Denmark
SMEs in the national economy
SMEs accounted for 99.4% of all enterprises in Denmark according to Statistics Denmark.
SME lending
In 2014, financial institutions’ lending to SMEs, approximated by loans which amount to less than EUR 1 million, amounted to a total of DKK 54 billion. However this figure cannot be compared to previous years, since there is a considerable data break in September 2013 affecting the numbers. Comparing the last four months of 2014 to the last four months of 2013, new SME loans saw an increase by 35.4 %. Total new business loans increased in 2008 and then declined over the period 2009-12. Comparing the last four months of 2014 to the same period in 2013, a reversal of this downward trend with an increase in new business loans by 21.7 % can be observed. The share of new SME loans in total new business loans was small (12%) in Denmark and declined even further to 9% during the recession in 2008 and 2009, suggesting SMEs suffered disproportionately. As could be expected, the share of SME short-term loans in total SME loans increased in 2008 and 2009, as SMEs sought financing to remedy liquidity problems and financial institutions preferred short term loans. After 2009, the share of short term loans decreased again, in particular in 2012 and 2013, signalling fewer liquidity problems1 . Comparing the last four months of 2014 to the same period of 2013, the amount of new short-term loans decreased by 25%.
Statistics Denmark undertook a survey on SMEs’ access to finance as part of a Eurostat survey in 2007 and 2010. It indicated that the smallest businesses applied for financing to a larger extent in 2010 than in 2007, but that significantly fewer obtained the full loan amount applied for. Other surveys by the Confederation of Danish Industry and the Danish Federation of Small and Medium-Sized Enterprises indicated that SMEs still considered it difficult to obtain financing in 2010 and that this restrained output. For example, in December 2010, the Confederation of Danish Industry stated that 37% of SMEs reported that the financing situation had become more difficult or much more difficult compared with the pre-crisis period. Looking at more recent data, the situation seems to have improved considerably. In the second quarter of 2015, more than 40% of their members stated that the current financing situation is good or very good, while less than 20% stated that it is bad or very bad.
The percentage of SMEs applying for finance decreased from 44% to 34% between 2010 and 2014.
Of the 34% of SMEs that applied for finance in 2014, 14% were rejected. The chances of rejection were higher for smaller businesses. The Ministry of Business and Growth analysed the relation between SMEs’ ability to obtain a loan and a number of financial ratios derived from their financial statements. It found that SMEs which obtain loans have higher EBIT margins2 , a higher return on equity and lower gearing than SMEs which only partly obtained loans or were rejected3 .
Credit conditions
Both, interest rates for SMEs and for large firms have been steadily declining since 2008, the former dropping by about a third, from an average of 6.6% in the first 10 months of 2008 to 4.2% for the same period in 20134 . Interest rates for large firms have fallen much faster over this period, however, resulting in a widening interest rate spread, from an average of 1.1% in the first 10 months of 2008 to 3% for the same period in 2013. This confirms the notion that the crisis affected Danish SMEs more than large firms regarding the price of credit5 .
The quarterly credit conditions survey of the central bank of Denmark shows that credit standards have been continuously tightened from 2011 to 2013. In the last quarter of 2014, the standards were relaxed, but were tightened again in the second quarter of 2015. According to the same source, the demand for loans, both for new and existing customers, increased in the first half of 2015.
Equity financing
According to the European Venture Capital Association (EVCA) database, venture capital financing in Denmark was about three times lower in 2010 compared to the 2007 figures. Venture capital financing has recovered somewhat since, but fell below the 2010 level in 2014. In contrast, growth capital more than doubled between 2007 and 2010, then plummeted to almost negligible levels afterwards, but has risen again to the initial pre-crises level (see Table 11.4).
Other indicators
Both, data on bankruptcies and on payment delays illustrate the stress SMEs were under during and in the aftermath of the financial crisis, as well as the improving business climate in 2012 to 2014. B2B (business-to-business) payment delays more than doubled between 2008 (6.1 days) and 2011 (13 days), and declined afterward to 9 days in 2014. Bankruptcies followed a very similar pattern; increasing dramatically from 2 401 bankruptcies in 2007 to 6 461 in 2010, and then falling steadily to 4 049 in 2014.6
Government policy response
SME access to finance is managed by Vaekstfonden (The Danish Growth Fund), a government investment fund created in 1992. Vaekstfonden offers guarantees and loans to established SMEs and entrepreneurs, invests equity in young companies with growth potential, and has a fund of funds activity focusing on both venture and the SME segment. In September 2009, the government introduced a package, which improved SME financing and export opportunities by strengthening loan guarantees, get-started loans, export guarantees and improving access to risk capital for new businesses. In late 2012, another policy package was introduced by the government with the purpose of further improving SMEs’ access to financing. Based on this new initiative, from 2013, Vaekstfonden introduced new direct loans for SMEs. In addition, the former scheme for get-started loans and the credit guarantee programme were merged into a single scheme.
Overall, the financing situation of SMEs shows signs of improvement. However, access to finance for SMEs and new businesses remains a policy concern in Denmark which explains why many new initiatives have been developed in the last few years and why the current programmes have largely been extended. Schemes such as direct loans and growth guarantees have been introduced and strengthened to give SMEs improved access to funding.
Growth loans “Vaekstlån”
Growth loans are issued by Vaekstfonden directly to SMEs seeking capital for business development or change of ownership. The financial assessment is based on the company’s current and past performance, its potential for growth and profitability, as well as the capabilities of management. All loans are granted as part of a funding package including other financial partners, such as banks or mortgage institutions. Only loans above DKK 2 million are issued. The interest rate is set at least 30%. above the comparable market rate to ensure minimal market distortion, avoid a crowding out of the private sector and because, in case of default, all collateral accrues to banks and other secured creditors before Vaekstfonden.
Growth loan guarantee “Vaekstkautioner”
Vaekstkautioner is provided to SMEs and covers up to 75% of the bank’s loss if a company cannot pay back its loan. Capped at DKK 2 million, growth loan guarantees can be granted to finance business development as for example change of ownership, capital investments, or the development of new and improved products.
The number of growth loan guarantees issued has increased from a total commitment of DKK 131 million (EUR 17 million) in 2007 to DKK 850 million in 2014. 84 433 guarantees with a total guarantee volume of DKK 473 million were issued in 2014. In the first quarter of 2015, 94 guarantees were issued with a total volume of DKK 94 million7 . The development can partly be attributed to increased knowledge of the scheme and partly due to the fact that the scheme is attractive to banks, as it will not only reduce the risk of lending, but also release parts of the tied-up capital for banks. The varying take-up is also most likely influenced by the difficulties businesses face to access loans on normal terms.
Growth Loans for Entrepreneurs (Vækstlån for iværksættere)
In 2014, a new programme was introduced to provide debt finance to entrepreneurs, which lacks sufficient collateral to finance their plans for start-up, expansion and growth. Government funding of DKK 45 million annually for loss coverage is available for this initiative, in addition to an explicit state guarantee for the Danish public investment fund, The Danish Growth Fund (Vækstfonden).
The loan amount is a minimum of DKK 2 million. The Danish Growth Fund charges a fixed fee of EUR 5 000 plus 0.5% of the principal. The loans are junior secured, which means that in case of default any collateral goes to other creditors (i.e. the commercial bank) before the Danish Growth Fund. The expected volume is DKK 350 million annually.
Green growth loans (Grønne Vækstlån)
The objective of this programme, introduced in 2013, is to provide debt capital to large environmental-improving investments, such as investments made to improve resource efficiency. Government funding amounts to DKK 45 million annually for loss coverage, in addition to an explicit state guarantee for the Danish public investment fund, The Danish Growth Fund (Vækstfonden). The loan amount is a minimum of DKK 2 million. The Danish Growth Fund charges a fixed fee of EUR 5 000 plus 0.5% of the principal. The loans are junior secured. 16 loans were issued in 2014, with a total volume of for DKK 65 million. In the first quarter of 2015, 6 loans have been issued with a total volume of DKK 51 million.
Danish Growth Capital (Dansk Vækst Kapital, DGC)
The aim of this programme is to improve the access to risk capital for entrepreneurs and SMEs by creating a fund-of-funds that invests in small cap-, mid cap-, venture- and mezzanine funds. The aim is to create more growth companies as well as delivering competitive, double-digit returns to the investors. The fund’s investments period ends in 2015.
The capital base – a total of DKK 4.8 billion – has been sourced entirely from the Danish pension funds. One-quarter is invested directly in DGC by the pension funds, and three-quarters is provided as a loan to the Danish public investment fund, The Growth Fund (Vækstfonden), which subsequently invests it for equity in DGC. This essentially creates two asset classes and alleviates the risk-based funding requirements of the pension funds. The interest rate of the loan is the government bond rate plus an illiquidity premium. Accordingly, The Growth Fund bears the risk of three-quarters of the fund-of-funds’ investments.
Syndication Loans (Syndikeringslån)
Syndication loans match venture capital investment from private investors with loan capital to encourage investments in knowledge- and capital-intensive growth companies that are in the early stages of development. Their purpose is to make it more attractive for venture capitalists to invest in early-stage growth companies, bringing more capital to a segment that traditionally has difficulty obtaining it. The syndication loans enable the private venture capital funds to broaden their portfolio in early-stage businesses. Given the high risk of financing early stage high-tech companies, the interest rate of 12% does not cover the total cost of the scheme. Therefore, the programme includes a government subsidy. Since its introduction in 2011, a total of 9 venture capital funds has been approved by The Growth Fund as partners. These funds have used the credit line for a total of 36 loans committing a total of DKK 169 million.
Export guarantee
Export guarantee was first established as a temporary guarantee scheme to provide the operating and development credit for Danish export firms with a limit of DKK 2 billion. As a result, the Export Credit Fund can guarantee up to 80% of operating and development credit extended by banks to export firms and their sub-suppliers. As of 1 January 2012, the scheme was made permanent.
The export credit facility
The export credit facility was established to support the international competitiveness of Danish enterprises and to benefit Danish exports in connection with the financial and economic crisis. Originally, it was possible to apply for an export credit until the end of 2011, but a political agreement has been concluded to extend the export credit scheme by four years until the end of 2020. Moreover, the credit limit was increased by DKK 15 billion to DKK 35 billion. The credit scheme supports Danish exports with long credit periods, i.e. more than two years.
The export credit facility has been supplemented by two agreements concluded by the Export Credit Fund with Pension Denmark and PFA Pension, respectively, to the effect that they will each provide up to DKK 10 billion for export financing. The Export Credit Fund guarantees the loans granted by the pension companies. Under the agreements, the Export Credit Fund presents relevant projects to the pension companies. The pension companies will then assess whether the investment is attractive and prepare an offer. The buyer is free to accept or reject the offer.
References
Abildgren, Drejer and Kuchler, 2012, A microeconometric analysis of the banks’ loan rejection rates and the creditworthiness of the banks’ corporate customers, Danmarks Nationalbank.
Confederation of Danish Industry, Analysis on Danish Financial Conditions, July 2015.
Danmarks Nationalbank – “Lending Survey, First quarter 2015”.
Ministry of Business and Growth, Developments in Credit Availability in Denmark in October 2015.
Ministry of Economy and Business Affairs (2011), Developments in Credit Availability in Denmark in the First Half of 2010, 11 January, 2011.
Ministry of Economy and Business Affairs (2011), Developments in Credit Availability in Denmark in the Second Half of 2010, 29 June, 2011.
Ministry of Economy and Business Affairs (2012), Developments in Credit Availability in Denmark in the Second Half of 2011, June 2012.
Notes
← 1. Source: ECB Statistical Data Warehouse.
← 2. The EBIT margin is equal to Earnings Before Interest and Tax, divided by net revenue.
← 3. Source: Abildgren, Drejer and Kuchler, 2012..
← 4. The interests are affected by a databreak in September 2013, therefore only the last 4 months of the years 2013 and 2014 are compared.
← 5. Source: Danmarks Nationalbank (The Central Bank of Denmark).
← 6. Source: Statistics Denmark.
← 7. Source: Vækstfonden.