Financing SMEs and Entrepreneurs 2020

11. Czech Republic

Key facts on SME financing

In 2018, there were roughly 1.155 million active enterprises in the Czech Republic. 99.83% of these firms were SMEs with less than 250 employees each. Together, they employed almost 1.88 million people, or 57.68% of the Czech Republic’s workforce. Micro-firms dominated the business landscape, comprising 96.4% of all SMEs in 2018 (roughly stable from 2017).

SME interest rates increased by 25.6 % in 2018 vis-à-vis 2017. It is the first year of increasing after the period 2008-17, when SME interest rates continued dropping year-on-year (by 55.1% in total). The recent development in interest rates was likely caused by tightening a monetary policy by the Czech National Bank (CNB) from 2017 onwards, which decided to increase interest rates from 0.50 to 0.75 percentage points in 2018.

Venture capital investments peaked in 2008, and then declined dramatically to 2017. This trend has been changed in 2018, with VC investments amounting to EUR13.9 million, 33.6% of their 2008 value. Growth capital fell even more steeply, from EUR 191.9 million in 2009, to EUR 4.9 million in 2016. In 2018, it dropped to 3.5 million.

Government support for enterprises and entrepreneurs primarily comprises measures with respect to developmental and operational financing, export support, support of the energy sector, development of entrepreneurial skills and financial literacy of entrepreneurs, technical education and research, as well as development and innovation.

In December 2012, the Czech government adopted a Small and Medium Sized Enterprises Support Strategy 2014-20 (SME 2014+), which represents the key strategic document for the preparation of the European Union (EU) cohesion policies over the 2014–20 programming period in the area of enterprise development. This includes the Operational Programme Enterprise and Innovations for Competitiveness (OPEIC), and similarly important national SME support programmes.

SME 2014+ also acknowledges the need to support social enterprises and strengthen social entrepreneurs’ education. The SME 2014+ is implemented through national programmes that support enterprises, such as the GUARANTEE, ENERG, VADIUM or Inostart programmes; and via the OPEIC.

SME 2014+ aims to motivate entrepreneurs to utilise available funding for the development of their businesses through national and EU programmes. This includes several tools, such as government loan guarantees (Czech-Moravian Guarantee and Development Bank), financing schemes for exporting SMEs (Czech Export Bank) and innovative businesses (INOSTART programme), as well as a programme to draw financial resources from the EU structural fund (OPEIC), which provides support to SMEs through grants, preferential loans and guarantees.

The Czech-Moravian Guarantee and Development Bank (CMGDB) is a specialised state-owned banking entity with a primarily mission of facilitating SME access to financing. Next to the programmes GUARANTEE and EXPANSION, the CMGDB launched two new programmes – ENERG and VADIUM, financed by the national budget. In June 2017, the CMGDB launched a new programme ENERG, earmarked for SMEs located in the capital of Prague. Entrepreneurs can obtain an investment loan of up to CZK 20 million for investment projects that spur energy savings in the company. In July 2018, the Bank launched a new programme VADIUM, which provides small entrepreneurs with guarantees (of up to CZK 50 million) for bids in public tenders. In 2018, the Bank also became an intermediary for equity investments from the Central Europe Fund of Funds (CEFoF), administered by the European Investment Fund. CEFoF will invest into innovative SMEs and small mid-caps in a later stage venture and growth phase, with a volume of financial resources of at least EUR 80 million.

Table 11.1. Scoreboard for the Czech Republic

Indicator	Unit	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	CZK billion	555.03	527.55	550.08	587.91	589.68	610.79	621.39	652.59	702.81	725.63	762.99
Outstanding business loans, total	CZK billion	850.76	784.07	783.54	831.21	840.59	871.58	890.23	935.36	994.86	1036.1	1097.39
Share of SME outstanding loans	% of total outstanding business loans	65.24	67.28	70.20	70.73	70.15	70.08	69.80	69.77	70.64	70.03	69.53
New business lending, total	CZK billion	866.11	780.87	667.98	599.09	694.94	500.50	544.73	607.59	510.58	457.94	461.84
New business lending, SMEs	CZK billion	207.24	147.74	123.40	124.12	129.83	86.66	97.76	118.28	100.46	101.24	97.92
Share of new SME lending	% of total new lending	23.93	18.92	18.47	20.72	18.68	17.31	17.95	19.46	19.68	22.11	21.20
Outstanding short-term loans, SMEs	CZK million	..	..	73 626	72 433	77 853	45 531	40 360	41 742	36 974	33 918	29 835
Outstanding long-term loans, SMEs	CZK million	..	..	49 772	51 684	51 977	41 129	57 404	76 475	63 490	67 325	68 090
Share of short-term SME lending	% of total SME lending	..	..	59.67	58.36	59.97	52.54	41.28	35.31	36.80	33.50	30.47
Government loan guarantees, SMEs	CZK million	3 529	6 369	6 593	472	1 534	3 251	4 010	6 913	3 530	4 014	6 485
Government guaranteed loans, SMEs	CZK million	5 094	9 550	10 070	630	2 215	4 616	5 771	9 947	5 055	5 758	9 287
Direct government loans, SMEs	CZK million	286	209	629	1 090	782	101	86	65	7	291	1 440
Non-performing loans, total	CZK million	35 340	61 904	70 166	67 876	61 480	62 032	58 694	52 677	50 307	43 225	39 999 (P)
Interest rate, SMEs	%	5.57	4.64	4.01	3.73	3.48	3.13	3.76	2.70	2.50	2.50	3.14
Interest rate, large firms	%	4.84	3.46	3.34	2.63	2.43	1.89	2.00	1.80	1.80	1.90	2.62
Interest rate spread	% points	0.73	1.18	0.67	1.10	1.05	1.24	1.76	0.90	0.70	0.60	0.52
Non-bank finance
Venture and growth capital	EUR million	104.0	219.7	153.8	18.3	9.5	23.3	34.6	12.4	9.4	16.3	17.4
Venture and growth capital (growth rate)	%, Year-on-year growth rate	..	111.2	-30.0	-88.1	-48.1	145.4	48.3	-64.0	-24.6	73.9	6.7
Other indicators
Payment delays, B2B	Number of days	18.00	19.00	14.00	14.00	15.00	14.00	14.00	14.00	19.00	16.00	15.00
Bankruptcies, SMEs	Number	873	1 280	1 301	1263	1345	1379	1228	1001	904	769	649
Bankruptcies, SMEs (growth rate)	%, Year-on-year growth rate	..	46.62	1.64	-2.92	6.49	2.53	-10.95	-18.49	-9.69	-14.93	-15.60

Source: See Table 11.3.

SMEs in the national economy

SMEs play an important role in creating jobs in the Czech Republic and generally contribute to social stability and economic development. Their development may, however, be hindered by factors such as insufficient collateral for obtaining capital or loans, limited resources to access information (especially on new technologies and potential markets), limited market reach, obstacles to entering foreign markets, as well as insufficient innovative potential.

The value added by SMEs continues to grow on a year-on-year basis, reaching nearly CZK 1.8 trillion in 2018. The share of SMEs that directly export is lower than that of large companies, and amounts to one-third (32.5%) of all exports. The statistics may, however, be skewed by the fact that SMEs often play the role of suppliers to large enterprises that export.

SME lending

New SME loans declined continuously between 2007 and 2010 by 40.7%, recovering slightly in 2011 and 2012 (+0.6% and +4.6%, respectively). In 2013, this upward trend again reversed with new SME lending dipping by 33.3% in the span of a single year. Recovery since then has been uneven, with increases in 2014 and 2015, and a 15% drop in 2016. The volume of new SME loans remained stable in 2017. Total new business loans peaked in 2008, before contracting again by a total 30.8% in the 2008-11 period. In 2018, new business lending reached a new record low, declining by 47 % vis-à-vis the pre-crisis period (2008).

This evolution is mainly due to the impact economic activity had on the volume of new loans in general. Its decline in 2013 negatively affected new lending volumes, especially for SMEs. The increase in new loan volumes in 2014 was a result of the recovery in economic activity. Moreover, in 2016, there was a discrepancy in the evolution of the volumes of new CZK loans and new EUR loans, as the former decreased and the latter increased. This can be explained by the likely exchange rate fluctuation after the Czech National Bank was expected to exit from the exchange rate commitment (using the exchange rate as an additional instrument for easing the monetary conditions).1

Overall, volumes of new loans to non-financial enterprises have remained on a lower level in comparison to the pre-crisis period (before 2009). From a long-term perspective, there seems to be an effort by companies to optimise their balance sheets and use their own sources of finance for their operational and investment expenses. In a context of growing demand for long-term credit, new loans are utilised especially for financing mergers and acquisitions, restructuring, as well as for debt and fixed investment expenses.

As in the reference period new SME loans shrank more than new business loans, the SME loan share in total new business loans decreased from 23.9% in 2008 to 22.2 % in 2018. This trend is caused by two factors. First, banks implemented stricter rules for credit risk management, placed higher demands on the financial health of borrowers and requested higher loan collateral. Entrepreneurs, on the other hand, faced lower order volumes, and fears of an uncertain economic development led to discretion in lending money along with more efficient methods of utilising own resources.

Figure 11.1. Changes in the demand for business loans in the Czech Republic

As a percentage

Source: Czech National Bank. Bank Lending Survey January 2019. Available at https://www.cnb.cz/en/financial-stability/bank-lending-survey/Bank-lending-survey-2019/.

Statlink

Credit conditions

SME interest rates were down for the third year in a row (2015-2017), to reach a level of 3.1% in 2018. This represents a cut of less than half from their 2008 level. Large enterprises’ interest rates also followed a similar pattern of decline since 2008, reaching 1.8% in 2016, 1.9% in 2017. In 2018, they grew to 2.6.%.

The interest rate spread between SMEs and large firms fluctuated between 2007 and 2018, dropping by almost half in 2015, and declining by a further 13,4% in 2018 to reach 0.5 percentage points.

Figure 11.2. Credit standards for non-financial corporations in the Czech Republic

As a percentage

Source: Czech National Bank. Bank Lending Survey January 2019. Available at https://www.cnb.cz/en/financial-stability/bank-lending-survey/Bank-lending-survey-2019/

Statlink

Alternative sources of SME financing

Venture capital investments peaked in 2008, and then declined dramatically, reaching 33.6% of their 2008 value in 2018. Growth capital fell even more steeply, from EUR 192 million in 2009 to EUR 4.9 million in 2016. In 2017, growth capital grew by 56 % to 7.6 million and in 2018 again dropped to 3.5 mil. Total equity investments showed strong growth in 2013 and 2014, although this was not sustained, as they contracted strongly in 2015, and declined further in 2016 to reach a level lower than that of 2012. There was a recovery in 2017 in equity investments, which grew by 74% and in 2018 by 6.7%. This indicates the instability of equity financing in the Czech Republic and their current marginal role in enterprise financing.

Table 11.2. Venture capital and growth capital investments in the Czech Republic

By stage of investment, in EUR thousand

Stage	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Seed	0	0	0	0	0	0	2 602	0	300	712	3 415	0
Start-up	500	282	0	13 141	2 718	127	1 038	2 935	1 300	3 488	150	13 895
Later stage venture	2 027	41 091	27 675	9 939	6 475	5 124	800	2 600	70	0	0	0
Total venture	2 527	41 373	27 675	23 080	9 193	5 251	4 440	5 535	1 670	4 200	3 565	13 895
Growth	118 262	62 613	191 984	128 142	9 092	4 240	15 952	29 428	8 750	4 860	7 614	3 510

Source: Invest Europe.

Note: Data from Invest Europe present a far from complete picture of the VC/PE market in the Czech Republic, as most transactions are not captured. Indeed, the majority of VC transactions in the Czech Republic come from captive VC funds and other non-Invest Europe members (e.g. Springtide Ventures, Inven Capital, JT Ventures). The actual trend from the past few years is a growth in the number of funds and capital raised.

Several public initiatives of the ministry of Industry and Trade, mainly through the EIF, helped develop the market recently. A new VC/PE fund – ESPIRA – was founded thanks to CEFoF, which also supported ENERN III and Genesis Growth Equity Fund in the later stage/growth segment in 2018. Two further accelerator/seed funds (Nation 1 VC and Lighthouse Ventures) were established as a result of the EIF fund of funds under the programme VENTURE CAPITAL OPEIC at the end of 2018.

Another option for alternative SME financing emerged in the Prague Stock Exchange, where a new alternative SME market START was created in 2018. During this year, there were 6 IPOs for EUR 14 million. Equity crowdfunding platforms like Fundlift are also gaining importance.

Other indicators

The proportion of non-performing loans to all loans almost tripled between 2008 and 2010, growing from 4.1% to 10.8%. This could be attributed to a worsening of the Czech economic climate in the same period. Since then, this percentage has fallen steadily, from 11.3% in 2011 to 8.7% in 2018 (to 31.3.2018), still remaining well above pre-crisis levels. It should also be noted that the quality of loans categorised as non-performing has been deteriorating, and that Czech banks have been facing an elevated credit risk.

SME bankruptcies increased year-on-year between 2008 and 2013, and remained more or less on the same level until 2013. Between 2008 and 2013, SME bankruptcies increased by 58.0%. Since then, it has declined continuously, falling from 1 228 SME bankruptcies in 2014 to 649 in 2018, the lowest.

Government policy response

Government policy support to SMEs is based on Act No. 47/2002 Coll., covering the support to small and medium-sized enterprises, and on the Small and Medium-sized Enterprises Support Strategy 2014-20. Financing small and medium-sized enterprises has been one of the key themes of the Czech government in recent years. In the aftermath of the financial crisis and the subsequent economic recession, the government was looking for ways to facilitate access to finance for SMEs.

In accordance with the Strategy for the support of small and medium-sized enterprises for 2014‑20, and the Action Plan to support small and medium-sized enterprises in 2017 and 2018, the Ministry of Industry and Trade considers strengthening the growth motivation of SMEs to be an important priority. Eligible SMEs must be marketing-ready and able to find new markets outside the Czech Republic (both in territorial and product terms), enter them and survive. It bears upon an increased ability for international expansion, as well as on extending the scope of export, production and sales activities.

The Marketing programme, which had been prepared in this spirit within the Operational Programme Enterprise and Innovation for Competitiveness 2014-20 (OPEIC 2014-20), was approved by the Government Decree no. 581 of 14 July 2014. The aim of the marketing programme, to which the sum of CZK 1.5 billion has been allocated, is to increase the internationalisation of small and medium entrepreneurs by supporting their participation in foreign exhibitions and fairs, the provision of advantaged consulting services, and more.

The Czech-Moravian Guarantee and Development Bank (CMGDB), the Czech Export Bank (CEB) and the Export Guarantee and Insurance Corporation (EGIC) are state-owned institutions. Given the decline in SME lending and its impact on employment, investment and exports, guarantee activities were stepped up in the aftermath of the crisis. In the framework of anti-crisis measures, the Ministry of Industry and Trade provided assistance under several programmes. All of these programmes are evaluated regularly and presented in the “Report on Developments in Small and Medium-sized Enterprises and their Support”, that is submitted to the government and to Chambers of Deputies of the Parliament.

GUARANTEE programme

The national guarantee programme for small businesses (GUARANTEE 2015-2023) allows small businesses (less than 50 employees) to obtain a guarantee for a bank loan (investment and operational loans), using as a part of its funding resources terminated former guarantees and repaid loans. The programme is administered by the CMGDB, which has been under full control of the Czech government since 2012. Eligible firms need to be registered in the Czech Republic, and not operate in primary production in the areas of agriculture, fisheries and aquaculture. In 2018 the guarantees by beneficiaries amounted to CZK 11.0 billion.

The CMGDB’s key guarantee program for SMEs in 2018 was the GUARANTEE 2015-2023 Programme which was launched in February 2015. The programme was mainly comprised of guarantees for working capital loans provided in a number twice as high as investment guarantees. The results of this programme implementation (especially after its expansion from the end of 2017) confirmed increasing interest in the use of the guarantees in 2018. In addition to using national resources, the GUARANTEE 2015-2023 Programme is co-financed also from the European Investment Fund under the COSME programme.

EXPANSION programme

The first call of the programme EXPANSION (Loan Fund) financed from the OPEIC 2014-20 was launched in June 2017. It facilitates access of SMEs to bank loans by providing them with soft (subsidised, preferential) investment loans and financial contribution in the form of interest rate subsidies of commercial co-loan (applicable only for projects in disadvantaged regions). The programme is administered by the CMGDB. Eligible firms need to be registered in the Czech Republic, and not operate in primary production in the areas of agriculture, fisheries and aquaculture.

The planned allocation to the programme is CZK 8.8 billion, out of which CZK 4.8 billion are allocated to the Loan Fund and CZK 4.0 billion are allocated to the Guarantee Fund. For the first call, which ran until March 2019, CZK 2.2 billion were allocated. In this programme, the CMGDB cooperates on a contractual basis with private banks, which provide SMEs with a co-loan. The CMGDB offers businesses a preferential loan, representing a maximally 60% of project eligible expenditure, to a maximum of CZK 100 million. By the end of 2018, the programme provided entrepreneurs with loans amounting to CZK 1.7 billion. The CMGDB also offers businesses a guarantee representing a maximum of 80% of a principal guaranteed loan (Guarantee Fund).

The CMGDB’s main programme of loans for SMEs in 2018 was again the EXPANSION - LOANS Programme. The programme has been implemented as part of the OPEIC and will be in operation until the end of the programming period in 2023. The programme conditions were amended several times during 2018, and these changes had a major impact on small and medium-sized enterprises’ growing interest in obtaining a loan from the this programme. The second part of the EXPANSION – Guarantee Programme was activated in the Autumn of 2018 and the first call was opened for 15 February 2019.

Figure 11.3. Trends in SME and entrepreneurship finance in the Czech Republic

Source: See Table 11.3.

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Table 11.3. Definitions and sources of indicators for the Czech Republic’s scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	Stock of loans issued to resident non-financial businesses with 0-249 employees or with unknown number of employees and with total revenue CZK 0-1 500 million	CNB, Loan register
Outstanding business loans, total	Outstanding loans to non-financial sectors other than government (stock)	CNB, ARAD
New business lending, total	All new business loans	CNB, ARAD
New business lending, SMEs	New business loans < CZK 30 million	CNB, ARAD
Short-term loans, SMEs	New business loans < CZK 30 million with maturity up to 1 year	CNB, selection from SNOB
Government loan guarantees, SMEs	Volumes of guarantees provided by the CMGDB	CMGDB
Government guaranteed loans, SMEs	Volumes of commercial loans guaranteed by the CMGDB guarantees stated above	CMGDB
Direct government loans, SMEs	Preferential loans provided by the CMGDB	CMGDB
Non-performing loans, total	Amount of total non-performing business loans	CNB, ARAD
Interest rate, SMEs	From new business loans < CZK 30 million	Calculations based on CNB ARAD data
Interest rate, large firms	From new business loans > CZK 30 million	Calculations based on CNB ARAD data
Non-bank finance
Venture and growth capital	Venture and growth capital, total amount invested	Invest Europe
Other indicators
Payment delays, B2B	Barometer of payment moral	Atradius
Bankruptcies	A number of enterprises ruled bankrupt	CRIF

References

T. Atradius, Payment Practices Barometer 2018, available at: https://atradius.cz/publikace/payment-practices-barometer-czech-republic-2018.html

Invest Europe, “European Private Equity Activity” series, available at: https://www.investeurope.eu/research/activity-data/annual-activity-statistics/

Czech National Bank, “Financial Stability Report 2017/2018”, available at: https://www.cnb.cz/en/financial_stability/fs_reports/fsr_2017-2018/index.html.

Czech National Bank. Bank Lending Survey January 2019. Available at https://www.cnb.cz/en/financial-stability/bank-lending-survey/Bank-lending-survey-2019/

Czech Statistical Office, Indicators of number of SMEs and Book value added

Ministry of Industry and Trade, Report on the Development and Support of Small and Medium-Sized Enterprises in 2018 – has not been finalised yet.

Ministry of Industry and Trade, Report on the Development of the Business Environment in the Czech Republic in 2018 – has been approved by the Czech Government on 30 September 2019.

Czech-Moravian Guarantee and Development Bank, Annual Report 2018, available at: https://www.cmzrb.cz/o-cmzrb/povinne-uverejnovane-informace/vyrocni-zpravy/?rc.

Note

← 1.  Exit from the exchange rate commitment, Czech National Bank. https://www.cnb.cz/en/monetary_policy/exit_exchange_rate_commit/index.html