European SMEs
Positive Economic Outlook, Greater Profitability, The Same Funding Gap.
European SMEs have achieved greater profitability than large companies, showing strong resilience and business acumen to weather the interest rate storm during previous years.
During the first three quarters of 2024, European Small and Medium Enterprises (SMEs) demonstrated remarkable resilience and profitability, surpassing large enterprises. This performance reflects SMEs’ agility in navigating the prior years' high-interest rate environment. Coupled with optimistic economic forecasts, this sets the stage for high-growth opportunities.
However, despite these improvements, SMEs have not experienced significant relief in funding costs or access to traditional financing channels. Compared to 2023 and the early months of 2024, the financial landscape remains constrained, driving increased interest in alternative financing options such as private debt funds, trade finance, and growth-oriented loans
Introduction
European enterprises, particularly SMEs, continue to face challenges in accessing finance amid economic improvements. Despite interest rate cuts aimed at controlling inflation, cautious lending practices persist, widening the gap between financing availability and demand. The Survey on the Access to Finance of Enterprises (SAFE) for 2024 indicates limited progress in easing financial constraints for SMEs.
Central banks have begun reducing interest rates as inflation nears the 2% target. While this fosters optimism, the conservative stance of traditional financial institutions, especially in weaker economies, has hindered financing availability. This backdrop has increased reliance on alternative lenders, including private debt funds, which offer tailored solutions to meet growth and operational needs.
The main results of the Survey on the Access to Finance of Enterprises (SAFE), which asks firms about the economic and financing developments during each quarter of 2024, show an improvement in economic terms for enterprises in the second and third quarter compared to the first quarter of 2024.
Financing Cost Disparities Between SMEs and Large Enterprises
The gap in financing costs between SMEs and large enterprises has widened during periods of high interest rates and only narrows slowly as rates decline. Banks perceive SMEs as higher-risk borrowers due to limited credit histories and smaller collateral bases, further exacerbating cost disparities.
Even in favourable economic environments, higher borrowing costs constrain SME growth and, in weaker economies, jeopardize day-to-day operations. SMEs comprise 99.8% of EU enterprises, contributing 58% of GDP. Constraints on their financial performance can have significant economic repercussions, perpetuating a cycle of restricted growth and heightened risk perception.
Graph 1: Change in Cost of Funding Terms and Conditions as Perceived by Euro Area Firms
Graph 1 looks at historical changes in price terms and conditions as perceived by the euro area as a weighted average score in percentages as reported over the years by enterprises in the SAFE report. Using historical data from 2011 up until 2024 Q2, the graph projects a forecast of how this change in price terms between large firms and SMEs will look from Q3 of 2024 to Q2 of 2025. The financial cost disparity gap is forecasted to decrease at a slow pace, hovering over the 10-20% range. Such a gap gives testament to how, despite the improved economic conditions, it will start to close down, and a significant difference between the financing costs for SMEs and large enterprises will remain in the next 4 quarters.
While in countries with a healthy economy, higher borrowing costs can constrain SMEs' capacity to invest in growth and development, in countries with weaker economies where SMEs rely on financing to run their day-to-day operations, higher costs can lead to insolvency. In the EU, around 99.8% of companies are SMEs, which, according to the EU, is any company with fewer than 250 employees, and these SMEs generate around 58% of the EU GDP.
High costs of borrowing and limited financing availability can severely hamper the economy. A loophole where limited access and high costs constrain the ability of SMEs to perform, grow and potentially survive could slow down economic growth and lead to a worsening in the economic environment. This would subsequently further fuel the bank’s worries and perception of risk associated with SMEs due to their increased vulnerability, leading to a further decrease in the availability of finance.
Country-Level Gaps in Demand and Availability for Finance
The availability of finance varies significantly across the eurozone, reflecting disparities in banking sector health and economic stability. Robust economies like Denmark experience minimal financing gaps, while countries like Greece face persistent challenges despite broader improvements.
SAFE data highlights the following differences:
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Increased financing availability was reported in 67% of surveyed eurozone countries in Q3 2024.
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Significant increases in financing needs were noted in 42% of countries, often outpacing availability.
A deeper analysis of Italy, Spain, and Finland reveals divergent trends:
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Spain maintained stable financing availability, supported by improved macroeconomic conditions and reduced financing needs.
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Italy experienced rising financing needs, straining perceived availability despite macroeconomic progress.
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Finland saw fluctuating availability and stable but elevated financing needs, reflecting its unique economic dynamics.
The SAFE survey data[1] illustrates these differences between availability and needs for bank loans, looking at Q1 to Q3 of 2024 in terms of net percentage and percentage of respondents. In addition, the survey also looks at the percentage increase or decrease in reported enterprise vulnerability.
The following bubble plot graphs visualise data from the 31st and 32nd SAFE surveys. With financing availability in the x-axis and financing needs in the y-axis, expressed as percentage figures of respondents, one can see the movement from Q1 to Q2 to Q3 (from a lighter tone to a darker tone of each country-specific colour). In addition, the size of the bubble represents the vulnerability reported by firms, providing an additional layer of data to further understand how the changing economic environment affects enterprises.
Graph 2: Bank Loans Availability vs Needs Across Europe
Graph 2: Bank Loans Availability vs Needs Across Europe depicts these differences in country-level financing gaps in Q3. Looking at various countries with different economic scenarios and clusters in the euro area, one can see how different companies have reacted and have reported their financing needs and availability in Q3 of 2024. The data suggests that although 66.6% of (8/12) countries reported an increased financing availability in Q3 of 2024, only 25% of (3/12) countries saw a significant increase of more than 5% in the availability of financing. On the other hand, 41.67% (5/12) of countries reported having an increase in financing needs.
Graph 3: Bank Loans Availability vs Needs: Q1 2024 – Q3 2024
Graph 3, which looks at Italy, Spain and Finland across the first three quarters of 2024. Italy and Spain have seen increases in availability of financing which is supported by the improvement in the macroeconomic environment with a close-to-target inflation rate and lower interest rates. Concerning, perceived financing needs, Spain and Italy saw a significant increase from Q1 to Q2. From Q2 to Q3, Spain managed to maintain the perceived availability of financing at the same level as a result of both an improved economic environment and a decrease in financing needs. From Q2 to Q3, Italy saw a further increase in needs, which consequently contributed to a decrease in perceived availability, which, despite this fall, remained higher than in Q1. Finland behaved quite differently as availability fell from Q1 to Q2 and then came back to its Q1 level in Q3. Needs, however, significantly increased from Q1 to Q2 and remained at the Q2 level in Q3. Concerning vulnerability, Italy saw the most significant decrease, with a 2% fall from Q1 to Q3. Spain’s vulnerability only decreased by 1% from Q1 to Q2 and remained constant at 5% from Q2 to Q3. Finland’s vulnerability, although decreasing 5% from Q1 to Q2, increased 5% back to its Q1 level in Q3.
Bank Lending Constraints Despite Interest Rate Cuts
Despite declining interest rates, restrictive lending practices by banks persist, driven by economic uncertainties, regulatory pressures, and risk aversion following events like the collapse of Silicon Valley Bank. Collateral and documentation requirements remain stringent, disproportionately affecting SMEs.
SAFE’s Q3 2024 survey indicates:
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A decline in firms reporting improvements in loan availability (6%, down from 9% in Q2).
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A marginal narrowing of the financing gap, primarily due to reduced demand rather than increased supply.
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SMEs face a more constrained credit environment compared to larger enterprises, which benefit from superior bargaining power and broader funding options.
Historical trends suggest SMEs will continue to bear higher financing costs compared to their larger counterparts. This is partly due to standardization in SME lending products and the limited negotiation leverage SMEs have in comparison to large firms with sophisticated financial teams and established market access.
Graph 4: ECB Interest Rate – Q2 2022 to Q2 2025
Like the 31st, the 32nd round of the SAFE survey conducted between the 2nd of September and the 15th of October suggests that although borrowing costs continued to rise to a much lower extent than the second quarter, many firms still indicate a further tightening of other loan conditions. In addition, 20% of firms perceived the general economic outlook to be the main factor hampering the availability of external funding, which represents a steep rise from 12% in Q2.
Worryingly, despite inflation rates falling and continuing cuts across Q2 and Q3 in interest rate levels, only 6% of firms reported an improvement in banks’ willingness to level, which is lower than the 9% reported in Q2. In addition, firms reported a slight increase in perceived vulnerability in Q3, and fewer enterprises reported increased investments compared to Q2. Across size classes, large enterprises still signalled better overall financing price terms and conditions when compared to SMEs.
Although the financing gap for bank loans narrowed in Q3 compared to Q2, this was mainly due to a decrease in needs rather than an increase in availability. Only 1% of firms reported an improvement in the availability of bank loans, which is lower than the 2% reported in Q2.
Historical data shows that market traditional financial institutions have taken longer to transfer lower costs of funding to SMEs than they have done so for larger companies. This can be explained by the higher bargaining power expressed towards SMEs as historically, the way to serve such companies has been through standardised lending products, differing greatly from their approach towards larger companies, as larger companies have a wider pool of funding options to opt from, creating a balance of power between them and their traditional financial service providers. Additionally, the experience in financial and capital markets that large companies hold at their financial divisions has historically been more structured and experienced than SMEs can afford, creating a knowledge disparity between these entities that allows larger companies to strengthen their bargaining agreements when it comes to negotiating funding rates and fees.
As markets expect the central bank to continue lower rates, we expect that SMEs face a similar challenge than in the past, with a funding cost gap to sit between 10% and 12% in Q1 and Q2 of 2025, around 6% lower than in the previous interest rate falling cycle where it was between 14% and 17% in 2024. Having said this, we acknowledge that teams in the finance divisions of European SMEs today are more knowledgeable than in the past, making them hold a competitive advantage versus their funding counterparts, but also making them more inclined to choose alternative financing products and instruments in the private markets and capital markets.
Despite improved economic indicators, the financing landscape for European SMEs remains challenging. Limited progress in traditional bank lending compels SMEs to explore alternative funding sources.
As central banks continue to reduce interest rates, SMEs may face marginally lower funding costs but will remain reliant on private lenders and capital markets to bridge financing gaps. This shift presents significant opportunities for investors focused on private debt and SME-focused financial products.
Investment professionals should monitor these developments closely, as SMEs’ adaptability and increasing use of alternative funding could drive high-growth strategies and innovative financial solutions in the coming years.
The constrained availability of traditional financing underscores the growing importance of alternative funding solutions. Private debt funds and capital market instruments like equity and bond listings are gaining traction among SMEs, offering tailored agreements that align with growth strategies.
With financing cost disparities expected to narrow modestly by mid-2025, SMEs are likely to increase their adoption of non-traditional financing options, leveraging the competitive advantages of today’s more financially savvy SME management teams.
APG expects European SMEs to face higher funding costs than its large peers.
Conclusion
Despite an improvement in the economic scenario in the euro area with inflation levels close to their 2% target, lower interest rates, and a positive outlook, the availability of external funds in the form of bank loans has remained relatively low,
References:
EPP Group in the European Parliament (no date) Helping small businesses to thrive. https://www.eppgroup.eu/what-we-stand-for/our-priorities/helping-small-business-to-thrive.
European Central Bank (2022) Monetary policy.
European Central Bank (2024a) Survey on the Access to Finance of Enterprises in the euro area - First quarter of 2024. https://www.ecb.europa.eu/stats/ecb_surveys/safe/html/ecb.safe202404~580876cfb9.en.html.
European Central Bank (2024b) Survey on the Access to Finance of Enterprises in the euro area - Second quarter of 2024. https://www.ecb.europa.eu/stats/ecb_surveys/safe/html/ecb.safe202407~58a9f48351.en.html.
European Central Bank (2024c) Survey on the Access to Finance of Enterprises in the euro area - Third quarter of 2024. https://www.ecb.europa.eu/stats/ecb_surveys/safe/html/ecb.safe202411~451cceb0f4.en.html#toc3.
World Economic Forum (2024) Businesses driving the EU economy. https://www.weforum.org/stories/2024/01/chart-drive-eu-economy-small-business-sme/#:~:text=Globally%2C%20SMEs%20make%20up%20about,for%20over%20100%20million%20jobs.
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