Financing SMEs and Entrepreneurs 2024

27. Luxembourg

Key facts on SME financing

According to the latest available data, SMEs (firms that employ less than 250 employees) accounted for 99.5% of all non-financial firms in Luxembourg in 2020. SMEs employed approximately 66% of the labour force and generated 59% of the economy’s total value added.

New loans to all enterprises continued to decrease in 2022, marking the lowest level since records began. New loans to SMEs also decreased in 2022, but at a slower pace than loans to all enterprises. The share of new lending to SMEs increased to 17.2%, surpassing the previous peak of 16.1% in 2011. It should be noted that, due to limited data availability, loans to SMEs are proxied by loans that amount to a maximum of EUR 1 million.

Interest rates experienced a sharp rise in the second half of 2022, a trend that continued into 2023. As of August 2023, the interest rate for SME loans reached 4.79%. For loans exceeding EUR 1 million, the interest rate was lower, at 2.81%.

Over the period 2007-2022, interest rates for SMEs remained consistently higher than those for large firms. In 2022, the interest rate for SMEs was 1.73%, compared to 1.47% for large firms. In absolute terms, this translates to a spread of 0.26 percentage points. In relative terms, interest paid by SMEs is approximately 17.9% higher than interest paid by large firms in 2022. The gap in interest rates between SMEs and large firms widened further in 2023. As of August 2023, SME loans had an interest rate of 4.79%, while large firms were charged a lower rate of 2.81%. This difference represents a 1.98 percentage point spread, meaning SMEs pay about 70% more in interest compared to large firms.

Alternative forms of financing, such as venture capital, may be important for SMEs seeking finance. In 2022, nearly EUR 225 million of venture capital was invested in Luxembourg’s firms. The largest portion of all venture capital funding was invested in firms active in the financial and insurance industry (EUR 178 million).

In 2022, government-guaranteed loans reached EUR 157.7 million, showing a significant increase from EUR 112.3 million in 2021, EUR 128.7 million in 2020, and just EUR 14.8 million in 2019. This trend underscores the countercyclical nature of these loans and highlights the government's commitment to supporting SME financing during the COVID-19 pandemic.

The government has also emphasised innovation within SMEs. In 2022, SMEs accounted for 76% of Research, Development, and Innovation (RDI) projects financed by the Ministry of the Economy.

The number of bankruptcies among all firms in Luxembourg stood at 1011 cases in 2022, marking a 12.7% decrease from the 1158 reported in 2021.

Table 27.1. Scoreboard for Luxembourg

Indicator		Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Debt
New business lending, total		EUR million	113 817	181 792	166 287	111 898	111 568	105 854	100 444	92 349	83 076	87809	80 264	95 633	84 091	62 083	56 126	50 775
New business lending, SMEs		EUR million	12 800	14 555	14 754	15 441	17 979	15 593	13 713	10 765	10 142	9 395	9 698	10 440	10 184	8 682	9 336	8 760
Share of new SME lending		% of total new lending	11.25	8.01	8.87	13.80	16.11	14.73	13.65	11.66	12.21	10.70	12.08	10.92	12.11	13.98	16.63	17.25
Non-performing loans, total		% of all business loans	0.12	0.18	0.44	0.48	0.64	0.59	0.52	0.41	0.40	0.27	0.38	0.40	0.42	0.57	0.46	0.60
Government loan guarantees, SMEs		EUR million													8.7	72.0	41.1	130.5
Government guaranteed loans, SMEs		EUR million													14.8	128.7	112.3	157.7
Interest rate, SMEs		%	5.51	5.72	2.81	2.71	2.68	2.22	2.05	2.08	1.88	1.75	1.76	1.73	1.65	1.57	1.37	1.73
Interest rate, large firms		%	4.96	4.97	2.59	2.30	2.62	1.86	1.64	1.47	1.42	1.20	1.21	1.26	1.12	1.10	0.98	1.47
Interest rate spread		% points	0.54	0.75	0.21	0.41	0.06	0.35	0.41	0.62	0.46	0.55	0.55	0.47	0.53	0.47	0.40	0.26
Percentage of SME loan applications		SME loan applications/ total number of SMEs	..	..	..	..	18.20	..	25.80	16.40	23.00	26.15	18.93	32.28	27.02	22.68	27.77	17.20
		Non-bank finance
Venture and growth capital		EUR thousand	103 343	298 650	49 021	132 917	281 484	86 212	31 090	128 472	144 368	196 346	59 145	113 098	173 872	199 386	72 608	225 269
Venture and growth capital (growth rate)		%, Year-on-year growth rate	..	188.99	-83.59	171.14	111.77	-69.37	-55.23	230.97	13.00	34.10	-69.88	91.22	53.74	14.67	-62.14	210.25
Factoring and invoice discounting		EUR million	..	..	349	321	180	299	407	339	..	..	..	..	..
		Other indicators
Bankruptcies, Total		Number	659	574	693	918	978	1 050	1 049	850	873	961	904	1 191	1 262	1 198	1 158	1 011
Bankruptcies, Total (growth rate)		%, Year-on-year growth rate	..	-12.90	20.73	32.47	6.54	7.36	-0.10	-18.97	2.71	10.08	-5.93	31.75	5.96	-5.07	-1.28	-12.69

Source: See Table 29.2.

Macroeconomic and financing conditions

The current macroeconomic outlook is characterized by a series of crises and significant uncertainties. The onset of the COVID-19 pandemic in early 2020 led to a sudden and profound global economic downturn. While the scale of the economic contraction was substantial, it differed from previous recessions in that credit and equity markets remained functional, aided by government interventions that mitigated widespread job losses and business bankruptcies. Subsequently, global economies have rebounded. According to the latest economic report from STATEC (2023a), Luxembourg's GDP showed yearly growth rates of +2.9% in 2019, a contraction of -0.9% in 2020, a robust expansion of +7.2% in 2021, and a more modest increase of 1.4% in 2022.

Nevertheless, this recovery has been accompanied by emerging geopolitical tensions and inflationary pressures, stemming from supply chain disruptions and rising energy and raw material prices. During these years, the yearly inflation rate was set at 1.7%, 0.8%, 2.5%, and a notable 6.3% in 2022 (STATEC, 2023b). Due to inflationary pressures, interest rates have begun to rise, affecting the overall interest rate structure and consequently impacting firms' financing conditions. Interest rates on loans play a pivotal role in determining the cost of business investments and related borrowing. Figure 1 illustrates the evolution of interest rates from 2018 to 2023, and indicates a sharp rise of this indicator in the second half of 2022, reaching 4.79% for loans up to EUR 1 million and 2.81% for loans exceeding EUR 1 million as of August 2023.

Figure 27.1. Interest rate on loans by amount of loan in Luxembourg (2019 – 2023).

Source: Banque Centrale du Luxembourg: Capital markets and interest rates, Table 3.3.1.

Note: Monthly data

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SMEs in the national economy

Table 3 shows that SMEs accounted for 99.5% of all non-financial firms in Luxembourg in 2020 (the latest year for which structural business statistics are available). SMEs employed 66.2% of the labour force and generated 58.9% of the economy’s total value added.

Some caution is needed when reading Table 3 because the data refer to the non-financial business economy. However, the financial sector is particularly relevant in Luxembourg. This sector accounted for 25.7% of the entire economy's gross value added (STATEC, 2022) and employed approximately 51 200 persons at the end of 2020.

Table 27.2. Firms in Luxembourg in 2020 by firm size

Firm size (employees)	Number of firms	%	Number of persons employed	%	Value added at factor cost per class size (in EUR million)	%
All firms	35 855	100.0	296 562	100.0	28 324	100.0
SME (0-249)	35 687	99.5	196 317	66.2	16 672	58.9
Micro (0-9)	31 278	87.2	50 759	17.1	5 478	19.3
Small (10-19)	2 282	6.4	30 751	10.4	2 198	7.8
Small (20-49)	1 392	3.9	41 977	14.2	2 921	10.3
Medium (50-249)	735	2.0	72 830	24.6	6 075	21.4
Large (250 +)	168	0.5	100 245	33.8	11 653	41.1

Note: Figures refer to total non-financial business economy.

Source: Structural Business Statistics, Eurostat-.sbs_sc_sca_r2.

SME lending

SME loans are defined as new business loans of up to EUR 1 million. The Banque Centrale du Luxembourg provided figures for the period 2007-2022.

In 2022, new loans to all enterprises continued to decrease (-9.5% y-o-y), marking the lowest level since data have been recorded, reaching EUR 50 775 million. New loans to SMEs also decreased in 2022 by -6.2% y-o-y, but at a slower pace than loans to all enterprises. Therefore, the share of new SME lending increased to 17.2%, surpassing the previous highest peak of 16.1% in 2011.

Credit conditions

The interest rate paid by SMEs and the interest rate spread (i.e. the difference between the borrowing costs faced by large firms and by SMEs) are important indicators of the credit conditions faced by SMEs. The yearly interest rate charged to SMEs is computed as the average monthly interest weighted by the amount of loans granted in the same month. The interest rate spread measures the difference in percentage points between the interest rate charged to SMEs and the interest rate for large enterprises. The “relative spread” is defined as the ratio of the spread to the interest rate paid by SMEs.

Following 2008, the average interest rate for SMEs generally exhibited a downward trend (see Figure 2). However, in 2022, SME loans carried an average interest rate of 1.73%, higher than 1.37% in the previous year and 1.65% in 2019, pre-pandemic. Despite this recent increase, interest rate for SMEs remains significantly lower than the 5.72% recorded in 2008.

Interest rates for SMEs consistently remained higher than those offered to large firms. The difference varied from 0.06 percentage points in 2011 to a high of 0.75 in 2008. In 2022, this spread narrowed to 0.26 percentage points, down from 0.40 in 2021 and 0.53 before the pandemic in 2019.

The relative spread (as indicated by the continuous line in Figure 2) exhibits significant fluctuations, ranging from 2.3% in 2011 to 47.6% in 2019, underscoring that SMEs obtaining loans from banks were paying higher interest rates compared to large firms. One plausible explanation for this wide spread is that banks incurred in substantial fixed costs associated with loan screening and monitoring. However, in 2022, this spread saw a sharp decline to 17.7%, down from 39.8% in 2021.

The Survey on the Access to Finance of Enterprises (SAFE) of the European Commission and European Central Bank shows that, in Luxembourg, 17.9% of SMEs applied for a loan in 2022, compared to 27.7% in 2021, suggesting a decrease in SMEs demand for bank financing. Over the reference period, the percentage of SMEs that applied for a loan ranged from 16.4% in 2014 to 32.3% in 2018.

Figure 27.2. Trends in interest rate in Luxembourg

Interest rate and interest rate spread points (left axis), interest rate spread relative (right axis)

Source: Banque Centrale du Luxembourg: Capital markets and interest rates.

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Alternative sources of SME financing

Venture Capital

In Luxembourg, venture capital (VC) investments have shown significant variations over the years, both in terms of investment stage (See Table 27.3) and industry (See Table 27.4. ). This volatility could have been caused by the limited number of companies that received VC funds (22 in 2022), rendering VC investments more susceptible to outlier values. Notably, venture capital investments in financial and insurance activities exhibit a particularly high level of volatility. Total investment in VC amounted to EUR 225.3 million in 2022 compared to EUR 72.6 million in 2021. In 2022, most of the VC investments were in firms at the start-up stage (EUR 188.5 million) and in firms that were active in the financial and insurance industry (EUR 179.6 million).

Table 27.3. Venture and growth capital investments in Luxembourg by stage

	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Seed	200	0	0	1000	175	750	0	300	101	145	342	9715	435	8209	1900	5020
Start-up	5225	3050	1141	1500	5334	4153	6742	3190	5458	3653	13078	1506	15025	26335	26740	188492
Later stage	10286	30363	4589	1010	25	6845	223	800	338	150	3200	4638	0	1002	0	6131
Growth	87129	270230	46607	124628	275867	74464	24125	124182	138471	192398	42525	96186	162412	156214	43968	25626
Total	102840	303643	52337	128138	281401	86212	31090	128472	144368	196346	59145	112046	177872	191759	72608	225269
Total number of companies	26	26	28	32	33	33	21	24	31	26	27	20	25	26	24	22

Note: EUR thousands

Source: Invest Europe / European Data Cooperative

Table 27.4. Venture and growth capital investments in Luxembourg by industry

	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Agriculture	0	0	0	8.000	101	806	0	0	0	0	0	0	0	0	62	0
Business products and services	25017	9100	2308	17000	21871	70	121	428	7281	5800	300	2336	6769	3000	23476	12468
Chemicals and materials	0	0	0	305	1917	0	0	0	0	0	0	10000	0	0	0	0
ICT(Communications computer and electronics)	59035	17745	21793	64140	8068	37003	992	11525	3738	16625	20508	19530	19352	79159	12042	24845
Construction	0	0	1000	645	0	0	0	0	14500	0	2450	0	10800	0	200	0
Consumer goods and services	0	250	0	14624	23500	20192	18600	8135	17558	1052	26881	8133	12589	3922	326	0
Energy and environment	8000	23550	200	0	15	15322	1468	1400	34787	1689	549	0	0	700	0	5000
Financial and insurance activities	10565	249026	20263	690	177934	9535	293	104058	51210	144135	1060	51030	4083	64071	21252	179653
Real estate	0	0	0	0	0	0	0	0	0	0	0	0	20230	500	250	45
Biotech and healthcare	224	1444	6774	22734	46498	359	3274	136	2814	2303	5122	5295	77342	39824	15000	3257
Transportation	0	2529	0	0	250	2925	5650	2790	12480	0	0	0	5750	0	0	0
Other	0	0	0	0	1246	0	692	0	0	24743	2274	16775	20959	582	0	0
Total	102840	303643	52337	128138	281401	86212	31090	128472	144368	196346	59145	113098	177872	191759	72608	225269

Note: EUR thousands

Source: Invest Europe / European Data Cooperative

Other indicators

Data on non-performing loans is sourced from the Commission de Surveillance du Secteur Financier (CSSF). In 2022, 0.60% of the total business loans in Luxembourg were classified as non-performing, representing a slight increase from the 0.46% recorded in 2021. Throughout the reference period (i.e. 2007 – 2022), the incidence of non-performing loans ranged from 0.12% in 2007 to 0.64% in 2011.

Regarding bankruptcies among all firms in Luxembourg, there were 1 011 cases in 2022, marking a decrease from the 1 158 reported in 2021. Over the reference period (i.e. 2007 – 2022), the number of bankruptcies ranged from 574 in 2007 to a peak of 1 262 in 2019.

Government policy response

Several measures have been implemented to facilitate SME financing, particularly in response to the economic challenges posed by the COVID-19 pandemic.

Government guaranteed loans 

A government-guaranteed loan is a financial arrangement where a firm obtains a loan from its regular bank with the backing of a state guarantee. The recent availability of the AnaCredit dataset, which provides detailed information on individual bank loans exceeding EUR 25 thousand, allows us to estimate the amount of government-guaranteed loans since 2019.

According to the Banque Centrale du Luxembourg, which manages the AnaCredit dataset, government-guaranteed loans amounted to EUR 157.7 million in 2022. This is a significant increase from EUR 112.3 million in 2021, EUR 128.7 million in 2020, and EUR 14.8 million in 2019.

During the same period, government loan guarantees to SMEs totalled EUR 130.5 million in 2022, compared to EUR 41.1 million in 2021, EUR 72.0 million in 2020, and EUR 8.7 million in 2019. These figures emphasize the countercyclical nature of these loans and highlight the government's commitment to supporting SME financing during the COVID-19 pandemic. Funding for Research, Development, and Innovation (RDI).

On May 17, 2017, the Luxembourg government established a legal framework with the objective of promoting research, development, and innovation (RDI), primarily through financial incentives and collaborative efforts. All manufacturing and service firms based in Luxembourg that are not in severe financial difficulty are eligible for financing. RDI projects are expected to have an economic impact. Additionally, an 'Effect of Incentive' criterion is applied, meaning aid cannot be granted if the project could be executed in the same manner without such funding. The aid covers the eligible costs for RDI projects, with maximum rates varying depending on the project type and company size. SME firms may be eligible for increased aid. SME status is determined by having fewer than 250 employees and either an annual turnover under EUR 50 million or a balance sheet total below EUR 43 million. This assessment is conducted at the group level, including the applying company and any associated entities forming a single economic unit.

According to the activity report of the Ministry of Economy, in 2022, a total of 92 projects or programmes falling within the scope of the revised law (May 17, 2017) were assessed, compared to the 42 projects of the previous year. The total costs of these RDI projects amount to nearly 135.8 million, of which 46.5 million are covered by governmental grants.

As shown in Figure 3, since 2016, the proportion of projects carried out by SMEs has surpassed that of large enterprises. In 2022, SMEs accounted for 76% of RDI projects. Furthermore, in 2022, the share of aid allocated to SMEs surpassed that given to large enterprises, standing at 67.78% compared to 32.83%.

Figure 27.3. Evolution of the share of projects undertaken according to company size

Source: Ministère de l’Economie (2022, p. 74)

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Other measures

The EUR 20 million Digital Tech Fund was set up in 2016 by private and public investors with an endowment of about EUR 20 million. This seed fund supports ICT start-ups active in industries such as cyber-security, FinTech, big data, digital health, telecommunications, satellite services and the internet of things.

In 2021 the Orbital Ventures, a public-private partnership was set up to advance space economy. With an initial endowment of EUR 70 million, the fund invests in early-stage companies and focuses on space technologies including downstream (communications, cryptography, data storage, and processing geolocation earth observation) and upstream (space, hardware, materials, electronics, robotics, rockets satellites) areas.

The Luxembourg Future Fund (LFF) was set up in 2015 with funding from the European Investment Fund (EUR 30 million) and the Société Nationale de Crédit et d’Investissement (EUR 120 million). This EUR 150 million fund invests in innovative SMEs that bear the potential to bring significant and sustainable development and diversification to Luxembourg’s economy. By the 31st of March 2021 LFF had co-invested in cyber‐security, FinTech and space sector.

Two mutual guarantee schemes aimed specifically at providing support for SMEs that operate in Luxembourg - the MPME (Mutualité des P.M.E.) and the MC (Mutualité de Cautionnement) of the Chambre de Commerce.

The MPME was established by the Chambre des Métiers and the Fédération des Artisans to alleviate financial constraints among their members. MPME offers its financial standing as collateral to banks and other financial institutions to facilitate lending to SMEs. In 2022, the reported outstanding guarantees amounted to nearly EUR 232.4 million, representing a slight increase from EUR 231.9 million in 2021.

MC is a mutual institution for members of the Chambre de Commerce which was set up to facilitate SMEs’ access to bank financing. This is achieved by providing guarantees to approved credit institutions when the guarantees provided by the contractor are insufficient. The guarantees can cover up to 50% of the credit for a maximum amount of EUR 250 thousand per request.

The ODL is a public institution that provides services to exporters, including SMEs. It ensures risks associated with international business and partially finances promotional expenses, exhibitions, and export training. In the most recent available data, ODL reported new business insured for EUR 875.1 million in 2021, compared to EUR 881.0 million in 2020.

A simplified form of société à responsabilité limitée (SARL-S) came into effect in January 2017. The SARL-S, also known as “1-1-1 companies” (one person, one euro, in one day), can be established more quickly and with fewer startup funds than a regular SARL. The SARL-S is limited to individuals and was designed to facilitate the startup and growth of new business activities. The SARL-S legal structure is experiencing a rising trend. From January to May 2023, 458 enterprises out of a total of 4 345 registrations in the trade and companies register (registre de commerce et des sociétés - RCS) adopted the SARL-S legal form, constituting approximately 10.5% of all registrations during that period. In comparison, during the corresponding period in 2021, this figure stood at 9.5%

Figure 27.4. Trends in SME and entrepreneurship finance in Luxembourg

Source: See Table 27.2.

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Table 27.5. Sources and definitions of Luxembourg’s Scoreboard

Indicator	Definition	Source
Debt
New business lending total	New business New loans sum at the end of December	Banque Centrale du Luxembourg: Capital markets and interest rates Table 3.3.1.
New business lending SMEs	New business New loans less than 1 Eur million sum at the end of December	Banque Centrale du Luxembourg: Capital markets and interest rates Table 3.3.1.
Non-performing loans total	Loans which are “in default” i.e. 90 days past due or classified as unlikely to be repaid	CSSF: “COREP Solvency” reporting tables 09.01 and 09.02
Government loan guarantees, SMEs	Government guaranteed loans to SMEs (firms with less than 250 employees)	Banque Centrale du Luxembourg: AnaCredit
Government guaranteed loans, SMEs	Government loan guarantees to SMEs (firms with less than 250 employees)	Banque Centrale du Luxembourg: AnaCredit
Interest rate SMEs	Luxembourg bank interest rates on euro-denominated deposits and loans by euro area residents - new business New loans less than 1 EUR million Floating rate and up to 1 year initial rate fixation and end December annual mean average interest rate weighted by amount.	Banque Centrale du Luxembourg: Capital markets and interest rates Table 3.3.1.
Interest rate large firms	Luxembourg bank interest rates on euro-denominated deposits and loans by euro area residents - new business all new loans Floating rate and up to 1 year initial rate fixation and end December annual mean average interest rate weighted by amount.	Banque Centrale du Luxembourg: Capital markets and interest rates Table 3.3.1.
Percentage of SME loan applications	Any application for bank loans in the last 6 months (excluding overdraft and credit lines). Figures based on question q7aa of SAFE questionnaire.	SAFE question "q7aa”; European commission European Central bank
Non-bank finance
Venture and growth capital	Investment in venture and growth capital (market statistics by country of portfolio company). Includes seed start-up later stage venture and growth investment (replacement capital turnaround and buyout investment were excluded). INVEST Europa /EDC revised historical data in the period 2007- 2022.	Invest Europe / European Data Cooperative
Factoring and invoicing	Factoring turnover both domestic and international for all firms	Factors chain international
Other indicators
Bankruptcies total	Bankruptcies handed down by the court of commerce on an annual basis	STATEC -National Institute of statistics and economic studies of the Grand Duchy of Luxembourg - -Business demography

References

Digital Tech Fund https://digital-luxembourg.public.lu/initiatives/digital-tech-fund

Luxembourg Future Fund https://www.snci.lu/files/107091.pdf

MC (Mutualité de Cautionnement) http://www.cautionnement.lu/

Ministère de l’Economie Rapport d'activité 2022 du ministère de l'Économie

MPME (Mutualité des P.M.E.) http://www.mpme.lu/fr

ODL (Office du Ducroire) https://odl.lu/en/about-us/

SNCI (Société Nationale de Crédit et d’Investissement) http://www.snci.lu/

STATEC (2022) Luxembourg in Figures 2021

STATEC (2023a) Conjoncture Flash Septembre 2023

STATEC (2023b) Taux d'inflation annuels (IPCN)