Financing SMEs and Entrepreneurs 2024

12. Estonia

Key facts on SME financing

In 2021, Estonian SMEs employed 81% of the workforce. In 2020 they accounted for 80.5% of total value added, and in 2021 for 82.1% of total value added. In 2021, 94% of all enterprises were micro-enterprises, i.e. companies with less than 10 employees. Micro-enterprises employed 31.7% of the workforce and accounted for 31.5% of total value added in 2021.

Since 2021, outstanding business loans to SMEs have been increasing after a previous decline. During the COVID-19 crisis, SME outstanding loans declined despite the provision of cheap guarantees and direct loans from the government. This can be explained by the increase in SME interest rates in 2020, as well as the provision of public support through non-debt channels such as employment support and the deferral of taxes and instalments. Furthermore, under the Estonian corporate income tax system all reinvested profits are tax-free. Thus, companies have a strong incentive to re-invest 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. Since then, interest rates have been increasing, reaching 3.28% in 2018 and 4.08% in 2020. Interest rates had a slight decrease in 2021, at 3.75%, but reached 4.08% in 2022. For larger loans, the interest rate also moved upward to 3.44% in 2022. In 2020, the interest rate spread reached a high for the last decade at 1.31%, but decreased to 0.65% in 2022.

Venture and growth capital have been growing steadily in recent years but had a rapid growth in 2021. Estonia has a well-developed start-up community that has good potential for raising venture capital. In 2021 companies raised EUR 962 million, a 112% year-on-year growth rate. In 2022 companies raised EUR 1 302 million, a 35% year-on-year growth.

Leasing and hire purchases turnover declined sharply during the COVID-19 crisis in 2020 but increased again reaching EUR 805 million in 2022.

Table 12.1. Scoreboard for Estonia

Indicator			Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
		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	1.56	1.508	1.660	1.681
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	7.18	7.518	8.175	8.987
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	21.7	20.06	20.31	18.70
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	8.15	7.368	8.810	9.576
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	2.91	2.587	3.010	2.650
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	35.65	35.11	34.17	27.67
Short-term loans, SMEs			EUR million	480.5	475.1	377.1	317.8	325.9	302.3	317.4	333.4	300.8	314.8	320.1	299	263	199	187	211
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	1.30	1.308	1.473	1.469
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	16.86	13.22	11.25	12.57
Government loan guarantees, SMEs			EUR million	15	23	52	66	53	60	52	66	66	93	61	72	75	112.60	94.0	100.56
Government guaranteed loans, SMEs			EUR million	27	39	86	122	116	122	100	111	112	171	100	118	145	188.13	140.10	153.72
Direct Government loans,SMEs			EUR million														85.1	10	3.79
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	0.70	0.59	0.29	0.23
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	2.19	2.09	0.84	0.56
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	3.85	4.08	3.75	4.08
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	2.56	2.77	2.81	3.44
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	1.29	1.31	0.93	0.65
		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	364	453	962	1302
Venture and growth capital (growth rate)			%, Year-on-year growth rate	..	..	- 5.00	293.7	- 68.8	200.2	- 34.3	530	40.6	9.4	157.9	19.3	-19	71.9	112.48	35.38
Leasing and hire purchases			EUR million	891.2	709.6	222.8	281.3	519.4	649.6	545.7	537.2	543	676	718	811	729	545	775	805
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	3451	2582	2989	3756
		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	..	6.4	..	...	..
Bankruptcies, SMEs			Number	202	423	1055	1028	623	495	459	428	376	335	343	273	271	341	103	98
Bankruptcies, SMEs (growth rate)			%, Year-on-year growth rate	..	109.4	149.4	- 2.56	- 39.4	- 20.5	- 7.27	- 6.75	- 12.1	- 10.9	2.39	-20.4	-1	25.8	-69.79	-4.85

Source: See Table 12.2.

Macroeconomic conditions

In 2022, GDP fell by 1.3%. Accommodation and catering, which recovered from the corona crisis, had the biggest positive impact. It was supported to a lesser extent by several other areas of activity. Real estate activities, energy, trade, agriculture and financial activities stood out with a stronger negative contribution.

Private consumption grew by 2.6% in 2022, government sector consumption remained at the level of 2021. Investments fell by 10.9% in 2022. Both exports (5.0%) and imports (5.8%) grew at a comparable pace. However, net export was negative for the second year in a row - more goods and services were bought in Estonia for 200 million euros than could be sold abroad.

SMEs in the national economy

In 2020, only 0.2% of Estonian companies were large enterprises, and in 2021 only 0.1% of enterprises were categorized as large enterprises, employing more than 250 people. The change is mostly caused by the growth in the number of micro-enterprises. In 2021, SMEs employed 81% of the private sector workforce, accounted for 82% of total value added and for 83% of total exported goods and services. As many as 94% of all firms were micro-enterprises (i.e. firms with less than 10 employees), employing 32% of the workforce and accounting for 31.5% of total value added in 2021. SMEs thus play an important role in the Estonian economy.

SME lending

The real GDP growth had a slight decrease in 2022. The economic growth of the Euro area slowed down due to the energy crisis and inflation caused by the large-scale aggression of Russia against Ukraine, and this also affected the rapid progress of the Estonian economy. New SME business loans increased to 3 billion in 2021 and had a slight decrease in 2022, when SME business lending was EUR 2.6 billion. The share of new SME lending from total new lending has been decreasing since 2019. In 2022 the share of new SME lending was 27% (down from 34% in 2021).

Since 2010, the share of SME outstanding loans decreased steadily and reached a low of 18.7% in 2022. One factor here is that, due to quite high inflation in Estonia in recent years, the EUR 1 million proxy used for SMEs loans 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. Since 2010 total amount of business loans has increased from EUR 6.5 billion in 2010 to EUR 8.9 billion in 2022. The amount of outstanding SME business loans had a slight growth in 2021 and 2022. This in part explain to large government support. SA KredEx started providing direct loans to SMEs and increased programmes for guarantees in 2022.

In 2022, the proportion of long-term SME loans decreased slightly from 89% to 87%. Deposits of Estonian non-financial enterprises grew by 15% in 2021 and 1.8% in 2022. Deposits of non-financial companies exceeded the 10-billion-euro level for the first time in 2021. 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

Interest rates had a slight decrease in 2021 and increased again in 2022 by 0.33 percentage points, reaching the same level as in 2020, which was 4.08%.

Other indicators on credit conditions 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 end of 2022. This proportion was lower than pre-COVID-19 crisis average. 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 24% year-on-year, reaching 32% of GDP in 2020.

The deterioration of the economic outlook and the rapid increase in interest rates have had an impact on corporate financing in 2022. Uncertain economic outlook has reduced both companies loan demand as well as probably influenced lenders' risk assessments when issuing loans. After a period of exceptionally low-interest rates, the sharp rise in interest rates (which has the objective to mitigate the rise in prices) has made borrowing more expensive, as has raising equity. This inhibits lending activity both in Estonia and elsewhere in the Euro Area. However, the current level of interest rates shouldn’t be too hard to deal with for Estonian companies and the economic outlook in case of clarification, the loan demand of companies probably increases again.

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 total Estonia has 10 Unicorns which is the best result per capita in Europe.

In 2022, for the first time in the history of the Estonian start-up sector, the volume of investments exceeded EUR 1 billion. Estonian start-ups raised EUR 1.3 billion in investments, which is 40% more compared to last year, when start-ups raised EUR 928 million. Compared to the previous year, the average size of the investment raised has also increased. It was EUR 17 million last year, and EUR 10.3 million the year before. At the same time, the number of start-up companies that have attracted investments has decreased - in 2022, 77 transactions took place, but the year before, 90 start-up companies received at least one investment.

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 remained underused compared to the pre-crisis period (although it remained higher compared to the 2008 and 2009 levels). In 2020, amounts on leasing and factoring declined considerably. Leasing and hire purchases were only 75% of the amounts compared to year earlier. In 2021 and in 2022 leasing and hire purchases increased again, reaching the same level as before the decline in 2020.

Other indicators

According to the Estonian Tax and Customs Board, 18 970 companies had a tax debt by the end of 2022. This is approximately 13% of all the economically active enterprises. This figure has increased compared to the end of 2021, when 14 592 corporations had a tax debt. Before the COVID-19 period the number of companies that had a tax debt was around 12000-13000 and the number of debtors began to rise rapidly in May 2020.

In 2021, bankruptcy was declared in 100 cases out of 285 companies, and for the remaining 185 cases, bankruptcy was not declared, and the company went into liquidation, as the level of company assets was too low to cover the costs of the bankruptcy process. The number of bankrupt companies in 2021 decreased by 56 companies (in 2020, bankruptcy was declared in 146 cases out of 341 companies, and for the remaining 195 cases, bankruptcy was not declared), or 16%, compared to last year. Compared to the pre-COVID-19 period, the number of bankruptcies is only 5% higher. The share of bankrupt companies among all companies fell to 0.11% of registered companies in 2021, the lowest share in the last 15 years. There were no major changes in the fields of activity during the recent years. In 2022, the sectors with the highest rate of bankruptcy was accommodation and catering, manufacturing industry and construction. The rate of bankruptcy was above the average also in wholesale and retail. In 2022, there were 98 bankrupt enterprises.

Despite a significant worsening of the economic outlook, the quality of Euro Area banks’ assets showed no signs of a broad-based deterioration, with the non-performing loan ratio falling further.  Non-performing SME loans maintained historically low levels at 0.54% in 2022. It was even a slightly lower level than the year before.

Government policy response

In 2022, the Recovery and Resilience Facility (RRF) began offering grants for the purpose of digital and green measures (with a financial volume of EUR 73 million). The establishment of the Just Transition Fund (with a financial volume of EUR 218 million) was also initiated.

In 2022, the Enterprise and Innovation Foundation introduced two new grants for tourism industry companies as part of the REACT-EU funds, which were directed towards sector development in the post-pandemic recovery phase with product development in the tourism sector and central digital solutions.

In late May 2022, several application rounds were opened to support real-time economic activities. On May 30th, an application round (funded by national resources) was launched with the aim of supporting business process innovation for entrepreneurs through e-invoice development. On May 31st, an application round supporting the development of e-waybills (funded by the recovery fund) was opened. This round received a significant number of applications and aimed to support the digital transformation of business processes for entrepreneurs in the transportation and logistics sector.

In 2022, there was an accessible application round for applying for support through the Digitalization Roadmap, aimed at increasing entrepreneurs' awareness of their current situation in this field.

On August 15, 2022, an investment support measure for entrepreneurship was launched under the Just Transition Fund in Ida-Viru County. Managed by the Estonian Business and Innovation Agency, this initiative allocates EUR 15 million to aid SMEs in the region. This funding is a key part of a broader effort to transition Ida-Viru County towards a climate-neutral economy. It aims to shift the region's focus from traditional industries to more sustainable and diverse economic activities. By providing financial support to SMEs, the measure seeks to create new jobs and stimulate economic development, fostering a more resilient and forward-looking regional economy.

On August 31, 2022, the long-awaited digital transformation grant for entrepreneurs was launched as two separate application rounds (funded by the RRF). One application round was dedicated to the processing and mining industries (with a budget of over EUR 51.5 million), while the other was open to other sectors (EUR 5 million). The objective of these application rounds is to support automation, as well as the implementation of digital technologies and robots. In 2022, a total of 45 applications were submitted, out of which funding decisions were made for eight cases, totalling EUR 1.2 million. For the remaining applications, the process will continue in 2023.

The open application rounds of the Estonia-Norway Green ICT cooperation programme have concluded in 2022. In 2023, the programme featured two final application rounds, with the first one being a small projects round for the development of innovative green and industrial solutions.

In 2022, support was also provided for entrepreneurs for applied research and product development (total budget EUR 18.9 million).

In 2022, Enterprise and Innovation Foundation launched the Top Innovators Programme. The programme includes ten ambitious companies in one group, providing them with the opportunity to work with leading experts and mentors in the field of innovation, both from Estonia and abroad. Their goal is to develop an innovation strategy with the support of these experts, enabling them to make the next leap in the development of their companies.

In the first quarter of 2022, Enterprise and Innovation Foundation started offering regional loans to SMEs. These loans are intended to partially or fully finance investments made outside of Tallinn and Tartu. They serve as a source of self-financing when an entrepreneur applies for a bank loan or leasing to fund their investment but lacks the required capital for the necessary self-financing.

In 2022, alongside the implementation of regular measures, Enterprise and Innovation Foundation continued to support entrepreneurs with extraordinary guarantees. Until June 30, 2022, Enterprise and Innovation Foundation provided entrepreneurs with extraordinary guarantees aimed at offering additional funding to overcome temporary difficulties caused by the COVID-19 outbreak.

In order to help mitigate the negative impact on the economy resulting from the large-scale aggression of Russia against Ukraine, starting from July 4, 2022, Enterprise and Innovation Foundation began offering entrepreneurs a new set of extraordinary guarantees.

On August 10 2022 the Environmental Investment Centre support scheme was launched under the RRF for resource efficiency for companies (budget EUR23,6 million). The aim of the grant was to increase resource productivity in industrial enterprises through the introduction of innovative green technologies and solutions to contribute to a climate-neutral economy, resilience, and adaptation to climate change.

Figure 12.1. Trends in SME and entrepreneurship finance in Estonia

Source: See Table 12.1

Statlink

Table 12.2. Sources and definitions of Estonia 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 2023, available at: www.eestipank.ee

Estonian Institute of Economic Research database, June 2023, available at: www.ki.ee

Statistics Estonia, June 2023, online database, available at: www.stat.ee

Krediidiinfo AS, Bankrupcies in Estonia 2021, available at: https://web.creditinfo.ee/Pankrotid_Eestis_2021.pdf

Fund KredEx, database, June 2023