Market Gaps on Access to Finance - Bank of Valletta

Malta Business Bureau – <strong>Market</strong> gaps in access to finance
April 2013
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.
Page | 23