Financing conditions for SME’s remain accommodative

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A European Commission survey of SME financing, reported in the 2020 Annual Report of the Central Bank of Malta, shows that turnover and profits of SMEs in Malta and in the EU were “severely impacted by adverse economic activity, even though financing conditions were generally accommodative”.

In spite of this, 59% of domestic SMEs reported that they did not apply for bank loans, while just over a half said that they did not apply for other bank related products, namely credit lines, bank overdrafts or credit cards as they had sufficient internal funds. In contrast, only around a third of EU firms fell into this category.

Maltese firms also took out fewer bank loans compared to 2019 (16% dropping to 12%) while the reverse was true in the EU (15% to 18% of all firms).

The Survey on Access to Finance of Enterprises (SAFE) was conducted in September/October 2020, in cooperation with the European Central Bank.

The survey also looks at SMEs’ reliance on different forms of financing, providing an interesting comparison between trends in Malta and in the EU as a whole. For example, a smaller share of SMEs in Malta resorted to credit lines and overdrafts last year, dropping from 50% in 2019 to 41% in 2020 – but this was still well above the share of one-third in the EU.

The share of domestic SMEs using trade credit also decreased last year (38% to 32%), despite this source of financing becoming more relevant, which might reflect a lower willingness to provide this type of funding by the relevant business partners.

Nevertheless, recourse to trade credit remained much higher than in other EU countries, as with a 32% uptake, Malta still stood in third place after Ireland (46%) and Poland (33%).

There was also a marked decline in the percentage of SMEs that used retained earnings or proceeds from the sale of assets. This decline has been seen for two consecutive years, starting at 33% in 2018, slipping to 25% in 2019 and 17% in 2020.

Slightly more than half of domestic firms reported that external funding was used for inventory and working capital, whereas around a fifth of firms reported using such funds for fixed capital. A fifth of firms reported using external finance for new products. Overall, reliance on external funding for inventory and working capital increased from 2019, while borrowing for fixed investment and new products were cited less often. Borrowing for hiring and training employees also decreased compared with the previous survey.

The survey indicated that on balance Maltese firms reported a drop in fixed investment in 2020, a sharp turn-around from the previous year, when a net 35% of respondents had reported an increase.

Fixed investment covered by the survey includes that in property, plant and equipment.

The survey also looked at what SMEs consider to be their most pressing problems, with the category that includes the COVID-19 pandemic cited by over a third of domestic ones as the most challenging in 2020, a significant increase from the 7% registered a year earlier. The category includes a wide range of problems, from taxes and cash flow, to political instability and Brexit.

This pattern was seen across the EU, with the survey finding that if the pandemic were given a category of its own, it would have been cited as the third most pressing problem of EU enterprises.

Access to finance was among the least pressing of obstacles. As could be expected, in a period of low demand, the previously pressing problem of skill shortages dampened considerably, though it remained the third-largest issue for Maltese firms.

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