Financing SMEs and Entrepreneurs 2020

13. Estonia

Key facts on SME financing

In 2017, Estonian SMEs employed 79% of the workforce and accounted for 79.2% of total value added. 91.6% of all firms were micro-enterprises, i.e. firms with less than 10 employees, employing 34% of the workforce and accounting for 29.9% of total value added in 2017.

Lending to Estonian SMEs contracted significantly in the aftermath of the financial crisis, with new SME loans almost halving from EUR 3.6 billion in 2007 to EUR 1.9 billion in 2010. Following the rebound of the Estonian economy, new SME lending began to slowly pick up again after 2011, but remained below pre-crisis levels in 2018, as was the case for outstanding SME loans.

Under the Estonian corporate income tax system, all reinvested profits are tax-free. Thus, companies have incentives to reinvest their profits, which may be an explanation for the low demand for loans. Loans under EUR 1 million, which are used as a proxy to describe SME loans, may have become unreliable to depict SME activities. This is because the high inflation rates in recent years may have pushed SMEs to contract larger loans.

The base interest rate on SME loans up to EUR 1 million decreased steadily from 4% in 2012 to slightly below 3% in 2016. After that, interest rates started to increase again reaching 3.28% in 2018. For larger loans, the interest rate has risen for the last three years in a row to 2.12%.

Venture and growth capital has been growing steadily on recent years. Estonia has a well-developed start-up community that has good potential for raising venture capital. The year of 2018 was a record year, with companies raising EUR 329 million, a 21% year-on-year growth.

Leasing and hire purchases turnover declined sharply between 2008 and 2009, and only recovered somewhat in 2011. After that, recovery was stronger and total turnover grew by 13% in 2018. Factoring was also much more important in 2018 than in previous years, reaching EUR 3 billion. This is close to EUR 700 million more than the year before.

Payment delays, bankruptcies and non-performing loans increased sharply in the aftermath of the financial crisis, peaking in 2009-10, but began to level off post-2010. In 2017, non-performing loans amounted to a 1.99% share of total SME loans (slightly higher than the previous year), while SME bankruptcies decreased by 20% year-on-year. The share of non-performing loans in total loans decreased strongly to 0.81%, with SME NPLs slightly increasing from 1.94% to 1.99% in 2018.

The Estonian government provides loan guarantees to all types of companies. Government loan guarantee volumes have been much higher in recent years than in the past (especially over 2007-08), but have overall followed an erratic pattern since 2009. In 2018, government loan guarantees to SMEs increased by 18.5%, and so did total guaranteed loans. Higher economic activity also improves demand for guarantees.

KredEx, a state owned financing institution, remains an investor in several fund- of-funds. The Baltic Innovation Fund, which has been running since 2012, in the EstFund, since 2016, offering private and venture capital. KredEx also provides the management of the fund-of-funds Early Fund II via the subsidiary AS SmartCap. With the support of these funds, a total of nearly EUR 700 million is being invested in the rapidly developing companies of the region.

Table 13.1. Scoreboard for Estonia

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, SMEs	EUR billion	2.44	2.49	2.13	1.90	1.68	1.61	1.65	1.70	1.67	1.71	1.81	1.70
Outstanding business loans, total	EUR billion	6.80	7.20	6.86	6.46	5.95	6.15	6.25	6.44	6.80	7.34	6.93	7.17
Share of SME outstanding loans	% of total outstanding business loans	35.83	34.55	31.01	29.37	28.28	26.24	26.45	26.40	24.56	23.23	26.1	23.7
New business lending, total	EUR billion	8.55	7.31	4.46	4.26	5.06	5.61	6.17	6.41	6.68	6.99	7.19	7.92
New business lending, SMEs	EUR billion	3.60	3.52	2.13	1.87	1.96	2.12	2.37	2.46	2.25	2.37	2.55	2.63
Share of new SME lending	% of total new lending	42.09	48.21	47.70	43.82	38.63	37.80	38.43	38.42	33.73	33.84	35.5	33.26
Short-term loans, SMEs	EUR million	480.53	475.13	377.13	317.84	325.92	302.35	317.41	333.41	300.81	314.86	320.18	299
Long-term loans, SMEs	EUR billion	1.96	2.01	1.75	1.58	1.36	1.31	1.34	1.37	1.37	1.39	1.49	1.40
Share of short-term SME lending	% of total SME lending	19.73	19.09	17.74	16.76	19.39	18.74	19.20	19.62	18.00	18.46	17.7	17.63
Government loan guarantees, SMEs	EUR million	15	23	52	66	53	60	52	66	66	93	61	72
Government guaranteed loans, SMEs	EUR million	27	39	86	122	116	122	100	111	112	171	100	118
Non-performing loans, total	% of all business loans	0.61	3.71	8.76	8.53	5.91	3.79	2.01	1.97	1.56	1.62	1.35	0.81
Non-performing loans, SMEs	% of all SME loans	0.95	3.59	7.36	8.17	6.31	5.18	3.27	2.96	2.79	2.88	1.94	1.99
Interest rate, SMEs	%	6.11	6.71	5.34	5.06	4.92	4.02	3.41	3.36	3.04	2.96	2.99	3.28
Interest rate, large firms	%	5.68	6.13	4.21	3.90	3.76	3.05	2.86	2.68	2.05	2.08	2.12	2.13
Interest rate spread	% points	0.43	0.58	1.14	1.16	1.16	0.98	0.56	0.68	0.99	0.88	0.87	1.15
Non-bank finance
Venture and growth capital	EUR million	..	4.74	4.51	17.8	5.53	16.6	10.9	68.7	96. 6	105.7	272.6	329
Venture and growth capital (growth rate)	%, Year-on-year growth rate	..	..	- 5.00	293.72	- 68.84	200.24	- 34.34	530	40.6	9.4	157.9	20.7
Leasing and hire purchases	EUR million	891.17	709.63	222.77	281.29	519.37	649.60	545.75	537.16	543	676	718	811
Factoring and invoicing	EUR billion	1.29	1.41	0.99	0.91	1.13	1.92	1.98	2.09	2.239	2.09	2.29	3 034
Other indicators
Payment delays, B2B	Number of days	9	8.1	12.7	12.8	10.2	10.1	9.4	7	6.9	6	5.5	..
Bankruptcies, SMEs	Number	202	423	1055	1028	623	495	459	428	376	335	343	273
Bankruptcies, SMEs (growth rate)	%, Year-on-year growth rate	..	109.41	149.41	- 2.56	- 39.40	- 20.55	- 7.27	- 6.75	- 12.15	- 10.90	2.39	-20.41

Source: See Table 13.4.

SMEs in the national economy

In 2017, only 0.2% of Estonian firms were large enterprises, employing more than 250 people. SMEs employed 79% of the private sector workforce, accounted for 79.2% of total value added and for 81% of total exported goods and services. As many as 91% of all firms were micro-enterprises, i.e. firms with less than 10 employees, employing 34% of the workforce and accounting for 29.9% of total value added in 2017. SMEs thus play an important role in the Estonian economy.

Table 13.2. Distribution of firms in Estonia, 2017

By firm size

Firm size (employees)	Number	%
All firms	88 186	100
SMEs (1-249)	88 011	99.8
Micro (1-9)	80 739	91.6
Small (10-49)	6 157	7
Medium (50-249)	1 115	1.2
Large (250+)	175	0.2

Source: Statistics Estonia.

SME lending

The Estonian GDP contracted severely as a result of the 2007-08 financial crisis. As a result, new loans to SMEs almost halved between 2007 and 2010, dropping from EUR 3.6 billion in 2007 to EUR 1.9 billion in 2010. An erratic recovery has taken place ever since, with the only negative year-on-year growth registered in 2014-15, with a 8.5% drop, non-inflation-adjusted values considered. New SME loans increased by 4.6% in 2016 to EUR 2.4 billion, by 7.8% in 2017 to EUR 2.6 billion and remained at that level in 2018, with a slight 3% growth. New business lending to all businesses, however, has recovered consistently since 2010.

Although new lending to SMEs has increased in recent years, both new and outstanding SME loans remain well below levels observed in 2007-08. Total outstanding loans have increased more than SME outstanding loans for the fifth year in a row, to EUR 7.2 billion in 2018.As a result, the share of SME loans among all business loans has steadily decreased over the reference period. In 2007, SMEs accounted for 35.8% of all bank loans. Since then, the share of SME outstanding loans decreased steadily and reached a low of 23.7% in 2018. One factor here is that, due to quite high inflation in Estonia in recent years, the EUR 1 million proxy may not show accurately the SME finance activity, because SMEs may be using larger loans. As the Estonian economy has a very high share of SMEs, the total amount of loans might be a better indicator, especially considering that large companies are usually foreign and do not use local financing instruments as much.

Low interest rates and favourable credit conditions support the use of long-term capital, even for working capital purposes. In 2018, the proportion of long-term SME loans increased slightly from 82.34% to 82.37%. Deposits of Estonian non-financial enterprises grew by 8% to 7.2 billion in 2018, which is close to the total amount of loans they have. The absence of a corporate income tax on retained and reinvested profits further incentivizes firms to save and reduces their dependence on external working capital.

Credit conditions

The base rate for the interest rate on SME loans up to EUR 1 million decreased steadily from 4.0% in 2012, to 2.99% in 2017. In 2018, interest rates started to increase again and reached 3.28%. The interest rate on larger loans declined from 3.0% to 2.13% over the same period. Therefore, the interest rate spread between loans over EUR 1 million and loans up to EUR 1 million increased to 115 basis points, i.e. to levels seen during the financial crisis. This increase in the interest rate spread suggests that conditions for small loans have worsened. Nevertheless, this interest rate is lower than inflation, which reached 3.4% in 2018, and growth of labour costs, which stood at 7.3% in the same year.

Other indicators demonstrate a similar trend. For example, according to the Estonian Institute for Economic Research, the proportion of manufacturing firms reporting access to finance as a significant hurdle to business growth was 4% at the beginning of 2019. This proportion was only slightly higher to survey results in 2018, at 3%, but remains low by historical standards. Another sign of improving corporate sector finances is the consistent increase of corporate sector deposits as a share of value added and GDP. For example, according to the Bank of Estonia, deposits of non-financial companies increased by 8% year-on-year, reaching 28% of GDP in 2018.

Alternative sources of SME financing

Venture capital investments in a small country like Estonia are very volatile and available data should therefore be treated with caution, since a single investment may have strong influence on annual data. Venture and growth capital have been growing steadily in recent years. Although the Estonian Venture Capital Association has modest money supply, Estonian companies can raise venture capital abroad quite successfully. In recent years, VC investments increased with the support of the “Baltic Innovation Fund” (BIF), which co-invests with private investors.

In 2018, Estonian start-up companies attracted around EUR 329 million in investments, which was 21% more than the year before. Estonian investors provided EUR 13 million. Number of deals reached 35, compared to 41 in the previous year. Meanwhile, the average size of a deal grew by 41%. By far the biggest investment was made in Taxify, which amounted to EUR 150 million. This was followed by Pipedrive and Monese, equally with EUR 51.6 million in investments.

Leasing and factoring are relatively important sources of finance for Estonian firms. Both new and outstanding leasing volumes declined sharply between 2008 and 2009, and slightly recovered in 2011. In 2013 and 2014, however, leasing (although it increased from the lows of 2008 and 2009) remained underused compared to the pre-crisis period. Since 2014, leasing volumes have risen year-over-year by 1.1% in 2015, 24.5% in 2016, 6.2% in 2017 and 13% in 2018. New factoring volumes also decreased substantially between 2008 and 2010 but have since recovered to unprecedented levels, reaching highs in 2014 and 2015. Over the past 2 years, factoring has become more popular, growing by 10% in 2017 and by 33% in 2018.

Other indicators

According to the Krediidiinfo survey, 5.2% of companies had tax debt in second half of 2018. This is slightly lower than the year before and lower than the historical average. The highest share of companies with tax debt was registered in the construction sector and the lowest in finance.

During the financial crisis, bankruptcies among Estonian SMEs skyrocketed. In 2007, only 202 Estonian SMEs went bankrupt, whereas more than 1 000 SMEs went bankrupt in both 2009 and 2010. Since then, however, the number of bankruptcies has declined, reaching 273 in 2018. Since 2007, the number of operational companies have more than doubled, which means that the bankruptcy rate is historically at its lowest level.

Similar trends are found for non-performing loans. In 2007, SME non-performing loans, defined as loans of less than EUR 1 million and overdue for more than 60 days at year-end, reached EUR 23 million. The figure peaked at EUR 157 million in 2009. Since then, however, the value of SME non-performing loans has decreased consistently, reaching EUR 49 million in 2016, EUR 35 million in 2017 and EUR 34 million in 2018. The share of these NPLs in total SME loans likewise decreased significantly (more than four times lower than in 2010), reaching the lowest level since the crisis in 2017, at 1.94%, but slightly increased to 1.99% in 2018.

Government policy response

Start-up loans provided by Kredex give support to entrepreneurs that face difficulties in starting a company due to a lack of start-up capital, insufficient guarantees or operational history for bank loans. Unlike a conventional bank loan, fewer guarantees are required from an entrepreneur for a start-up loan. Since the introduction of this programme in 2012 and until the end of 2017, 495 projects had been financed for a total amount of EUR 130.2 million. In 2018 only, start-up loans and start-up loan guarantees from KredEx helped17 start-up companies to establish themselves, thanks to a total amount of EUR 0.9 million.

Subordinated loans (including export loans) were established in 2011. Subordinated loans support the financing needs of fast growing companies, whose level of self-financing is too low to obtain a bank loan, or whose guarantees are insufficient. KredEx provides capital to entrepreneurs, which, by increasing the solvability of their firm, increases their chances of obtaining additional financing, such as bank loans or leasing.

Subordinated loans are issued directly to enterprises, partly from KredEx’s own funds and partly from the European Regional Development Fund, within the framework of the “Enterprise state guarantees and capital loan programme”, an additional support programme for the improvement of the availability of loan capital for entrepreneurs. They have been issued with a term of up to 10 years and an interest rate ranging between 9% and 13%.

Export loans are targeted at companies wishing to finance large-scale export transactions of goods manufactured in Estonia. An export loan can be issued to a company that wishes to offer a long payment term to a foreign buyer, pay a credit insurance premium, or finance the production of goods to be sold to a foreign buyer. In 2018, two export loan agreements were concluded to secure the export transactions of two enterprises, for a total of EUR 2 million.

Additionally, industry loans are designed for export-oriented enterprises operating in the the processing industry, mining industry, the production, transfer and distribution of electrical energy and the processing and disposal of waste, which need to invest in machines and devices. Similarly to export loans, industry loans help if a bank loan or leasing is used for an investment, but the entrepreneur lacks the required capital for self-financing. To fill this gap, KredEx provides capital as subordinated debt to the entrepreneur, which in the eyes of other financers increases the self-financing capacities of the enterprise, thus making it possible to receive additional leasing or bank loans for the company to grow quicker. KredEx does not interfere with the management of the enterprise having received a loan.

Industry loans issued under the programme ‘Subordinated loan programme’ are an exception in regards to the interest rate; which is equal to the interest rate of the loan issued by a credit or financing institution, or 1 to 2 percentage points higher, depending on the rate of financing. The Technology Loan became the Industry Loan in the middle of the year, with this significant change serving to expand the opportunities available for making fixed asset investments. While the Technology Loan could only be used for investing in machinery and equipment, the Industry Loan enables firms to finance all fixed asset investments (including intangible assets). Over the course of the year, 13 industry loan agreements were concluded with nine companies in total sum of EUR 1.6 million. Thanks to the subordinated loans from KredEx, companies are planning investments totalling EUR 6.1 million. The funded companies employed a total of 769 people, and as a result of the projects, 101 new jobs were planned to be created.

At the beginning of 2013, the Baltic Innovation Fund (BIF), created in cooperation between the three Baltic Republics and the European Investment Fund (EIF), started its operations. This fund of funds places money in private equity and venture capital funds that invest in companies and are managed by fund managers from the private sector. The goal of BIF is to offer new financing opportunities to Baltic enterprises with strong growth potential, and develop the capital market of the Baltic States. BIF is managed by EIF and its volume is EUR 130 million. The contribution of each country through KredEx (Estonia), ALTUM (Latvia), and INVEGA (Lithuania) is EUR 26 million, and the EIF contributes EUR 52 million. At least the same amount of capital is added to the contribution of BIF on the funds’ level by private investors. As at the end of the year, altogether EUR 155 million have been invested from BIF in 34 firms. Out of these, 16 are Estonian firms, who were financed with EUR 87 million. In the coming years, another EUR 350 million will be invested in regional companies with the support of BIF. In 2018, the preparations for the establishment of Baltic Innovation Fund II continued. The planned volume of the fund is EUR 156 million. The agreements necessary for the foundation will be presumably be signed mid-2019.

Figure 13.1. Trends in SME and Entrepreneurship Finance in Estonia

Source: See Table 13.3.

Statlink

Table 13.3. Definitions and sources of indicators for Estonia’s Scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	Loan stock in the end of the year. Does not include leasing and factoring. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Outstanding business loans, total	Loan stock in the end of the year. Does not include leasing and factoring.	Bank of Estonia
New business lending, total	New bank loans within the year. Does not include leasing and factoring.	Bank of Estonia
New business lending, SMEs	New bank loans within the year. Does not include leasing and factoring. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Short-term loans, SMEs	Loan stock in the end of the year. Does not include leasing and factoring. Maturity less than 1 year. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Long-term loans, SMEs	Loan stock in the end of the year. Does not include leasing and factoring. Maturity more than 1 year. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Government loan guarantees, SMEs	Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Fund KredEx
Government guaranteed loans, SMEs	Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Fund KredEx
Non-performing loans, total	Bank loans overdue by more than 60 days in the end of the year. Does not include leasing and factoring.	Bank of Estonia
Non-performing loans, SMEs	Bank loans overdue by more than 60 days in the end of the year. Does not include leasing and factoring. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Interest rate, SMEs	Interest rate of new long-term bank loans (flows). Does not include leasing and factoring. Loans smaller than 1 million euros are used as proxy for SMEs' loans.	Bank of Estonia
Interest rate, large firms	Interest rate of new long-term bank loans (flows). Does not include leasing and factoring. Loans larger than 1 million euros are used as proxy for large firms' loans.	Bank of Estonia
Non-bank finance
Venture and growth capital	Volumes in national currency and year-on-year growth rate in % non-bank finance instruments, including external equity for start-up, early development and expansion stages.	Estonian Venture Capital Association
Leasing and hire purchases	Leasing turnover within the year.	Bank of Estonia
Factoring and invoicing	Factoring turnover within the year	Bank of Estonia
Other indicators
Payment delays, B2B	Average payment delay measured in days. Surveyed 5 000 companies, of which 99.99% were SMEs	Krediidiinfo AS
Bankruptcies, SMEs	Number of enterprises	KrediidiinfoAS

References

Eesti Pank, database, June 2019, available at: www.eestipank.ee

Estonian Institute of Economic Research database, June 2018, available at: www.ki.ee

Statistics Estonia, June 2019, online database, available at: www.stat.ee

Krediidiinfo AS, Bankrupcies in Estonia 2018, available at: http://www.krediidiinfo.ee/files/pankrotid2018.pdf

Estonian Venture Capital Association, Estonian Private Equity & Venture Capital Industry Review 2016: available at: http://www.estvca.ee/data-and-publications

Fund KredEx, database, May 2019

Startup Estonia database, June 2019