gap for start-ups in Malta as previous attempts to set up venture capital funds for technology-driven ideas (see Section 2.4.3) have not been successful to date.

3.1.3 The emerging-growth stage As a result of the afore-mentioned initial stages, and through feedback and experience gained in the process, the SME would have worked out the majority of the product malfunctions and can therefore shift its focus on market growth. With growth, the firm would need to hire additional employees to help the business keep up with its growth, as well as any new competitor market entrants.

Though the firm could be seeing its first profits in this stage, it is also probably also dealing with increased demand for its products/ services and new competition. Hence top management may begin looking for a new round of funding should profits and the initial funds not be adequate when it comes to covering internal growth. In Malta, this need for additional funding might lead to the SME’s first attempt at securing bank financing through loans, potentially facilitated by local schemes providing soft loans or interest rate subsidy schemes from ME or guarantee-backed schemes such as the MicroCredit scheme. Certain sectors, such as enterprises engaged in manufacturing, industrial services, ICT, biotechnology, or in other innovative or high value adding operations, are better positioned to attract such financing. While formal Malta-based private equity remains inexistent in this firm lifecycle stage, informal venture capital might be successfully secured through local entrepreneurs and businessmen who are often seeking investment and further diversification opportunities.

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3.1.4 The development-growth stage At this point the firm will start focusing on keeping up with competition and reducing costs, and as a result long-term production changes may be made - a factory may be purchased, or a new branch established. Outsourcing may also be a viable option to reduce costs.

In this stage the firm relies on profits and existing funds for finances, and may also rely on the government and banks for further financing. In Malta, with the availability of financial statements and customer demand/ contracts, such a firm is more likely to be able to prove its viability and attractiveness and secure government assistance and bank loans. This financing might also enable the firm to release its initial financial backers, including family and friends. Any informal investors would also start looking at an exit strategy.

3.1.5 The expansion-growth stage To reach this stage the firm must realise that it is not enough to just be an established company - to keep up with competition and remain relevant, the firm may consider expanding into new markets and distribution channels. This is carried out through market development (new markets), product development (new/ improved products) and diversification (new product and new markets). At this stage there could be the creation of new departments/ divisions, the building of other premises or the acquisition of other businesses. These changes can be deemed as risky as the firm would be starting fresh in new markets, and hence might require the founder to bring some of the seed stage and related funding back to the business.

Locally, the firm may share the cost of new projects by entering into joint ventures with other companies or directly from banks, but may also get funds from private investors (through informal approaches), partners, and licensing. A firm in this stage and with a potentially successful track record in its core product/ service might also be able to start looking at institutional investors. In Malta, organisations which pool large sums of money and invest those sums in securities, real property and other investment assets are the investment fund managers, insurance companies, pension schemes and banks’ investment arms. Some banks have also invested equity directly in local companies, even though this practice is locally not common due to the local banks’ cautious approach to investment and lending, increasingly stringent regulatory capital adequacy requirements and the current financial and economic crisis. Only the largest local companies would be able to list their bonds or shares – generally the listing requirements and related costs are too exorbitant for SMEs48.

The figure below, taken from Ernst & Young’s Funding the Future publication49, combines the above discussion related to the stage of SME development, enterprises’ revenues, various funding mechanisms, and related risks.

48

In a Eurobarometer survey carried out in 2009, Maltese firms were mostly to mention small size as the main obstacle for not being listed on the stock market (94% vs. 82% for EU27; European Commission (2009), Eurobarometer: Access to finance – analytical report).

49 Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20

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Figure 2: SME development and funding instruments

Source: Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20

3.2

Small size constraints Apart from the inherent difficulties associated with each lifecycle stage and which are faced by SMEs across all Europe, local SMEs have additional daily constraints arising from the national territory’s small size. These constraints are likely to magnify any access to finance issues.

The size of the domestic market is too small and acts as a limiting factor on competition possibilities. This might facilitate market dominance by firms, but there are also very competitive markets (potentially new entrants are attracted by a misconception of the market profitability) that make it very difficult for existing companies to make an adequate return on capital. As a result many companies close down causing negative repercussions on these sectors as a whole.

Another constraint relates to barriers to entry. Natural barriers exist due to the poor chances of success of new businesses in products and services already supplied by existing firms. For instance, importation in bulk is often required to avoid excessive fragmentation and reduce (unit) transport costs, especially in the case of raw materials. This requirement limits the number of potential players in the market. Moreover, the additional transport costs end up being included in the price of imported industrial supplies and finished goods. Apart from high costs of transport per unit, insularity may also lead to additional problems related to time delays and unreliability of transport services, creating risks and uncertainties in production. To cater for sudden changes in demand, therefore, firms end up keeping (relatively) large stocks and incurring additional costs related to tied-up capital, warehousing and other storage costs.

Moreover, in a small domestic market like Malta, market failure due to social and environmental externalities is more likely to take place. In Malta this often leads to the need to limit the number of products. In addition, the poor natural resource endowments and low inter-industry linkages result in high import content, again increasing local SMEs’ vulnerability. In the same way, Malta’s market is highly dependent on exports and therefore on economic conditions in the rest of the world. Even though this high degree of export orientation is a safeguard for maintaining competitiveness, it also implies potential volatility in earnings as has been the case with the recent financial and economic crisis.

Small size also renders the exploitation of economies of scale advantages difficult, leading to a high cost per unit of production. It is thus often the case that a local SME will find it difficult to reach the critical mass required to enable it to successfully compete in the international market. Likewise, the

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critical mass required by institutional investors to pool risk and provide financing to local SMEs is also difficult to reach, leading to reduced/ selective funding, if any at all.

The case of state aid support and grants, even though it might be argued that it might distort competition, is even stronger in small countries such as Malta, given the high degree of economic openness and the need to be internationally price competitive. There may therefore be a case for considering state aid and continued provision of grants as permitting some form of level playing field due to Maltaâ&#x20AC;&#x2122;s small size and insularity and their consequent impact on the cost of production50.

Moreover, access to finance in the local SME market is nowadays even more challenging as local banks, despite not being exposed to peripheral country sovereign debt, have tightened their lending criteria. As a result many SMEs are finding it increasingly difficult to find access to finance to run and expand their businesses.

3.3

Traditional sources of finance This section provides further details on the these traditional sources which are currently available to local SMEs, including assistance from family or friends, the main forms of bank financing and other third party financing.

3.3.1 Loans In Malta bank financing is the most common and accessible source of external finance. With a sizeable number of players in the market, bank financing can range from short term assistance such as bank overdrafts, credit line or credit card overdrafts, to loans of a longer-term nature. Firms can tap this source subject to: Previous credit history Guarantees requested Track record and availability of a Business plan Availability of own capital and working capital Applicable interest rate/ fees Type of investment, that is, attractiveness/ riskiness of investment or sector.

Other obstacles which banks often face when dealing with local SMEs relate to: Inadequate knowledge, experience and capacity of the SME Management to ensure good financial management Issues related to corporate governance/ succession planning issues Locally, banks often build a long-term client relationship with their SME clients, providing assistance at various stages and for various needs. Apart from bank loans, other traditional sources relate to loans from internal sources (family or friends) or external sources (other shareholders or related companies).

3.3.2 Trade credit and factoring Maltese SMEs also tend to utilise trade credit in their financing needs, thus reducing the need to go to a bank and use personal funds as collateral. It also allows the SME to establish business credit and hence have a better chance of getting a bank loan â&#x20AC;&#x201C; the SME can also be seen as reserving the bank financing for capital improvements that will generate more returns. The cost of such financing relates to the forfeiture of cash discounts or the incurring of late penalties. Banks also use information on business credit to assess credit rating at the bank loan application process.

50

Briguglio and Buttigieg (2004), Competition constraints in small jurisdictions

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A number of local firms are increasingly transferring their receivables to specialised financial institutions such as commercial banks and banks specialised in trade finance. Through factoring, SMEs are able to solve problems of late payment, collection and ease cash flow problems. As a result, local SMEs benefit from working capital financing, credit risk protection, accounts receivable book keeping and collection services.

The 2013 Budget Speech referred to the development of a regulatory framework of factoring to facilitate the use of factoring as another means of liquidity for local SMEs51.

3.3.3 Leasing and hire-purchase In Malta, over the last few years leasing and hire purchase have become increasingly readily available for SMEs which use it to acquire most types of equipment, machinery, IT and vehicles.

3.4

Non-traditional sources of finance Although relatively non-existent in the local market, there are various other sources of finance which are currently utilised in other European countries. These include business angels, venture capital funds, mezzanine finance, and other sources of finance. These are being overviewed hereunder.

3.4.1 Business angels A business angel is generally an individual investor, usually with business experience, who provides capital for firms, especially in the start-up phase. They are an important source of equity for small firms with growth potential in their early stages of development, long before they become attractive for venture capital funds (discussed in the next sub-section) and bank lending. Business angels are usually interested in firms with potential for rapid growth operating in fields where they have experience, and usually prefer firms located close to their home or office.

There are about 75,000 business angels in Europe52. Business angels are increasingly merging together into networks (such as the European Business Angel Network), private or semi-public organisations which help match up entrepreneurs and potential investors.

At an EU level, the European Angels Fund, managed by the EIF, provides equity to the business angels and other non-institutional investors for the financing of innovative companies in the form of co-investments. It works together with business angels and helps them to increase their investment capacity by co-investing into innovative companies that are in the seed, early or growth stage53.

In Malta, as discussed in Section 2.4.3 of this report, a Malta Business Angels Network was set up in 2003. This network was not taken forward for a number of reasons, including the quality of the sales pitches to the business angels by potential start-ups, lack of willingness to dilute ownership by founders, high expectations of entrepreneurs and the fact that Maltaâ&#x20AC;&#x2122;s small size facilitates informal approaches to venture capital which did not require the usage of this formal business angels network.

3.4.2 Venture capital Venture capital is private equity which is provided, generally through a fund, to early-stage, highpotential, high risk, growth companies, especially start-ups. Venture capital funds operate by making returns through equity ownership in these companies. Typical venture capital sectors include 51

Ministry for Finance (2013), Budget Speech 2013 CSES (2012), Evaluation of EU Member Statesâ&#x20AC;&#x2122; Business Angel Markets and Policies 53 European Investment Fund (2012), European Angels Fund 52

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technology-driven industries, such as biotechnology, IT and software. Some venture capital funds are also listed.

Investment in companies generally takes place after the seed lifecycle stage, with the exit strategy being targeted at the growth stages (through an Initial Public Offering (IPO) or sale of the company).

Though more common in some countries, overall venture capital is estimated to be used by less than 10% of European SMEs54. In addition, according to the SAFE surveys carried out by the ECB, on average about 60% of European businesses say that venture capital is not applicable to them.

Likewise, to operate profitably, a venture capital fund requires the attainment of a critical mass.

Given that most European SMEs fall under the “micro” category, a more applicable funding option is provided by micro venture funds. These funds invest in enterprises whose projects are not attractive enough for the attention of traditional venture capitalists but are too big or risky to attract capital from traditional lending sources. Such funds strengthen a company's capital base and develop entrepreneurs' business skills using coaching methods throughout the investment period55.

For a small economy like Malta, venture capital can provide a means of reducing reliance on FDI since such funds incentivise local acquisition. In addition, they promote a culture of openness and lead to the setting up of professional management structures within local companies. In Malta, some venture capital funds were launched in the past, as discussed in Section 2.4.4 of this report. In each case, the targeted sectors were innovative and technology-driven companies, but take up/ success was limited.

3.4.3 Microfinance Microfinance shares many characteristics with microcredit and village banking56 since they include a revolving loan concept. In this funding mechanism, loans are provided to persons or groups of people that do not qualify for traditional financial services or are otherwise viewed as being high risk. Borrowers tend to be small producers of goods and services who might have no credit history or access to other types of loans from financial institutions. Organizations that offer RLF lending aim to help new project or business owners in becoming financially independent and eventually to become eligible for loans from commercial banks.

In Malta there is an absence of the traditional microcredit providers, particularly those envisaged to advance credit to vulnerable groups. This could also be attributable to the size of the Maltese market and the reliance on bank financing. Nevertheless, there is a growing interest in Malta in the microfinance sector both from non-bank institutions and from charitable organisations wishing to enter the microcredit field57.

3.4.4 Mezzanine Finance Mezzanine finance is a collective term for hybrid forms of finance that have features of both debt and equity. Providers of mezzanine finance have claims that are subordinated to senior lenders and possess priority over equity investors. Consequently, mezzanine investments generate returns that are higher than traditional bank lending rates and lower than the returns required by most equity investors.

There are various types of mezzanine finance, each having its own unique characteristics. The most common forms of mezzanine finance include subordinated loans, participating loans, ‘silent’

54

European Parliament (2013), Report on improving access to finance for SMEs European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs. Financités (http://www.financites.fr/) is given as example of a micro venture fund.

56 Village banking is a microcredit model under which neighbours in a poor community form a borrowing group 57 Camilleri (2012), Microfinance - Access to Finance for SMEs within a European Context 55

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participation, profit participation and convertible bonds58. The structuring possibilities are, however, almost endless. The main benefit of this type of finance mechanism is that it reduces the amount of equity required in the transaction.

Mezzanine finance is in principle unsecured. There are, however, securitisation options for mezzanine finance59. The level of control by the finance provider is dependent on the mezzanine product chosen. This gives SME owners the option to retain control of the company, which is one of the main concerns shared by European SMEs, including Malta based ones. At the same time mezzanine finance is a relatively expensive financing tool and difficult to obtain for most SMEs compared to debt finance. As a result, it is very often used in the growth stages where the conventional debt capacity has been exhausted, and the ordinary shareholders do not wish to dilute their interests, such as in acquisitions and expansion projects, recapitalizations and management and leveraged buyouts.

3.4.5 Public issue of own shares or bonds Firms can also raise finance through capital markets, whereby they issue new securities (shares or bonds) on the primary market. Primary issues are used by companies to set up additional businesses/ subsidiaries or for expanding or modernizing their existing business. They are therefore related to the expansion stage of the firm lifecycle. In addition, firms can also use the secondary market to buy and sell financial instruments previously issued.

In Malta, there are 20 companies with listed equity and 21 companies with listed corporate bonds (some companies have both equity and bonds), and based on the EC SME definition, c. 60% are not SMEs. An alternative capital market was also set up in Malta in 1999 to create a secondary market on which companies without an established track record, and/ or those that would otherwise not qualify for a listing on the Official List of the Malta Stock Exchange could offer equity or bond participation to potential investors – this could be a potential attractive source of financing for many local SMEs60.

SME-specific investment funds also offer the potential to obtain financing through capital markets.

These funds seek to invest in a number of SMEs in different/ specific sectors, providing risk-pooling opportunities and making it easier to reach a critical mass. Pooled corporate bond funds are an example of such investment initiatives61.

3.4.6 Crowd funding Crowd funding is a form of equity funding where individuals network together and pool their money to support an initiative. This concept was originally linked to various non-profit making/ social initiatives, such as disaster relief, political campaigns, free software development, or scientific research. The concept, assisted through internet technologies, has also been extended in various countries to start-up funding62. Although in Malta various fund-raising campaigns held throughout the year for a variety of specific reasons could be considered to be similar to a form of crowd funding, the number of experiences of equity funding through this mechanism for private sector initiatives remains limited.

58

Another type of hybrid instrument is a bond with an equity warrants (entitling the holder to purchase a pre-determine number of shares at a predetermine price for a fixed period) 59 European Commission (2007), Roundtable between bankers and SMEs - SME Securitisation. Pg. 17 refers to a securitisable mezzanine product created by a Swiss non-bank, which is now offered to companies in several Member States through the banking system. The European Economic and Social Committee refers to new mezzanine products such as a guarantee for mezzanine loans (European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs, pg. 8) 60 The Sunday Times (2007), The Alternative Companies List - bridging the gap 61 European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs, pg. 7 62 www.fundable.com, www.40billion.com, www.peerbackers.com, www.investedin.com, www.fundersclub.com

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3.5

Financing instruments for SMEs The main sources of finance which have been available to Malta based SMEs relate primarily to traditional sources of finance (assistance from family or friends, bank overdrafts and loans, trade credit, hire purchase, and/ or leasing). Formal private equity markets and financial instruments are relatively inexistent, with support measures provided by Government or other institutions mostly being grant or loan-based.

Most financial instruments can be classified as either loans or equity, while it is now also common to find hybrid type of instruments which combine elements of both debt and equity63. These sources of finance can be obtained from private sector institutions and financial intermediaries, from government or through EU programmes, or any combination of these sources. The EC has been providing a balanced mix of flexible financial instruments under the 2007-2013 Programming Period with the aim of enabling public sector resources to be used in a more efficient way by drawing upon commercial practices and actors and by stimulating the participation of private sector capital.

According to a Communication issued by the EC, and as per the February 2013 European Council conclusions, innovative financial instruments should play an increasingly important role in the EU budget spending for the 2014-2020 Multiannual Financial Framework (MFF)64. The term “innovative financial instrument” is used by the EC to refer to interventions other than pure grant funding. The EC’s intention is, however, not to replace grant funding with financial instruments as grants will still be necessary, but to complement grant funding with other forms of intervention in order to increase the volume of finance and the impact resulting from the EU budget intervention.

These financial instruments are being advocated to support investments which are expected to be financially viable but which do not give rise to sufficient funding from market sources. This shift to financial instruments is influenced by the contractionary fiscal policy being adopted by most Member States governments, as well as the experience to date with such instruments. The main advantage of financial instruments is their multiplier effect, whereby risk coverage (in the case of loans and guarantees) or risk participations (in the case of equity) induces private investors to invest, and whereby the repayments of capital or interest and proceeds of an investment can be reused for the instrument in subsequent cycles. In addition, such instruments require less administrative controls compared to grants.

These innovative financial instruments referred to in the EC’s Communication include instruments which provide equity/ risk capital (e.g. such as the JEREMIE-funded equity fund Catalyst Romania65), debt instruments such as loans (e.g. JEREMIE instruments in Poland) or loan guarantees to intermediaries that provide financing to a large number of final recipients who have difficulties in accessing finance (e.g. JEREMIE initiative in Malta), or risk sharing instruments with financial institutions (e.g. JEREMIE instrument in the Languedoc-Roussillon region, France). Where appropriate, such EU support can be provided indirectly via dedicated investment vehicles, in particular where participation of private investors alongside public investors is being sought.

3.5.1 Rationale for innovative financial instruments According to the EC, the increased adoption of these types of instruments is based on the following objectives66: 63

European Commission (2012), Financial Instruments in Cohesion Policy European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms; European Council (2013), Conclusions – Multiannual Financial Framework 65 http://www.eif.org/what_we_do/jeremie/news/2012_news/3TS_Romania.htm 66 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms 64

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3.5.1.1 Pursuit of EU policy objectives These instruments ensure there is necessary financing for areas of EU interest and thus assist in correcting market failures/imperfections that give rise to an insufficient funding in such areas. This is the case in areas which are perceived as too risky by the private sector.

These instruments can also lead to important non-financial effects such as demonstration effects in the targeted markets, triggering wider application to other sectors. The consistent application and promotion of best practices through the EU instruments may foster a qualitative development of certain markets, such as for instance the venture capital markets, and increase intermediary sophistication over time. These instruments also offer a higher degree of flexibility through the possibility of tailor-made support and delivery structures.

In addition, the expertise of the EU and the financial institutions responsible for the implementation of such financial instruments can be transferred to national, regional or local authorities.

3.5.1.2 Increasing efficiency and effectiveness of public resources By pooling resources from various sources, financial instruments can catalyze investments for identified market gaps, achieve economies of scale and/or minimize the risk of failure in areas where it would be difficult for individual Member States to achieve the required critical mass.

In line with the subsidiarity principle, an EU level instrument should be able to be more advantageous than a series of financial instruments at national, regional or local level, due to higher volumes under management, cost efficiencies through harmonised implementation standards and terms and lower implementation costs, e.g. management fees charged by the financial intermediaries. This might be applicable locally, where difficulties in obtained the required critical mass due to Maltaâ&#x20AC;&#x2122;s small size can be circumvented through an amalgamation with a panEuropean instrument (this also applies to venture capital funds).

3.5.1.3 Promoting enhanced performance and financial discipline Well-designed innovative financial instruments can promote enhanced performance by setting appropriate success indicators suited to the achievement of public policy objectives in line with best practices. National and local institutions can also benefit from the EU institutionsâ&#x20AC;&#x2122; knowledge in the design of financial products.

3.5.1.4 Multiplier effect of the EU budget Innovative financial instruments create a multiplier effect for the EU budget by facilitating and attracting other public and private financing for projects of EU interest throughout the various levels of the implementation chain (intermediaries and final beneficiaries). Through risk coverage (in the case of loans and guarantees) or risk participations (in the case of equity), the EU intervention may induce new/ additional investment in cases where investors would have not invested at all or invested less without the support from the EU budget. Such direct financial "leverage" or multiplier effect can be achieved through co-financing by international financial institutions (e.g. EIF, EIB) or through the additional debt volumes banks and guarantee institutions are requested to provide to final beneficiaries.

Furthermore, an additional multiplier effect is achieved during the lifetime of the innovative financial instrument, if repayments of capital or interest and proceeds of an investment can be reused for the instrument. Such "revolving" character can considerably increase the reach of instruments, leading to a further indirect multiplier effect. After this period, repayments of the initial investment plus an eventual participation upside will flow back to the general budget, which also positively impacts the overall cost-efficiency of the intervention.

The possibility of using the same funds several times through various revolving cycles contributes to the impact and sustainability of such revolving instruments. The impact of revolving funds can be

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many times greater than grant assistance, giving them a particular added value and relevance in times of budgetary constraints, as explained in the figure below67. These financial instruments are also seen as a way of encouraging a move away from public funding grant dependency. However, the EC has also commented that its intention is not to replace grant funding since this form of funding will still be necessary in a range of areas, but rather to blend such grants with financial instruments, such as loans from financial institutions68.

Figure 3: Comparison of grants and revolving instruments

Revolving Instruments

Support based on Grants

Tax Revenues

Tax Revenues Reallocation to Funds Grant programmes

FUNDS

Target Projects

Target Projects

MONEY REMAINS IN CIRCULATION

MONEY IS LOST

Leverage ratios69 vary significantly by type of instrument. For equity-related financial instruments the EC refers to a leverage ratio of up to 3.4x70. For guarantee-related instruments, a higher ratio of up to 7.5x is referred to71. The loan-related instruments’ benchmark leverage ratio mentioned by the EC is up to 2x72.

A short description of the JEREMIE scheme, the only currently available financial instruments in Malta, is provided in the section below, including take-up to date.

67

European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms 68 Ibid 69 In this context, leverage is referred to as the relationship between EU funds and total projected/ attained investment.

70 European Commission (2012), Financial Instruments in Cohesion Policy, pg. 3. In the Court of Auditors report, lower ratios are mentioned. For instance, for five venture capital funds in Germany and the UK focusing on high-technology SMEs, the leverage ratio ranged between 1.33x and 2.26x. For ten risk capital funds in Germany, Hungary, Portugal and the UK with less/ no focus on high technology, the ratio ranged from 1.09x to 2.75x. As a benchmark, the same audit report refers to the ETF-Start-up Facility, which is designed for venture capital and focuses on relatively risky SMEs. The average aggregate leverage ratio stood at 6.5x between 2001 and 2008 (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs. 38-39) 71 European Commission (2012), Financial Instruments in Cohesion Policy, pg. 3. In the Court of Auditors report, leverage ratios for guarantee instruments ranged from 4.2x (Hungary) to a maximum of 171.0x (Portugal). As a benchmark, the SMEG Guarantee Facility had a cumulative leverage of 67.0x from 2001 until 2006 (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs 40-41). Another EC report provides a range of between 1.8x and 7.7x for 10 selected guarantee funds through ERDF contributions (European Commission (2012), Financial Engineering Instruments implemented by Member States with ERDF contributions, pg. 27) 72 European Commission (2012), Financial Instruments in Cohesion Policy, pgs. 3-4. The same report mentions an interim evaluation of soft loans in Northern Italy that found a leverage ratio of 4.5x, while a group of capital grants to similar enterprises generated no significant leverage. The Court of Auditors report refers to the EU’s SME Finance Facility (used in Central and East European countries before they joined the EU), which led to leverage ratios usually exceeding 5.0x and reaching up to 12.5x and 19.2x. However, according to the Court of Auditors’ report, 5 out of the 10 audited loan funds did not leverage any private funding at all, while the other loan funds showed very limited leverage ranging between 1.3x and 1.7x (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs. 39-40)

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3.5.2 Innovative financial instruments in the 2007-2013 Programming Period The 2007-2013 Programming Period included a number of financial instruments that comprised interventions other than pure grant funding which provide equity/risk capital, debt instruments (such as loans and guarantees), as well as instruments combining equity and debt support. The following sub-sections provide short descriptions related to these financial instruments73.

3.5.2.1 EU level risk capital/equity instruments High Growth and Innovative SME Facility (GIF) – The GIF is aimed at increasing the supply of risk capital/equity for innovative SMEs in their early stages (GIF1) and in the expansion phase (GIF2). It is operated by the EIF on behalf of the EC. The EIF enters into investment agreements with venture capital funds which support such SMEs, generally under a longterm facility of up to 12 years. The majority of the capital invested in any VC fund is to be provided by market-oriented investors and all investments are made pari passu (Like Risk, Like Reward) with private investors The Marguerite Fund – this is a pan-European equity fund for infrastructure investments in the transport, energy and renewables sectors. Apart from investment from the EU, the other investors in this fund are public banks, but the fund is also open to participation from private investors. Investments are made pari passu. The fund has endeavoured to invest a total sum equivalent to 3.5 times the EU contribution into TEN-T projects. All decisions must be taken in compliance with the investment policy of the Fund, which was established together with the EC.

3.5.2.2 EU level debt instruments (guarantees/risk sharing) Risk Sharing Finance Facility (RSFF) – the RSFF aims to support the financing of risky projects in the field of RD&I by private and public sector promoters that do not have easy access to the capital markets. The instrument was developed jointly by the EC and the European Investment Bank (EIB) to share the risk on the EIB's direct loans or guarantees for loans supporting RD&I investments in thematic priority areas of the Seventh Framework Programme for Research and Technological Development (FP7). The facility was set up through the pooling of the EU contribution and the EIB contribution and provides a cover for potential losses incurred. Based on its own financial evaluation and in accordance with its credit risk policy guidelines, the EIB assesses – on a project-by-project basis – the level of financial risks for which it is required to set aside provisioning and capital allocation (for expected and unexpected loss), in accordance with normal banking rules, and requests a contribution from the EU to cover the provisioning and capital allocation. According to the evaluation report, this instrument remained one of the few financial instruments available to innovative firms and organizations at a time when banks and other financial institutions were reducing access to finance for high risk investments in R&D and innovation areas 74.

SME Guarantee Facility (SMEG) - his facility provides counter-guarantees to national guarantee schemes as well as direct guarantees to financial intermediaries in order to increase and enhance the supply of debt finance to SMEs. SMEG is operated by the EIF on behalf of the EC. The financial intermediaries supported by the EU guarantee in turn provide debt finance to SMEs while passing on the advantage of the guarantee to the final beneficiaries, e.g. by accepting a higher risk profile or less collateral, or by charging lower 73

European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms. This report also makes reference to financial instruments in pre-accession areas (Western Balkans, Southeast Europe) such as the European Fund for Southeast Europe (EFSE), which is based on a public-private partnership model initiated by a German bank. The investors of the fund are the EC, other public donors and international finance institutions such as the EIB and the European Bank for Reconstruction and Development (EBRD).

74 Group of Independent Experts (2010), Mid-Term Evaluation of the Risk-Sharing Financial Facility; European Investment Bank (2010), Evaluation of activities under the Risk-Sharing Financial Facility

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interest rates or providing similar advantages compared to their ordinary financing activities. Under SMEG a portion of each individual transaction is guaranteed, typically 50% (i.e. guarantee rate). The overall exposure for the EU budget is however limited by a contractually agreed maximum cap on portfolio losses (i.e. cap rate).75 Loan Guarantee Instrument for TEN-T projects (LGTT) - This instrument is aimed at facilitating larger participation of the private sector in the financing of TEN-T infrastructure. Attracting private sector funding in core European transport projects can be challenging due to the relatively high levels of revenue volatility in the projects' early operating stages. The LGTT partially covers this revenue risk and consequently improves the financial viability of such TEN-T projects. LGTT is financed with a capital contribution from the EU budget. Technically, the LGTT Guarantee is issued in favour of commercial banks which provide a stand-by liquidity facility (SBF) to the project. Such SBF can be drawn upon by the project company in case of unexpected reduction of traffic/usage related income of the project during the initial operating period in order to insure the service of the senior debt facilities.

3.5.2.3 Instruments combining equity and debt support European Progress Microfinance Facility (EPMF) –through the EPMF, set up in 2010, the EU facilitates the granting of credit by providing guarantees, loans and equity to intermediaries who can then lend to small businesses and individuals or make available equity finance. It consists of two parts: 1) a guarantee instrument to providers of microcredit (i.e. loans of up to €25,000, in particular to vulnerable groups in risk of social exclusion, for the purpose of setting small commercial operations) and 2) a structured investment vehicle, the European Progress Microfinance Fund, which offers senior loans, subordinated loans, risk-sharing loans (senior loans combined with risk participation in the micro-credit portfolio) and equity participation to micro-credit providers. The maximum guarantee rate is 75% of the underlying microcredit or guarantee portfolio, while a cap is agreed for each guaranteed portfolio, based on the expected cumulative losses of the portfolio. The maximum liability for the EPMF is set at 20% of each guaranteed portfolio.

The Fund has the EU and the EIB as investors while the EIF acts as Management Company.

The EU holds the junior shares, which means that it bears the first net losses affecting the fund’s assets, within the agreed cap, while the EIB is protected as holder of the senior shares against the losses borne by the junior shares. The financial intermediaries may be private or public banks, non- bank microfinance institutions and not-for-profit microcredit providers. These providers would lay down the conditions, such as the amount, rate of interest and duration applicable to any microloans granted. The micro-enterprise can further benefit from interest rate rebates, guidance and coaching with the support of the ESF. The EU also provides funding to microcredit providers aimed at covering start-up costs and funding for lending to high-risk target groups, whilst increasing microcredit on-lending volumes76.

European Energy Efficiency Fund (EEEF) – the EEEF was set up in 2011 using unspent funds from the European Energy Programme for Recovery. The fund is a structured finance vehicle to invest either directly in smaller scale energy efficiency and renewable energy projects of local authorities or invest in such projects indirectly via financial institutions.

The Fund aimed at supporting the development of energy service companies. Investors in 75

In its evaluation report, the European Court of Auditors found the EU value added of SMEG not demonstrated since its results might have also been achieved by funding under national schemes (European Court of Auditors (2012), Financial instruments for SMEs – audit report. Audit based on Germany, Hungary, Portugal, Slovakia and the UK). On the other hand, the final evaluation of the EIP found the SMEG to fulfil a demand for finance which otherwise would not have been met (CSES (2011), Final evaluation of the Entrepreneurship and Innovation Programme).

76 Camilleri (2012), Microfinance - Access to Finance for SMEs within a European Context; European Commission (2012), Implementation of the European Progress Microfinance Facility - 2011

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the Fund include the EU, the EIB, the Italian Cassa Depositi e Prestiti, and Deutsche Bank, who are also acting as investment managers of the fund.

3.5.2.4 Structural Funds Member States and Managing Authorities have the option of using part of the resources made available to them through the ERDF and the ESF to support financial engineering instruments. The ERDF resources are primarily used for support to enterprises, mainly SMEs, urban development and regeneration, energy efficiency and use of renewable energy in buildings, while ESF is used for support to self-employment, business start-ups and micro-enterprises. Many Member States today implement a range of equity and/or debt (loan and guarantee) instruments in at least one of these areas, either directly by contributing resources from an operational programme to a venture capital fund, loan or guarantee fund, or through holding funds set up to invest in several funds.

Instruments are implemented through a variety of governance models and legal structures specific to each Member State or region. In Malta, the primary vehicle used to assist enterprises in various sectors were the afore-mentioned grant and assistance schemes made available through a number of intermediary bodies including ME, the ETC, the Ministry for Tourism, the MRRA and the Funds and Programmes Division (see Sections 2.4.2 and 2.4.3).

Across the EU, instruments are implemented through investment into holding funds. Under the Joint European Support for Sustainable Investment in City Areas (JESSICA) initiative, holding funds are implemented through the EIB. Under the JEREMIE initiative, holding funds are generally implemented through the EIF or a range of national or regional institutions. In general, depending on the areas of intervention, the EIB or the EIF can receive a mandate to carry out holding fund tasks through a direct award of a contract by Member States or Managing Authorities. Other financial institutions can also be selected to implement operations organised through a holding fund, either by way of public procurement or by way of a grant.

As indicated earlier (in particular in Section Error! Reference source not found.), in Malta, a Micro redit scheme under the JEREMIE initiative based on a loan guarantee was launched in 2011.

3.5.3 JEREMIE / MicroCredit scheme As briefly referred to in Section 2.4.3, the JEREMIE Malta Fund is based on a loan guarantee scheme and was set up for the first time in Malta in 2011. The JEREMIE Fund is an initiative developed in cooperation with the EC. The EC encourages Member States to use part of their EU Structural Funds to support local SMEs by providing finance to them by means of equity, loans or guarantees, through a revolving Holding Fund acting as an umbrella fund. JEREMIE is particularly advantageous to SMEs since it reduces their difficulties in accessing finance through the provision of credit risk protection.

The JEREMIE Holding Fund (JHF) can provide selected financial intermediaries with SME- focused financial instruments including guarantees, co-guarantees and counter-guarantees, equity guarantees, (micro) loans, export‑credit insurance, securitisation, venture capital, Business Angel Matching Funds and investments in Technology Transfer funds77.

In Malta, following a call for expression of intent to select financial intermediaries in November 2010, BOV was selected as the financial intermediary to implement this First Loss Portfolio Guarantee financial instrument. A repayable instrument is provided through JEREMIE instead of one off payment of grants. The JHF, managed by the EIF, injected €8.8 million in the JEREMIE Malta Holding Fund. Against this guarantee of €8.8 million, BOV added further capital to reach a loans portfolio of €51 million78. This creates a minimum leverage of around 5.8x (without taking into

77 78

http://www.eif.org/what_we_do/jeremie/index.htm €8.8 million/ (coverage rate of 75% * cap rate of 23%) = c. €51 million

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consideration further recycling of funds). This guarantee thus enables loans to be offered at favourable interest rates and lower collateral requirements.

The main JEREMIE benefits for Malta and its SMEs relate to79: Sustainability of funding: SMEs are supplied with sustainable funding on market-friendly terms Recycling of funds: The Holding fund is of a revolving nature, receiving payments for further investments in the SME sector. This ensures sustainability of SME support by rolling over recycled funds over the longer term.

Leverage: JEREMIE has a potential ability to engage the financial sector either at the Holding Fund level with additional capital from financial institutions, or at the level of financial instruments through co-financing. In the case of Malta, a guarantee of €8.8 million generated a loans portfolio of €51 million, which is a sizeable pot for the local market.

Benefits of a portfolio approach: The umbrella fund approach will allow a diversification of risks and expected returns due to the pooling of different default rates, as well as active cash flow management to allow for a swift response to changing market requirements.

Expertise: Apart from external funding, SMEs very often also require additional professional assistance to be able to utilise funding in the most efficient and effective way. The involvement of a financial institution allows for the leverage of the bank’s expertise – the bank has an incentive to get involved in understanding the business because it retains the sole direct client credit relationship. In the case of BOV (and other commercial banks in Malta), a large part of its existing customers would already be SMEs – in this regard, banks have a competitive advantage for projects involving SMEs80.

Requirements: JEREMIE also allows for lower collateral requirements and favourable interest rates for SMEs, making bank financing more affordable.

Institution building: since there is no guarantee society in Malta, a European counterguarantee scheme is thus important to provide the possibility for local financial institutions to boost their volumes in the early stage, and facilitate the creation of such schemes.

Cash flow: this scheme provides finance to final recipients before actual project expenditure. This is an added benefit compared to the reimbursement process applicable in most grant schemes The Holding Fund is also able to re-allocate the resources to one or more financial products in a flexible way, depending on the actual demand over time. This benefit is however not applicable to the initial local JEREMIE initiative as it is based on one financial product only.

The following table provides further information on the Malta JEREMIE scheme.

Table 2: JEREMIE Parameters

JEREMIE Parameters Eligible SMEs Excluded Industries Type of Facility Purpose of Loan Repayment Structure Maturity Period

79 80

Micro, Small or Medium sized enterprises as per EU Definition Industries related to Fishing, Agriculture, Construction, Real Estate, Transport (specific) Only loans - overdrafts are not eligible Capital expenditure purposes (i.e. investments which enhance the company’s value) Amortising or bullet type Minimum: 1 year/ Maximum: 10 years

Bank of Valletta (2012), JEREMIE presentation for Accountants; European Investment Fund (2012), JEREMIE European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds, pg.

10

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Default Definition Concentration Coverage Cap rate Implementation

In line with Basel II81 - 90 days in arrears means default No particular industry is to exceed 20%, and low single name concentration with average loans being less than €100,000 75% of credit losses at a facility level, up to the cap rate 23% of total fund at a portfolio level 36 months (6th April 2011 – 5th April 2014)

Source: Bank of Valletta (2012)

As at the end of December 201282, that is, after approximately twenty-one months of implementation, about 80% of the available funds have already been sanctioned through the granting of c. 480 facilities to about 430 SMEs. There is a good sector distribution of SMEs, but as expected traditional sectors take up a large portion of the sanctioned facilities.

These facilities have been used for various purposes, including: Assistance to start-ups in relation to working capital costs Upgrading of tourism product Upgrading of manufacturing processes and operating processes Investment in energy efficiency Investment in ICT Investment in R&DI, and creativity Initiatives related to internationalisation Compliance to EU regulations

No JESSICA funds are currently being utilised in Malta.

The EIB has also implemented various loan programmes aimed at improving access to finance for SMEs. These programmes are mainly funded by the EIB’s resources and without any funding from the EU budget.

3.5.4 Innovative financial instruments for the 2014-2020 financial framework With the new 2014-2020 Programming Period, the EU is pushing towards complementing grant funding with other forms of interventions, especially innovative financial instruments such as loans, equity and guarantees. Under the new common provisions covering all five EU funds, financial instruments are being advocated to support investments which are expected to be financially viable but which do not give rise to sufficient funding from market sources. These common provisions also take into consideration a combination of financial instruments and other forms of support, including grants since these stimulate the design of well-tailored assistance schemes that meet the specific needs of Member States or regions83.

In contrast to the 2007-2013 programming period, the rules proposed for 2014-2020 financial instruments are non-prescriptive in regards to sectors, beneficiaries, types of projects and activities that are to be supported. Member States and managing authorities may use financial instruments in relation to all thematic objectives covered by Operational Programmes and for all Funds, where it is efficient and effective to do so.

81

Basel II, initially published in June 2004, is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

82 Bank Of Valletta (2013), Access to finance – points for discussion 83 European Commission (2012), Elements for a Common Strategic Framework 2014-2020: ERDF, ESF, CF, EAFRD and EMFF; European Commission (2012), Financial Instruments in Cohesion Policy

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One of the main shortcomings observed in the previous programming period were related to gap assessments84. Financial instruments are a special category of spending and their successful design and implementation hinges on a correct assessment of market gaps and needs. The amended regulations stipulate that financial instruments should be designed on the basis of an ex ante assessment that has identified market failures or sub-optimal investment situations, respective investment needs, possible private sector participation and resulting added value of the financial instrument in question. Such an ex ante assessment should also avoid overlaps and inconsistencies between funding instruments implemented by different actors at different levels.

The EC has already outlined a number of proposals for the inclusion of innovative financial instruments in the next MFF to be implemented through a set of common rules and guidance for equity and debt instruments (referred to as the “EU equity and debt platforms”)85. These include86:

BOX 3.5.4.1: Investments in RD&I under Horizon 2020 Two financial instruments are planned: (1) a debt instrument providing loans to single beneficiaries for investment in RD&I, guarantees to financial intermediaries making loans to beneficiaries, combinations of loans and guarantees and/or counter-guarantees for national or regional debtfinancing schemes, and (2) an equity instrument that would (i) invest in technology transfer and intellectual property vehicles and in venture capital funds providing equity finance to early stage RD&I-intensive SMEs, and (ii) support investments in RD&I sectors by targeting thematically focused, multi-country “funds-of-funds” with a broad investor base, including private institutional and strategic investors.

BOX 3.5.4.2: Competitiveness and SMEs Two financial instruments to be funded by the Programme for the Competitiveness of Enterprises and SMEs 2014-2020 (COSME) are being proposed: (1) an equity facility for growth-phase investment, which will provide commercially oriented reimbursable equity financing primarily in the form of VC through financial intermediaries to SMEs. Two measures are envisaged: - Direct investments in VC funds which operate across borders within the EU and are focused on investing in growth-oriented enterprises not primarily based on innovation or research.

- “Funds-of-funds” investing across borders in VC funds which subsequently invest in enterprises, in particular in their international expansion phase.

(2) a loan facility, providing direct or other risk sharing arrangements with financial intermediaries to cover loans for SMEs and provide cross-border lending or multicountry lending with a high leverage effect.

84

This was one of the main recommendations put forward by the Court of Auditors’ report, also suggesting the inclusion of a quantified analysis of the financing gap (European Court of Auditors (2012), Financial instruments for SMEs – audit report).

The same report also provides a good practice example of a gap assessment related to an initiative in Sweden (Ibid, pg. 18) 85 Various documents highlight the need for amendments to the Regulations, improved guidance and technical assistance to be provided to Member States on the basis of experiences from the 2007-2013 Programming Period (European Court of Auditors (2012), Financial instruments for SMEs – audit report; European Commission (2012), Financial Instruments in Cohesion Policy; European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms). This need for higher assurance will, however, come at the price of flexibility.

86 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms, pgs. 11-12

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BOX 3.5.4.3: Self-employment, micro-enterprises and social enterprises A Microfinance and Social Entrepreneurship axis is being proposed to build upon and continue the existing EPMF. It extends its coverage through supporting the building-up of the institutional capacity of microcredit providers, and complements it by a financial instrument with an EU contribution to provide equity, debt, and risk sharing instruments to social investment funds and other financial intermediaries for financing social enterprises. Social enterprises are dealt with in further detail in Section 6.2.1.

BOX 3.5.4.4: Infrastructure Financial instruments under the Connecting Europe Facility for infrastructure are likely to include: (1) a risk-sharing instrument covering loans and bonds (incl. the Europe 2020 Project Bond Initiative) to respond to the requirements of multiple financing models applied across the EU, the size and sector of projects and the stage of development of project finance and capital markets in general, and (2) an equity instrument to complement the toolbox of infrastructure instruments with the objective of further developing EU-wide risk capital markets.

BOX 3.5.4.5: Education and culture Guarantee facilities will be developed to contribute to the EU2020 objectives under the Creative Europe Programme, including: (1) a student loan guarantee facility to enable master level students to undertake studies in another country, contributing to the objective that 20% of higher education students participate in cross-border learning mobility, and (2) a guarantee facility (possibly to be combined with another SME financing instrument) to incentivise financial intermediaries to extend loans to SMEs in the cultural and creative sectors, which include producers, music companies, video game developers, publishers and distributors whose assets are mostly intangible (such as intellectual property rights), often resulting in financial intermediaries perceiving these companies as too risky to finance.

BOX 3.5.4.6: Structural Funds An increasing share of support under the structural funds will be delivered by means of financial instruments, in particular support to enterprises and other projects or investment activities that generate revenues, notably in the areas of climate change, environment, innovation, ICT and infrastructure.

BOX 3.5.4.7: European Social Fund Member States and regions will also be encouraged to support financial instruments under the ESF (e.g. for students, job creation, mobility of workers, social inclusion and social entrepreneurship).

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Members States can choose from three options in terms of the development and implementation of structural funds instruments: (1) Creation of tailor-made instruments under shared management principles, aligned with some common rules inspired by the EU equity and debt platforms for the EU instruments; (2) Creation of "off-the-shelf instruments" under shared management principles which would facilitate the set-up of instruments for Member States as well as ensure compatibility with the EU-level instruments; (3) Invest part of their structural funds in joint instruments, that is, compartments of EU level instruments "ring-fenced" for investments in regions and policy areas covered by operational programmes from which structural funds resources are contributed.

3.5.5 Improved regulatory framework for venture capital Acknowledging its high but largely unexploited potential for the development of European SMEs, the EC has put forward a new regulatory regime (referred to as the single rulebook) specifically designed to channel equity funds to SMEs87. This new regime is aimed at enabling EU VC funds to market their funds and raise capital on a pan-European basis across the Single Market, reducing fragmentation of the venture capital markets along national lines that prevent cross-border operations and limit the supply of VC through the lack of a critical mass, as is the case in Malta. The frameworkâ&#x20AC;&#x2122;s objectives are to increase the scale of the venture capital market and lead to88: (i) (ii) (iii)

larger, more efficient VC funds, with more possibilities to specialise by type of investments; increased competition between funds and better diversification of their investments; and more cross-border financing available for SMEs.

The EC is also looking into the relationship between prudential regulation and VC investments by banks and insurance companies in the light of new solvency/ capital requirements regulations. The EC believes that a well-calibrated legislative framework for VC, that recognises in particular the benefits of diversification, may allow for a certain amount of VC investments in a way that does not cause prudential concerns89.

The EIB Group will also continue supporting the growth of SMEs through its wide range of equity products and particularly the enlarged EIB Risk Capital Mandate. Further cooperation between the EIB Group and the EC, including risk-sharing arrangements, will be developed in order to facilitate the mobilisation of additional public and private resources90. The EIB Group has also increased its Risk Capital Mandate to enable it to extend the scope to include co-investing with business angels.

87

European Commission (2011), An action plan to improve access to finance for SMEs European Commission (2011), Regulation of the European Parliament and of the Council on European Venture Capital Funds 89 Ibid, pgs. 3-4. The European Banking Authority has also proposed a reduction in the prudential SME risk-weighting to alleviate the potential impact of the stricter capital requirements for SMEs (European Banking Authority (2012), Assessment of SME proposals for CRD IV/CRR).

90 European Commission (2011), An action plan to improve access to finance for SMEs, pg. 11 88

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4.

Study methodology The following section presents the main methodology adopted for the data gathering aspects of this study. In order to assess the existing market gaps for Malta-based SMEs to obtain financing beyond the “traditional” bank loan facilities, the study uses a mix of stakeholder consultation and a survey with business owners/ managers.

4.1

SME survey A survey was conducted with 100 SME owners/ managers, covering different enterprise sizes (micro, small and medium), business lifecycle stages, and economic sectors.

4.1.1 Sample size The sample size was based on the following criteria: Population of SMEs in Malta: as explained in Section 2.1, this stands at c. 35,000 (after excluding agriculture, fishing and non-market service such as education and health) Population of member firms in the parent organizations of the MBB, that is the Malta Chamber and the MHRA Sampling error of ±10%, which is deemed acceptable for the purposes of this survey.

Based on a population-sample formula91 a sample size of 100 was established. This represents the number of actual interviews achieved, independently of the eventual take-up/ response rate.

Various studies have used different firm distributions by size92. Likewise, the number of SMEs by sector is highly dependent on the correct classification by NACE code. In terms of lifecycle, there are various definitions of firm lifecycle stages, and no national data on the lifecycle of the local SME population exists. SMEs were chosen at random from the latest membership database of the MBB’s parent organizations, the Malta Chamber and the MHRA, using a random number generation technique to determine the members selected. The resulting distribution by size, lifecycle and sector was therefore reflective of the type of Malta Chamber and MHRA members. The survey excluded firms engaged in agriculture, fishing, aquaculture, public administration, social enterprises (including cooperatives) and NGOs. Additionally, in order to ensure representation by start-ups, the sample was supplemented with SMEs who had successfully applied and obtained funding through ME’s ERDF Small Start-up Grant Scheme93.

All respondents were screened to ensure that only the persons most knowledgeable about the financial situation of the firm were interviewed. Participating job functions included Managing Director/Owner/Proprietor, Chief Executive Officer and Chief Financial Officer/Head of Finance.

4.1.2 Data gathering techniques 100 interviews were conducted with randomly-selected Maltese SMEs between 16th January 2013 and 28th February 2013. The interviews were conducted using a mix of Computer Assisted Telephone Interviewing (CATI) methodology and one-to-one interviews.

91

n = N / (1+N(e2)) and n = n0/(1+((n0-1)/N) for small populations

92

The EC’s SBA Fact sheet for 2012 refers to a distribution highly skewed towards micro-enterprises (Micro-enterprises: 95%; Small enterprises: 4%, Medium enterprises: 1%). On the other hand, the SAFE survey for 2011 adopted a more normally distributed sample (Micro-enterprises: 29%; Small enterprises: 44%, Medium enterprises: 28%) 93 http://www.maltaenterprise.com/en/support/erdf-small-start-grant-scheme

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4.1.3 The Questionnaire The final version of the questionnaire (copies of which are shown in Appendix A: English version and Appendix B: Maltese versions) and the ‘demographic’ variables used were discussed and determined with the MBB, also taking into consideration relevant questions from the EC’s SAFE initiative. The questionnaire consisted of a number of close-ended questions and probes the attitudes, individual preferences, behaviour and concerns related to access to finance for SMEs. The draft questionnaire was initially pre-tested on a sample of 5 respondents. Adjustments were made accordingly, depending on the feedback received.

4.1.4 The Interviewers The survey was conducted by trained and experienced interviewers who were given a technical briefing organised by our research team before conducting the interviews. The inputting of the quantitative data from the responses was carried out by these trained staff using a spreadsheet specifically prepared by the research team.

4.2

Stakeholder consultation In order to gather further information on current financial assistance and sectoral needs, a number of sectoral stakeholder interviews were conducted. These included interviews with: Bank of Valletta plc, as financial intermediary in charge of the implementation of JEREMIE Ministry for Resources and Rural Affairs, including officials in charge of fisheries and agriculture assistance schemes, as well as officials from the Paying Agency Co-operative representing operators in the fisheries sector Malta Enterprise representatives Sectoral Sub-Committee on Growth and Competitiveness, within MFIN Office in charge of the EMFF within PPCD Office in charge of ESF within PPCD Individuals involved in VC funds in Malta

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5.

Survey results This section contains an analysis of the responses obtained from the SME survey. Where applicable, the results shown hereunder include an analysis of the results by size, industry sector and stage in the firm’s lifecycle. The full tables for each question, including analysis by size, sector and lifecycle stage, are provided in Appendix C. Rounding up was used when presenting all percentage figures.

5.1

Respondent demographics This section shows the respondents’ characteristics in terms of firm size, industry, and stage in the lifecycle.

The table below shows the distribution of firms by number of employees in the sample analysed. The pie chart shows that half of the firms interviewed had less than 10 employees, and therefore are classified as a micro enterprise according to the EC SME definition.

Figure 4: Number of Employees

15% 1 to 9: Micro

48%

10 to 49: Small 50 to 249: Medium

37%

A number of studies have referred to different distributions by size for Maltese SMEs. For instance, the EC’s SBA Fact sheet for 2012 refers to a distribution highly skewed towards micro-enterprises (95%) as shown in Table 194. On the other hand, the SAFE survey for 2011 adopted a more normally distributed sample95. The distribution in this MBB survey is a direct reflection of a randomly generated selection process based on the Malta Chamber’s and MHRA’s membership databases as well as a reflection of the larger proportion of micro firms compared to larger SMEs. The next pie chart shows the distribution of respondents according to their annual turnover in Malta for the last applicable financial year. This chart again shows that the majority of respondents are “micro enterprises”, given that almost 80% registered turnover below the €2 million revenue threshold.

94 95

Micro-enterprises: 95%; Small enterprises: 4%, Medium enterprises: 1% Micro-enterprises: 29%; Small enterprises: 44%, Medium enterprises: 28%

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Figure 5: Annual Turnover in Malta for 2011

4% 16%

< 0.5M 0.5M - 1M 1M to 2M

51%

13%

2M to 10M 10M to 50M

15%

The next table shows the sectors of the firms in the sample, analysed according to the stage of development in their life cycle. It is pertinent to note that there is no clear-cut objective demarcation or criteria to classify firms by lifecycle, especially in the growth stages.

Table 3: Distribution of firms by lifecycle and economic sector

Stage Start-up Emerginggrowth Domestic growth Expansiongrowth

Manufacturing

Retail/ Distribution

Tourism / Hospitality

Life Sciences and ICT

Other Service s

Total

1%

1%

2%

5%

1%

10%

0%

1%

0%

0%

3%

4%

10%

20%

25%

7%

12%

74%

5%

2%

3%

2%

1%

13%

16%

24%

30%

14%

17%

100%

The table shows that about three-fourths of firms are in the domestic growth lifecycle stage. This is a natural reflection of the type of Malta Chamber and MHRA members. On the other hand, 10% are in the start-up phase – this time a reflection of the selection process from the ERDF Small Start-up Grant Scheme96. In terms of year of incorporation, all start-up phase firms in the sample were incorporated in the last 24 months, while the majority of the firms in the “Domestic-Growth” and “Expansion-Growth” stages were incorporated prior to the year 1990 (Development-Growth: 53%, Expansion Growth: 54%, Average: 25%). There were also a couple of legacy firms having been incorporated in the 1800s.

5.2

General Characteristics This section provides an overview of the general characteristics of the SME respondents. Where applicable, answers are analysed by size, sector and lifecycle.

5.2.1 Q1: Who are the owners of your firm?

In this question respondents were prompted with possible answers on their ownership structure.

The results are shown in the following table: 96

On a similar note, there were no firms in the “pre-seed/seed stage”. This is again a reflection of the population used as a basis for the random generation of the sample, but could also reflect the fact that a firm in such an early stage might still have to apply for finance since it is still in the phase of converting an idea into a registered company. Such firms might thus have limited experience of access to finance.

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Table 4: Firm Owners

Start-up

Emerginggrowth

Domestic growth

Expansion -growth

Total

One Owner

60% (6)

50% (2)

20% (15)

62% (8)

30% (31)

Family/ Entrepreneurs Other firms/ Business Associates

30% (3)

0% (0)

67% (50)

31% (4)

56% (57)

10% (1)

50% (2)

13% (10)

8% (1)

14% (14)

Base: All Respondents

The table above shows that the most common type of ownership is the family business, which is followed by the “one owner” category. None of the firms that were interviewed are publicly listed on the stock exchange – as discussed in Section 3.4.5 this is very often the case with the majority of small and micro size firms. The results also reflect a common belief among SMEs that obtaining an equity injection from other business partners is not relevant to their business97. The firms having a business associate amount to 14% of all the firms interviewed. As expected, larger firms are more likely to move away from a one-owner structure. A family-run business was the most prominent ownership for all firm sizes and all economic sectors.

The data in the table above also shows that expansion-growth firms have a higher tendency for a one-owner structure (64%; average: 30%), possibly indicating that local firms are able to survive and grow despite internal funds being reliant on one individual only. The family/ entrepreneurs structure is mostly found in the domestic-growth stage (67%; average: 56%). As explained earlier, the involvement of other firms/ business associates is quite limited across the board (14% across all stages).

In terms of sectoral analysis, the family ownership structure emerged as the preferred structure in all sectors. However, the “other services” sector was more likely to incorporate other firms/ business associates in their ownership structure (29%, average: 14%) – this was especially the case with professional firms. On the other hand, none of the Life Sciences/ICT firms interviewed had any third party involvement (i.e. from other firms or business associates).

The size of the firm was also a determinant of firm ownership structure, as “Medium” SMEs are less likely to have a one-man ownership structure (13%, Average: 30%). In fact, these firms were more likely to take into consideration third party equity from other firms/ business associates (27%, average: 14%).

5.2.2 Q2: Can you kindly provide an indication of the current source/s of your funding?

This question gives an indication of the type of financing currently being adopted by local firms, independently of the purpose for funding. Each respondent could provide more than one reply. It is pertinent to note that the “Family/friends” in this question does not overlap with the previous ownership structure question. In this question, interviewees were asked whether families/friends that were not owners from the inception of the business have provided additional finance.

97

European Central Bank (2012), SAFE tables – 2011 (Excel file). For 80% of Maltese respondents, an equity injection from third parties as an additional source of financing was never relevant to their firm. The EU27 average was c. 79%, mainly due to the responses provided by a number of other countries (> 70% for Austria, Bulgaria, Czech Republic, Germany, Ireland, Italy, Latvia, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and the UK). A greater willingness to accept third party equity was observed in the Nordic countries (non-EU Norway – 26%, Denmark and Sweden – 35%), Lithuania (46%) and France (48%).

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Figure 6: Current sources of finance 100% 90%

89%

%age of respondents

80%

70%

70%

60% 47%

50%

50%

40% 30% 20%

9%

10%

4%

0% A: Own Financing

B: Family/Friends

C: Overdraft, credit line, or credit cards

D: Bank Loans E: Trade Credit (excl. OD and credit lines)

F: Other

Base: each percentage is based on total sample size

The figure above confirms the reliance of most firms on traditional sources of finance - “own financing” (89%), overdraft facilities (70%) and bank loans (47%). Financing from family/ friends (who are not also owners) was a less utilised source of financing with only 9% of respondents currently using this type of finance. The “other” category is made up of respondents who receive funding from the parent company and shareholder’s loans.

An analysis by size resulted in more prevalent financing from overdraft facilities and bank loans from medium firms (93% for both, average: 70% and 47% respectively). On the other hand, “micro” firms were less likely to opt for bank loans and trade credit (31% and 37% respectively, average; 47% and 50%).

The main differences when comparing firms by sector are highlighted below: - Almost all firms in Life Sciences, ICT and manufacturing firms replied “yes” to using own financing, (average: 89%) - The manufacturing sector tended to prefer more loan financing when compared to other sectors (67%, average: 47%) - Firms operating in the retail/distribution sector tended to have lower reliance on own financing (79%; average: 89%), but this was generally set off by greater reliance on overdraft financing (83%, average: 70%) - Restaurants were less likely to utilise overdraft financing compared to the average results (55%, average: 70%) - Professional services have less dependence on bank loans (33%, average: 47%) and trade credit (17%, average: 50%). This is also a reflection of the low capital intensity of this sector.

The following differences emerge when comparing firms by their growth stage: - Start up firms are more inclined towards financing from family/friends (30%; average: 9%), while opting for less bank loans (30%; average: 47%) and overdraft facilities (50%; average: 70%) - Firms in their expansion growth take up less overdraft facilities (54%; average: 70%) and tend to use trade credit less frequently (38%; average: 50%) than other firms.

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Malta Business Bureau – Market gaps in access to finance April 2013

5.2.3 Q3: How would you rate your company’s ability to raise finance?

This question was asked to all survey respondents in order to assess the difficulty in raising finance for specific purposes. Firms in the growth stage were also requested to answer this question to reflect any past difficulties they faced in their earlier start up phase. In this question, a 1 rating is categorised as “very hard”, while 5 as “very easy”, with 3 being the median. The figure below is a representation of the answers obtained, showing the displacement from the mean of 3. Data bars pointing right show a more positive result (i.e. easier to obtain finance) while data bars pointing left reflect difficulties in obtaining finance for the respective purpose. The figure also shows the mean for each response.

Figure 7: Firm's Ability to raise finance Very hard Normal Day to day operations – internal finance

Very Easy 3.27

Normal day to day operations -external finance

3.12

Specific projects or investments – internal finance

2.82

Specific projects or investments – external finance

2.90

Internal finance in your start-up phase

3.07

External finance in your start-up phase

2.89 1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Base: All respondents for each purpose of finance

The results show minimal deviation from the mean, potentially reflecting replies obtained in other surveys whereby access to finance did not emerge as the main pressing business problem 98 in Malta. However, it seems that SMEs face less difficulties in funding normal day to day operations through internal sources (mean result of 3.3). On the other hand, the biggest access to finance hurdle for these SMEs relates to obtaining finance to start a new project or to fund a new investment. This applies to both internal and external sources. The results also seem to indicate that any difficulties experienced in generating external finances in firms’ start up phase were circumvented through internal finance. However, this might also be a reflection of the fact that many local SMEs do not/ cannot apply for external finance in such an initial stage, as discussed in Section 3.1.2.

When analysed by size, firms that are larger in terms of size face less difficulties in accessing finance. There were differences in all types of financing purposes, namely financing related to day to day operations (Internal: 3.9, Average: 3.3; External: 3.5, Average: 3.1) and in financing related to specific projects or investments (Internal: 3.2, Average: 2.8; External: 3.4, Average: 2.9). On

98

Access to finance was a concern for only 4.6% of Maltese respondents in the ECB SAFE survey for 2012 (European Central Bank (2012), Survey on the access to finance of small and medium-sized enterprises in the euro area – April to September 2012). In a local survey, respondents ranked access to finance as their fifth most pressing problem (GRTU (2012), Access to finance survey)

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

the other hand, the most difficult financing access for micro firms tended to be financing specific projects or investments through internal finance (2.6; average: 2.9).

A sectoral comparison shows the largest displacement from the mean in the Life Sciences and ICT sector, where greater difficulties were experienced in start-up external financing (1.83, average: 2.9). The restaurants also seem to face more difficulty in raising finance, mainly in day to day requirements (restaurants: 2.7, average: 3.0). The manufacturing sector faced greater difficulties in using internal finance for specific projects/ investments (2.50, average: 2.82) but made up for it through external finance (3.22, average: 2.92).

Expansion growth firms indicated facing greater difficulties to access finance. The average score of 2.7 is lower than the average across all stages (3.0) â&#x20AC;&#x201C; this is mainly derived from the difficulty in obtaining finance for specific projects or investments. This may possibly be due to bigger/ more ambitious projects than those engaged by firms in earlier lifecycle stages. Start-up firms also have difficulties in accessing finance, with a score of 2.5 (average: 2.9) in obtaining external financing.

Lower scores (i.e. greater difficulties) were registered in obtaining finance both for day-to-day operations as well as for specific projects by start-ups.

5.2.4 Q4: Have you ever used/ applied for any of the following sources of finance?

The first bar graph in this analysis shows the different types of funding, and the percentage of respondents that used or applied for such funding.

Figure 8: Use of different Sources of finance 74%

%age of respondents

80%

64%

70%

65%

60% 50% 40% 30%

26%

20% 10% 0%

32%

26% 6%

A: National Grants/Public aid

9% 4% B: EU Funds EU funds

6% C: Bank overdraft, credit line or credit cards overdraft

2%

2%

27%

4%

0%

D: Bank Loans E: Trade Credit F: Other loan G: Leasing/ H: Equity from I: Public issue (e.g. related hire-purchase/ other Sources of own shares company/ factoring or own bonds shareholders, family, friends)

Yes, Used

Yes, Applied

Yes, applied but rejected/ refused to proceed further

Yes, applied but partially rejected

Base: All respondents for each type of finance

This question again reflects the preference of local SMEs towards traditional sources of finance. In fact, the most popular source of finance were bank overdrafts, credit lines or credit cards overdraft (74% of respondents used the overdraft facility at some point). Bank loans and trade credit also emerged as popular sources of finance (64% and 65% of respondents, respectively).

On the other hand, the above bar graph shows that the use of additional equity (both from private sources as well as through a public offering) is the least popular source of finance. This result is a reflection of the lack of formal venture capital funds in Malta, but also the reluctance of SME owners to dilute ownership. The next bar graph shows the percentage of firms that did not apply for the respective funding and related reasons for not doing so.

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Malta Business Bureau – Market gaps in access to finance April 2013

Figure 9: Reasons for not using sources of finance 100% 8%

90%

7%

%age of respondents

80% 70% 60%

4%

6%

6%

4%

50% 87%

40% 30%

63%

0%

0%

34%

33%

56%

20%

0%

10%

21%

61%

93%

66%

0% A: National B: EU Funds Grants/Public EU funds aid

C: Bank D: Bank Loans E: Trade Credit F: Other loan G: Leasing/ H: Equity from I: Public issue overdraft, (e.g. related hire-purchase/ other Sources of own shares credit line or company/ factoring or own bonds credit cards shareholders, overdraft family, friends)

Did not use them – not relevant to my firm

Did not use them – other reasons

Base: All respondents, for each type of finance

The figure above shows that most of the firms did not use or apply for equity sources, and the most prevalent reason is because they are not deemed relevant to their firm (87% for private equity and 93% for public listing). Some responses for the “other” category related to respondents being unaware of related advantages for the respective source of finance, respondents whose needs were met through traditional bank finance, and the difficulty to find providers of finance locally.

A: National Grants/Public Aid National grants were used by only 26% of firms, with some firms having their national grant assistance requests rejected. Rejections were reportedly mostly due to failure to meet application requirements. About two-thirds deem these grants as not relevant to their firm.

Firms in the “medium” category used this type of finance most (33%, average: 26%). The manufacturing and Life Science/ ICT firms were more likely to use this type of finance (50% and 43% respectively, average: 26%), while hotels and restaurants tended to use national grants less often (9% and 10% respectively; average: 26%). Firms in the start-up and emerging growth stages were the most frequent users of this source of finance (50% on both cases; average: 26%).

B: EU Funds This type of finance was accessed mostly by “medium” firms (53%, average: 26%), and was used less often by “micro” firms (16%, average: 26%), who were more likely to deem such funds not relevant to their business (65%, average: 56%).

When analysed by sector, the responses show that the Life Sciences and ICT firms, and hotels (50% and 45%, average: 26%) used this type of finance more often. Respondents in the retail and distribution sector were more likely to consider these grants not relevant to their activities (71%, average: 56%). Rejections for EU fund assistance related mostly to the manufacturing industry (25%, average: 9%). Firms in their start up stage used EU funds more often (40%; average: 26%).

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Malta Business Bureau – Market gaps in access to finance April 2013

C: Bank overdraft, credit line or credit cards overdraft This type of finance is used by all “medium” SMEs, while “micro” SMEs used the overdraft facility less frequently (61%, average: 74%). The use of this type of finance also varied across sectors. The retail/distribution and professional services sectors had the highest usage rate (92% and 82% respectively, average: 74%). Restaurants had the lowest rates of take up for this source of finance (55%). Firms in the start up phase used this source of finance the least (50%, average: 74%).

D: Bank Loans Bank loans were also a popular source of finance, used by 64% of total respondents. On the other hand, 34% never looked into this type of finance – this may be attributable to a preference for own financing (used by 89% of the firms interviewed).

All “Medium” SMEs used this type of finance, compared to half the micro enterprises. In terms of sectors, the less frequent users of this type of finance were firms in the Life Sciences and ICT sectors (50%, average: 64%). On the other hand, three-fourths of all manufacturing firms utilised bank loans.

Start ups were less likely to utilise bank financing (30%; average: 64%), while emerging/ expansion growth firms were the most frequent users (75% and 77% respectively; average: 64%).

E: Trade Credit Trade credit was also one of the most prevalent sources of finance, with an average of 65% usage.

Micro firms were the less frequent users of trade credit (53%, average: 65%), while small enterprises were the most frequent users (76%; average: 65%). The retail sector was more likely to utilise trade credit (75%, average; 65%). On the other hand, emerging growth firms were less likely to go for trade credit as a source of finance (25%, average: 65%).

F: Other loan (e.g. related company/ shareholders, family, friends) This type of finance was not used by many firms (32%), and many firms from the interviewed sample thought that this was not relevant to their firm. This type of finance was mostly used by “medium” SMEs (53%; average: 32%).

The Life Sciences and ICT sector, as well as the other services, used this type of finance more frequently (43% and 41% respectively, average: 32%), while manufacturing firms the least (19%, average: 32%). Firms in the emerging growth stage were aided more often by this type of finance (50%; average: 32%).

G: Leasing/ hire-purchase/ factoring 27% of respondents had utilised either leasing or hire-purchasing or factoring as a source of finance. This was most likely to be the case with small firms (37%) and less likely to relate to micro firms (18%), tourism/ hospitality firms (23%) and start-ups (20%).

H: Equity from other sources (including business angels, venture capital) This proved to be one of the least used type of finance (only 4 respondents), with the main reasons being that respondents did not consider this type of financing as relevant to them or not being willing to dilute their ownership. None of the SMEs responding to the survey were listed, again since the respondents deem this source of financing not relevant to their firm.

5.2.5 Q5: What was the reason for your request being rejected/ only partially met/ your decision not to proceed further?

The chart overleaf summarises the reasons provided by respondents to explain why their applications for financing were not taken forward, either by the authority/ institution, or by the respondents themselves (a total of 15 responses). Refusals were generally linked to assistance schemes part-financed by national and/ or EU funds. Some of the reasons provided include: –

Respondent did not meet application requirements

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

Respondent refused to proceed further due to Terms & Conditions Application rejected due to the risk involved, especially if linked to a start-up

â&#x20AC;&#x201C; â&#x20AC;&#x201C;

Figure 10: Discontinued Applications 10

No. Of Respondents

9 8 7 6

5 4 3 2

1 0 A: National Grants/Public aid

B: EU Funds EU funds

Stage in company lifecycle

Did not meet application requirements

Refused - Unaccaptable T&Cs

Others

Base: Respondents that applied for funds bet were rejected/ refused to proceed further

5.2.6 Q6: Would you apply for any of the below types of financing if offered locally?

This question asked respondents to provide their preferences in relation to those sources of finance most appealing to their firm. The responses were prompted with a list of sources of finance, including reference to sources which are both currently available in Malta, but also to other sources which are available in other countries but not in Malta (e.g. formal business angels, seed funding, venture capital, and securitised mezzanine finance). Despite the already high dependence on grant funding in certain sectors, respondents still opted for more grants (both national and EU-funded). In fact, c. 80% of respondents were willing to apply (for the first time/ again) for grant schemes.

Moreover, 93% of those who already applied for a national grant were willing to obtain more national grants. From those who applied for EU funds, 87% were interested in applying for more funds. This shows that despite the administrative, compliance and cash flow impacts, local firms still demand grants.

The figure below again reflects the low preference for sharing ownership through additional private equity financing. In this regard, 65% of respondents showed no interest in obtaining equity from other sources (including business angels, seed funding and venture capital) or in mezzanine finance.

On the other hand, 24% were interested; currently, only 4% of respondents use financing through equity from other sources. This may indicate the need for more financing instruments combining elements of a grant, debt and equity.

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

Figure 11: Interest in applying for sources of finance

0%

%age of Respondents 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

A: National Grants/Public aid

83%

B: EU funds

81%

C: Bank overdraft, credit line or credit cards overdraft

60%

D: Bank Loans

60%

E: Trade Credit

60%

F: Other loan (e.g. related company/ shareholders, â&#x20AC;Ś

30%

G: Leasing/ hire-purchase/ factoring 24%

I: Public issue of own shares or own bonds Yes

13%

5%

13%

35%

9%

31%

3%

37% 60%

4%

49%

12%

9%

Don't Know

6%

10% 47%

H: Equity from other Sources

5% 12%

65% 78%

No

The following table shows the distribution of respondents and their take up for the various sources of finance, analysed by firm lifecycle: Table 5: Respondents that were interested in types of finance, distributed by lifecycle

Source of finance / Lifecycle stage A: National Grants/Public aid B: EU funds C: Bank overdraft, credit line or credit cards overdraft D: Bank Loans E: Trade Credit F: Other loan G: Leasing/ hire-purchase/ factoring H: Equity from other Sources I: Public issue of own shares or own bonds

Startup

Emerging growth

Domestic growth

Expansiongrowth

Total

80% (8)

75% (3)

84% (63)

85% (11)

83%

80% (8)

75% (3)

81% (61)

85% (11)

81%

40% (4)

75% (3)

65% (49)

38% (5)

60%

50% (5)

50% (2)

63% (47)

54% (7)

60%

50% (5)

25% (1)

63% (47)

62% (8)

60%

30% (3)

50% (2)

32% (24)

15% (2)

30%

60% (6)

0% (0)

47% (35)

54% (7)

47%

50% (5)

0% (0)

21% (16)

23% (3)

24%

40% (4)

0% (0)

11% (8)

8% (1)

13%

Base: percentages based on total responses in each lifecycle

Firms at the two extremes of the firm lifecycle (start ups and expansion growth firms) were less interested in bank overdrafts (40% and 38% respectively, average of 60%), while start-ups were more likely to favour equity (50%, average 24%). In terms of sectors, the Life Sciences and ICT industry showed the highest interest in equity financing from other sources and through a public issue (64% and 36% respectively, compared to averages of 24% and 13%).

5.2.7 Q5: What is the size of the last loan, of any kind, that your firm has obtained in the last two years?

This question asked respondents to provide an indication of whether they have taken a loan in the last two years and, if yes, the size of such a loan. Given the confidential / sensitive nature of this question, 3% of respondents chose not to provide an answer to this question and the subsequent

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Malta Business Bureau – Market gaps in access to finance April 2013

question. In addition, 31% of firms who have used bank financing in the past had not obtained a loan within the indicated timeframe, while another 35% had never obtained a loan.

35% of actual respondents to this question had obtained a loan in the range between €100,000 to €1 million. An almost equal amount of responses mentioned the next lower bracket (€25,000 €100,000) and loans greater than €1 million (14% of responses each).

Figure 12: Size of loan €<25K 6%

No loan in the last 2 years 31%

€25 100K 14%

€100K 1M 35%

€>1M 14% Base: All respondents

As expected, smaller firms tended to opt for smaller loans; 42% of loans from “micro” SMEs were less than €100,000 (average: 13%), while “medium” SMEs were more likely to opt for loans with a value higher than €1 million (47%, average: 9%).

5.2.8 Q6: What did you use this last loan for?

The next questions asked respondents to provide the reasons for taking up the above-mentioned loans. The figure below shows the number of occurrences in which a loan was taken and used for the respective categories. As shown in the figure below, loans were mostly used for acquiring/ investing in fixed assets.

Figure 13: Use of last loan

20

Number of Respondents

18 16 14 12 10 8 6 4 2 0

Working capital

Land/ buildings or R&D or intellectual Equipment/vehicles property

<25K

25 - 100K

Buying another business

100K - 1M

Base: Respondents that used a loan

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>1M

Refurbishment

Can't Say

No loan in the last 2 years

Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

5.2.9 Q6: Do you see any other important funding instruments emerging in the future?

Apart from previous questions on respondentsâ&#x20AC;&#x2122; willingness to use other sources of financing such as various forms of equity financing, this question asked respondents for their opinions on other funding options, such as private public partnerships, microfinance institutions, crowd funding and the concept of a co-operative bank.

Figure 14: Other funding options 25% 21% %age of total respondents

20%

15%

9%

10%

5%

5%

3% 1%

1%

0% Private Public Partnership

Microfinance institutions

Crowd funding

Co-operative Venture Capital* Banks

Business Angels*

Base: All respondents Note (*): Venture Capital and Business angels were not prompted to respondents

These additional funding options got few positive responses. In addition, 5% of respondents again mentioned venture capital, without being prompted. Venture capital was already referred to in Q6, whereby respondents were prompted for their potential interest in other private equity sources, such as business angels and venture capital funds. In that question, 24% said they would be interested in such financing. Other funding option suggestions mentioned as replies to this question were export credit guarantees, merchant banks, and financing from insurance firms.

5.2.10 Q7: What are your expectations regarding assistance to be designed in the next financing period covering 2014 - 2020?

This open-ended question was asked to all respondents to obtain feedback and comments in connection with the next EU Programming Period for 2014-2020. The following points were put forward:

Extending definition of eligible costs: the current economic situation has put a strain on businessesâ&#x20AC;&#x2122; cash flow. For this reason the most common response was the desire for eligible costs for grants to include energy costs, cost of machinery, staff training expenses and bank interest.

Greater funding in relation to renewable energy: various respondents also indicated being willing to invest in renewable energy but commented that initial capital outlay was a stumbling block in this regard. It was therefore suggested that more renewable energy schemes ought to be offered, with possible higher co-financing rates.

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

Reducing grant administrative process: A number of respondents mentioned the need to decrease the administrative burden, reducing time lags and removing complexity from the process and application for national and EU funds. Many SMEs commented that, while the end result is beneficial for their business, applying for funding results in the utilisation of significant time and resources, which are already limited. In addition, respondents also commented about the waiting time needed for approval, and to subsequently also receive the finances/ reimbursements. A suggested solution for these problems mentioned by some respondents was for better guidance to be provided, for instance through more information sessions.

Type of schemes: Interviewees stated that the Microinvest scheme is a very positive initiative.

However, global funding for this scheme should be increased so that further investment can be made. On the other hand, some firms commented that the Micro Guarantee scheme should feature the banksâ&#x20AC;&#x2122; input at an earlier stage to reduce the possibility of rejection at a later stage.

Medium-sized enterprises and firms in the development growth stage commented on the lack of specific allocation of funds targeted towards them. Some respondents in this category need these funds for refurbishment, further company growth, for health and safety infrastructure, to recruit the appropriate expertise in-house, to increase investment in R&D and product development, for marketing, export and internationalisation initiatives. A few SMEs planning to expand internationally stated that they require assistance to appoint of representatives in other countries. Another respondent suggested the development of schemes specifically designed for Gozitan SMEs. A couple of SMEs planning to expand their business online stressed the need for support in line with such plans.

Business Ombudsman: One particular respondent suggested the introduction of a Business Ombudsman - this official would have a role similar to a Tribunal and would assist firms in litigation when two parties cannot agree on certain issues.

SME network: One particular comment related to the need for SMEs to form a network to flourish. Because of the economic / competitive environment in Malta, it is difficult to establish such a network.

Grants or tax rebates: a few respondents pointed towards more grant-based measures rather than tax rebates, and that any tax rebates should be based on each companyâ&#x20AC;&#x2122;s annual turnover.

Other suggestions: one respondent was particularly interested in more factoring products, and more soft loans to be guaranteed by third parties.

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Malta Business Bureau â&#x20AC;&#x201C; Market gaps in access to finance April 2013

6.

Local potential for new financial instruments This chapter provides an assessment of the feasibility of financing instruments to address the credit needs of Maltese SMEs. This is done on the basis of the survey results and stakeholder interviews, as well as on the basis of best practice examples obtained from other EU-26 Member Statesâ&#x20AC;&#x2122; experience with the use of various types of financial instruments within the 2007-2013 Programming Period, including the Malta JEREMIE initiative. The assessment is being presented through a mapping exercise, matching the different financing needs with the economic sectors applicable for the purposes of this study, as well as firm lifecycle.

6.1

Mapping by economic sectors The analysis by economic sector takes into consideration the traditional local sectors of manufacturing, retail and distribution, and hospitality (hotels and restaurants), as well as new areas of economic growth related to innovative and creative sectors. The current needs of these sectors are diverse, with the traditional commercial activities being currently focused on sustainability issues and the ability to re-invest funds in their business for upgrading/ expansion purposes. The following table provides an assessment of the financing needs and local scope for further financing by economic sector.

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Table 6: Mapping of financial instruments with selected local economic sectors

Economic sectors

Manufacturing

Current financing needs

The manufacturing industry has faced (and still faces) the need to upgrade and restructure in order to better compete at international levels (especially with emerging markets) and at the same time face challenges brought about by the dismantling of protective measures.

Many companies are now adopting leaner approaches, looking into higher value-added activities through R&D activities and product and process (re-) design. This sector is becoming more capital intensive and requiring increasingly specialised HR – this necessitates further investment to upgrade and acquire such equipment and recruit new talent, as well as finance investment to enable local companies to move up the value-chain. Other plans relate to internationalisation efforts, the efficient use of resources and the environment.

Current financing options

Commercial bank loans represent the current main source of finance (survey results show highest sectoral reliance on bank loans). In some cases, however, the premises would not be owned by the company (e.g. MIP estates) and cannot therefore be used as collateral. The local market has also provided soft loans, interest rate subsidy schemes, and loan guarantees (c. 15% of the Microcredit scheme has been taken up by this sector; survey results show highest sectoral take up for national schemes). Other traditional sources include lines of credit, trade credit and leasing.

Government has stepped in during the economic crisis to provide various forms of in/direct assistance, and is likely to continue adopting this policy in order to safeguard local jobs. The Maltese industrial policy also provides scope for further assistance to selected manufacturing sectors.

According to the survey results, manufacturing firms find it more difficult to finance specific projects/ investments from internal sources.

However, given the ongoing international economic crisis, the loss in competitiveness compared to other (especially low cost manufacturing) countries, government budget constraints and the increased banking regulatory requirements, manufacturing firms might need to look elsewhere for additional (cheaper) financing.

Others are postponing their investment decisions.

 Significant external challenges – retraction in protectionism, and increasing competition from emerging countries  Re-structuring process underway  Shift from low cost manufacturing towards higher value added  Significant restructuring expenditure

 Reliance on one main source of financing – banks  Strong banking relationships  Important take-up by sector for JEREMIE loan guarantee  Government has provided support, through policy and direct financial assistance

Scope for financial instruments

This sector’s current financing needs are largely met by bank financing. However, new innovative projects from existing SMEs (e.g. business process re-engineering, internationalisation initiatives) as well as innovative start-ups, especially in the high value added sub-sector, would require additional financing which might be considered too risky by traditional providers of finance, even though these companies do provide a “tangible” product (and might hence be deemed less risky than service companies). In addition, the current economic climate might have brought a tightening of credit conditions for the sector.

There is therefore further scope for grants and financial instruments providing loan/ loan guarantee options, especially given that c. 15% of the Microcredit scheme has been taken up by this sector. The survey results also show a higher sectoral interest in national/ EU grants. And average interest in bank financing.

Financial instruments providing a combination of grants and loans would also be applicable. Box 3.5.4.1 and 3.5.4.2 provide examples of financial instruments from the upcoming MFF. In terms of equity, the setting up of a VC fund for innovative start-ups in high value added manufacturing in Malta is unlikely to provide the critical mass needed, and hence such fund would need a wider scope covering other sectors. An alternative is to be part of a pan-European VC fund. According to the survey results, about 25% of manufacturing firms expressed an interest in other forms of equity financing.  Further scope for grants  Further scope for financial instruments – given reliance on bank financing, loans and loan guarantees are likely option  Equity instruments for high value-added manufacturing 

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Economic sectors

Retail/ distribution

Current financing needs

The local retail sector has been significantly affected by the advent of internet technologies and e-commerce. The 2012 Malta Retail Review found that turnover in 2012 among participants had only increased by 0.4% over the previous year99.

The local retail sector is stepping up its initiatives to upgrade retail/ shopping outlets to European standards. Some retail businesses and other new entrants in this sector are also investing in the development of related e-commerce sites (e.g. payment institutions, online malls).

There is also scope for looking at cost reductions through reaping the benefits of scale economies, such as through bulk buying/ joint importation to reduce transport costs.

According to the survey results, this sector expressed less difficulties in accessing finance in all stages, including financing for day-to-day operations as well as specific upgrade projects/ other investments.

 Threats from external environment – ecommerce  Minimal growth and financial difficulties   Increased retail supply (e.g. new malls)  Upgrading of facilities  Reintermediation and Countermediation  Restructuring initiatives to cut costs

99

Current financing options

Traditional sources of finance represent the main sources of finance for this sector. According to the survey results, retail and distribution firms showed the highest sectoral reliance on bank overdrafts and trade credit, possibly indicating temporary financing issues related to cash flow and working capital.

In addition, bank loans were another popular source of financing, with the provision of collateral being less of an obstacle compared to manufacturing companies. This is also supported by the fact that this sector is responsible for about one-fourth of the total take-up in the JEREMIE loan guarantee scheme.

Grant initiatives are more likely to be focused on the manufacturing sector and sometimes exclude importation agents and distribution as an eligible business activity. In fact, as evidenced by the survey results, retail and distribution firms represented one of the lowest sectoral usages of EU schemes.

 Reliance on bank lending as main source of finance  Strong banking relationship  Important take-up of JEREMIE scheme  Not main focus of grant schemes

Times of Malta (2012), Retail up but Valletta suffers haemorrhage

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Scope for financial instruments

Given the potential problems with e-commerce substitution and increased competition locally, firms in this sector might increasingly be facing financial difficulties, and hence there is scope for further bank assistance. In fact, two-thirds of respondents in this sector showed preference for more bank financing. This can also be applied through an extension of the JEREMIE MicroCredit loan guarantee fund, especially since about onefourth of the total current take-up is attributable to this sector.

Again, a hybrid approach taking into consideration both grants and loans would also be applicable.

The survey clears points towards a majority of this sector’s respondents looking for future opportunities to apply for national schemes and EU financing.

The lower growth rates associated with such a mature sector would generally not be deemed attractive for VC funds. Moreover, this sector showed the lowest preference for any equity related initiative. However, a balanced portfolio approach would require investment in both highgrowth high-risk and low-growth low-risk sectors, and hence this sector might also be included in a wider approach to a VC fund.

 Significant interest in loan guarantee financial instrument  Scope for extending loan guarantee product, or combining it with other forms (loan + loan guarantee, risk-sharing, grant + loan guarantee)  Minimal scope for VC funds

Economic sectors

Hospitality

Current financing needs

Current financing options

The last two years’ (2011 and 2012) tourism figures are encouraging in terms of number of arrivals, but still reflect high seasonality and income volatility, and falling tourist average stays.

In addition, competition from nearby Mediterranean countries has further pushed down room rates. The sector often complains of shrinking margins100.

Similar to the manufacturing sector, commercial bank overdrafts/ loans represent the current main source of finance for this sector. This is facilitated by the fact that the premises would be used as collateral. Start-up restaurants are also generally funded through this traditional source. In addition, the local market has also provided soft loans, interest rate subsidy schemes, and loan guarantees. Given the significant importance of tourism for the local economy through direct and indirect multiplier effects, Government has also stepped in at various stages to provide direct assistance to the hotel sector and the related airline sector (e.g. Interest Rate Subsidy Scheme for the Refurbishment of Hotels, Accommodation Facilities & Restaurants, Soft Loans for Energy Efficiency, MTA ERDF schemes).

The sector is currently focusing on improving the tourist experience to reflect a better usage of Malta's historical infrastructure. This is a priority at the various service provision levels, including accommodation, dining and entertainment.

In terms of the restaurant sector, there has been strong demand for funding, especially for niche services such as Maltese traditional restaurants and specialised cuisine. Other niche/ specialised tourism services relate to rural tourism (upgrading of town houses and farm houses on our towns and villages, upmarket guest houses 101) and medical tourism.

Hotels have also applied for various schemes to upgrade their premises. This is especially the case for three and four star establishments.  Year-on-year growth in sector  Falling average tourist stay  Significant competitive pressures pushing down prices and squeezing margins  Upgrading initiatives underway  Focus on niche tourism  Costly refurbishment

Given the dynamic external environment, Government is likely to continue adopting this policy in order to safeguard local jobs. The Maltese tourism policy also provides scope for further assistance to niche areas within this broad sector.

A few hotels have also sought financing from the capital markets (equity and corporate bonds).

 Reliance on bank lending  Strong banking relationships  Significant take-up for JEREMIE product  Various earmarked national/ EU funded schemes  Use of capital markets

100

Scope for financial instruments

Rapidly changing environmental factors make it increasingly difficult for hotels to obtain the necessary bank financing, and hence they may need to look elsewhere for additional (cheaper) financing. Some establishments have had to postpone their investment decisions, leading to a deterioration of the Maltese tourism experience.

The c. 20% take up in the MicroCredit scheme by hotels and restaurants is a clear indication of the continuous financing needs of this sector. There is therefore scope for further bank assistance, possibly through a replication of the JEREMIE MicroCredit loan guarantee fund. Moreover, a hybrid approach taking into consideration both grants and loans would also be applicable.

There is doubtful scope for additional equity financing – many large Maltese entrepreneurs have moved away from SME hotels and restaurant investments, leaving banks as the main source of financing. This is also reflected in the survey results, where this sector expressed the lowest willingness to seek additional equity injections.

 Significant interest in loan guarantee financial instrument  Scope for extending loan guarantee product, or combining it with other forms (loan + loan guarantee, risk-sharing, grant + loan guarantee)  Minimal scope for VC funds and other third party private equity

MaltaToday (2010), Three-star hotels’ income squeezed by recession, competition; Times of Malta (2010), Tourism on the road to recovery but sector still very fragile; MaltaToday (2011), Tourism in 2012 will require additional funding; Times of Malta (2012), Restaurants report higher sales but slower growth 101 For example, the MTA Palazzini scheme is a pilot project aimed at encouraging the conservation and rehabilitation of historic properties to incentivise their adaptive reuse as luxury heritage accommodation (http://www.mta.com.mt/template.aspx?id=276)

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Economic sectors

Innovative/ creative industries

Current financing needs

Malta performs below EU average in innovation, with its main weaknesses being a shortage of qualified human resources and low levels of public and private investment in R&D. Government policy is aimed at addressing these weaknesses and is behind the development of innovative/ creative sectors. This is especially the case with the digital gaming industry and the film industry. Other initiatives are being carried out to develop audiovisual products, theatre and design. These are all potential growth areas, especially given the likely increase in demand through the Maltese Presidency of the EU in 2017 and Valletta being awarded the European Capital of Culture in 2018.

The large majority of start-ups would be operating in the innovative sector, including ICT, gaming and renewable energy. The business needs for this sector would therefore relate to attracting specialist skills, investing in the necessary infrastructure, and R&D expenditure.

According to the survey results, firms in this sector have the largest access to finance issues – starting off from obtaining external financing in their start-up phase, to their day-to-day operations, as well as to finance specific projects or investments in their growth stage.

Current financing options

Given the predominantly intangible nature of these companies’ product/ services, traditional providers of finance have generally shied away from this sector. Looking at the funding history of some of the local established IT/ ICT companies in Malta, it is clear that most started as small units with limited capital, generally internally sourced. At the point where further capital was required to fuel growth, these founders informally approached leading local entrepreneurs, who were generally seeking diversification/ freewheeling opportunities. Some of these local businessmen are still shareholders in such IT companies. The involvement of these individuals was also beneficial to the company since it facilitated access to bank financing.

Investment in these companies was also facilitated through clearer exit strategies routes – a number of companies have merged, have been acquired by larger international companies or have sought financing from capital markets.

Government has stepped in through various grant schemes through national/ EU funds, including ERDF Innovation Actions (Innovation and Environment) grant scheme, ERDF e-Business Development grant, tax credits for the development of digital games, Innovative Start-ups Programme, CREATE, and Invex. This is also reflected in the survey results, where half of the respondents in this sector have utilised national/ EU funded schemes.

A number of previous VC fund initiatives in Malta had targeted this sector.

 Weak R&DI performance  Government directed policy  “One-off” project based funding  2017 Maltese Presidency of the EU  2018 European Capital of Culture

 Difficulty in tapping bank financing, especially for start ups  National/ EU grant schemes  Interest from local businessmen  Limited take up / success for VC funds in the past

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Scope for financial instruments

This sector provides the greater scope for equitybased financial instruments, as evidenced by the survey results - about two-thirds of respondents are interested in non-traditional sources of finance. This is mainly spurred by the higher potential returns, growing interest in the sector, but also a founder readiness to accept new partners bringing in not only the necessary capital but also new business ideas.

This is also the sector where traditional sources of finance are less likely to provide financing. Hence the funding gap created by traditional sources can be offset by the increased interest from the private sector.

There is therefore significant market scope for further equity investment. Boxes 3.5.4.1, 3.5.4.2, 3.5.4.5 and 3.5.4.6 all refer to financial instruments that will be available in the upcoming MFF. Examples could include: (a) VC fund for innovative companies (not necessarily start-ups). Where critical mass is the main stumbling block, such fund could be designed to have a wider scope (covering other sectors), or be a sub-component of a pan-European VC fund. (b) looking for equity investment through informal business angels (local entrepreneurs) or formal business angel networks. (c) equity guarantee schemes, such as one of the products offered through JEREMIE (d) hybrid financial instruments providing both equity and debt elements. (e) Public – private partnerships, such as the University of Malta’s Research, Innovation & Development Trust Fund.

A proposal for a Culture Venture Fund and crowd funding has also been put forward as part of Malta’s Strategy for the Cultural and Creative Industries (e.g. WEFUND.com).  Further scope for grants, especially for R&D and start-ups  Further scope for financial instruments – loans and loan guarantees, but also risksharing hybrid forms  Equity instruments for innovative companies in all lifecycle stages  Potential for VC funds  Crowd funding for creative/ cultural concepts

6.1.1 Mapping by firm lifecycle The analysis by firm lifecycle takes into consideration the various typical stages in a firmâ&#x20AC;&#x2122;s development, including inception (covering both pre-seed and seed), the start-up phase, and the growth (covering emerging/ development/ expansion) phase.

The current financing needs of firms in these stages are clearly different, with firms in the primary stages still struggling with the commercialisation of their ideas, and thus requiring investment in setting up. On the other hand, growth stages require financing to increase market penetration, but also to expand through internationalisation. The following table provides an assessment of the financing needs and local scope for further financing by firm lifecycle.

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Table 7: Mapping of financial instruments with Malta SME firm lifecycle

Lifecycle stage

Current financing needs

Inception (Preseed/ Seed)

The financing needs in the initial stages will revolve around developing a prototype (in the case of a product), financing the market research and the business plan, and other professional services (appointment of advisers and mentors). Compared to other stages, these initial financing needs generally involve small amounts, but might still represent a stumbling block for young people/ founders with limited own funds.

Current financing options

Many local business founders start by using personal savings, where available, as well as funds from family and/ or friends.

Commercial banks in Malta are unlikely to provide assistance at this stage since the risk is still high and the idea still uncertain. At this stage it is only possible to take personal loans from banks at a high price and/ or against a property collateral (generally first residence).

National and EU funded schemes have also provided grant support, such as the ERDF Small Start-up Grant Scheme and the Innovative Startups Programme, which are however applicable for selected sectors with higher growth/ value added potential.

Locally, there are no programmes that provide seed funding through private sector equity injections. There are no formal venture capital funds or other risk-based financial instruments which are currently targeted at seed companies in Malta. Some companies have managed to attract investment from local business entrepreneurs through their informal contacts.

 Limit to growth set by internal resources  Smaller financing needs compared to subsequent phases

 Lack of accessibility to bank financing  Specialised grant schemes  Lack of equity programmes / VC funds/ formal business angel networks  Lack of equity investor readiness

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Scope for financial instruments

Businesses at this stage are still in their embryonic stage, and as a result are unlikely to be considered viable/ bankable as yet. The high risk they carry reduces bank financing possibilities, and any equity injection will come at a high price in terms of requested shareholding interest.

Consequently, scope for grant assistance will remain. However, financial instruments taking a combined approach between grants and a loan guarantee might also be considered, especially in innovative sectors or where already established companies are venturing/ diversifying into new product/ services, and hence might have the available collateral.

A seed capital/ venture capital fund might also need to be re-launched – such funds are based on the premise that failure is highly likely in this firm lifecycle stage. Failure is “acceptable” and “educational”, and therefore new ideas should be encouraged. However, given the high risk and limited risk pooling opportunities in the local market, government involvement/ risk-pooling within a pan-European fund might need to be considered.

 Further scope for grants, especially for R&D/ innovative ideas  Further scope for financial instruments blended with grants  Equity instruments for innovative companies in all lifecycle stages  Potential for VC funds and business angels in selected sectors

Lifecycle stage

Start-up

Current financing needs

A firm in the start-up stage requires further financing to test the market/ product, and implement adjustments. Financing will then be required for marketing and for the initial working capital requirements. The survey results confirm the fact that start-ups tend to face greater access to finance obstacles.

Current financing options

Scope for financial instruments

In terms of financing, the firm is still relying, in all likelihood, on its initial seed funding sources to keep it going (personal savings, family and friends), and is probably not yet profitable. The survey results show that 90% of start-up financing derives from the two above-mentioned sources.

For this reason, those running the business must be very careful not to use up their available funds too quickly.

In order to make firms in the “start-up” phase more bankable, financial instruments based on loans, loan guarantees or a mix of both needs to be retained/ extended. Likewise, a hybrid approach considering both debt-based financial instruments and grant assistance would match the financing requirements of firms in this stage.

80% of start-up respondents would welcome further grant assistance.

Apart from the initial seed funding, SMEs in the start-up phase might again be eligible for earmarked grant assistance as discussed under the Inception stage. As shown in the survey results, about half of the start-ups have utilised national/ EU funds.

The survey results also indicate that start-ups are more willing to consider equity from other sources. In terms of equity financing, venture capital funds are aimed at targeting firms specifically in this sector, where the risk-return trade-off is at its peak. Locally, such initiatives have had limited impact. Any intention to relaunch such initiatives would, however, require government intervention or the involvement of a pan-European initiative.

Though less risky and uncertain than in the earlier inception stage, commercial banks might still deem start-ups as “non-bankable clients” due to their risk profile and potentially low collateral coverage. In fact, the survey results point towards lower usage of bank financing by startups. The JEREMIE initiative has managed to fill in this gap by providing a safety cushion in the form of an EIF-backed guarantee, leading to lower pricing/ collateral requirements. In fact, c. 40% of JEREMIE successful applicants as at December 2012 had initiated operations within a period of less than 24 months.

Box 3.5.4.1 and 3.5.4.2 provide examples of financial instruments being proposed for the upcoming MFF which could be applicable for this sector.

In terms of local private equity funding, there currently still exists a gap for start-ups in Malta as previous attempts to set up venture capital funds for technology-driven ideas and formal business angel networks have not (to date) been successful. According to the survey results, only one start-up successfully tapped equity from third party sources.  Increased financing needs  Initial working capital requirements

 Lack of accessibility to bank financing  Specialised grant schemes  Lack of equity programmes / VC funds/ formal business angel networks  Lack of equity investor readiness

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 Further scope for grants, especially for R&D/ innovative start-ups  Further scope for financial instruments blended with grants  Equity instruments for innovative companies in all lifecycle stages  Potential for VC funds and business angels in selected sectors

Lifecycle stage

Growth (Emerging/ Development/ Expansion)

Current financing needs

The shift in focus on market growth would require investment in human resources and strengthening the organisational structure (e.g. new departments), automated equipment and marketing targeted at acquiring new clients and expanding into new markets/ distribution channels (including overseas opportunities). In order to reduce costs, firms in this stage might also be focusing on production process changes.

A factory may be purchased, or a new branch established. Outsourcing may also be a viable option considered to reduce costs. Diversification into new products might also be considered (through the acquisition of other businesses or through organic means) – this would represent the re-start of the business lifecycle. These changes can be deemed as risky as the firm would be starting afresh in new markets, and hence might require the founder to bring some of the seed stage and related funding back to the business.

Alternatively, local firms might share the cost of new projects by entering into joint ventures with other companies.

According to the survey results, main access to finance difficulties in this phase relate to raising internal/ external finance for specific projects/ investments, and also raising external finance for normal day-to-day operations.  Increased financing needs, especially for expansion plans and internationalisation initiatives

Current financing options

Though the firm could be seeing its first profits at this stage, it is also probably also dealing with increased demand for its products/ services and new competition. Hence a new round of funding might be sought, should profits and the initial funds not be adequate. Bank financing is likely to be the first line of attack, potentially facilitated through the established track record of the business, as well as national/ EU schemes (e.g. soft loans, interest rate subsidies, JEREMIE guarantee-backed loan, SME Development Grant, and ERDF International Competiveness Grant Scheme). According to the survey results, half of the emergent-growth firms have utilised national/ EU grants.

While formal Malta-based private equity remains inexistent in this firm lifecycle stage, informal venture capital might be successfully secured through local entrepreneurs and individuals who are often seeking investment and further diversification opportunities.

A firm in this stage and with a potentially successful track record in its core product/ service might also be able to start looking at institutional investors. Likewise, the public stock markets will represent another financing option that also provides an exit strategy for the original founders/ initial seed backers/ business angels.  Bank financing becomes accessible  Specialised grant and loan schemes  Lack of equity programmes / VC funds/ formal business angel networks  Lack of equity investor readiness  Availability of public capital markets

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Scope for financial instruments

Assistance to SMEs in this stage remains important, but is increasingly likely to take the form of financial instruments rather than grants.

And firms in this stage have a greater readiness/ attractiveness to switch to such instruments, as evidenced by the take-up for the JEREMIE loan guarantee product. In fact, more than 80% of firms in this category would be seeking further grant assistance from the upcoming programming period.

Looking forward, there is scope for similar instruments to the current JEREMIE loan guarantee product, but with a wider mix. Apart from loan guarantees, equity guarantees might also be considered. About one fifth of survey respondents in this category would be willing to consider equity from other sources.

A hybrid equity-loan instrument might be an alternative. In addition, mezzanine funds might be attractive for firms looking for the security of bank financing and new ideas which an equity injection can bring about. Likewise, venture capital funds and business angels can provide an injection of new funds/ ideas into existing businesses.

 Significant interest in loan guarantee financial instrument  Further scope for other forms of financial instruments – loan, equity, guarantees, or hybrid forms  Potential for VC funds and business angels in selected sectors

6.2

Financial instruments funded by ESF, EARDF and EMFF The following section looks into the local market potential for revolving instruments in the following sectors not covered by the SME survey, namely: Social enterprises: instruments funded by the ESF with the aim of fostering social entrepreneurship and addressing social inclusion.

Agri-food processing firms: instruments funded by the EARDF, to address the capital investment upgrading needs of agri-food processing firms.

Fisheries and aquaculture: instruments funded by the EMFF, to address the capital investment upgrading needs and addressing the processing and marketing improvement needs of the fisheries and aquaculture sectors.

In each case, a comparative assessment is carried out, on the basis of examples from other EU member-states/ regions as well as stakeholder consultation, to analyse the feasibility of introducing revolving instruments for local businesses in these sectors.

6.2.1 Social enterprises Social businesses are an emerging sector in the EU. They relate to undertakings whose primary objective is to achieve social impacts, rather than generate profits for shareholders or other stakeholders. Being socially innovative and often newly created businesses, they are mostly composed of a large population of SMEs, facing problems of access to finance similar to all other small businesses. In Malta, it is estimated that there are around 750 organisations which potentially fulfil the function of a social enterprise: 394 voluntary organisations, 236 sports clubs, 63 band clubs, and 57 cooperatives102. It is also estimated that Malta has a voluntary sector that employs more than 4,300 people (in addition to a voluntary base of more than 24,000 people) and generates around â&#x201A;Ź68 million a year. About 85% are micro organizations, about 10% are small organizations and the remaining 5% are medium-sized103. These enterprises are generally registered as business structures (such as co-operatives), but a legislation is currently being drafted to provide the legal and regulatory framework for such social businesses.

The main current EU funding mechanism for such enterprises is through the ESF since this fund is aimed at investing in people. The ESF is dedicated to improving social cohesion and economic wellbeing across the regions of the EU. The specific objective of ESF expenditure is to support the creation of more and better jobs in the EU, which it does by co-funding national, regional and local projects that improve the levels of employment, the quality of jobs, and the inclusiveness of the labour market in the Member States and their regions.

The 2007-2013 Programming Period was aimed at providing further support to business creation, entrepreneurship and SMEs. The ESF interventions on entrepreneurship were clustered around three main categories: Entrepreneurial Spirit, Support to SMEs and Social Entrepreneurship104. The Maltese ESF programme focused on boosting participation in education and training and therefore building skills and adaptability. It involved a wide range of initiatives aimed at stimulating a higher level of participation in working life and at providing wider access to education and training to help Maltese workers improve their knowledge and professional skills105.

102

Times of Malta (2012), Work on formal social enterprise policy begins APS Consult Ltd / DF Advocates (2012), Social Enterprise Sector 104 European Commission (2010), The European Social Fund and Entrepreneurship 105 European Commission (2012), Malta and the European Social Fund 103

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Few financial instruments were co-financed directly through the ESF in the 2007-2013 Programming Period. According to the EC, this is mainly due to a narrower scope of possible revolving interventions, limited in practice until now to micro-credit schemes or guarantee funds for micro-credits106. Thirteen OPs in five Member States co-financed financial instruments with ESF resources, but this only represented 0.7% of declared ESF eligible expenditures107. The PROGRESS Programme is a financial instrument developed under the Employment, Social Affairs and Inclusion Policy supporting the development and coordination of EU policy in the areas of employment, social Inclusion and social protection, working conditions, anti- discrimination and gender equality108.

Another facility that falls under the Employment, Social Affairs and Inclusion Policy is the EPMF, which was already referred to in Section 3.5.2. Several managing authorities in other Member States had shown interest in setting up similar financial instruments.

For the 2014-2020 MFF, the EC has presented a new European Social Entrepreneurship Funds regime that will enable EU funds to specialise in this field and to be marketed across the EU under a specific and distinctive label. Under the EU Programme for Social Change and Innovation (20142020), the EC is proposing a specific Microfinance and Social Entrepreneurship Axis that will support financing for social enterprises, apart from financial support to microfinance for microenterprises and assistance to build up the institutional capacity of microcredit providers, as explained in Box 3.5.4.3109. Under the new common provisions covering all five EU funds, including the ESF, financial instruments are being envisaged to support investments that are expected to be financially viable but which do not give rise to sufficient funding from market sources. In addition, the common framework also allows for the combination of financial instruments with other forms of support, including grants.

The following table provides an assessment of the financing needs and local scope for further financing for social enterprises.

106

European Commission (2012), Financial Instruments in Cohesion Policy European Commission (2012), Financial Instruments in Cohesion Policy, pgs. 17-18. Two examples of ESF-funded instruments include “Microcredits and Guarantees” in Calabria, Italy (through a public financial institution managing a holding fund) and the “Guarantee Fund for microcredits” in Germany (public bank acting as guarantee fund manager) 108 European Commission (2012), Employment, Social Affairs and Inclusion 109 European Commission (2011), An action plan to improve access to finance for SMEs, pg. 9 107

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Table 8: Mapping of financial instruments with local social enterprises

Economic sectors

Social enterprises

Current financing needs

The main current issues that are impacting local social enterprises are the protection of capital resources, lack of economies of scale, and the need for specialist human resources.

The new policy framework for social enterprises would determine the legal ‘personality’ of the enterprise, and this recognition would in return ensure it could operate on the market with the necessary capital.

However, the implementation of the new framework will not only bring about greater protection/ rights, but also increased obligations. These relate to meeting operational benchmarks for management, human resources, services-driven income, liquidation and reporting mechanisms. They will also be subject to a social audit to monitor the quality of their service provision.

Current financing options

A number of local social enterprises are off-shoots of charities, seeking to engage their clients in the world of work with a service offering from which to derive income. This income would then be ploughed back into the enterprise to expand its infrastructure or workforce. The limit is thus imposed by the enterprises’ internal means.

Current financing options relate to donations, sponsorships and other fund-raising initiatives.

Bank financing is very often limited due to the collateral requirement. In the case of EU funding, restrictions relate to the legal status of the social enterprise, the eligibility rules and the limited number of calls earmarked for such enterprises.

Scope for financial instruments

The new framework aims to create the necessary legal provisions to recognise these social enterprises separately from other business structures. This will facilitate the operations of these enterprises on the market, with the necessary capital. For instance, not-for-profit principles, a social objective and democratic control would qualify a social enterprise for EU funding. Such recognition could also facilitate access to bank financing. Potentially, considering the collateral restrictions, EU schemes combining loan guarantee instruments and grants would be best suited for such enterprises.

In addition, concepts of social venture capital and the development of social corporate venturing, allowing for shares to be acquired in a social enterprise, are also often mentioned within this context. However, these options are potential sources of finance at a later stage of the social enterprise lifecycle. In Malta, the options mentioned in the previous paragraph are likely to be more attractive to local social enterprises. Box 3.5.4.3 and 3.5.4.7 are examples of MFF financial instruments being proposed for this sector.

A proposal for crowd funding has also been put forward by the Creative Economy Working Group to finance community arts and heritage projects with potential inclusion of civil society causes and community sports projects.

 Lack of legal recognition, hindering funding possibilities  Need to invest in capital and human resources  Government policy to provide a new legal/ regulatory framework  Greater regulation means more (costly) obligations

 Significant number of potential “social enterprises”  Limit to growth imposed by internal sources  Few national/ EU earmarked schemes, and various competing enterprises  Lower access to bank financing

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 Increased potential for bank financing  Greater scope for schemes aimed at social enterprises  Other innovative concepts could relate to social venture capital, social corporate venturing and crowd funding

6.2.2 Agri-food processing firms Despite the agricultural sector’s minimal direct contribution to local economic growth, the role of agriculture in Malta goes far beyond that captured in figures, especially given the high population density of the small islands. Agriculture remains a major contributor in maintaining the quality of the landscape and an integral component of the cultural heritage110.

In Malta, the agro-food processing industry accounts for c. 3% of the value added generated by the total economy. Of the total workforce employed in this sector, over 80% are in full-time employment.

Around 80% of turnover is derived from domestic sales and only c. 20% from exports. According to the RDP, investment levels are very sporadic111. In many cases, the contained size of the local market can support only a limited number of agro-processors operating in a particular product line.

It is therefore a common occurrence that only few firms produce a given product and can therefore absorb the local farmers’ production.

With EU membership, higher import penetration, enhanced competition and more compliance costs, operators in the agri-food processing sector have had to adapt to survive – they had to invest in upgrading their processing equipment, improve quality standards, and gradually switch towards high quality, premium products. In this respect, in a highly competitive setting, the local small firms tend to find market niches through low-volume premium products.

The European Agricultural Fund for Rural Development (EAFRD) is the fund that provides assistance to this sector. It is financed under Pillar II of the Common Agricultural Policy (CAP). In Malta, it is managed by the Ministry for Resources and Rural Affairs (MRRA) and aims at ensuring sustainable development initiatives in rural areas by helping to create new sources of income and employment while protecting rural heritage. It also seeks to develop competitiveness for farming and forestry, to protect the environment and the countryside, to improve the quality of life and diversification of the rural economy and to support locally based approaches to rural development. These measures are incorporated in the RDP, which has an overall objective of promoting multifunctional agriculture within a wider framework of integrated rural development so as to achieve sustainable development of rural Malta. The main focus is to explore the potential of the agriculture sector through the provision of grant assistance.

For the 2014-2020 MFF, in order to better target EU support for SMEs, the focus will be increasingly on enhancing the competitiveness and growth performance of SMEs in line with the SBA. Again, EC proposes that Member States should make a decisive shift to financial instruments such as the provision of start-up capital, guarantees, loans, mezzanine and seed capital in supporting SMEs112.

The EC’s intention is, however, not to replace grant funding with financial instruments as grants will still be necessary, but to complement grant funding with other forms of intervention113.

The following table provides an assessment of the financing needs and local scope for further financing within this sector.

110

Ministry for Resources and Rural Affairs (2012), Rural Development Plan 2007-2013; Adi Associates Environmental Consultants Ltd. (2009), Ex-post evaluation report on Malta’s Rural Development Programme 2004-2006. Agriculture in Malta accounts for less than 2% of the gross value added generated by the Maltese economy and it employs the same proportion of the total gainfully employed. Agriculture is the major contributor to the primary sector (which also covers the fisheries sector) 111 Ministry for Resources and Rural Affairs (2012), The Rural Development Plan 2007-2013, pgs. 29-30 112 European Commission (2012), Elements for a Common Strategic Framework 2014 to 2020 113 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms

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Table 9: Mapping of financial instruments with local agri-food processing firms

Economic sectors

Agri-food processing firms

Current financing needs

Current financing options

Scope for financial instruments

Local agri-food processing firms have a limited ability to exploit economies of scale compared to larger firms in other countries. They also find it difficult to fully utilise technology because of their small production runs. As a result, Maltese agriculture cannot compete on the basis of the quantity of the produce that it produces, but needs to establish specialty niche markets for a number of products to ensure sustainability.

There are significant limitations in accessing funds compared to larger counterpart firms. This is reflected in the low capital investment, limited R&D expenditures and the use of internal sources of finance (personal savings and retained earnings).

The dependence on grant assistance is likely to remain given the various obstacles inherent in this sector and its importance to the local environment (beyond the contribution captured by GDP figures). In addition, public sector support can have an important role to play in fostering an outlook for innovation and in stimulating R&D cooperation, especially in relation to the exploitation of niche markets.

This shift in focus requires a sectoral adaption – this requires investment in new/ upgraded equipment, process improvement to raise quality standards, and marketing of high quality, premium products that promote the distinctive Maltese nature of the produce being sold.

The sector is again highly dependent on lines of credit, trade credit as well as grants through national and EU schemes. These include EARDF schemes such as Measure 124: Cooperation for development of new products, processes and technologies in the agriculture and food sector, and Measure 121: Modernisation of agricultural holdings.

EU funded schemes which would consider a hybrid approach between grants and loan guarantees are likely to be a further option to be considered in view of the current dependence on grant financing, the lower dependence on bank funding and the unlikely possibility of equity financing.

The private sector, due to limited resources, shows little interest in investing its funds in projects and research which in most cases is hindered by a severe limitation in the size and number of projects.

A recent addition to the local market is a financial institution which will lend to agricultural and rural businesses seeking financing for machinery and equipment. Though it will initially be targeting UK businesses, the concept might be extendable locally.

 External threats represented by import substitution and regulation  Need to invest in capital  Government policy to sustain the industry  Industry focus shifting towards niche products which do not require mass production

 Lower access to bank financing  Various national/ EU earmarked schemes, generally based on grants  Significant grant dependence  Adequate take-up for national grants

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 Reliance on grant assistance to remain – limited scope for innovative financial instruments  R&D financing options would require a collaborative effort between government and the private sector  Specialised financial institutions, such as a specialised lenders

6.2.3 Fisheries and aquaculture The proportion of the Maltese working population dependant, to varying extents, on the fisheries sector for its livelihood, is limited to around 1.0%. The fisheries industry provides direct employment to around 1,500 people in the primary and secondary sectors (including aquaculture). Around 60% of registered fishers are over 40 years of age whilst only c. 10% are aged under 25114.

The Maltese aquaculture industry has two sectors: tuna penning, which relies on captured wild fish, and farming of closed cycle species such as seabream and seabass, which are cultured from the egg.

Production from tuna penning reached a peak of 7,000 tonnes in 2007, but is expected to fall due to quota restrictions and reductions in the fishing fleet. At the industry peak, Malta was the largest producer in the Mediterranean, aided by its favourable position on tuna migratory routes and expertise in offshore aquaculture. In contrast, Malta is only a minor producer of closed cycle species, with production reaching c. 2,000 tonnes in 2009, compared with a regional production of around 250,000 tonnes. This sector is dominated by major industries in Greece, Turkey and Spain and is highly cyclical in nature and prone to overproduction115.

The fish processing industry in Malta is very limited. This relates mainly to aquaculture harvesting and packing with little or no value added. There is also some limited activity relating to captured fish (both local and imported, fresh and frozen). In this case some activity in terms of slicing, filleting, portioning, rewrapping and smoking takes place. The main reason why this activity has remained rather limited is that the local catch usually consists of high-value fish which is consumed in its fresh state or exported.

EU financial support for aquaculture in Malta comes in two forms: for commercial projects, European Fisheries Fund (EFF) grants (mainly for capital expenditure) are available for projects addressing key strategic objectives such as the diversification of cultivated species, reducing environmental impacts, and development of markets. For R&D, funding is available through RTD Framework Programmes, an example of which is the SELFDOTT project on bluefin tuna which involves Maltese partners. EU aid is intended to stimulate the development of an economically profitable fisheries sector that is respectful of the environment and contributes to the well-being of the populations dependent on the sector, thus encouraging sustainable fisheries and aquaculture.

For the 2014-2020 MFF, the European Maritime and Fisheries Fund (EMFF) is intended to be the main tool to drive the implementation of the reformed Common Fisheries Policy to foster Europeâ&#x20AC;&#x2122;s fisheryâ&#x20AC;&#x2122;s transition to sustainability. This fund reflects the EUâ&#x20AC;&#x2122;s social, economic and environmental ambitions for the fisheries sector, and needs to sustain growth, food supply and employment. To reflect the common strategic framework to be adopted for the 2014-2020 programming period, the EC has again recommended a shift to financial instruments so that EU support for SMEs from the EMFF is more targeted, focusing on enhancing the competitiveness and growth performance of SMEs in line with the SBA and its review116.

The following table provides an assessment of the financing needs and local scope for further financing within this sector.

114

Ministry for Resources and Rural Affairs (2011), Fisheries Operational Programme for Malta 2007-2013 Stirling Aquaculture (2012), An Aquaculture Strategy for Malta 116 European Commission (2012), Elements for a Common Strategic Framework 2014 to 2020 115

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Table 10: Mapping of financial instruments with local enterprises in the fisheries and aquaculture

Economic sectors

Fisheries and aquaculture

Current financing needs

Current financing options

Scope for financial instruments

The fisheries sector is highly fragmented, with operators comprising both full-time and part-time fishers. Likewise, the Maltese fishing fleet register includes more part-time registered vessels than full-time, with the average size of the Maltese fishing vessels being under 10m in length. The current financing needs relate to the upgrading of the vessel fleet and gear to conform with health & safety requirements and to allow for greater diversification in the catch.

EU membership has increased the number of obligations which Malta has to meet, and which, though ultimately beneficial, are costly to implement. These financing requirements are needed to enable the sector to catch up with its foreign counterparts, but higher quality investment is needed to spur growth and improve competitiveness. For example, a number of operators have started investing in on-board fridges / freezers to improve the quality and freshness of their product. The sector also needs to find other income sources and diversify (e.g. tourist fishing trips).

The need for aquaculture to be environmentally sustainable has an impact on site selection, carrying capacity, good practice and sustainable development. This sector is constrained by lack of sites (permit issues, not eligible for ME premises), lack of vertical integration (limited value chain) and poor economies of scale. The current financing needs relate to expansion plans (product differentiation), obtaining specialist HR skills, development of new species, sites for processing and packing plants, facilities for R&D and related R&D expenditure.

The fisheries sector is also highly dependent on grant assistance through national and EU funded schemes. Examples include Measure 1.3: Investments on board fishing vessels and selectivity and Measure 1.4: Socio-economic compensation for the management of the Community fishing fleet. The co-financing rates of some of these schemes were often limited through state aid restrictions (e.g. 15%).

In order to ensure the sustainability of the fisheries sector, initiatives have been put in place to attract young fishermen. Further grant funding is required in this regard to ensure an adequate take-up of such schemes.

 External threats represented by depleted natural resources, greater regulation  Need to invest in upgrading fleet and gear  Reactive rather than proactive investment  Ageing population of fishermen  Planning permit issues in aquaculture  Growth in aquaculture  Government policy to sustain the industry, especially aquaculture  Potential for R&D opportunities in aquaculture

Due to the lack of collateral, bank financing is often not a viable option in the fisheries sector. As evidenced by a recent scheme aimed at assisting operators to acquire new vessels through partgrant, part-loan, many operators found it difficult to acquire the necessary bank financing and as a result take-up for this scheme was low.

The aquaculture sector requires larger capital outlays and as a result requires various funding options. National and EU funded schemes have provided aid to this sector, as evidenced by schemes such as Measure 2.1: Productive investments in aquaculture. Collateral, however, still remains a stumbling block for these operators and thus inhibits bank financing.

 Lack of own capital  Limited access to bank financing  Various national/ EU earmarked schemes, generally based on grants  Significant grant dependence and reluctance to consider loans  Certain schemes undersubscribed

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In the aquaculture sector, where growth opportunities are more pronounced, the JEREMIE guarantee scheme could be extended to include the “aquaculture” and “processing” sectors. In addition, hybrid instruments combining loan guarantees with grant assistance could be considered. This could be especially relevant for processing firms, for those firms attempting to tap inland aquaculture (e.g. in industrial premises) and those investing in R&D to diversify production/ hatch new species.

The private sector, due to limited resources, shows little interest in investing its funds in projects and research which in most cases is hindered by a severe limitation in the size and number of projects. As a result, the public sector will remain an important player in this sector.

According to the Aquaculture Strategy for Malta, discussions were underway on the proposed establishment of a large scale spawning and hatchery facility to be run as a Public Private Partnership which would also include research facilities. There is therefore scope for such initiatives where government acts as catalyst for further private sector involvement.

 Reliance on grant assistance to remain – limited scope for innovative financial instruments, especially for micro enterprises/ self-employed fishermen  Extension of JEREMIE guarantee scheme to include “aquaculture” and “processing” sectors  R&D initiatives in aquaculture would require a collaborative financing effort between government and the private sector, such as a PPP

6.3

Best practice examples Following the market scope assessment, this sub-section discusses best practice examples in the use of a wide array of financial instruments and various funding sources, as well as other related considerations which could be taken into account in the local scenario as recommendations for the BOX 6.3.1 Grant schemes The need to address the financing gap structures in Malta through grant assistance will remain, especially for those sectors / start-ups that have a high dependence/ necessity for such aid.

The grant process should therefore be made as effective and efficient as possible. next programming period.

National/ EU-funded grant schemes will continue to remain a necessity for the local market. This is especially the case for firms lacking the necessary initial collateral (especially start-ups) looking to finance their initial stock and working capital. It is also needed for those local companies having a low capital base, as well as those firms operating in sectors whose sustainability is often a challenge (e.g. agriculture, fisheries). Moreover, due to the small size/ insularity of the Maltese islands, grants are needed to finance internationalisation efforts that allow local firms to bridge this market gap (e.g. export guarantee scheme).

There are various lessons learnt from the previous programming period. These include: 1.1 1.2 1.3 1.4

Greater access to EU funding â&#x20AC;&#x201C; greater access and availability of funds, especially for sectors such as tourism, digital gaming and the creative arts, and for projects related to energy efficiency, exporting, and commercialisation of prototypes.

Application process - Open call system rather than time windows to speed up approval times and provide greater certainty to the market. The approval process itself needs to be streamlined and quickened.

Selection process - Careful selection process/ control mechanisms so as not to finance distressed companies.

Disbursements - Faster refunding process to decrease cash flow pressure on SMEs. Another option is the pre financing of projects, particularly for start-ups. This type of bridge loan is already provided by some local banks. Pre financing could also be linked

BOX 6.3.2 Financial instruments The JEREMIE loan guarantee product introduced in Malta has proven to be a success in terms of take-up, effectiveness and efficiency in the use of resources. There is therefore scope for more financial instruments, including loans and loan guarantees, equity guarantees, and engineering instruments combined with grants. with a bank guarantee to safeguard EU/ national funds.

The high dependence on bank financing and the lack of risk capital financial instruments in Malta does not rule out any market scope for further financial instruments. The JEREMIE Malta product has managed to successfully provide the local market with a product that combines bank financing with a guarantee element, and a similar product (with potentially extended scope that extends the eligible sectors) would be envisaged for the upcoming programming period. In line with a demanddriven approach that takes into account the heterogeneity of the local SME population, there is also potential scope to provide:

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6.3.2.1 Extending scope of current loan guarantee financial instrument – the success and take-up of the current JEREMIE loan guarantee instrument implemented in Malta suggests the need for further similar instruments – potentially increasing the guarantee and consequently the available funds, as well as extending scope of such an instrument by having additional eligible sectors (e.g. agriculture and agri-processing firms, fisheries and aquaculture) 6.3.2.2 Introducing loan-based financial instruments - Financial instruments based on a loan element could be introduced. For example, in the Languedoc- Roussillon region (France), a seed loan product was introduced. Aimed at start-ups (less than 3 years since inception), or entrepreneurs with the duty to set up their SME in the next 6 months, this product was planned to have a direct leverage of 2x. The product entails an interest-free loan of up to €100,000, without any personal guarantee required, and can finance both the acquisition of assets and working capital. The risk sharing was split equally between the fund and the financial intermediaries administering it. Another example is the JEREMIE Campania, JEREMIE Sicily and JEREMIE Calabria, which provides loans to SMEs, micro-enterprises and individuals, including those focusing on social inclusion and improvement.

6.3.2.3 Introducing equity-based financial instruments - Financial instruments based on an equity element could also be introduced through funded risk-sharing products (equity, equity guarantee). For example, in the Languedoc-Roussillon region (France), an equity product aimed at SMEs with high growth potential was introduced. This product was based on a leverage ratio of 2x, a maturity of 10 years, and co-investment amounts set at a maximum of €2.5 million over a period of 12 months117. To date, the leverage is equal to 5x, with the fund generating significant interest from the private market (included VC firms based outside the region). In Hungary, an equity-based financial instrument was implemented. A fund manager was established by the Hungarian Development Bank under the JEREMIE initiative. This Venture Finance Hungary acts as the Holding Fund manager, selecting several private financial intermediaries to execute the programmes, provide microcredit and credit guarantees, or manage venture capital funds118.

6.3.2.4 Blending facilities – facilities that combine grants with financial instruments (e.g. equity/ loan / loan guarantee). This would be subject to State Aid considerations (both financial instruments and grants are subject to rules on State Aid119) and the related impact of any reductions in co-financing rates following Malta’s move from an Objective 1 country. For example, a facility could include grant funding, a financial instrument funding, and the remaining being financed directly by the SME. These hybrid instruments would capture the synergies between grant assistance and the revolving nature of financial instruments.

The administrative feasibility of this option would need to be analysed further given that State Aid may limit blending of grants with financial instruments, and might only allow for grants being blending with loans priced on normal market-lending parameters.

An example of such a combination is the Bulgarian Energy Efficiency for Competitive Industry Financing Facility (BEECIFF). This facility combines the European Banks for Reconstruction and Development (EBRD)’s credit lines with grant financing from EU 117

In this fund, the co-investment vehicle and other co-investors act according to the “pari passu” principle, and fund distribution is according to the cascade principle, i.e. the fund is entitled to the paid-in capital in additional to a hurdle rate (at least 5%); thereafter the carried interest is split 80/20.

118 European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds, pg.

12 119 European Commission (2011), Guidance Note on Financial Engineering Instruments under Article 44 of Council Regulation (EC) No 1083/2006

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Structural Funds. Specifically, the EBRD provides loans to 6 participating banks, which onlend to private companies investing in industrial energy efficiency initiatives and/ or renewable energy sources, up to €2.5 million per project. Then, upon the successful completion of the project, the applicant company receives a grant of up to 15%. Active since mid 2004, this facility has financed more than 200 projects with a total amount of loans of €138 million and grants of €23 million120. Apart from the financial assistance, the institutions also provide free consulting services on project eligibility and creditworthiness, energy audit and cash flow analysis, preparation of a business plan, and monitoring.

In Bulgaria, to combine the two funding sources, the following administrative cycle was implemented: 1. Submitted application is checked for technical eligibility and procurement compliance by the Project Team 2. Submitted application is checked for financial eligibility by the Participating Bank121 3. On the basis of the two above checks, the Managing Authority approves the grant and signs the Grant Agreement 4. The beneficiary signs the Loan Agreement with the Participating Bank.

5. In the monitoring phase, the technical implementation of the project is verified by the Project Team.

6. The Managing Authority verifies the project expenditures, and the grant is disbursed Another example of a hybrid approach is the Hungarian New Széchenyi Plan Combined Loan Guarantee, whereby SMEs involved in technology development and the development of logistics centres need to finance 25% of the total cost, while the rest of the project budget is given by 25% nonrefundable EU grant and 50% bank loan (against collateral). Moreover, banks provide the full sum of the EU grant in advance for the duration of the implementation of the project122.

6.3.2.5 Adopting a multiple instrument approach - a multiple instrument approach of JEREMIE funds have been used in some countries/ regions. The examples mentioned above in relation to the Languedoc-Roussillon region are part of a multiple instrument approach comprising seed loan (mentioned in Box 6.3.2.2), equity (Box 6.3.2.3) and a guarantee. All these three JEREMIE-backed financial instruments have been utilised concurrently to assist the region in supporting SME innovation123.

Through an equal split between ERDF resources and regional funds, a €30mln fund was set up to provide €143 million in assistance through seed loans, equity and guarantees. This allows the fund to target SMEs in their various firm lifecycles. The guarantee product is 120

Nikolaev (2012), Combination of EBRD loans with EU Structural Funds grants for energy efficiency of Bulgarian SMEs. The EU has also adopted this hybrid approach in its blending facilities. For instance, the Latin America Investment Facility (2009) is intended to extend EU policies to the Latin American region. This facility operates through grants combined with loans from finance institutions, providing investment co-financing in public infrastructure projects, loan guarantees, technical assistance, and risk capital operations (European Commission (2009), Latin America Investment Facility). The Western Balkans Investment Framework – Joint Grant Facility uses EU grants in combination with loans to provide technical assistance for energy efficiency investments in public buildings and the public service sector (e.g. subsidised interest rates and/or co-financing up to 20% of the initial energy efficiency investment costs for public authorities) (European Commission (2012), Project Fiche - IPA Multi-beneficiary programmes, pg. 13). Other blending facilities relate to the Neighbourhood Investment Facility, the EU–Africa Infrastructure Trust Fund, and the Investment Facility for Central Asia (European ThinkTanks Group (2011), EU Blending facilities: implications for future governance options).

121 Two other options that could be considered relate to: (1) submitting application to participating banks only (but banks would then need to be compensated for the additional administrative burden); or (2) submitting application first to the Project Team/ Managing Authority, and only those that are approved are then passed on to the Participating Bank (this is the procedure adopted for Malta’s MicroGuarantee scheme – a number of SMEs interviewed as part of this Study’s survey expressed their disappointment at their bank application being rejected despite having a letter of intent from ME) 122 http://www.nfu.hu/content/8511 123 Bonnet, A. (2013), Presentation to the Sectoral Sub-Committee on Growth and Competitiveness, 28 January 2013

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similar to the current Maltese MicroCredit JEREMIE scheme. Based on a leverage of 8.4x, the aim is to facilitate access to finance for SMEs by offering them better terms and conditions through a price reduction and reduced collateral requirements. The guarantee rate is set at 80%, covering the first loss up to the cap rate. The loans can be used for both capital investment and working capital.

Audits and evaluations carried out on existing innovative financial instruments are generally positive on their output124. Some key lessons/ recommendations emanating from these external audits, interim and ex post evaluations, and other studies on the existing financial instruments are outlined below: o

Overlap and duplication of instruments – the possible overlap in terms of areas and beneficiaries targeted by the different instruments developed by individual member states could create confusion among stakeholders and beneficiaries. In addition, due to the ad-hoc manner in which some instruments have been set up in the 20072013 framework, there are cases of duplication of instruments supported by the EU budget125.

o

Visibility – findings point to low stakeholder and final recipient awareness of the EU’s contribution to financial instruments. This could occur since financing through these instruments is generally delivered through intermediation.

o

New risk-sharing arrangements – incentives may be needed to stimulate private investment in important policy areas. As highlighted in the mid-term evaluation of the RSFF, there is a need to further develop a portfolio approach to risk sharing, i.e. losses are covered for a portfolio of loans provided to specific target groups to allow for a distribution of risk and thus increase the volume of finance which can be generated with a certain amount of budgetary funds set aside to cover provisions and capital allocations126. Specifically, in the area of debt finance, the EU contribution would be used to cover potential first losses up to a defined percentage as a way to attract sufficient private involvement in financing higher risk operations.

This is the approach adopted in the local MicroCredit JEREMIE scheme. In terms of equity finance, the EC proposes the EU contribution to be used to provide adequate incentives to private investors, notably in the form of preferential returns or priority returns not exceeding a fair rate of return and ensuring commercial viability of their investments. Beyond that fair rate of return, profits would have to be shared proportionally between public and private investors in order to avoid overcompensation127.

o

Quantitative and qualitative ratings – given that quantitative rating models are often too rigid for the evaluation of SME’s creditworthiness, the EC encourages the use of qualitative rating schemes as a complementary tool to the standard quantitative techniques128. In the case of banks, this approach would take into

124

European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms.

125 The EIP final evaluation report comments about overlaps between the financial instruments under the CIP and the Structural Funds, or between the CIP and the Progress Microfinance Facility (CSES (2011), Final evaluation of the Entrepreneurship and Innovation Programme).

126 Group of Independent Experts (2010), Mid-Term Evaluation of the Risk-Sharing Financial Facility 127 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms, pg. 11 128 European Commission (2011), An action plan to improve access to finance for SMEs, pg. 12; European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs, pg. 8

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consideration the importance of “relationship banking” when dealing with SMEs, which is already being done in the local market129.

BOX 6.3.3 Greater role for local banks in an intermediary role Bank lending is the main source of SME financing in Malta and will remain crucial. It needs to be made more accessible and facilitated, and the role of banks within the whole spectrum of SME financing needs to be strengthened. However, this does not rule out supporting alternatives for bank lending.

Survey results and discussions with key stakeholders indicate that loan finance is and will remain one of the most widely used instruments for local SME development. Regulatory and financial measures should therefore be aimed at reinforcing debt finance for local SME growth. Credit guarantee instruments are one such example (discussed in Box 6.3.2.1). Additionally, greater involvement by banks in the whole funding process is often advocated – given their specialist knowledge, banks have a significant role to play in various aspects, including information and education campaigns, proposal evaluation and selection, and monitoring. Any financing of the additional administrative burden where this is considered unfair would also need to be taken into consideration.

The majority of Member States have decided to manage EU funds directly or through state agencies.

As advocated through the Vienna Initiative130, however, commercial banks can play a crucial role in further increasing national absorption of EU funds. Banks and other private financial actors could contribute to leverage EU grant funds through their knowledge of local sectors and ongoing search for innovative entrepreneurial concepts and financial instruments. Banks can also provide prefinancing (in anticipation of the disbursement of the EU grants) and co-financing (especially where not all expenditure related to a project is eligible), thereby leveraging grants available. Banks are also in a position to assist in project selection/ evaluation and eventual monitoring. Best practice examples in channelling funds to SMEs include the intermediary role adopted by Italian commercial banks, the setting up of profit-oriented companies in Hungary131, and the involvement of banks in the design of new EU co-financed programmes in Latvia and Poland. At the same time, issues related to the potential discrepancy between bankable projects and public-interest projects need to be taken into consideration132.

Locally, feedback obtained on both the Micro Guarantee and MicroCredit schemes show the involvement of banks at an early stage of the process. In the former scheme, some SMEs expressed their disappointment at their bank application being rejected despite having a letter of intent from ME. On the other hand, in the latter scheme, the bank was the first recipient of applications and any decisions were based on the bank’s creditworthiness assessment.

The KBIC is another local example of the important support role of banks. The centre provided financial consultancy to start-ups in collaboration with a local bank, through three full-time advisors and a part-time advisor appointed by the bank. This was in addition to the assistance provided by ME

129

This is also linked to thereadiness lack of credit bureaus in Malta – the local banking market is dominated by two large players that BOX 6.3.4 Investor have their own credit rating systems, thus reducing any scope for the setting up of such bureaus.

130 European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds 131The needs of local entrepreneurs might be met through bank financing, and this could be the Ibid, pg. 11. The Hungarian Managing Authority has an intermediary body as well as a financial body acting as profitmain reason why alternatives are not sought. However, lack of awareness on available oriented companies.

132alternative sources, and their respective application and advantages, might be another reason.

Ibid

Entrepreneurs require further investor readiness training programmes.

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business mentors and officials to help start-ups to assess their needs, financing requirements and draw up a business plan133.

Such programmes would tackle: Optimal use of overdraft and loans, and related cash management Business planning Understanding project viability and formal appraisal techniques Stocking As outlined earlier, an investor readiness programme carried out locally by ME had a considerable take-up and there is interest in repeating this programme. In addition, local banks have also carried education seminars for investors. Apart from the owners, another important player in various local micro firms is the external accountant, who generally takes over various tasks in those firms not employing such a professional. This accountant needs to be made aware of the different funding options/ schemes available for SMEs, so that he/ she will be in a position to advise his own clients.

The financial institution implementing the JEREMIE scheme in Malta took this approach when providing a tailor-made presentation on JEREMIE for accountants.

The 2013 Budget Speech referred to the launch of short and intensive weekend courses for those interested in starting up their own business.

BOX 6.3.5 Private sector equity funding Malta lacks any equity funding alternatives. Previous attempts at creating a market for venture capital have been far from successful. Understanding the reasons for these outcomes is key in future attempts at re-launching such schemes. For instance, where investors are unwilling to dilute ownership, exit strategies might provide for a buy-back clause that allows the recipient to re-purchase their own shares after a stipulated period of time or attainment of certain financial targets.

Banksâ&#x20AC;&#x2122; risk appetite might not provide adequate financing for particular ventures as at the end of the day a bank is in the business of lending, not investing. This provides further scope for equity funding from non-bank sources. There are various options that can represent a complementary option to bank lending, rather than a competing alternative. The options below can be supported through the involvement of the EIF, local banks and other new financial players, as well as financial intermediaries that provide business advice to local SMEs:

133

Malta Business Weekly (2006), From a concept to market success

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6.3.5.1 Risk capital instruments such as mezzanine financing - Mezzanine finance should receive more attention in the overall Commission SME financing strategy. This could represent an important financing source because: • it is relevant for many SME owners for whom it is not attractive in the given situation to give up their ownership (whether in full or in part).

• it is relevant for companies unable to obtain debt financing due to their low equity ratio.

• companies with mezzanine capital are often able to obtain additional and more attractive bank loans, since the mezzanine finance is subordinated to all other types of loans.

Bulgaria has already implemented a mezzanine capital fund through the JEREMIE initiative. Bulgaria Mezzanine Capital is a joint venture between Growth Capital Partners AG and Rosslyn Capital Partners. This mezzanine fund provides mezzanine financing for growth expansion, external growth and capital restructurings in the Bulgarian lower midmarket, across a wide range of sectors.

6.3.5.2 Other funding schemes – funding through Venture Capital Funds, Start-up Funds, Business Angel Networks and Crowd funding, as well as sector-specific funding. Examples include: -

-

-

Baltic Innovation Fund – equity Co-investment alongside business angels, family offices and institutional investors into early to growth phase SMEs in Latvia, Lithuania and Estonia.

ERP-EIF Dachfonds, European Angels Fund and LfA-EIF Facility – German funds targeting high-tech early and growth-stage enterprises, and start-ups, through equity injections NEOTEC and European Angels Fund – Spanish funds for start-ups and high-tech early stage enterprises Portugal Venture Capital initiative (PVCi) – fund aimed at early and development stage enterprises Istanbul Venture Capital Initiative (iVCi) – fund targeted at early and growth-stage enterprises UK FTF L.P. – fund for early and growth-stage technology enterprises in the ICT, life sciences and advanced manufacturing sectors Venture Fund for Creative Industries - EIF’s fund addressed to the creative industries in Finland

These funding mechanisms might not necessarily be through Malta-based funds. Alternatively, any Malta-based fund might also provide investment for non-Maltese companies, so as to ensure the attainment of the critical mass required to balance the portfolio’s risk.

BOX 6.3.6 Other good practice examples The applicability/relevance of other sources of finance to the local market can be considered.

For instance, win-win loans, the role of credit mediation and co-operative banking, and the increasing importance of PPP structures could provide relief to local SMEs’ access to finance issues.

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6.3.6.1 Win-win loans - in Belgium it is possible for friends and family members of starter entrepreneurs to receive a tax benefit if they extend a loan to the business for a period of eight years. Initially it only applied to start-ups, but it has been extended to all SMEs, who can gain access to a maximum of €100,000. This loan has worked extremely well in Flanders, helping small businesses who need risk capital but cannot get a bank loan. Since 2006 this measure has assisted about 3,000 SMEs with a total of €98 million134. This scheme is in principle similar to the Maltese Micro Invest scheme, but the tax credits would be available not only for the businesses themselves, but also for the providers of finance.

The 2013 Budget Speech also announced the B.START initiative, giving a reduction in tax up to a maximum of €30,000 on capital investment in new enterprise approved by ME135.

6.3.6.2 Credit mediation: Given SMEs find it hard to obtain the necessary funding from traditional sources, Belgium and France appointed a “credit mediator” to intervene to ease difficulties and help enterprises obtain bank funding.136 This mediator acts as a “final referee” by reviewing loan requests by SMEs and indicating how the request should be treated. In the case of France, between November 2008 and February 2009, the rate of successful mediation within 15 days was 66 %, while the main cause of referral to the mediator was the need for short-term credit (69% of referrals)137.

6.3.6.3 Setting up a framework for PPPs: a number of Member States have utilised PPPs in which special purpose vehicles are funded through both Structural Funds and commercial banks.

Such frameworks for PPPs need to be developed to attract this potential private lending into a wider range of sectors eligible for EU funds138.

6.3.6.4 Development of a co-operative bank: In 2010, the European Parliament said the European economy needed a sound network of regional and local banks like cooperative banks, since they had a positive impact on GDP growth in most countries, and their internal deposit guarantee schemes could withstand the shocks of a crisis. The latter is mainly due to very tight bottom-up control mechanisms, leading to highly conservative investment decisionmaking. Co-operative banks are a popular concept in Italy which mitigate credit-rationing to certain market segments, particularly SMEs139. Some banks are consumer co-operatives, others are worker co-operatives. In Malta, this concept was discussed in local fora, addressing the possibility of developing such a bank locally, either through groups like cooperatives setting up a bank, or a local institution converting to this model, or a local institution establishing such a subsidiary140.

134

Lannoo (2013), Presentation to the Sectoral Sub-Committee on Growth and Competitiveness, 28 January 2013; Flanders Today (2013), EU seals fate of win-win loan; European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs, pg. 5, The EC is currently considering scrapping this measure on the basis of discrimination and violation of the principles of freedom of movement and residence given that both the starter and supplier of these loans must live in Flanders 135 Ministry for Finance (2013), Budget Speech 2013 136 OECD (2009), The impact of the global crisis on SME and entrepreneurship financing and policy responses centre 137 Ibid, pg. 35 138 Ibid, pg. 17 139 International Monetary Fund (2008), The reform of Italian co-operative banks: discussion of proposals. Apart from the positive impact of co-operative banks, this paper also discusses potential issues related to the governance framework of such institutions.

140 Times of Malta (2012), Co-operative bank could be ‘tonic’ for SMEs – minister; European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs, pg. 7

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6.3.6.5 Credit guarantees: In many countries, credit guarantees are emerging as a strong lever to address declining bank credit. In order to address the gap between expectations for bank credit and the willingness of banks to finance small enterprise, there is significant potential for public credit guarantees of subsidies. Indeed, all mature economies have established publicly funded guarantee schemes for SMEs. These schemes not only provide a direct financing guarantee to the borrower, but also help to share information, advice and monitoring, to foster the interaction between banks and SMEs141.

6.3.6.6 Alternative markets: The success of several junior stock markets, led by the AIM (London Stock Exchange), illustrates that having such an alternative source of liquidity for small size companies is a leading government practice in fostering those companiesâ&#x20AC;&#x2122; expansion142.

141 142

Ernst & Young (2012), Entrepreneurs speak out Ibid

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7.

Reference list Adi Associates Environmental Consultants Ltd. (2009), Ex-post evaluation report on Malta’s Rural Development Programme 2004-2006 APS Consult Ltd / DF Advocates (2012), Social Enterprise Sector Bank of Valletta (2012), JEREMIE presentation for Accountants Bank of Valletta (2013), Access to finance – points for discussion Bonnet (2013), Presentation to the Sectoral Sub-Committee on Growth and Competitiveness, 28 January 2013 Briguglio and Buttigieg (2004), Competition constraints in small jurisdictions Camilleri (2012), Microfinance - Access to Finance for SMEs within a European Context CSES (2011), Final evaluation of the Entrepreneurship and Innovation Programme CSES (2012), Evaluation of EU Member States’ Business Angel Markets and Policies Ernst & Young (2011), Entrepreneurs speak out Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20 European Bank Coordination (“Vienna”) Initiative (2011), The role of commercial banks in the absorption of EU funds European Banking Authority (2012), Assessment of SME proposals for CRD IV/CRR European Central Bank (2012), SAFE tables – 2011 (Excel file) European Central Bank (2012), Survey on the access to finance of small and medium-sized enterprises in the euro area – April to September 2012 European Commission (2003), EU Recommendation 2003/361 concerning the definition of micro, small and medium-sized enterprises, 2003/361/EC European Commission (2007), Roundtable between bankers and SMEs - SME Securitisation European Commission (2008), “Think Small First” – A “Small Business Act” for Europe, COM(2008) 394 final European Commission (2009), Eurobarometer: Access to finance – analytical report European Commission (2009), Latin America Investment Facility European Commission (2010), The European Social Fund and Entrepreneurship European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms, COM(2011) 662 final European Commission (2011), An action plan to improve access to finance for SMEs, COM(2011) 870 final European Commission (2011), Regulation of the European Parliament and of the Council on European Venture Capital Funds, 2011/0417(COD) European Commission (2011), Review of the “Small Business Act” for Europe, COM(2011) 78 final European Commission (2011), SBA Fact Sheet – Malta 2010/2011 European Commission (2011), Guidance Note on Financial Engineering Instruments under Article 44 of Council Regulation (EC) No 1083/2006, COCOF_10-0014-04-EN European Commission (2012), Elements for a Common Strategic Framework 2014-2020, SWD(2012) 61 final – part II European Commission (2012), Employment, Social Affairs and Inclusion European Commission (2012), Eurobarometer: Entrepreneurship in the EU and Beyond European Commission (2012), Eurobarometer: Entrepreneurship – Malta country report European Commission (2012), Financial Instruments in Cohesion Policy, SWD(2012) 36 final European Commission (2012), Malta and the European Social Fund European Commission (2012), SBA Fact Sheet – Malta 2012 European Commission (2012), Project Fiche - IPA Multi-beneficiary programmes European Commission (2012), Financial Engineering Instruments implemented by Member States with ERDF contributions, Ares (2012)78108 European Commission (2012), Implementation of the European Progress Microfinance Facility – 2011, COM(2012) 391 final European Council (2013), Conclusions – Multiannual Financial Framework, EUCO 37/13 European Court of Auditors (2012), Financial instruments for SMEs – audit report

Page | 81

European Economic and Social Committee (2012), Opinion – An action plan to improve access to finance for SMEs European Investment Bank (2010), Evaluation of activities under the Risk-Sharing Financial Facility European Investment Fund (2012), European Angels Fund European Investment Fund (2012), JEREMIE European Parliament (2013), Report on improving access to finance for SMEs, 2012/2134(INI) European Think-Tanks Group (2011), EU Blending facilities: implications for future governance options Flanders Today (2013), EU seals fate of win-win loan Group of Independent Experts (2010), Mid-Term Evaluation of the Risk-Sharing Financial Facility GRTU (2012), Access to finance survey International Monetary Fund (2008), The reform of Italian co-operative banks: discussion of proposals Lannoo (2013), Presentation to the Sectoral Sub-Committee on Growth and Competitiveness, 28 January 2013 Malta Business Weekly (2006), From a concept to market success MaltaToday (2010), Three-star hotels’ income squeezed by recession, competition MaltaToday (2011), Tourism in 2012 will require additional funding MaltaToday (2013), €15000 tax credit for development of digital game Ministry for Economic Services (2001), Budget Speech 2002 Ministry for Finance (2013), Budget Speech 2013 Ministry for Resources and Rural Affairs (2011), Fisheries Operational Programme for Malta 20072013 Ministry for Resources and Rural Affairs (2012), The Rural Development Programme 2007-2013 Nikolaev (2012), Combination of EBRD loans with EU Structural Funds grants for energy efficiency of Bulgarian SMEs OECD (2009), The impact of the global crisis on SME and entrepreneurship financing and policy responses centre Stirling Aquaculture (2012), An Aquaculture Strategy for Malta The Sunday Times (2007), The Alternative Companies List - bridging the gap Times of Malta (2002), Lm 1m technology venture fund launched Times of Malta (2004), European business angels to converge in Malta Times of Malta (2006), Malta venture capital set up with Lm 10m authorised capital Times of Malta (2008), Banks geared to serve SMEs better Times of Malta (2009), Equity financing for expanding companies Times of Malta (2010), Tourism on the road to recovery but sector still very fragile Times of Malta (2011), University appeals for private donations to new research fund Times of Malta (2012), Co-operative bank could be ‘tonic’ for SMEs Times of Malta (2012), Restaurants report higher sales but slower growth Times of Malta (2012), Retail up but Valletta suffers haemorrhage Times of Malta (2012), Work on formal social enterprise policy begins Times of Malta (2012), Malta Freeport Terminals funds University research

Page | 82

8.

Appendix A: Survey (English) The Survey is segmented into three sections: ► ► ►

Section 1 – General Characteristics of the firm Section 2 – Financing – A Company perspective Section 3 – Financing – A National perspective

1 General characteristics of the SME being interviewed [To be filled in directly by interviewer based on sample data provided by MBB, and/ or information gathered during initial phone call]: Name of firm: _________________________________________________ Contact person: _______________________________________________ Contact details: _______________________________________________ Number of employees: _________________________________________ Main business activity: _________________________________________ D1 - Kindly confirm the number of persons employed by the firm: From 1 employee to 9 employees [MICRO]......................................................................

1

-

From 10 employees to 49 employees [SMALL]................................................................

2

-

From 50 employees to 249 employees [MEDIUM]............................................................

3

-

250 employees or more.................................................................................................

4

D2 – Kindly confirm the main activity of your company: Manufacturing ..............................................................................................................

1

-

Services (Retail/Distribution)..........................................................................................

2

-

Tourism/ Hospitality Industry.........................................................................................

3

-

International Education Services.....................................................................................

4

-

Life Sciences and Healthcare..........................................................................................

5

-

Information and Communication Technology (ICT)...........................................................

6

-

High value-added manufacturing (incl. Pharmaceuticals & aviation engineering).................

7

-

Creative Industries (incl. the film industry)......................................................................

8

-

Other (Please specify) _____________________________________________________________

9

D3 - What was the annual turnover of your company in Malta in 2011?

Up to €500,000............................................................................................................

1

-

More than €500,000 up to €1 million.............................................................................

2

-

More than €1 million up to €2 million..............................................................................

3

-

More than €2 million up to €10 million............................................................................

4

-

More than €10 million up to €50 million..........................................................................

5

-

More than €50 million....................................................................................................

6

D4 - In which year was your firm registered? ___________________________________

Page | 83

D5 – How would you classify the current stage of your company? (Prompt) Still an idea / Developing prototype [Pre-seed]................................................................

1

-

Developing Business Plan / Setting up the company [Seed]...............................................

2

-

Just formed the company / Product has been created / Introducing product to the market /Market testing the product [Start-up] ...........................................................................

3

-

Company registered its first profits recently / Hiring additional employees [Emerginggrowth]........................................................................................................................

4

Focusing on maintaining loyal customers / Strengthening market position [Developmentgrowth (domestic)]........................................................................................................

5

Reducing costs / Making production process more efficient/ Introducing an additional new product [Development-growth (domestic)].....................................................................

6

Building new factory/ offices/ Planning to export in the near future/ Exporting product/ [Expansion-growth (export/internationalisation)].............................................................

7

Other (Please specify) _____________________________________________________________

8

Q1 - Who are the owners of your firm?

One owner only.............................................................................................................

1

-

Family or entrepreneurs [more than one owner]..............................................................

2

-

Other firms or business associates..................................................................................

3

-

Company is listed on the stock market (public shareholders).............................................

4

-

Other (Please specify) _____________________________________________________________ Don’t know/Not Available..............................................................................................

5 6

-

-

-

-

-

Q2 – Can you kindly provide a rough indication of the current source/s of your funding? (Prompt) YES

NO

(Can’t say)

A

Own financing (incl. retained earnings)

1

2

99

B

Financing from family/ friends

1

2

99

C

Bank overdraft, credit line or credit cards overdraft

1

2

99

D

Bank loans (excluding overdraft and credit lines)

1

2

99

E

Trade credit (purchase of goods/ services from another business without making immediate cash payment) Other (please specify) ______________________

1

2

99

1

2

99

F

2

Financing – A Company perspective

In this section we will overview respondents’ perception of the availability of financing assistance to their particular SME. Q3 - How would you rate your company’s ability to raise finance (from a scale of 1 to 5, with 1 being “very hard” and 5 being “very easy”) for each of the following company requirements?

(Prompt A to F) Very hard

Hard

Not so hard

Easy

Very easy

(Can’t say)

A

Normal Day to day operations – internal finance

1

2

3

4

5

99

B

Normal day to day operations -external finance

1

2

3

4

5

99

C

Specific projects or investments – internal finance Specific projects or investments – external finance

1

2

3

4

5

99

1

2

3

4

5

99

D

Page | 84

E

F

Internal finance in your start-up phase [FOR COMPANIES IN EMERGING GROWTH, DEVELOPMENT GROWTH OR EXPANSION GROWTH AS PER Q5] External finance in your start-up phase [FOR COMPANIES IN EMERGING GROWTH, DEVELOPMENT GROWTH OR EXPANSION GROWTH AS PER Q5]

1

2

3

4

5

99

1

2

3

4

5

99

Please provide your comments on Question 3: ____________________________________________________________________________________ ____________________________________________________________________________________ Q4 - Have you ever used/ applied for any of the following sources of finance and if not, why?

(Prompt A to I) Yes, used

Yes, applied

Yes, applied but rejected / refused to proceed further

Yes, applied but partially rejected

Did not use them – unaware of advanta ges

Did not use them – not available in Malta

Did not use them – tradition al bank finance suffices

Did not use them – internal finance suffices

Did not use them – internal and tradition al bank finance suffice

Did not use them – not relevant to my firm

Did not use them – other (PLEASE SPECIFY IN SPACE BELOW)

A

National Grants/ Public aid

1

2

3

4

5

6

7

8

9

10

11

B

EU funds

1

2

3

4

5

6

7

8

9

10

11

C

Bank overdraft, credit line or credit card overdraft

1

2

3

4

5

6

7

8

9

10

11

D

Bank loans

1

2

3

4

5

6

7

8

9

10

11

E

Trade credit

1

2

3

4

5

6

7

8

9

10

11

F

Other loan (e.g. related company/ shareholders, family, friends) Leasing/ hirepurchase/ factoring Equity from other sources (ex: business angels, venture capital funds Public issue of own shares or own bonds

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

G H

I

Please provide your comments on Question 4: ____________________________________________________________________________________ ____________________________________________________________________________________ Q5 – [TO BE ASKED TO RESPONDENTS WHOSE APPLICATION WAS REJECTED/ PARTIALLY MET IN Q9] What was the reason for your request being rejected/ only partially met/ your decision not to proceed further?

General economic outlook

Company’s sector of operation

Stage in company lifecycle

Lack of firm collateral

Company’s credit history

Refused Cost too high

Refused Unacceptabl e T&Cs

Other (PLEASE SPECIFY)

A

National Grants/ Public aid (incl. Tax rebates)

1

2

3

4

5

6

7

8

B

EU funds (grants)

1

2

3

4

5

6

7

8

C

1

2

3

4

5

6

7

8

D

Bank overdraft, credit line or credit card overdraft Bank loans

1

2

3

4

5

6

7

8

E

Trade credit

1

2

3

4

5

6

7

8

F

1

2

3

4

5

6

7

8

G

Other loan (e.g. related company/ shareholders, family, friends) Leasing/ hire-purchase/ factoring

1

2

3

4

5

6

7

8

H

Equity from other sources

1

2

3

4

5

6

7

8

I

Public issue of own shares or own bonds

1

2

3

4

5

6

7

8

Page | 85

Please provide your comments for Question 5: ____________________________________________________________________________________ ____________________________________________________________________________________ Q6 - Would you apply for any of the below types of financing if offered locally? Why? Why not?

A B C D E F G H

National Grants/ Public aid (incl. Tax rebates) EU funds (grants) Bank overdraft, credit line or credit card overdraft Bank loans (incl. EU programmes like JEREMIE) Trade credit Other loan (e.g. related company/ shareholders, family, friends) Leasing/ hire-purchase/ factoring Equity from other sources (e.g. Business angels, seed funding, venture capital, securitized mezzanine finance) Public issue of own shares or own bonds

I

Yes 1 1 1 1 1 1 1

No 2 2 2 2 2 2 2

Don’t Know 4 4 4 4 4 4 4

1

2

4

1

2

4

Please provide your comments for Question 6: ____________________________________________________________________________________ ____________________________________________________________________________________ [FOR RESPONDENTS WHO HAVE USED/ APPLIED FOR A LOAN IN Q9] Q7 - What is the size of the last loan, of any kind, that your firm has obtained in the last two years?

Smaller than €25,000 ...................................................................................................

1

-

€25,000 - €99,999 ......................................................................................................

2

-

€100,000 - €1 million ...................................................................................................

3

-

Over €1 million .............................................................................................................

4

Q8 - What did you use this last loan for?

Working capital ............................................................................................................

1

-

Land/ buildings or Equipment/vehicles ...........................................................................

2

-

R&D or intellectual property ..........................................................................................

3

-

Promotion ....................................................................................................................

4

-

Staff training ................................................................................................................

5

-

Buying another business ...............................................................................................

6

-

Other (PLEASE SPECIFY) __________________________________________________________

7

3 Financing – A National perspective In this section we will overview respondents’ perception of the overall availability of financing assistance to SMEs. Q9 - Do you think that access to external funding (non-bank loans) for Maltese SMEs is easy in Malta?

Very easy.....................................................................................................................

1

-

Relatively easy .............................................................................................................

2

-

Relatively difficult.........................................................................................................

3

-

Very difficult............................................................... .................................................

4

-

Can’t Say (Do not Suggest).............................................................................................

5

Please provide your comments for Question 9: ____________________________________________________________________________________ ____________________________________________________________________________________

Page | 86

Q10 - Do you see any other important funding instruments emerging in the future?

Private Public Partnership..............................................................................................

1

-

Microfinance institutions................................................................................................

2

-

Crowd funding...............................................................................................................

3

-

Co-operative banks........................................................................................................

4

-

Other (please specify) _____________________________________________________________

5

-

Can’t say (do not suggest)..............................................................................................

6

Q11 – What would you like assistance schemes for SMEs over the coming years to contain?

Can’t say (do not suggest)............................................................................................

Please provide your comments on Question 11: ____________________________________________________________________________________ ____________________________________________________________________________________ Thank you for participating in this survey!

Page | 87

99

9.

Appendix B: Survey (Maltese) Dan l-istħarrig huwa maqsum fi tlett sezzjonijiet: ► Sezzjoni 1 – Karatteristiċi ġenerali tal - kumpanija ► Sezzjoni 2 – Finanzjament – Perspettiva tal- kumpanija ► Sezzjoni 3 – Finanzjament – Perspettiva nazzjonali Nixtieq nitkellem ma’ xi ħadd li jista jipprovdi informazzjoni fuq il- bżonnijiet finanzjarji talkumpanija. Huwa possibli li nsaqsu l-mistoqsijiet issa jew jekk tippreferi nagħmlu appuntament fejn nkunu nistgħu nagħmlu s-survey fuq it- telephone? Dan l- istħarrig għandu jieħu madwar 15- il minuta.

1 Karatteristiċi Ġenerali tan- negozji żgħar jew medji li qegħdin jiġu intervistati (Din is-sezzjoni trid tinkiteb mill- intervistatur jew informazzjoni li kienet diġa ittieħdet mittelefonata inizzjali) L-isem tal- kumpanija: _____________________________________________ Persuna inkarigata: _______________________________________________ Dettalji għall- kuntatt: _____________________________________________ Numru ta’ impjegati: ______________________________________________ L-attivita’ prinċipali tan- negozju: ___________________________________ D1 – Jekk jogħġbok ikkonferma in- numru ta persuni impjegati mal- kumpanija: Minn impjegat 1 sa 9 impjegati [żgħira ħafna/micro]........................................................

1

-

Minn 10 impjegati sa 49 impjegati [żgħira]......................................................................

2

-

Minn 50 impjegati sa 249 impjegati [medji].....................................................................

3

-

250 impjegati jew iktar .................................................................................................

4

D2 – Jekk jogħġbok ikkonferma l-attivita prinċipali tal- kumpanija: Manifattura..................................................................................................................

1

-

Servizzi (Retail/ Distribuzzjoni) ............. ........................................................................

2

-

Industrija tat-turiżmu/ospitalita’.....................................................................................

3

-

Servizzi ta’ l-edukazzjoni internazzjonali……………………….....................................................

4

-

Xjenzi tal- ħajja u saħħa .................................................................................................

5

-

Teknologija tal- informatika u il- komunikazzjoni(ICT)........................................................

6

-

High Value added manufacturing (incl. Pharmaceuticals & aviation engineering)................

7

-

Creative industries (incl. the film industry)......................................................................

-

Oħrajn (Speċifika) ________________________________________________________________

8 9

D3 – X’kien il- qliegħ annwali tal- kumpanija f’Malta f’2011?

Sa €500,000................................................................................................................

1

-

Iktar minn €500,000 sa €1 miljun...................................................................................

2

-

Iktar minn €1 miljun sa €2 miljuni...................................................................................

3

-

Iktar minn €2 miluni sa €10 miljuni.................................................................................

4

Page | 88

-

Iktar minn €10 miljuni sa €50 miljun...............................................................................

5

-

Iktar minn €50 miljun....................................................................................................

6

D4 – F’liema sena ġiet irreġistrata l-intrapriża? ___________________________________ D5 - F’liema stadju ta’ żvilupp hija klassifikata il- kumpanija? (Prompt) Għada idea/ Żvilupp tal- prototip....................................................................................

1

-

Żvilupp tal- pjan tan- negozju/ Twaqqif tal- kumpanija......................................................

2

-

Il- Kumpanija ġiet iffurmata/ Il- Prodott ġie ikkreat/ Introduzzjoni tal –prodott fis- suq/ Ittestjar fis- suq tal- prodott...........................................................................................

3

Il- kumpanija irreġistrat l-ewwel qliegħ tagħha riċentement/ Ingaġġar ta’ iktar impjegati......................................................................................................................

4

-

Enfasi fuq klijenti leali/ Issaħħah il- pożizzjoni fis- suq.......................................................

5

-

Tnaqqis fl-ispejjes/ Teħid ta’ deċiżjonijiet fuq produzzjoni iktar effiċjenti/ Introduzzjoni ta’ iktar prodotti................................................................................................................

6

Bini ta’ fabbrika/ uffiċini ġodda/ Pjanijiet ta’ esportazzjoni fil- futur qarib/ Esportazzjoni tal- prodott...................................................................................................................

7

Oħrajn (Speċifika) _________________________________________________________________

8

Q1 – Min huma is- sidien tal- kumpanija?

Sid wieħed biss.............................................................................................................

1

-

Familja jew intraprendituri [iktar minn sid wieħed]...........................................................

2

-

Impriżi oħra jew assoċjati tan- negozju............................................................................

3

-

Il- Kumpanija hi irreġistrata fuq il- Borża (public shareholders)..........................................

4

-

Oħrajn (speċifika) _________________________________________________________________ Ma nafx/Mhux Disponibbli..............................................................................................

5 6

-

-

-

-

Q2 – Jekk jogħġbok ipprovdi indikazzjoni fuq is- sors preżenti tal- kapital tal- kumpanija (Prompt) A

Own financing (incl. retained earnings)

1

2

(Ma nistax ngħid) 99

B

Financing from family/ friends

1

2

99

C

Bank overdraft, credit line or credit cards overdraft

1

2

99

D

Bank loans (excluding overdraft and credit lines)

1

2

99

E

Trade credit (purchase of goods/ services from another business without making immediate cash payment)

1

2

99

F

Oħrajn (Speċifika) ______________________

1

2

99

4

Iva

Le

Finanzi – Mill- perspettiva tal- kumpanija

F’din is- sezzjoni ser ngħatu ħarsa ġenerali lejn x’jaħsbu il-kumpaniji li qed jipparteċipaw f’dan l’eżerċizzju fuq l’għajnuna finanzjarja mogħtija lin- negozju żgħir jew medju tagħhom.

Q3 – Kif tiklassifika il- ħila tal- kumpanija biex iżżid il- finanzjament tagħha (minn skala ta bejn 1 u 5, fejn 1 ifisser “diffiċli ħafna” u 5 tfisser “faċli ħafna”) għal kull wahda minn dawn? (Prompt A to F)

A

Normal Day to day operations – internal finance

Difficli ħafna

Diffiċli

1

2

Page | 89

Mhux daqshekk diffiċli 3

Faċli

Faċli ħafna

(Ma nafx)

4

5

99

B

Normal day to day operations -external finance

1

2

3

4

5

99

C

Specific projects or investments – internal finance

1

2

3

4

5

99

D

Specific projects or investments – external finance

1

2

3

4

5

99

E

Internal finance in your start-up phase [FOR COMPANIES IN EMERGING GROWTH, DEVELOPMENT GROWTH OR EXPANSION GROWTH AS PER Q5] External finance in your start-up phase [FOR COMPANIES IN EMERGING GROWTH, DEVELOPMENT GROWTH OR EXPANSION GROWTH AS PER Q5]

1

2

3

4

5

99

1

2

3

4

5

99

F

Jekk jogħġbok għati kummenti fuq mistoqsija 3: ____________________________________________________________________________________ ____________________________________________________________________________________ Q4 – Qatt uzajt jew applikajt ghal xi sorsi ta finanzi minn dawn ta hawn taht u jekk le, ghalfejn?(Prompt A to I) Iva, użajt

Iva, applikajt

Iva, applikajt imma mhux aċċettat

Iva, applikajt imma mhux kollha aċċettati

Ma użajtho mx- ma kontx naf fuq ilvantaġġi tagħhom

Ma użajtho mx- ma kinux disponni bli f’Malta

Ma użajtho mxfinanzi millbank kienu biżżejjed

Ma użajtho mxfinanzi millintern kienu biżżejjed

Ma użajtho mxfinanzi millbank u millintern kienu biżżejjed

Ma uzajtho mx- ma kinux relevanti għalimpriża

Ma użajtho mx (raġuni oħra, speċifika )

A

National Grants/ Public aid

1

2

3

4

5

6

7

8

9

10

11

B

EU funds

1

2

3

4

5

6

7

8

9

10

11

C

Bank overdraft, credit line or credit card overdraft

1

2

3

4

5

6

7

8

9

10

11

D

Bank loans

1

2

3

4

5

6

7

8

9

10

11

E

Trade credit

1

2

3

4

5

6

7

8

9

10

11

F

Other loan (e.g. related company/ shareholders, family, friends) Leasing/ hirepurchase/ factoring Equity from other sources (ex: business angels, venture capital funds) Public issue of own shares or own bonds

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

1

2

3

4

5

6

7

8

9

10

11

G H

I

Jekk jogħġbok għati kummenti fuq mistoqsija 4: ____________________________________________________________________________________ ____________________________________________________________________________________

Page | 90

Q5 – [TO BE ASKED TO RESPONDENTS WHOSE APPLICATION WAS REJECTED/ PARTIALLY MET IN Q9] X’kienet ir- raġuni għalfejn it- talba tiegħek ġiet irrifjutata/ parzjalment aċċettata/ id|deċiżjoni tiegħek ma tkomplitx iktar?

Prospetti ekonomiċi

Is- settur li l- kumpanija taħdem fih

l-istadju li fih tinsab ilkumpanija

Nuqqas ta’ firm collateral

Storja talkreditu talkumpanija

Irrifjutat- lispiża kienet wisq għolja

Irrifjutat – termini u kundizzjoniji et inaċċetabli

Xi ħaga oħra( Jekk jogħġbok speċifika)

A

National Grants/ Public aid (incl. Tax rebates)

1

2

3

4

5

6

7

8

B

EU funds (grants)

1

2

3

4

5

6

7

8

C

Bank overdraft, credit line or credit card overdraft

1

2

3

4

5

6

7

8

D

Bank loans

1

2

3

4

5

6

7

8

E

Trade credit

1

2

3

4

5

6

7

8

F

Other loan (e.g. related company/ shareholders, family, friends)

1

2

3

4

5

6

7

8

G

Leasing/ hire-purchase/ factoring

1

2

3

4

5

6

7

8

H

Equity from other sources

1

2

3

4

5

6

7

8

I

Public issue of own shares or own bonds

1

2

3

4

5

6

7

8

Jekk jogħġbok għati kummenti fuq mistoqsija 5: ____________________________________________________________________________________ ____________________________________________________________________________________ Q6 – Kieku t- tipi ta’ finanzjament li hawn fil- lista li jmiss ikunu f’Malta, tapplika għalihom? Għalfejn?

A B C D E F G H

National Grants/ Public aid (incl. Tax rebates) EU funds (grants) Bank overdraft, credit line or credit cards overdraft Bank loans (incl. EU programmes like JEREMIE) Trade credit Other loan (e.g. related company/ shareholders, family, friends) Leasing/ hire-purchase/ factoring Equity from other sources( Business angels, seed funding, venture capital, securitized mezzanine finance) Public issue of own shares or own bonds Oħrajn (Speċifika) _________________

L K

Iva 1 1 1 1 1 1 1

Le 2 2 2 2 2 2 2

Ma nafx 4 4 4 4 4 4 4

1

2

4

1 1

2 2

4 4

Jekk jogħġbok għati kummenti fuq mistoqsija 6: ____________________________________________________________________________________ ____________________________________________________________________________________ [FOR RESPONDENTS WHO HAVE USED/ APPLIED FOR A LOAN IN Q9] Q7 – X’kien l- ammont ta’ l-aħħar self li ittieħed mill- kumpanija f’dawn l- aħħar sentejn?

Inqas minn €25,000 .....................................................................................................

1

-

€25,000 - €99,999 ......................................................................................................

2

-

€100,000 - €1 miljun ....................................................................................................

3

-

Iktar minn €1 miljun ......................................................................................................

4

Q8 – Għal xiex intuża l-aħħar self li ttieħed?

Working capital ............................................................................................................

1

-

Land/ buildings or Equipment/vehicles ...........................................................................

2

-

R&D or intellectual property ..........................................................................................

3

-

Promotion ....................................................................................................................

4

-

Staff training ................................................................................................................

5

-

Buying another business ...............................................................................................

6

Page | 91

-

Oħrajn (Speċifika) _________________________________________________________________

7

5 Finanzjament – Perspettiva Nazzjonali F’din is- sezzjoni ser ngħatu ħarsa lejn il- perċezzjoni tar- rispondenti dwar id- disponibilita’ ta’ lassistenza finanzjarja għal negozji żgħar u medji.

Q9 – Taħseb li l-aċċess għal finanzjament differenti (self mhux minn banek) huwa sempliċi f’Malta? Ħafif ħafna.................................................................................................................. 1 -

Ħafif...........................................................................................................................

2

-

Diffiċli.........................................................................................................................

3

-

Diffiċli ħafna................................................................................................................

4

-

Ma nafx (Do not Suggest).............................................................................................

5

Jekk jogħġbok għati kummenti fuq mistoqsija 9: ____________________________________________________________________________________ ____________________________________________________________________________________ Q10 – Taħseb li ħa jkun hemm iktar strumenti finanzjarji fil- futur?

Private Public Partnership..............................................................................................

1

-

Microfinance institutions................................................................................................

2

-

Crowd funding...............................................................................................................

3

-

Co-operative banks........................................................................................................

4

-

Other (please specify) _____________________________________________________________

5

-

Can’t say (do not suggest)..............................................................................................

6

Q11 –X’tixtieq li jinkludu l-iskemi ta’ assistenza għas- snin li ġejjin?

Ma nafx (do not suggest)..............................................................................................

Jekk jogħġbok għati kummenti fuq mistoqsija 11: ____________________________________________________________________________________ ____________________________________________________________________________________ Grazzi talli ipparteċipajt f’dan l- istħarriġ!

Page | 92

99

10.

Appendix C: Data tables D1: Kindly confirm the number of persons employed by the firm Total respondents 49 38 15 102

1 - 9: Micro 10 to 49: Small 50 to 249: Medium

Percentage of respondents 48% 37% 15% 100%

D2: Kindly confirm the main activity of your company: Total respondents 16 24 31 14 17 102

Manufacturing Retail/ Distribution Tourism / Hospitality Life Sciences and ICT Other Services

Percentage of respondents 16% 24% 30% 14% 17% 100%

D3: What was the annual turnover of your company in Malta in 2011?

Total respondents 52 15 13 17 4 1 102

€ < 0.5M 0.5M - 1M 1M to 2M 2M to 10M 10M to 50M > 50M

Percentage of respondents 51% 15% 13% 17% 4% 1% 100%

D4: In which year was your firm registered?

Year Range - 1800 – 1960 - 1961 – 1970 - 1971 – 1980 - 1981 – 1990 - 1991 – 2000 - 2001 – 2010 - 2011 – 2020

Total respondents 4 12 12 21 20 29 4 102

Percentage of respondents 4% 12% 12% 21% 20% 28% 4% 100%

D5 – How would you classify the current stage of your company?

Stage Start-up Emerging-growth Domestic growth Expansion-growth

Total respondents 10 4 75 13 102

Percentage of respondents 10% 4% 74% 13% 100%

Page | 93

Q1 - Who are the owners of your firm?

Total respondents 31 57 14 102

One Owner Family/Entrepreneurs Other firms/Business Associates

Percentage of respondents 30% 56% 14% 100%

1 - Who are the owners of your firm? – Firm Size 1 - 9: Micro 15 (31%) 29 (59%) 5 (10%)

One Owner Family/Entrepreneurs Other firms/Business Associates

10 to 49: Small 14 (37%) 19 (50%) 5 (13%)

50 to 249: Medium 2 (13%) 9 (60%) 4 (17%)

Q1 - Who are the owners of your firm? – Economic sectors

One Owner Family/Entrepreneurs Other firms/Business Associates

Manufacturing 6 (38%) 8 (50%)

Retail/ Distribution 7 (29%) 14 (58%)

Tourism / Hospitality 9 (29%) 18 (58%)

Life Sciences and ICT 5 (36%) 9 (64%)

Other Services 4 (24%) 8 (47%)

2 (13%)

3 (13%)

4 (13%)

0 (0%)

5 (29%)

Q1 - Who are the owners of your firm? – Firm lifecycle

One Owner Family/Entrepreneurs Other firms/Business Associates

Start-Up 6 (60%) 3 (30%) 1 (10%)

Emerging Growth 2 (50%) 0 (0%) 2 (50%)

Development Growth 15 (20%) 50 (67%) 10 (13%)

Expansion Growth 8 (62%) 4 (31%) 1 (8%)

Q2 – Can you kindly provide a rough indication of the current source/s of your funding?

Yes Own Financing Family/Friends Overdraft, credit line, or credit cards Bank Loans (excl. OD and credit lines) Trade Credit

No 89% 9% 70% 47% 50%

9% 90% 29% 51% 49%

Can't Say 2% 1% 1% 2% 1%

Q3 – How would you rate your company’s ability to raise finance (from a scale of 1 to 5, with 1 being “very hard” and 5 being “very easy”) for each of the following company requirements?

Normal Day to day operations – internal finance Normal day to day operations -external finance Specific projects or investments – internal finance Specific projects or investments – external finance Internal finance in your start-up phase External finance in your start-up phase

1 6 3 12 10 7 5

2 14 19 22 15 23 16

Page | 94

3 41 26 29 2 6 18

4 22 20 20 24 25 14

5 15 7 5 2 8 3

Can't say 4 27 14 29 28 41

Total 102 102 102 102 97 97

Q4: Have you ever used/ applied for any of the following sources of finance and if not, why?

A: National Grants/Public aid- Firm Size 1 - 9: Micro 14 (29%) 0 (0%) 2 (4%) 0 (0%) 0 (0%) 0 (0%) 1 (2%) 0 (0%) 1 (2%) 30 (61%) 1 (2%)

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

10 to 49: Small 8 (21%) 0 (0%) 4 (11%) 0 (0%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 25 (66%) 0 (0%)

50 to 249: Medium 5 (33%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (7%) 9 (60%) 0 (0%)

A: National Grants/Public aid- Economic Sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 8 (50%) 0 (0%) 1 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 4 (17%) 0 (0%) 1 (4%) 0 (0%) 1 (4%) 0 (0%) 0 (0%) 0 (0%)

Tourism / Hospitality 3 (10%) 0 (0%) 3 (10%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%)

Life Sciences and ICT 6 (43%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 6 (35%) 0 (0%) 1 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 7 (44%) 0 (0%)

1 (4%) 17 (71%) 0 (0%)

1 (3%) 23 (74%) 0 (0%)

0 (0%) 7 (50%) 1 (7%)

0 (0%) 10 (59%) 0 (0%)

A: National Grants/Public aid- Firm Lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Start-Up 5 (50%) 0 (0%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (30%) 1 (10%)

Emerging Growth 2 (50%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 2 (50%) 0 (0%)

Developme nt Growth 16 (21%) 0 (0%) 4 (5%) 0 (0%) 1 (1%) 0 (0%) 1 (1%) 0 (0%) 2 (3%) 51 (68%) 0 (0%)

Expansion Growth 4 (31%) 0 (0%) 1 (8%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 8 (62%) 0 (0%)

B: EU funds- Firm Size Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm

Page | 95

1 - 9: Micro 8 (16%) 3 (6%) 3 (6%) 0 (0%) 2 (%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 32 (65%)

10 to 49: Small 11 (29%) 1 (3%) 4 (11%) 0 (0%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 21 (55%)

50 to 249: Medium 8 (53%) 0 (0%) 2 (13%) 0 (0%) 1 (7%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (27%)

B: EU funds- Economic Sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm

Manufacturi ng 5 (31%) 0 (0%)

Retail/ Distribution 4 (17%) 1 (4%)

Tourism / Hospitality 9 (29%) 0 (0%)

Life Sciences and ICT 7 (50%) 1 (7%)

Other Services 2 (12%) 2 (12%)

4 (25%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

1 (4%) 0 (0%) 1 (4%) 0 (0%) 0 (0%) 0 (0%)

4 (13%) 0 (0%) 3 (10%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 7 (44%)

0 (0%) 17 (71%)

0 (0%) 15 (48%)

0 (0%) 5 (36%)

0 (0%) 13 (76%)

B: EU funds- Firm Lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm

Start-Up 4 (40%) 1 (10%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (40%)

Emerging Growth 1 (25%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (75%)

Developme nt Growth 18 (24%) 3 (4%) 8 (11%) 0 (0%) 4 (5%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 41 (55%)

Expansion Growth 4 (31%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 9 (69%)

C: Bank overdraft, credit line or credit cards overdraft- Firm Size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 30 (61%) 5 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 14 (29%) 0 (0%)

10 to 49: Small 30 (79%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 7 (18%) 0 (0%)

50 to 249: Medium 15 (100%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

C: Bank overdraft, credit line or credit cards overdraft- Economic Sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 11 (69%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 22 (92%) 2 (8%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Tourism / Hospitality 19 (61%) 2 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Life Sciences and ICT 9 (64%) 2 (14%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 14 (82%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 5 (31%) 0 (0%)

0 (0%) 0 (0%) 0 (0%)

0 (0%) 10 (32%) 0 (0%)

0 (0%) 3 (21%) 0 (0%)

0 (0%) 3 (18%) 0 (0%)

Page | 96

C: Bank overdraft, credit line or credit cards overdraft- Firm Lifecycle Emerging Growth 5 (50%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

3 (75%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Development Growth 59 (79%) 4 (5%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 5 (50%) 0 (0%)

0 (0%) 1 (25%) 0 (0%)

0 (0%) 12 (16%) 0 (0%)

Start-Up Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Expansion Growth 8 (62%) 2 (15%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (23%) 0 (0%)

D: Bank Loans- Firm size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 25 (51%) 1 (2%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 23 (47%) 0 (0%)

10 to 49: Small 25 (66%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 12 (32%) 0 (0%)

50 to 249: Medium 15 (100%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

D: Bank Loans- Economic sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 12 (75%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 17 (71%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Tourism / Hospitality 18 (58%) 2 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Life Sciences and ICT 7 (50%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 11 (65%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 4 (25%) 0 (0%)

0 (0%) 7 (29%) 0 (0%)

0 (0%) 11 (35%) 0 (0%)

0 (0%) 7 (50%) 0 (0%)

0 (0%) 6 (35%) 0 (0%)

D: Bank Loans- Firm lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Page | 97

Start-Up 3 (30%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 7 (70%) 0 (0%)

Emerging Growth 3 (75%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (25%) 0 (0%)

Developmen t Growth 49 (65%) 2 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 24 (32%) 0 (0%)

Expansion Growth 10 (77%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (23%) 0 (0%)

E: Trade Credit- Firm Size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 26 (53%) 2 (4%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 21 (43%) 0 (0%)

10 to 49: Small 29 (76%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 9 (24%) 0 (0%)

50 to 249: Medium 11 (73%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (27%) 0 (0%)

E: Trade Credit- Economic sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 11 (69%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 18 (75%) 1 (4%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Tourism / Hospitality 19 (61%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Life Sciences and ICT 8 (57%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 10 (59%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

0 (0%) 5 (31%) 0 (0%)

0 (0%) 5 (21%) 0 (0%)

0 (0%) 11 (35%) 0 (0%)

0 (0%) 6 (43%) 0 (0%)

0 (0%) 7 (41%) 0 (0%)

E: Trade Credit- Firm Lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Start-Up 5 (50%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 5 (50%) 0 (0%)

Emerging Growth 1 (25%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (75%) 0 (0%)

Developmen t Growth 50 (67%) 2 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 23 (31%) 0 (0%)

Expansion Growth 10 (77%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (23%) 0 (0%)

F: Other loan (e.g. related company/ shareholders, family, friends) - Firm size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Page | 98

1 - 9: Micro 15 (31%) 0 (0%) 0 (0%) 0 (0%) 2 (4%) 0 (0%) 2 (4%) 0 (0%) 1 (2%) 29 (59%) 0 (0%)

10 to 49: Small 10 (26%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 27 (71%) 0 (0%)

50 to 249: Medium 8 (53%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 6 (40%) 1 (7%)

F: Other loan (e.g. related company/ shareholders, family, friends) - Economic sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 3 (19%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 7 (29%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (4%) 1 (4%) 0 (0%)

Tourism / Hospitality 10 (32%) 0 (0%) 0 (0%) 0 (0%) 2 (6%) 0 (0%) 1 (3%) 0 (0%)

Life Sciences and ICT 6 (43%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 7 (41%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

1 (6%) 12 (75%) 0 (0%)

0 (0%) 15 (63%) 0 (0%)

0 (0%) 18 (58%) 0 (0%)

0 (0%) 8 (57%) 0 (0%)

0 (0%) 9 (53%) 1 (6%)

F: Other loan (e.g. related company/ shareholders, family, friends) - Firm lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Start-Up 4 (40%) 0 (0%) 0 (0%) 0 (0%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 5 (50%) 0 (0%)

Emerging Growth 2 (50%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (25%) 1 (25%)

Development Growth 23 (31%) 0 (0%) 0 (0%) 0 (0%) 1 (1%) 1 (1%) 2 (3%) 0 (0%) 1 (1%) 47 (63%) 0 (0%)

Expansion Growth 4 (31%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 9 (69%) 0 (0%)

G: Leasing/ hire-purchase/ factoring- Firm size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 9 (18%) 0 (0%) 0 (0%) 0 (0%) 1 (2%) 0 (0%) 2 (4%) 0 (0%) 1 (2%) 35 (71%) 1 (2%)

10 to 49: Small 14 (37%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 0 (0%) 1 (3%) 22 (58%) 0 (0%)

50 to 249: Medium 5 (33%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 10 (67%) 0 (0%)

G: Leasing/ hire-purchase/ factoring- Economic Sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 5 (31%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 7 (29%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (4%) 1 (4%) 0 (0%)

Tourism / Hospitality 7 (23%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 1 (3%) 0 (0%)

Life Sciences and ICT 4 (29%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 5 (29%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

1 (6%) 10 (63%) 0 (0%)

0 (0%) 15 (63%) 0 (0%)

1 (3%) 21 (68%) 0 (0%)

0 (0%) 9 (64%) 1 (7%)

0 (0%) 12 (71%) 0 (0%)

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G: Leasing/ hire-purchase/ factoring- Firm lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Start-Up 2 (20%) 0 (0%) 0 (0%) 0 (0%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 7 (70%) 0 (0%)

Emerging Growth 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (100%) 0 (0%)

Developm ent Growth 22 (29%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (1%) 2 (3%) 0 (0%) 2 (3%) 47 (63%) 1 (1%)

Expansion Growth 4 (31%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 9 (69%) 0 (0%)

H: Equity from other Sources- Firm Size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 4 (8%) 0 (0%) 0 (0%) 0 (0%) 1 (2%) 0 (0%) 3 (6%) 0 (0%) 1 (2%) 39 (80%) 1 (2%)

10 to 49: Small 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 3 (8%) 0 (0%) 0 (0%) 0 (0%) 35 (92%) 0 (0%)

50 to 249: Medium 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 15 (100%) 0 (0%)

H: Equity from other Sources- Economic sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 1 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (4%) 1 (4%) 0 (0%)

Tourism / Hospitality 1 (3%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 2 (6%) 0 (0%)

Life Sciences and ICT 1 (7%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 2 (14%) 0 (0%) 0 (0%)

Other Services 1 (6%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

1 (6%) 14 (88%) 0 (0%)

0 (0%) 22 (92%) 0 (0%)

0 (0%) 27 (87%) 0 (0%)

0 (0%) 10 (71%) 1 (7%)

0 (0%) 16 (94%) 0 (0%)

H: Equity from other Sources- Firm lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

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Start-Up 1 (10%) 0 (0%) 0 (0%) 0 (0%) 1 (10%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 7 (70%) 0 (0%)

Emerging Growth 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (100%) 0 (0%)

Development Growth 2 (3%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 2 (3%) 3 (4%) 0 (0%) 1 (1%) 66 (88%) 1 (1%)

Expansion Growth 1 (8%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 12 (92%) 0 (0%)

I: Public issue of own shares or own bonds- Firm size

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

1 - 9: Micro 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (2%) 0 (0%) 3 (6%) 0 (0%) 1 (2%) 44 (90%) 0 (0%)

10 to 49: Small 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 0 (0%) 0 (0%) 37 (97%) 0 (0%)

50 to 249: Medium 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (7%) 14 (93%) 0 (0%)

I: Public issue of own shares or own bonds- Economic sector

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Manufacturi ng 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Retail/ Distribution 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (4%) 1 (4%) 0 (0%)

Tourism / Hospitality 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (3%) 0 (0%) 2 (6%) 0 (0%)

Life Sciences and ICT 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

Other Services 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%)

1 (6%) 15 (94%) 0 (0%)

1 (4%) 21 (88%) 0 (0%)

0 (0%) 28 (90%) 0 (0%)

0 (0%) 14 (100%) 0 (0%)

0 (0%) 17 (100%) 0 (0%)

I: Public issue of own shares or own bonds- Firm lifecycle

Yes, Used Yes, Applied Yes, applied but rejected/ refused to proceed further Yes, applied but partially rejected Did not use them – unaware of advantages Did not use them – not available in Malta Did not use them – traditional bank finance suffices Did not use them – internal finance suffices Did not use them – internal and traditional bank finance suffice Did not use them – not relevant to my firm Did not use them – other

Start-Up 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (10%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 9 (90%) 0 (0%)

Emerging Growth 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 4 (100%) 0 (0%)

Developme nt Growth 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 1 (1%) 3 (4%) 0 (0%) 2 (3%) 69 (92%) 0 (0%)

Expansion Growth 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 0 (0%) 13 (100%) 0 (0%)

Q5: What was the reason for your request being rejected/ only partially met/ your decision not to proceed further?

General Economic Outlook Company's Sector of Operations Stage in company lifecycle Lack of firm Collateral Did not meet application requirements Refused - Cost too high Refused - Unacceptable T&Cs Others

A: National Grants/Public aid 0 0 1 0 3 0 0 2

B: EU Funds EU funds 0 0 1 0 4 0 2 2

Q6: Would you apply for any of the below types of financing if offered locally? Why? Why not?

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Yes No Don't Know

A: National Grants/Pu blic aid 83% 12% 5%

B: EU Funds EU funds 81% 13% 6%

C: Bank overdraft, credit line or credit cards overdraft 60% 35% 5%

D: Bank Loans 60% 31% 9%

E: Trade Credit 60% 37% 3%

F: Other loan (e.g. related company/ shareholder s, family, friends) 30% 60% 10%

G: Leasing/ hirepurchase/ factoring 47% 49% 4%

H: Equity from other Sources 24% 65% 12%

Q6: Would you apply for any of the below types of financing if offered locally? Why? Why not?- Firm lifecycle

Seed Start-up Emerginggrowth Domestic growth Expansiongrowth

F: Other loan 0% (0) 33% (3)

G: Leasing/ hirepurchase / factoring 0% (0) 56% (5)

H: Equity from other Sources 0% (0) 56% (5)

I: Public issue of own shares or own bonds 0% (0) 44% (4)

A: National Grants/Pu blic aid 0% (0) 78% (7)

B: EU Funds EU funds 0% (0) 78% (7)

C: Bank overdraft, credit line or credit cards overdraft 0% (0) 44% (4)

75% (3)

75% (3)

75% (3)

50% (2)

25% (1)

50% (2)

0% (0)

0% (0)

0% (0)

84% (63)

81% (61)

65% (49)

63% (47)

64% (47)

32% (24)

47% (35)

21% (16)

11% (8)

86% (12)

86% (12)

36% (5)

57% (8)

64% (9)

14% (2)

57% (8)

21% (3)

7% (1)

D: Bank Loans 0% (0) 44% (4)

E: Trade Credit 0% (0) 44% (4)

Q7: What is the size of the last loan, of any kind, that your firm has obtained in the last two years?

Total respondents 44 20 35 3 102

Took out a loan in the last 2 years No loan in the last 2 years Never took out a loan Chose not to respond

Percentage of respondents 43% 20% 34% 3% 100%

Q7: What is the size of the last loan, of any kind, that your firm has obtained in the last two years? - Firm size 1 - 9: Micro 4 (15%) 7 (27%) 6 (23%) 0 (0%) 9 (35%)

<25K 25 - 100K 100K - 1M >1M No loan in the last 2 years

10 to 49: Small 0 (0%) 2 (8%) 13 (50%) 2 (8%) 8 (31%)

50 to 249: Medium 0 (0%) 0 (0%) 3 (20%) 7 (47%) 3 (20%)

Q7: What is the size of the last loan, of any kind, that your firm has obtained in the last two years? â&#x20AC;&#x201C; Economic sector

<25K 25 - 100K 100K - 1M >1M No loan in the last 2 years

Manufacturing 0 (0%) 2 (17%) 6 (50%) 2 (17%)

Retail/ Distribution 0 (0%) 1 (6%) 5 (29%) 3 (18%)

Tourism / Hospitality 3 (15%) 3 (15%) 7 (35%) 3 (15%)

Life Sciences and ICT 0 (0%) 1 (14%) 3 (43%) 0 (0%)

Other Services 1 (9%) 2 (18%) 1 (9%) 1 (9%)

2 (17%)

7 (41%)

2 (10%)

3 (43%)

6 (55%)

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I: Public issue of own share s or own bonds 13% 78% 9%

Q7: What is the size of the last loan, of any kind, that your firm has obtained in the last two years? - Firm Lifecycle

<25K 25 - 100K 100K - 1M >1M No loan in the last 2 years

Start-Up 0 (0%) 0 (0%) 2 (100%) 0 (0%) 0 (0%)

Emerging Growth 1 (33%) 0 (0%) 0 (0%) 0 (0%) 2 (67%)

Developmen t Growth 3 (6%) 9 (18%) 15 (29%) 8 (16%) 13 (25%)

Expansion Growth 0 (0%) 0 (0%) 5 (45%) 1 (9%) 5 (45%)

Q8: What did you use this last loan for?

Number of Respondents Working capital Land/ buildings or Equipment/vehicles R&D or intellectual property Promotion Staff training Buying another business Refurbishment No loan in the last 2 years Can't Say Never took out a loan

7 19 2 0 0 2 9 20 3 35

Q9 - Do you think that access to external funding (non-bank loans) for Maltese SMEs is easy in Malta?

Seed Start-up Emerging-growth Domestic growth Expansion-growth

Very Easy 0% (0) 0% (0) 0% (0) 0% (0) 0% (0) 0% (0)

Relatively Easy 0% (0) 10% (1) 0% (0) 10% (7) 10% (1) 10% (9)

Relatively difficult 0% (0) 20% (2) 50% (2) 30% (24) 30% (4) 30% (32)

Very Difficult 0% (0) 60% (5) 50% (2) 20% (18) 40% (5) 30% (30)

Q10 - Do you see any other important funding instruments emerging in the future?

Private Public Partnership Microfinance institutions Crowd funding Co-operative Banks Venture Capital* Business Angels* Can't Say (Do not Suggest)

Number of respondents 21 9 1 3 5 1 33

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Percentage of respondents 21% 9% 1% 3% 5% 1% 32%

Can't Say 0% (0) 10% (1) 0% (0) 30% (26) 30% (4) 30% (31)