Market Gaps on Access to Finance - Bank of Valletta

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Lifecycle stage Current financing needs Current financing options Scope for financial instruments Growth (Emerging/ Development/ Expansion) 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 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 Page | 64 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 cooperatives 102 . 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 €68 million a year. About 85% are micro organizations, about 10% are small organizations and the remaining 5% are medium-sized 103 . 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 Entrepreneurship 104 . 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 skills 105 . 102 Times of Malta (2012), Work on formal social enterprise policy begins 103 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 Page | 65
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Market Gaps on Access to Finance - Bank of Valletta

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