- 1. International Conference Economic System of European Union
and Adjustment of Bosnia and HerzegovinaUniversity of Mostar
Faculty of EconomicsMostar, April 26-27, 2002SLOVENIAN EXPERIENCES
WITH THE SME FINANCING Miroslav Glas Mateja DrnovekDamjan
MirtiUniversity of Ljubljana Faculty of EconomicsCentre for
Entrepreneurship DevelopmentTel.: +386 1 589 2400 Fax: +386 1 589
2698 E-mail: [email protected] Peniny GEA College of
EntrepreneurshipTel.: +386 1 5687 002 E-mail:
[email protected] Ljubljana, July 2002
2. University of Mostar Faculty of Mostar: International
Conference, Mostar, April 26-27, 2002 SLOVENIAN EXPERIENCES WITH
THE SME FINANCING Key words: Small and Medium-Sized Business, Debt
Financing, Microcredits, Guarantee schemes, Equity Financing,
Venture Capital, Business Angels ABSTRACTSmall and medium-sized
enterprises (SMEs) have some specific needs for financing in their
early stages of development, when commercial banks are reluctant to
enter due to high risk. To foster the process of new venture
creation, the government has to provide some alternative forms of
financing that would lower the risk for banks e.g. the micro-credit
scheme, guarantee scheme and grants for some specific types of
SMEs, in particular for innovation and high-tech firms.While
venture capital and business angels were quite an important source
of capital for high growth firms in the USA, Europe is still more
conservative and banking sector is the major source of enterprise
financing. This experience is also valid in Slovenia although some
cases of venture capital are already well documented.The paper
analyses the responses of a sample of SMEs to their problems with
the access to capital, experience with different forms of debt
financing, the government schemes of financial support as well as
SMEs attitudes towards equity investments. POVZETEKMala in srednja
podjetja (MSP) imajo posebne potrebe po financiranju v svoji
zgodnji razvojni fazi, ko so poslovne banke zelo previdne pri
kreditiranju zaradi velikega tveganja. Da bi pospeili proces
ustanavljanja novih poslov, mora vlada zagotoviti alternativne
oblike financiranja, ki bodo prinesle manja tveganja za banke, npr.
mikrokreditne sheme, garancijske sheme in nepovratne pomoi za
posebne skupine MSP, zlasti za inovativna in visoko tehnoloka
podjetja.Medtem ko je tvegani kapital in so poslovni angeli
sorazmerno pomemben vir kapitala za hitro rastoa podjetja v ZDA, je
Evropa e vedno dokaj konservativna in banni sektor ostaja glavni
vir financiranja podjetij. Ta izkunja velja tudi v primeru
Slovenije, eprav so e znani in dokumentirani nekateri primeri nalob
tveganega kapitala.Prispevek preuuje odgovore iz vzorca MSP o
njihovih problemih z dostopom do kapitala, izkunjami z razlinimi
oblikami dolnikega financiranja, vladne oblike finanne podpore in
odnos MSP do nalob trajnih lastnikih sredstev. Miroslav Glas,
Mateja Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 20022 3.
University of Mostar Faculty of Mostar: International Conference,
Mostar, April 26-27, 20021. INTRODUCTIONEntrepreneurship, and in
particular small and medium-sized enterprises (SMEs) has become the
focus of national and even international institutions. To develop a
virtuous cycle of growth, jobs, and innovation leading to social
welfare and greater social cohesion, the entrepreneurial culture of
economic dynamism has to be added to the culture of economic
stability as nurtured by welfare states. This is the conclusion of
the EU countries whereas countries in transition need this force of
the creative destruction (Schumpeter, 1943) even to a greater
extent in order to change radically their economic structure.There
is, however, the finance gap as an obstacle to SMEs creation and
growth. A competitive financing environment and an easy access to
capital is essential for SMEs besides other factors of an enabling
business environment to foster their growth. SMEs should get the
access to financial instruments that match their needs at each
stage of development, but are also consistent with the tradition
and culture of each country, what means that SME financial support
would largely differ between countries.As the most developed
transition country Slovenia early in 1990's (Law on Small Business
Development, 1991) established a legal foundation for the Small
Business Development Fund, and experimented widely with local
funds, micro credit and guarantee schemes, and lately started the
processof venture capital and business angels. However, it has
still to develop a comprehensive scheme according to its finance
culture and behaviour of entrepreneurs, potential investors and
financial institutions. The paper will present a critical overview
of past practices of SME financing and describe some findings of a
recent survey of entrepreneurs on their experience with different
sources of finance. 2. SME FINANCEThe exact information on how
small firms are financed in their early stages is limited because
the majority of SMEs is financed outside the public domain, through
informal sources. It is clear, however, that small businesses use
different types of finance compared to large firms, mainly because
small businesses do not have access to capital markets and
owner-managers themselves are the single most important providers
of start-up finance. The sources SMEs really use depend upon
different factors:- the stage of business development (see Shulman,
1994) where initial start-up capital is sought from internal
sources, from the entrepreneur's own pocket, and later on sources
of external funding become more important; - the extent and source
of funds depend upon the size of business, with larger ventures
seeking external sources (Jarvis, 2000); - the industrial sector in
which a SME operates (some production firms are based on tangible
assets land, buildings, equipment that can be offered as
collateral; Jarvis, 2000); and - some SMEs, like female-owned
(Carter, 2000) or minority / ethnic businesses (Ram, Barrett, 2000)
face larger barriers in the access to capital, at least in some
countries.Jarvis (2000) traces the discussions of the finance gap
of SMEs back to the Macmillan Committee (1931), echoed by Bolton
Report (1971) etc. Governments in developed countries have
introduced since a number of initiatives, with varying success.
Also, financial Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem
Peniny, Ljubljana 20023 4. University of Mostar Faculty of Mostar:
International Conference, Mostar, April 26-27, 2002institutions
have developed new products to fund easier SMEs that should narrow
the finance gap (Deakins, 1996).However, SMEs are far from large
firms since banks have problems in measuring/assessing risks of new
ventures, so they rather rely on secured lending. Loan officers are
not really SME advisers, well versed in working with SMEs.More or
less, the traditional relationship between levels of (outside)
funding and firm maturity as presented by Shulman (1994)
exists.Picture 1. Sources of outside funding for SMEs according to
their maturityges ty erss rs ksilysns cia tyiva ists in ndrderui
aplie uini mantiondcandeq ie l pa eq Fa ppta lp lb itufu Frle itpim
Su teic lf-edciastca ed cobl Se InerCr erPuas ePre m ur m nct-b
mmnt ra Co se Co Vesu AsIn Source: Shulman, Debt and Other Forms of
Financing (1994), p. 196This picture, however, does not show the
share each source takes in financing SMEs. Financing is a problem
at the start-up phase since other investors rarely share the
entrepreneur's vision and growing firms again face more acute
financing problems because of their need for development finance
(Wilson Committee, 1979; Buckland, Davis, 1992) that extends beyond
the capital of owner(s) and retained profits. SMEs can only
increase loan capital in proportion to assets held and
owner-managers are mostly reluctant to seek equity finance from
external sources (Jarvis, 2000) due to their desire to maintain
independence and control over the business (Keasey, Watson,
1993).The insufficient start-up capital (of the owner-manager(s))
is the reason why subsequently, SMEs have low ability to raise loan
capital (ACOST, 1990). It is also claimed that SME problems in
raising finance are related to their insufficient information about
financing opportunities with regard to both loan and equity
capital, the quality and cost of information (Bovaird et al, 1995;
Binks, Ennew, 1995). This information gap is important also for the
informal risk capital, where matching potential investors with the
firms that need the funds and have good projects is particularly
difficult. The information flows and the advisory schemes with
government agencies have improved substantially and the
dissemination of information on the range of sources of finance
available to SMEs over internet is considerable.SMEs target a
different capital structure than large firms and Norton (1990)
concludes that they are less likely to have target debt ratios and
there is a preference for using internal finance rather than
external finance, in particular family businesses and life-style
ventures. Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem
Peniny, Ljubljana 20024 5. University of Mostar Faculty of Mostar:
International Conference, Mostar, April 26-27, 2002Michaels,
Chittenden and Poutziouris (1996) have found that the life-cycles
of small firms influence their capital structure, industrial
sectors have an impact on capital structure, preferences and
economic conditions also influence financial decisions. Shulman
(1994) also stressed the differences between short-term cash
sources and long-term financing.While banks as sources are
traditional, what is becoming very important are some government
related sources and equity capital from informal and institutional
risk capital. However, these agencies, venture capitalists and
business angels have specific guidelines they follow in providing
money to new business operations which sometimes are not liked by
entrepreneurs.Shulman (1994), Gatewood and Hylton (1994) give the
picture of external assistance for start- ups and SMEs in the USA,
while there is an amazing body of literature about venture capital
funds and business angels (see also the latest GEM study, 2001). An
overview of enterprises' access to finance in the EU countries is
provided by EC papers (Enterprises' Access to Finance, 2001; Risk
Capital Action Plan, 1998) that reveal differences in the access
and use of different sources between the Member States. The
findings confirm that the supply of enterprise finance will
continue to be dominated by bank lending supported by loan and
equity guarantees and micro-credit schemes. However, the use of
equity and alternative forms of financing will gradually increase
and for dynamic and innovative businesses this form will become a
vital part (see Enterprises' Access to Finance, 2001). Also, there
is an increasing amount of literature about SME financing in the
transition countries, both from national surveys and international
projects (OECD, EBRD). 3. DEVELOPMENT OF SME FINANCE IN
SLOVENIAWhile on the average one in five SMEs in the EU countries
considers access to finance as a barrier to growth (Enterprises'
Access to Finance, 2001, p. 6), the lack of capital is invariably
the most commonly cited problem by SMEs in countries in transition
(OECD, 1996, p. 47). Due to the absence of large private wealth in
former socialist countries and limited private savings, potential
entrepreneurs have difficulties to gather start-up capital and they
mostly have problems to develop a long-term stable financial basis.
Although Slovenia ranks as the most developed and wealthy country
in transition, SMEs still face the same type of financial
difficulties as listed by SMEs in Poland, Hungary, Czech and Slovak
Republic:- high interest rates on (bank) loans; - overly high
securities demanded by banks as collateral; - overly bureaucratic
application procedure; - lack of information in banks about
assistance or assistance refused (OECD, 1996, p. 49).Slovenian SMEs
ranked financial problems and high taxes and social contributions
as their most important problems, although lately the dynamic firms
stated the bureaucracy and the lack of skilled staff as their key
barriers to growth - however, dynamic firms are already far beyond
their start-up phase and they had mostly developed a good track
record and working relationship with banks. They are also quite
capable of providing some collateral (Peniny, Blejec, Glas,
2001).We do not have good statistics about loan finance for SMEs
(alike the EU countries; Enterprises' Access to Finance, 2001, p.
8), although some research revealed partial Miroslav Glas, Mateja
Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 20025 6. University
of Mostar Faculty of Mostar: International Conference, Mostar,
April 26-27, 2002information about banking practices (Kopa, 1997).
Banks by themselves do boast to offer a wide variety of various
banking services to SMEs, considering:- financing of working
capital needs (overdraft, short-term loans, even long-term
investment loans and project financing); - financial advisory
services (preparation of different analyses demanded, reports and
project assessments, real estate valuation); - short-term
investment of excess finance through different types of securities,
etc. (Cuznar et al, 2000).However, entrepreneurs and in particular
would-be entrepreneurs face quite a different reality and their
complaints mostly resemble those from other countries.The finance
gap has been largely recognised in early 1990's as already in 2000
the government established the Small Business Development Fund of
the Republic of Slovenia (SBDF), that offered following forms of
financial assistance to SMEs:- soft loans for SMEs; - subsidies of
interest rate for commercial bank loans; - guarantees for loans of
commercial banks; - loans with specified objectives (exports,
tourism, start-ups); - short-term liquidity loans.SBDF used to
determine the eligibility of SMEs to this assistance using the
criteria given by the Small Business Development Law (1991), that
are different from those in the Company Law (1993) and from the EU
definitions. SBDF never really assisted start-ups but rather
focused on established firms undergoing some development project.
It started in 1991 with approximately 6,5 billion SIT, but due to
some failed firms assisted it almost went bankrupt and the
government had to bail it out with new capital infusions (1995-96).
The key source of funding were the proceeds from the privatisation
which are now running out. Generally, SBDF considers the results of
its financial assistance in terms of new jobs as very satisfactory,
particularly during the last 5 years. The demand for loans however
exceeded the available resource for each subsequent year while
guarantees did not attract the expected interest from businesses
during the last period.While the SBDF should assist SMEs along the
strategic development goals, a number of local funds were created
at the municipal level or the municipalities allocated a part of
budget to subsidise interest rates to SME loans. There were some
good practices, e.g. Development Fund Lendava, but the loans were
prevalently in the range of micro loans to support larger number of
applicants and local funds have mixed experiences with the
efficiency of the disbursement process and actual performance of
businesses. Some local funds entered the joint scheme of micro
credits with the Employment Services in disbursing financial
assistance to new businesses established under the Self-Employment
Programme.Since the reliance on bank loans implies a need for
collateral that can act as a considerable barrier for start-ups,
the initiative to establish Regional Guarantee Schemes based on a
vast experience of Italian schemes has been launched in 1996. Some
Regional Schemes have since provided good support to SMEs, but the
lack of subsequent allocation of government money to these funds
raised some questions about the future of these schemes. Miroslav
Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 20026
7. University of Mostar Faculty of Mostar: International
Conference, Mostar, April 26-27, 2002Slovenia has not been targeted
by Western donor countries or financial institutions as a country,
that would attract lots of donor activities, although some EIB
resources and JOPP ventures have brought external resources to
Slovenian SMEs. Foreign capital also entered through the venture
capital funds, but only lately their activity provided visible
results. Following the changes in the EU approach to SME financing,
the issues of venture capital and business angels attracted more
attention recently. However, there are scarce success stories
(Bofex with the Horizonte Venture Fund) and this type of external
finances is still quite limited both because of scarce resources
but even more due to problems and reservations on the demand side.
SMEs are not eager in taking venture capital because of the lack of
information, misunderstandings about the nature of this capital and
the strong desire to keep the control over the business.We know the
least about some forms of grey market lending activities and other
informal investments, apart from anecdotal evidence of illegal
pressures on debtors to repay debts after encountering adverse
market situation. Within this type of SME finance there might be
some attempts to wash illegal money through informal investments in
SMEs, but hard evidence is lacking. 4. EMPIRICAL RESULTS FROM A
SURVEY OF SMEs 4.1. MethodologyWe conducted a survey among
Slovenian SMEs to get their opinion upon the SME financial
environment. SMEs have been chosen randomly from the register of
incorporated businesses and sole proprietors. We collected and
analysed the first batch of 116 questionnaires with the following
characteristics:Legal status 53,4 % incorporated businesses (51,7 %
l.l.c.), 33,6 % soleproprietors, the rest mixed and 3,5 % unknown
Gender 80,2 % men-managed businesses Education21,6 % vocational
school, 34,5 % high school, 17,2 % college, 17,2% university
education, 6,0 % graduate studies, 3,4 % unknown Family business
status 57,8 % family businessesThe structure of survey covers a
larger share of incorporated businesses (they usually have much
higher response rate), while the share of female businesses and the
educational structure is close to other surveys of Slovenian SMEs
in the past.4.2. SMEs Financial ProblemsWorldwide, SMEs complain
about the problem of collecting receivables from customers. In the
past it was always a strong problem of Slovenian SMEs, too, and the
main demand of the Chamber of Crafts towards the government focused
on the regulation that should ease the debt collection. However, in
our survey, this issue only ranked ninth and other financial
problems were considered as more important. Table 1 presents the
ranking of problems with SME finance, using a five-point Likert
scale (1 not problem at all, 2 a small problem, 3 quite a problem,
4 a big problem, 5 a huge problem) in the survey but for the paper
we merged answers 1-2 (less important) and 4-5 (more important).
SMEs were asked to rank two issues: (a) problems with some
financial aspects of the access to finance and (b) the level of
difficulties with financing different types of expenses. Miroslav
Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 20027
8. University of Mostar Faculty of Mostar: International
Conference, Mostar, April 26-27, 2002Table 1. Ranking of problems
with finance in Slovenian SMEs (survey 2002)Rank Financial
problemLevel of importance (in %) Gradelessit is a more impor-
problem impor-tant tant A. Problems with financial aspects of
finance 1 Access to (public) funds 9,017,074,14,16 2 High costs of
insurance and other related costs of loans17,521,161,53,62 3 Lack
of good expert advisors on financial affairs 18,929,751,33,48 4
High interest rates (bank loans)22,728,748,73,38 5 Short period of
loan repayment23,029,247,83,31 6 Demand for extensive
documentation30,816,853,13,30 9 Difficulties to collect receivables
34,827,038,33,2312 Time consuming, complicated loan disbursement
30,332,737,13,0913 Providing for loan collateral 36,921,941,23,0514
Access to credit resources in general 34,623,641,93,0516 Absence of
private investors32,137,630,22,9917 Banks are more focused on
larger credits30,636,033,32,9818 Possibility to get/extend the
grace period for loans37,131,931,02,9119 Too low amounts of
loans39,128,232,72,9121 Long procedures on loan applications in
banks 44,726,329,02,75 B. Difficulties with financing different
types of expenses 7 Difficulty to invest in equipment
22,338,439,33,29 8 Difficulty to finance R&D for new
products/services 26,130,643,23,2710 Difficulty to finance new
premises33,126,840,23,1311 Difficult to finance marketing
activities 27,036,036,93,0915 Difficulty to finance (credit)
customers34,933,032,22,9920 Difficult to finance wages and related
expenses 41,427,930,62,8722 Difficulty in financing
stocks46,420,033,72,75The single most important problem is the
access to public funds since the amount of available money has
always been fairly limited and only few SMEs would get some public
money. Problems with commercial banks were ranked as follows
(numbers in brackets through the paper give the rank calculated
from the answers of respondents):- Costs of loans: high costs of
insurance and other related costs bother SMEs the most (2),
followed by interest rates (4) and the fact that banks are inclined
to allow mostly short repayment period due to their problems with
risk assessment (5); loan collateral were less exposed (13); -
According to owner-managers, banks are demanding extensive
paperwork (6), their disbursement procedures are far too
complicated (12) and decisions take too much time (21); banks seem
to be highly unfriendly to SMEs; - Banks are still eager to do
deals with larger firms (17) where less effort is needed per money
unit of the loan and firms have an established track record with
the bank.Absence of private (equity) investors (16) does not rank
high on the list, since mot many SMEs are eager to enter external
equity market, yet. It is important that SMEs recognise the need
for good financial experts (3), since entrepreneurs have quite a
low educational level and only 20,2 % have economic/business
education and 53,5 % have technical schools. Miroslav Glas, Mateja
Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 20028 9. University
of Mostar Faculty of Mostar: International Conference, Mostar,
April 26-27, 2002In accord with these problems SMEs have also quite
consistently ranked business areas that need to be financed:- It is
most difficult to finance investment in equipment (7) as well as in
new premises (10) due to the lack of long-term loans and equity
finances; - SMEs also find it difficult to fund R&D activity
(8) and marketing activities (11), where it is fairly difficult to
forecast the actual costs and outcomes that might vary; - SMEs are
not in a good shape to extend credits for customers, while they are
already used to managing the current expenses for labour (wages and
taxes) and stocks.In general, financing is not an easy task for
Slovenian SMEs and they mostly depend on own resources and bank
assistance. Since own resources are outside the public domain and
owner- managers use them as far as possible, it is more interesting
what they consider as an issue for banks if thinking of providing
better services to SMEs (Table 2). Entrepreneurs recommend to the
banks almost straightforward measures related to their ranking of
problems:- Lower costs of loans (1) and interest rate (2), as well
as demands for collateral (10); - Providing more long-term
investment loans (3), but allowing for grace period (7); -
Improving procedures through lessening demands for documentation
(4), making shorter decision-making periods (6) and providing
better information (8), - Improving loan-officer staff to give
advisory support (5), to develop their capabilities in properly
assessing the situation in SMEs (9) and being kind to entrepreneurs
(11).Table 2. Recommendations to commercial banks to provide better
services to SMEsRank Improvement in bank servicesOpinions (in %)
Grade disagree neutral agree1 Lower insurance and other related
costs of loans0,0 6,3 93,74,542 Lower interest rate for loans 0,0
8,8 91,24,533 Providing more long-term investment loans 0,912,4
86,74,394 Simplify documentation, rely on personal2,712,3
85,14,32knowledge of enterprises/entrepreneurs5 Improving advisory
support to SMEs0,017,4 82,64,246 Shorten the loan decision-making
process0,918,8 80,44,237 Providing 1-2-year grace period for
repayment 0,918,6 80,64,228 Improving the information on loans
available0,020,2 79,84,139 Developing staff know-how to assess
better the0,924,1 75,04,13soundness of SMEs 10 Lower the demand for
collateral5,3 17,7 77,04,10 11 Ensure kinder staff behaviour 12,4
44,3 43,43,52Some of these recommendations are difficult to
introduce unless banks develop their financial capabilities (1, 2
and 3) and adapt better to deal with the needs of SMEs staff
capabilities, know-how and experience (4, 5 and 6, respectively).
It is interesting, however, that 60 % of entrepreneurs in the
survey have the best experience with the (formerly social) banks
that were in business already before the year 1990, while only 11 %
prefer new (private) banks and 13 % have better experience with
foreign banks already better suited to deal with SMEs. Still, 16 %
of owner-managers do not have good experience with banks in
general. Very high percentages of respondents agreeing with at
least first 10 possible changes in bank policies clearly prove the
importance of bank loans to SME owner-managers in Slovenia.
Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny,
Ljubljana 20029 10. University of Mostar Faculty of Mostar:
International Conference, Mostar, April 26-27, 20024.3. Government
supportSlovenian government recognised rather early the need for
financial support to SMEs. However, the financial instruments have
changed quickly making it difficult even for SME support
institutions, not alone for entrepreneurs, to have an overview over
available financial and related assistance. Available funds were
always too short to cover the needs and SMEs complained about
extensive paperwork and slow procedures. We checked two aspects of
the financial assistance: (a) how much do SME owner-managers know
about available assistance programmes and (b) to what extent did
they try to get this assistance and whether they were successful in
their applications (Table 3).We can conclude that familiarity with
the financial assistance schemes goes well along with the intention
to make use of these sources. If we first look at the level of
knowledge about the schemes, we can state:- owner-managers
generally do not know a lot about most of assistance; - the schemes
applied only in some regions (micro-credits and guarantees) are not
known well, while Small Business Development Fund is better known
and local funds have done quite a good promotion effort; - grants
and European programmes look to be quite familiar to
SMEs.Nevertheless, government has to do better in the future about
the promotion of assistance, if the SMEs have to be convinced that
these forms are equally open to everybody and the real information
is not withdrawn in order to open better chance to some SMEs being
acquainted with the public invitations for application. The second
part of the Table 3 gives a picture of how SMEs responded to the
(known?) available forms of public financial support. We can infer
from the results that a great number of SMEs have never been
interested in this support (in case we assume that they really got
the proper information about the possibilities). Also, there is a
substantial number of SMEs that were interested but never actually
applied for the support. We should in the future do some more
research into reasons, while some advisors and entrepreneurs
provided the explanation as too much effort (documentation) needed
in the relation to the benefits, uncertainty about the timing of
invitations, low expectations to get the support demanded etc.
Different support schemes have quite different ratios between the
applications and supports approved according to the results: local
SME funds should deny the support to twice as many applicants than
SMEs being successful in application process while the support for
unemployed was readily available as well as the interest rates
subsidies.The fairly small number of SMEs, that really succeeded to
attract public money besides the self-employment scheme helps to
understand why so few SMEs list public sources among the source of
start-up, working or investment capital (see Peniny, Blejec, Glas,
2001, for a small share of public sources even among the dynamic
(growing) Slovenian SMEs that have always been considered as the
prime target group for public support: for the years 1993, 1999-
2001 the share for start-up sources varies between 1 % (1993) and 7
% (2000), for working and investment capital after three years in
business between 1 % (1993) and 7,1 % (2000) and for last two years
between 0,5 % (2001) and 5,2 % (2000). If we assume that the public
support would really be provided for the most promising firms, this
data would not provide the reason for deep disappointments.
However, the fact that the SBDF almost failed on some unsound
guarantees issued proves that the public sources have not done a
good job on the financial assistance to SMEs during 1990s. Miroslav
Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 200210
11. University of Mostar Faculty of Mostar: International
Conference, Mostar, April 26-27, 2002 Table 3. Familiarity with the
public financial assistance to SMEs and the extent of applications
for local and national assistance (in %)Forms of local / national
SME financialTo what extent are SMEs familiar with different forms
How far did owner-managers during last five years try assistance of
local and national financial assistance?to collect local or
national SME financial assistance Extent of
familiarityRankGradeAttitude of SMEs to public fundsRankGradeNever
Heard Knows KnowsNot atInte- Appli- Got theheard by the theit very
all inte- rested, ed, wasassis-aboutwayformwell
restedneverrefusedtanceapplied Financial support for unemployed for
self- 8,0 22,155,814,2 1 2,7663,217,55,3 14,0 1 1,70 employment
SBDF soft loans 18,2 48,227,3 6,4 2 2,2260,725,07,1 7,1 21,61 Local
SME funds loans 20,4 46,031,0 8,7 3 21666,423,07,1 3,541,48 Grants
from programmes of various 31,8 39,123,6 5,5 4 2,0364,918,09,9
7,231,59 government departments Loan interest rate subsidies46,9
20,726,1 6,3 5 1,9275,915,23,6 53 51,38 European projects /
programmes35,1 45,118,0 1,8 6 1,8682,113,43,60,9 71,23 SBDF
Liquidity loans42,9 37,516,1 3,6 7 1,8075,920,50,92,7 61,30
Micro-credit scheme 55,4 24,117,0 3,6 8 1,6985,811,50,91,881,19
SBDF - guarantees 48,7 38,910,6 1,8 9 1,6584,713,50,90,991,18
Regional guarantee schemes64,0 26,1 9,0 0,910 1,4789,3 9,80,00,9
101,13 Project Business angels club75,9 17,9 6,3 0,011 1,30 Source:
SME survey 2002 Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem
Peniny, Ljubljana 2002 11 12. University of Mostar Faculty of
Mostar: International Conference, Mostar, April 26-27, 2002 Table
4. Forms of government financial assistance and related support
services government should provide for SMEs Rank Form of assistance
How to apply the measure (in %) Grade Not to Only to To allTo all
beSME SMEs SMEs applied targetlimited nogroupsextent limits1-2 Tax
relieves for new job creation1,8 5,4 14,3 78,63,701-2 Free advisory
services 0,0 7,1 16,1 76,83,703 Tax relieves for investors 3,6 8,2
18,2 70,03,554 Soft loans for new job creation0,910,9 21,8
66,43,545 Assistance with enforcement of 4,411,5 15,0
69,03,49collection of receivables6 Free training programmes
2,710,821,6 64,9 3,497 Tax deductions for innovation0,913,424,1
61,6 3,468 Use of European projects / 0,022,529,7 47,8
3,25programmes resources9 (Soft) loans of SBDF 1,820,937,3 39,1
3,13 10 (Soft) loans of local SME funds1,821,640,5 36,0 3,11 11
SBDF guarantees2,723,641,8 31,8 3,03 12 (Regional) guarantees for
bank loans 6,317,942,9 33,0 3,03 13 Micro-credit (small loans for
start-ups) 4,623,247,2 25,0 2,93 14 Grants11,028,421,1 39,5 2,89 15
Government's equity investments 15,331,526,1 27,0 2,65Table 4
should be considered a kind of bible for the providers of public
support to SMEs. The very important message is that SMEs support
governments efforts to provide some financial assistance but some
other forms of assistance are considered as more important and
public equity investment is the least preferred form. Tax
incentives for new job creation (1), investments (3) and innovation
(7) are ranked higher than most financial schemes, and free
advisory services (2) and training programmes (6) have attracted
strong recognition. Even soft loans are preferred if tight to new
job creation (4) and SBDF soft loans (9) and soft loans of local
SME funds (10) are not so much recognised. The guarantee schemes
are ranked even lower, either as SBDF (11) or regional funds (12).
Micro-credits are again not appreciated, but we could speculate on
the fact, that existing SMEs are not really their target group and
the time of being eligible for these credits is already the past
for our respondents. SMEs prefer to have financial assistance tight
to some objective (jobs, innovation) since it is easier for them to
envisage the criteria for this support. Grants are also not very
much in favour among SMEs as they look like money not really earned
by SMEs.We do not consider Table 4 as the only possible answer for
the government about how to structure the financial assistance, but
some lessons have to be learned and some existing schemes really
need further discussion. It is a proof of maturity for SMEs to
stress advising and training as important measures and to opt for
some forms of debt financing that could provide larger amounts of
support but enable public funds to finance new businesses through
the instalments paid on early disbursed loans.There is a specific
aspect of government support to SMEs. The world recession and
domestic markets becoming highly competitive have also brought
quite a number of SMEs into financial distress. Should government,
used to support large troubled companies, also consider assistance
to SMEs as its inherent task? Should it discriminate in this aspect
of Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny,
Ljubljana 2002 13 13. University of Mostar Faculty of Mostar:
International Conference, Mostar, April 26-27, 2002 support against
SMEs? While the current regulation is limiting these forms of
support to SMEs, the survey respondents have proposed the strategy
to get quite a strong support to troubled SMEs. However, they were
quite selective with the choice of forms of assistance and they did
not consider the support without fulfilling certain criteria.Table
5. The proposed forms of governments assistance to troubled
SMEsRank Form of governments assistanceConditions for assistance
(in %)Grade GovtSME SME has Always should has toto provenot help
provide potential guarantee1 Free counselling / advisory services
1,83,613,5 81,13,742 Free training programmes 2,75,319,5 72,63,623
Assistance on collecting receivables 2,7 10,017,3 70,03,554 Tax
deductions for investors 4,49,729,2 56,63,385 Soft loans (SBDF,
local funds) 1,8 20,751,4 26,13,026 Deferred tax payments8,9
20,542,9 27,72,897 Grants10,8 15,352,3 21,62,85 8-9Deferred social
contributions7,1 32,134,8 25,92,79Exempt payments of interests
for17,9 18,829,5 33,92,79deferred taxes / contributions 10
Transformation of deferred taxes into20,4 16,7 45,4 17,62,60govt
equity share 11 Lower/exempt taxes and contributions 21,8 19,1 38,2
20,92,58 12 Government equity investment 25,2 19,8 41,4
13,52,07SMEs propose to the government:-to provide free counselling
(1) and training (2) for troubled SMEs, indicating the lack
ofknow-how and mistakes by entrepreneurs as the cause for troubles
encountered; -instead of providing money, SMEs suggest to encourage
investors to enter these SMEsthrough tax deductions (4) or
temporary freeze of tax (6) and contribution payments (8-9); -the
financial assistance, if any, is ranked as following: soft loans
(5) as the mostacceptable form, followed by grants (7) and
governments equity investment as leastdesirable (12).However,
looking at Table 5, we can see that mostly free advising and
training, assistance in receivables collection (3) and tax
deductions for (outside) investors are considered as measures to be
used indiscriminately, while other measures should be tried mostly
to SMEs with a real potential to recover and not as a general
solution. Its is still fair to ask, if there is a mechanism in
place to provide a reliable assessment of the potential, but it is
a question of the design and capability of the enterprise support
network that should develop the expertise to work on troubled
businesses. 4.4. SMEs and InvestmentSMEs in the survey have ranked
the factors that influence their choice among financial instruments
to be used in financing investment (Table 6). According to our
previous findings, interest rate (now by far the most important
factor) and other related costs were considered as ranking first
and second. Other financial aspects are still quite important:
collateral to provide Miroslav Glas, Mateja Drnovek, Damjan Mirti,
Viljem Peniny, Ljubljana 200214 14. University of Mostar Faculty of
Mostar: International Conference, Mostar, April 26-27, 2002 (5),
repayment period (7), grace period (9). However, the information
gap is clearly identified (3) and owner-managers have exposed as
well human relationship aspects of financial deals: honest bank
staff behaviour (4), trust and personal contacts (6), while
professional record is less pronounced: understanding the problems
of SMEs (8). Some formal aspects of SME finance, like documentation
(13) and slow procedures in the bank (12) are not placed high on
the list and they seem to be taken as a kind of necessity and
habitual behaviour of finance providers. Even the autonomy of
decision-making (10) and the need to provide current financial
reports (15) is not ranked high. The direct financial aspects are
clearly the most important factors and this finding should be
considered when structuring the SME financial support scheme.Table
6. Important factors that influence the choice of specific
financial instruments for investments in Slovenian SMEs Rank
Factors influencing the choiceLevel of importance (%)
GradeVeryImpor- Less impor-tantimpor-tant tant1 The price of
resources (interest rate)89,1 10,0 0,9 1,362 Low related costs
(insurance, manipulation fee) 77,3 22,7 0,0 1,703 Transparent
information about conditions77,5 21,6 0,9 1,754 Professional,
honest attitude of the staff working74,7 25,2 0,0 1,84with SMEs5
Limited demands for collateral72,023,4 4,51,896 Good personal
contacts and trust in investor72,022,5 5,41,907 Long repayment
period 72,025,2 2,71,928 Investors understanding for the problems
of the74,721,6 3,61,98company9 Possibility to negotiate the grace
period 65,729,7 4,52,09 10 Maintaining autonomy in decision-making
62,734,6 2,72,09 11 Additional assistance of the investor
(advising)63,927,0 9,02,11 12 Tome to work on application procedure
55,826,0 8,12,19 13 Limited demands on documentation56,439,1
4,52,32 14 Opportunity to re-negotiate the repayment 49,546,0
4,52,21schedule 15 Extent of investors demands to provide
on-going51,336,012,62,41business information 16 The prestige
(image) of the bank / investor 45,038,716,22,53Entrepreneurs
clearly recognise the need for themselves to provide a fair share
of investment. Their share should be according to the respondents
in the range of 31-50 % of financial needs (for 45,5 % of
respondents), even above 50 % for 25,9 % of respondents, with 25,0
% putting it at 11-30 % and only 3,4 % considering the share below
10 % of investment as appropriate. We also asked entrepreneurs to
rank alternative forms of government financial assistance for
investment. Among four possible scenarios, their ranking was
established as presented in Table 7. Entrepreneurs expressed the
preference for soft loans in the case the loans would provide for a
large share of investment. Grants are quite a temptation, but only
up to 10 % of investment seems to fail to cover the finance gap in
long-term investment. State equity investment is not an attractive
choice, even if the state already declared the intention to exit in
5-7 years in the manner of the normal venture capital. Miroslav
Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 2002
15 15. University of Mostar Faculty of Mostar: International
Conference, Mostar, April 26-27, 2002 Table 7. Ranking of
alternatives of government support for investment (in %)Rank
Alternative government supportRank 1 Rank 21 SBDF soft loan (lower
interest rate) up to 50 % of investment40,2 38,02 State grant for
up to 10 % of investment 40,9 24,73 State guarantee for bank loans
up to 80 % of the loan17,8 24,44 State equity investment for 20 %
of investment, with state exit in7,0 10,55-7 years 4.5. Private
equity investmentThe most important discourse about financial
assistance to SMEs is currently focused around private equity in
vestment either as formal venture capital or informal business
angel solution. Slovenia is still far from having a considerable
amount of these types of investment coming to SMEs and it will
really become an important issue in the future. However, we tried
to establish a better understanding of attitudes to these questions
among SME owner- managers. So we first asked respondents whether
they ever considered or even initiated the option of private equity
investor entering their business or becoming themselves such
investors in another SME.Table 8. Searching for private equity
investor (in %)Have you searchedHave you for a private
equityconsidered own investor for yourequity investment company in
another SME Never considered this alternative45,449,4 Considered it
only once 8,312,9 Considered it many times, never realised
it39,2295 Realised it, once 4,1 47 Realised it, more than once 3,1
3,5 Comment: quite a number of entrepreneurs did not respond to
this questions, 19 on the first and 31 on the second question.It is
impossible to check for the validity of answers, in particular
about the seemingly realised equity investments, but these
alternatives are still quite an unknown territory for almost a half
of respondents and others have mostly considered it as a mental
exercise. Why such an attitude? We asked the entrepreneurs to
reveal their feelings about outside equity owners entering their
businesses.Table 8. Would an outside owner, either a state venture
capital fund or a private equity investor in your company bother
you (in %)? State venture Private equitycapital fund investor
(co-owner) It would not bother me23 30 It would bother me a little
27 26 That would be quite a serious issue 12 14 It would bother me
very much8 6 For me, it is unacceptable31 24 Miroslav Glas, Mateja
Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 200216 16.
University of Mostar Faculty of Mostar: International Conference,
Mostar, April 26-27, 2002 We see from Table 8 the following
pattern:1. The majority of owner-managers are worried about
introducing outside equity capital intheir firms, ranking from
unacceptable to the small discomfort; the half would takethat as a
serious issue in managing their business. 2. The state venture
capital would be more a problem, but private investors would not be
aneasy partner either.The cultural norms among our entrepreneurs
need to change considerably if venture capital is to become a
source of capital, considered seriously by a number of
businesspeople. However, the concept of venture capital is not an
issue for average entrepreneurs. Already the share of
owner-managers that would not consider the outside equity capital a
nuisance exceeds any venture capital involvement elsewhere. Venture
capital is really interested only for a small target group of SMEs
and we should focus the research on such a group.We tried to
clarify further what factors could influence equity investment as
an incentive or disincentive. Table 9 presents an extensive list of
possible influences but it is only the aspect of entrepreneurs as
targets for venture capital investment. However, some of them might
become a kind of business angels in the future, as well. We should
also survey potential investors to get the other side of the
story.Results in Table 9 do not give a really good picture about
these factors, but it is an early attempt to get a better insight.
The majority of answers are focusing on the neutral attitude that
does not really point to the direction of impact. Also, there are
only few factors that are considered as encouraging factors with
over 6-7 % of respondents. Least encouraging factors involve:- the
lack of real opportunities for investors to make the exit (economic
aspect), - complicated legal formalities for ownership transfer
(legal aspect), - fears of entrepreneurs to give too high a share
of ownership and control in exchange for small money, to get greedy
investors focusing more on quick returns (psychological and
economic aspect), - the tax system discouraging equity investment
(economic aspect of investors), - the possible leakage of
information through outside investors.These factors could be really
considered as true barriers to accept equity investment and they
are legitimate and fairly serious concerns. On the other side, not
the same factor rank as the most important deterrents to equity
investment:- high income tax and the lack of tax incentives are
considered as having important negative impact on equity
investment; - fear from the loss of control over distribution of
profits generated and control over the firm is quite important to
owner- managers; - entrepreneurs also fear from not being able to
negotiate on equal foot with (experienced) investors due to their
lack of know-how; - also the management style in SMEs, with
entrepreneurs being of the lone-wolf type, not aspiring for real
growth, is a negative element for investors; - entrepreneurs
considering their businesses as sources of luxuries (cars,
mobitels), covering up for actual profits are not the type,
preferred by investors . Miroslav Glas, Mateja Drnovek, Damjan
Mirti, Viljem Peniny, Ljubljana 200217 17. University of Mostar
Faculty of Mostar: International Conference, Mostar, April 26-27,
2002 Table 9. Impact of different factors on the attitude of
entrepreneurs towards private equity investment and on investors to
consider investing into SMEsRank Factor influencing equityThe
character / direction of influence (in %) Gradeinvestments Most
Encoura NeutralDeter-Mostencoura--ging ringdeter-ging ring1 High
income tax rates on capital 1,04,027,7 36,6 30,73,92gains2
Entrepreneurs feeling that2,0 4,0 21,851,5 20,8 3,85investor demand
too highdividends limiting growth3 Lack of tax incentives for 0,0
6,9 27,739,6 25,7 3,84investors4 Investors are not ready to wait
a1,0 5,0 21,257,6 15,2 3,81reasonable period for a return5
Complicated, expensive legal 1,0 2,0 33,046,0 18,0 3,78formalities
for ownershiptransfer6 Entrepreneurs cover expensive2,0 4,0
38,027,0 29,0 3,77cars, GSM etc. on the costs ofenterprise7
Uncertain entrepreneurs due to 2,0 5,1 26,548,0 18,4 3,76the lack
of legal, financialknow-how8 Entrepreneurs think that 1,0 4,0
34,048,0 13,0 3,68investors demand too muchcontrol for small money9
Entrepreneurs fear from leaking3,0 2,0 34,347,5 13,1 3,66important
information10Entrepreneurs dont want 1,0 9,0 34,038,0 18,0
3,63growth11Management style, wanting to 2,0 14,930,732,7 19,8
3,53do everything themselves12Investors do not have real exit1,0
4,0 48,038,0 9,03,50opportunities13SMEs try to cover up for
profit5,0 4,0 45,529,7 15,8 3,48with innovative accounting14Higher
returns on other2,1 16,038,337,2 6,43,30financial
investments15Entrepreneurs want to maintain 5,9 14,932,737,6
8,93,29their life-style16Entrepreneurs tend to maintain 9,1
22,223,233,3 12,1 3,17full control over the company17SMEs attitude
towards the 12,0 36,041,0 9,0 2,02,53concept of equity
investment18Level of mutual trust between 17,7 46,118,6 9,8
7,82,44entrepreneurs and investorsIt looks like there is no problem
to find barriers for equity investment, but the incentives are
really missed and there is room for improvements in the behaviour
of government (taxes, legal aspects), entrepreneurs (going to do
business in a modern, transparent way, to state the results in the
most correct way in relation to investors (and state)) as well as
investors (they should become more long-term oriented, loyal or
even dedicated to SMEs they invest in and entering the whole
relationship with more trust and empathy for entrepreneurs.
Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem Peniny,
Ljubljana 200218 18. University of Mostar Faculty of Mostar:
International Conference, Mostar, April 26-27, 2002 Since there is
not a lot of information among owner-managers about the benefits
that outside equity investors could bring to the company besides
providing financial resources alone, we checked what non-financial
benefits entrepreneurs expect from investors (Table 10).Table 10.
The non-financial benefits entrepreneurs expect from equity
investorsRank Form of non-financial assistanceLevel of importance
(in %)Grade Less ImportantVery importantimportant 1Assistance in
entering new markets1,817,680,64,13 2Access to key market
information5,623,967,03,95 3Ideas for new products/services
7,421,171,63,92 4Management know-how 4,629,466,13,89 5Business
links5,626,967,63,88 6Search for highly skilled professional staff
11,931,256,93,57 7A role of protector with experience
and19,624,356,13,53enabling rational decision-making 8Support in
psychological terms in case of 17,033,050,0 3,52business troubles
9Advisory assistance to substitute for 14,935,250,0 3,51commercial
advisors 10 Assistance on internationalisation of
business17,636,146,3 3,41operations 11 Negotiations with suppliers
20,034,645,5 3,39 12 Informal promotion of the
enterprise14,043,942,0 3,38 13 Assistance with the access to bank
loans27,534,937,6 3,15 14 Assistance with the access to other
private 42,136,521,5 2,74investorsThe results indicate that
entrepreneurs expected really a lot from equity investors. The
structure of answers could be characterised as interesting, since
entrepreneurs ranked the benefits from the assistance in somewhat
unexpected range of importance:-they expect mostly the assistance
in the access to new markets (1 and 2), establishing links/
networks with other business-people (5) or support for the process
of internationalisation(10); -investors should also provide ideas
for new products / services (3) through theirexperience;
-management know-how (4) is expected, also in the role of the
protector / peace-maker inthe process of decision-making (7);
-investors should also care about skilled staff (6), knowing the
scene; -and they are expected to behave as free consultants (9) or
mentors / supports throughdifficult times (8).However, we were
surprised with the finding that these investors are not really
expected to add the assistance through supporting the SMEs when
negotiating with banks (13) and even less in bringing other private
investors in (14). The second finding might suggest that owner-
managers could consider an alliance between other equity investors
as a threat of collusion between them against themselves, while the
first one could mean giving up an additional strength when facing
banks with the backup from private investors. It seems that
entrepreneurs fear from becoming too depending from investors in
financial aspects, while they do not fear from stronger market
support. Miroslav Glas, Mateja Drnovek, Damjan Mirti, Viljem
Peniny, Ljubljana 200219 19. University of Mostar Faculty of
Mostar: International Conference, Mostar, April 26-27, 2002 5.
CONCLUSIONS AND RECOMMENDATIONS During 1990s, Slovenia experimented
with a number of forms of governments financial assistance to SMEs.
However, due to limited available resources, the lack of financial
know- how, inadequate management of public funds and some political
abuses of resources, the results were not really satisfactory and a
comprehensive scheme has not been developed, yet. Entrepreneurs
were rather disappointed with this assistance and quite a few
really acquired any substantial financial support apart from the
Self-Employment Programme.Slovene SMEs are financed the same way as
it is the tradition throughout in the world: mostly financed out of
entrepreneurs own resources, with a minor support from friends or
other individual outside investors. Later on, commercial banks
enter the SME financing, but relying heavily on some local and
national assistance for subsidised interest rate or guarantees.
While new private banks were the first to provide loans to SMEs,
former socially-owned banks developed their expertise and they are
becoming increasingly involved in the SME financial support.
Entrepreneurs still complain about high interest rates and related
costs of loans (insurance, manipulation fee) as well as about the
bureaucratic procedures. They also lack the professional, honest
attitude among bank loan officers and trust-based relationship
instead of paperwork.While the European Union is focused on the
issue of venture capital and business angels, these sources have
only recently started to attract some attention among Slovene SMEs.
They would in the average consider the state or private equity in
their companies as quite a hostile type of investment, having fears
about the greed, inclination towards control from investors as
strong barriers to allow more freely the outside equity investments
in thriving SMEs.The survey among Slovenian SMEs in the beginning
of the year 2002 is indicating following paths of SME finance:- Let
own savings present the major source of start-up capital, with some
local or national support for targeted groups of entrepreneurs
(micro-credits, other subsidised resources); - Support commercial
banks in their deals with SMEs by lowering their risks through soft
information, advisory and training support to SMEs, providing the
guarantee scheme; - Work on the promotion of equity capital, with
some tax and other incentives and creating an environment of mutual
trust among entrepreneurs and investors. Miroslav Glas, Mateja
Drnovek, Damjan Mirti, Viljem Peniny, Ljubljana 200220 20.
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