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: miroslav.glas@uni-lj.siViljem Peniny GEA College of EntrepreneurshipTel.: +386 1 5687 002 E-mail: viljem.psenicny@gea-college.si 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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