Financing SMEs and Entrepreneurs 2020

14. Finland

Key facts on SME financing

The Finnish economy continued to grow in 2018. The uncertainty in the global economy, however, slowed down exports and corporate investments. Low interest rates supported investments and the availability of SME financing.

In Finland, 99.3% of all employer firms were SMEs in 2017 (84 043 SMEs), employing 66.6% of the labour force. The vast majority of them (76.5%) were micro-enterprises with less than 10 employees. The decline in the number of employer firms levelled off in 2017 after a few years of downswing, whereas the number of self-employed has been increasing.

The volume of new lending to SMEs continued to increase in 2018, almost approaching the pre-crisis level. New business lending to SMEs grew by 5.5% in 2018 in comparison to the previous year. Meanwhile, total new lending to all enterprises declined by 2.2%. SMEs’ strong demand for loans was supported by the bright economic situation and positive expectations regarding economic growth in Finland in 2018.

The base rate on small loans of up to EUR 1 million, which is used as an interest rate proxy for loans to SME, remained quite stable during 2010–2017, with the average interest rate at around 2.8%. In 2018, the interest rate on small loans increased to 3.9%. On the other hand, the interest rate charged on loans over EUR 1 million has remained at around 1.3% for three consecutive years. The widening of credit spread between small and large business loans indicates a tightening of credit terms for SMEs compared to large enterprises.

A record-high figure of EUR 479 million was invested into start-ups and early stage growth companies in Finland in 2018. Of the total sum, foreign investments accounted for EUR 291 million. Finnish Venture Capital (VC) funds invested EUR 101 million and business angels invested EUR 36 million. Foreign VC funds allocated EUR 103 million of direct investments into Finnish companies. The amounts of investments from both Finnish and foreign VC funds has grown significantly from the previous year.

Ample availability of bank financing lowered the demand for public sector financing from Finnvera. Finnvera is a financing company owned by the government of Finland and the country’s official export credit agency. The volume of direct government loans to SMEs has decreased yearly since 2015 from EUR 385 million to EUR 203 million. Moreover, the introduction of EU guarantee programmes targeted at SMEs has increased availability of SME loans intermediated by banks and reduced the demand for loans provided by Finnvera.

Table 14.1. Scoreboard for Finland

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Debt
Outstanding business loans, total	EUR billion	48.4	57.6	54.1	56.5	60.4	63.3	66.7	68.4	72.5	76.0	78.1	85.3
New business lending, total	EUR billion	42.7	54.4	50.9	54.4	37.4	34.9	39.5	35.6	35.0	36.4	37.1	36.3
New business lending, SMEs	EUR billion	11.6	11.9	9.9	8.3	7.9	7.7	7.3	6.8	8.4	9.1	9.6	10.1
Share of new SME lending	% of total new lending	27.11	21.85	19.56	15.25	21.11	22.23	18.55	19.21	24.14	24.92	25.90	29.95
Short-term loans, SMEs	EUR million	..	..	..	839	1 615	1 613	1 312	1 250	1 655	1 864	2 046	2 384
Long-term loans, SMEs	EUR million	..	..	..	3 314	6 287	6 136	6 018	5 583	6 789	7 219	7 561	7 747
Share of short-term SME lending	% of total SME lending	..	..	..	20.20	20.44	20.82	17.90	18.29	19.60	20.52	21.30	23.53
Government loan guarantees, SMEs	EUR million	416	438	474	447	497	408	379	476	522	570	540	563
Direct government loans, SMEs	EUR million	385	468	593	397	369	342	284	287	385	275	241	203
Non-performing loans, total	% of all business loans	..	..	..	..	..	..	..	..	4.07	3.07	2.68	3.72
Non-performing loans, total (amount)	EUR million	..	..	..	..	..	..	..	..	1 423	1 119	994	3 170
Interest rate, SMEs	%	5.39	5.58	3.02	2.66	3.23	2.86	2.81	2.94	2.96	2.76	2.75	3.92
Interest rate, large firms	%	4.83	5.08	2.24	1.86	2.59	2.07	1.91	1.92	1.46	1.33	1.35	1.34
Interest rate spread	% points	0.56	0.50	0.78	0.80	0.64	0.79	0.90	1.02	1.50	1.43	1.40	2.58
Collateral, SMEs	% of SMEs needing collateral to obtain bank lending	..	..	..	33	34	35	41	41	38	35	34	31
Percentage of SME loan applications	SME loan applications/ total number of SMEs	..	..	13.85	18.42	20.79	21.50	21.85	27.70	21.97	23.89	19.99	20.35
Rejection rate	1-(SME loans authorised/ requested)	..	..	6.98	4.92	3.12	8.08	7.06	6.71	6.24	5.59	6.76	4.15
Non-bank finance
Venture and growth capital	EUR million	144	191	119	319	120	149	133	134	175	203	207	315
Venture and growth capital (growth rate)	%, year-on-year growth rate	..	32.6	-37.7	168.1	-62.4	25.0	-10.7	1.0	30.6	16.0	2.0	52.2
Leasing and hire purchases	EUR million	..	..	1 067	1 361	1 566	1 765	1 658	1 858	..	..	..	..
Other indicators
Payment delays, B2B	Number of days	6	5	7	7	7	7	6	6	5	5	5	5
Bankruptcies, SMEs	Number	2 254	2 612	3 275	2 864	2 947	2 961	3 131	2 986	2 574	2 408	2 160	2 534
Bankruptcies, SMEs (growth rate)	%, year-on-year growth rate	..	15.9	25.4	-12.5	2.9	0.5	5.7	-4.6	-13.8	-6.4	-10.3	17.3

Source: See Table 14.5.

SMEs in the national economy

In Finland, 99.3% of all employer firms were SMEs in 2017 (84 043 SMEs), employing 66.6% of the labour force. The vast majority of them (76.5%) were micro-enterprises with less than 10 employees. The decline in the number of employer firms levelled off in 2017 after a few years of downswing, whereas the number of self-employed has been increasing.

Table 14.2. Distribution of firms in Finland, 2017

By firm size

Firm size (employees)	Number	%
SMEs (2-249)	84 043	99.3
Micro (2-9)	64 764	76.5
Small (10-49)	16 373	19.3
Medium (50-249)	2 906	3.4
All firms	84 660	100

Source: Statistics Finland (Structural business and financial statement statistics). Data includes all industries (excluding primary production sectors) and excluded non-employer firms.

SME lending

The volume of new lending to SMEs continued to increase in 2018, almost approaching its pre-crisis level. New business lending to SMEs grew by 5.5% in 2018 in comparison to the previous year. Meanwhile, total new lending to all enterprises declined 2.2%. SMEs’ strong demand for loans was supported by the bright economic situation and positive expectations regarding economic growth in Finland in 2018.

Total business lending and SME lending have followed inverse trends since the slump that followed the financial crisis. SME lending plummeted in 2013 and 2014 due to economic downturn. It has escalated by 48% since, whereas the total business lending has grown only by 2% in the same period.

The share of short-term loans in new SME lending increased by some two percentage points to 23.5%. According to the investment survey conducted by the Confederation of Finnish Industries, investments made by SMEs increased strongly in 2018, while they are expected to turn downwards this year. This is in line with the expectations on dwindling loan demand as shown in the Finnish Banking Barometer I/2019 published by Finance Finland. The increased share of short-term loans suggests that there was a growing need for working capital financing for SMEs. According to the SME-barometer from the Federation of Finnish Enterprises, Finnvera and the Ministry of Economic Affairs and Economy, the use of working capital to recover poor financial situation was not very prominent. A purpose that was more frequent is the use of working capital to finance rapid growth or internationalisation of an SME.

Ample availability of bank financing lowered the demand for public sector financing from Finnvera. The volume of direct government loans to SMEs has decreased yearly since 2015 from EUR 385 million to EUR 203 million. Moreover, the introduction of EU guarantee programmes targeted at SMEs has increased availability of SME loans intermediated by banks and reduced the demand for loans provided by Finnvera.

Credit conditions

The base rate on small loans of up to EUR 1 million, which is used as an interest rate proxy for loans to SME, remained quite stable during 2010–2017, with the average interest rate at around 2.8%. In 2018, the interest rate on small loans increased to 3.9%. On the other hand, the interest rate charged on loans over EUR 1 million has remained at around 1.3% for three consecutive years. The widening of credit spread between small and large business loans indicates a tightening of credit terms for SMEs compared to large enterprises. The interest rate spread was 2.5% in 2018, while it was on average 1.4% during the past three years.

The structurally higher interest rate spread in Finland in comparison to other Eurozone countries is partly attributable to high concentration in the Finnish banking sector. Competition is not intense on small business loans, and in some areas of Finland SMEs do not have many alternative sources of credit.

The rise in average interest rate on small loans is mainly attributable to increased interest rates on loans up to EUR 250 000, while the interest rates on loans between EUR 250 000 and EUR 1 million have remained generally unchanged. The higher interest rate charged on small business loans may also reflect the fact that fewer SME loans were secured with collateral in comparison to previous years. The percentage of loans up to EUR 1 million secured with collateral dropped from 34% in 2017 to 31% in 2018.

According to the latest SME-barometer, some 40% of respondents consider that credit conditions have tightened. The results of the Survey on the Access to Finance of Enterprises (SAFE) published by the ECB convey the same message, as the share of Finnish SMEs that view credit conditions as having tightened increased to 38% from 24% in the previous survey round. Guarantee requirements similarly became more stringent according to 24% of respondents, in comparison to 17% in the previous survey round. Net tightening of collateral requirements was stronger in Finland than in the Eurozone on average.

Overall, however, access to finance is not the most pressing problem for Finnish SMEs. According to SAFE, the availability of skilled staff is by far the most frequently mentioned barrier to SMEs’ growth. Access to finance appears only as the fifth most pressing problem and only 6% of Finnish SMEs indicate finance as their main concern, while in the Eurozone the share is 8%. The share of rejected loan applications was about 4% in Finland, and it was lower by more than two percentage points from the previous year.

Alternative sources of SME financing

According to the Finnish Venture Capital Association (FVCA), a record-high figure of EUR 479 million was invested into start-ups and early stage growth companies in Finland in 2018. Of the total sum, foreign investments accounted for EUR 291 million. Finnish Venture Capital (VC) funds invested EUR 101 million and business angels invested EUR 36 million. Foreign VC funds allocated EUR 103 million of direct investments into Finnish companies. The amounts of investments from both Finnish and foreign VC funds has grown significantly from the previous year. New venture capital fund managers have emerged and new funds in the seed and start-up stage have been established in recent years.

In 2018, the total number of start-up investments surged thanks to the increased amount of large investments made by foreign investors in the most promising start-ups and early stage companies in Finland. These investments also substantially increased the share of foreign VC investors in the investor pool in Finland. The number of domestic start-up investments made by Finnish VC funds also increased considerably (35%) from last year.

The average growth investment was some EUR 3 million in 2018 according to the FVCA statistics. The average investment amount has been on the increase in recent years, but the levels preceding financial crisis are still persistently unattainable. The average growth investment was more than EUR 10 million in 2007. However, foreign investors have been increasingly turning to Finnish growth companies and private equity funds, which may facilitate a rise in the availability of growth funding in the long run.

Another positive development is that the number of companies receiving growth capital increased significantly in 2018.

Table 14.3. Venture and growth capital investments in Finland

By stage of investment, in thousands of EUR

Stage	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Seed	17 161	9 480	9 174	5 350	3 272	6 089	5 678	8 526	9 229	12 990	18 527	13 692
Start-up	49 347	64 372	52 000	65 576	52 881	61 400	68 599	77 034	67 897	84 976	82 605	97 964
Later stage	67 311	76 930	32 073	38 476	31 351	13 059	53 464	37 787	32 243	34 185	39 751	91 793
Total venture	133 506	148 081	93 647	103 061	87 667	80 703	128 493	124 210	108 436	152 953	122 628	203 449
Growth	55 325	69 807	56 451	250 943	64 678	107 159	44 626	44 349	91 426	101 793	81 005	136 805

Note: Total excludes buyout, turnaround and replacement capital.

Source: Finnish Venture Capital Association.

The growth in crowdfunding volumes grew fast during 2016–2017, according to Bank of Finland, but after that the growth pace has moderated. In 2018, the total funding volume mediated in the peer-to-peer and crowdfunding market in Finland was about EUR 307 million. Of the crowdfunding targeted to businesses, loan-based crowdfunding increased by 29% to EUR 98 million, whereas investment-based crowdfunding decreased and amounted to EUR 58 million in 2018. Despite the rapid growth seen in crowdfunding over the recent years, it is still marginal as a corporate financing source in comparison to bank lending.

Other indicators

Average payment delays have remained unchanged at 5 days for the past four years. There was a slight increase in payment delays following the financial crisis and during the economic downturn in Finland, but the delays have decreased as the economic conditions improved. Finnish businesses are among the fastest in Europe to pay their invoices, according to the statistics collected by Intrum for the European Payment Report 2018. The share of businesses that have accepted excessively long payment terms is significantly higher in Finland at 75%, compared to the European average of 56%. Moreover, intentional late payments is a rather frequent cause of late payment in Finland. These observations suggest that some businesses are able to utilize cash planning for their advantage, but that some of their creditors, particularly SMEs, may become financially strained.

The number of bankruptcies increased markedly by 17% in 2018 from the previous year. The total number of firms in bankruptcy proceedings was 2 534 in 2018, and this figure covers all enterprises, as a statistics on SME bankruptcies is not available. According to Statistics Finland, a part of the growth was explained by exceptionally low number of bankruptcy applications made by Tax Administration in the beginning of 2017. More recent data from the first half of 2019 indicate that the number bankruptcies have turned downwards again.

Government policy response

There are four financing companies owned by the Government of Finland providing financing to SMEs. While Finnvera Plc and Business Finland provide unsecured loans, guarantees and grants, both Finnish Industry Investment Ltd and Business Finland Venture Capital Ltd operate in venture capital (incl. private equity) markets.

At the end of 2018, Finnvera had 25 700 customers, of which 89% were micro-enterprises and 11% other SMEs and midcap enterprises. The majority, 87% of the SME and midcap financing, was targeted at start-ups, companies seeking growth, internationalisation or change and transfers of ownership. The activities of Finnvera in helping Finnish SMEs to access finance by covering their collateral deficit was partly substituted with the financing backed by EU guarantee instruments. Finnvera has shifted its focus to guarantees, which is clear in the 16% decrease in the loan stock in 2018 from the previous year. The main SME product is the Start Guarantee, with which an enterprise can get bank financing for its various investment and working capital needs. In 2018, Finnvera granted a little over EUR 31 million in Start Guarantees.

Table 14.4. SME loans and guarantees granted by Finnvera in Finland

In EUR million

Instrument	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Loans	385	468	593	397	369	342	284	287	385	275	241	203
Guarantees	416	438	474	447	497	408	379	476	522	570	540	563
Subtotal	801	906	1 067	844	866	750	663	763	906	845	781	766
Export guarantees	96	122	127	71	111	104	93	151	118	119	115	178
Total	897	1 028	1 194	915	977	853	757	914	1 024	964	896	944

Source: Finnvera, Annual Reports 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018.

Since the European Fund for Strategic Investments (EFSI) was set up by the European Commission in 2015, various EU guarantee and funding arrangements have become available in Finland. SME InnovFin and SME Initiative guarantee instruments are among the most relevant of these EU financial instruments. These loans are granted by six private Finnish banks and one insurance company.

In 2016, Finland signed the funding agreement, “SME initiative” with the European Investment Fund (EIF), for supporting the access to finance for the growth seeking Finnish SMEs. The initial agreement included EUR 40 million of the ERDF funds. This guarantee instrument was successfully implemented through five Finnish banks, the lending programme totalling EUR 400 million, and reaching nearly 600 SMEs. The purpose of the instrument is to support SME financing by providing partial coverage for banks’ loan losses. The intermediary banks serve as one-stop-shops for the loans guaranteed under the SME initiative. In addition to the high demand for the loans and the increased availability of growth financing for SMEs, the programme has benefited the Finnish capital market by incrementally increasing competition in the corporate lending market, since by availing the guarantee instrument, three smaller national banks have started to gain ground.

At the end of 2018, the programme was decided to be increased with EUR 35 million of Finnish national budget resources for the rest of the period up to 2020. In total, after the increase of the SME Initiative, it is expected to generate EUR 750 million of loans to SMEs. Together with other main EU risk-sharing instrument Innovfin, Finnish banks have provided loans totalling almost EUR 1.5 billion to SMEs during last few years.

A new guarantee instrument is becoming available, as Finnvera applied for the status of an intermediary of the European Investment Fund’s (EIF) COSME guarantee programme. The plan is to sign the agreement in the second half of 2019. After that, the aim is to launch the new product, made available through banks, as quickly as possible. Within the framework of the programme, Finnvera can grant an unsecured 80 per cent guarantee for a loan of a maximum of EUR 150 000.

Tesi (Finnish Industry Investment Ltd) manages KRR funds-of-funds (“growth fund of funds”), in which both Tesi and Finnish insurance and pension companies invest. KRR funds invest in venture capital and growth funds operating in Finland that invest in Finnish growth companies. Since the launch of the first KRR fund ten years ago, the programme has played an important role in encouraging large pension funds to get familiar with and invest in Finnish VC and buyout funds.

Business Finland Venture Capital Ltd (BFVC) invests in venture capital funds, which invest in companies in their early stages of development. The purpose of the company is to develop Finland’s venture capital market. The programme has had a great impact on encouraging different groups of investors to participate in the fund raising of smaller first time VC funds. Their due diligence work has been especially appreciated by the co-investors in the funds. Both programmes, KRR and BFVC, are bridging the funding gaps by investing in private sector funds.

Figure 14.1. Trends in SME and entrepreneurship finance in Finland

Source: See Table 14.5.

Statlink

Table 14.5. Definitions and sources of indicators for Finland’s scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, total	All business loans, including all firms and housing corporations	Bank of Finland
New business lending, total	All new business loans; including renegotiated loans and loans to housing corporations. Excludes lines of credit, overdrafts and business credit cards, includes loans to non-employer firms and housing corporations.	Bank of Finland
New business lending, SMEs	New business Loans up to EUR 1 million; including renegotiated loans and loans to housing corporations. Excludes lines of credit, overdrafts and business credit cards, includes loans to non-employer firms and housing corporations.	Bank of Finland
Short-term loans, SMEs	New business loans up to EUR 1 million and up to 1 year	Bank of Finland
Long-term loans, SMEs	New business loans up to EUR 1 million and over 1 year	Bank of Finland
Government loan guarantees, SMEs	Value of guarantees granted to SMEs (defined as firms with less than 250 employees) by Finnvera	Finnvera
Direct government loans, SMEs	Loans granted to SMEs (defined as firms with less than 250 employees) by Finnvera	Finnvera
Non-performing loans, total	Non-performing business loans include: not past due exposures, debtor unlikely to pay and exposures past due by less than 90 days, debtor unlikely to pay.	The Financial Supervisory Authority
Interest rate, SMEs	Average interest rates for SMEs (defined as loans up to EUR 1 million), initial rate fixation of up to and over one year, base rate plus risk premium	Bank of Finland
Interest rate, large firms	Average interest rates on loans over EUR 1 million, initial rate fixation of up to and over one year, base rate plus risk premium	Bank of Finland
Collateral, SMEs	Percentage of loans up to EUR 1 million secured by collaterals, including all firms and housing corporations	Bank of Finland
Percentage of SME loan applications	ECB, Statistical Data Warehouse, "SAFE" Survey, SMEs, question 7A, Financing applied, Bank loan - "Applied" - Including not applicable responses - Weighted percentage of responses; ECB,SAFE.H.at.SME.A.0.0.0.Q7A.FBLN.R1.AL.WP	ECB/European Commission, Survey on the Access to Finance
Rejection rate	Percentage of SMEs which applied bank loans but were rejected	EC and ECB http://ec.europa.eu/growth/access-to-finance/data-surveys/
Non-bank finance
Venture and growth capital	Invested capital: seed, start-up and other early stage investments made in Finnish enterprises by private investment companies	Finnish Venture Capital Association
Leasing and hire purchases	Financial leasing acquisitions	Statistics Finland
Other indicators
Payment delays, B2B	Average of days for business-to-business. All enterprises.	Intrum Justitia, European Payment Report
Bankruptcies, SMEs	Number of firms which are in bankruptcy proceedings. All enterprises.	Statistics Finland

Notes

The headquarters of Nordea bank were moved to Finland in 2018. This had an effect on some of the indicators. The total amount of non-performing loans (the rate and the amount in EUR) are derived from the Financial Supervisory Authority, which collects its statistics at the bank group level and not separated for business areas (Finland operations of Nordea).