Market Gaps on Access to Finance - Bank of Valletta

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Table 7: Mapping of financial instruments with Malta SME firm lifecycle Lifecycle stage Current financing needs Current financing options Scope for financial instruments 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. Limit to growth set by internal resources Smaller financing needs compared to subsequent phases 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. Lack of accessibility to bank financing Specialised grant schemes Lack of equity programmes / VC funds/ formal business angel networks Lack of equity investor readiness Page | 62 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 Current financing needs Current financing options Scope for financial instruments Start-up 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. Increased financing needs Initial working capital requirements 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. 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. 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. 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. Lack of accessibility to bank financing Specialised grant schemes Lack of equity programmes / VC funds/ formal business angel networks Lack of equity investor readiness Page | 63 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. 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. 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. 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
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Market Gaps on Access to Finance - Bank of Valletta

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