ESBA - The Independant Voice for Small Business

FINANCING SMEs & GROWTH: RETENTION OF EARNINGS IS THE BEST WAY TO FINANCE SMALL BUSINESSES

Brussels, July 6th 2006

ESBA welcomes the initiative unveiled by the Commission on 29 June on SME Financing but calls for retention of earnings to be considered as a key measure for financing small and medium sized businesses and growth at European level and in the EU Member States.

Access to finance is clearly the weak part of current EU and national SME policies. The recent communication, in spite of being a small step forward in the right direction, does not focus enough on enterprise financing through retention of earnings.

In a context where SMEs represent 99.8% of all EU enterprises and provide twothirds of all employment, allowing entrepreneurs to start a business and expand it is of primary necessity. However, as long as banks apply the same lending principles to SMEs as to big firms, small businesses will be deprived of key access to finance. As long as nothing is undertaken to make sure that profits aimed at being reinvested in the company are less taxed, SMEs, especially the smallest ones, will remain dependent on a highly risk-adverse culture.

Indeed, most small businesses rely on accumulated earnings to provide the capital for investment and growth. Therefore, tax systems affect the way they accumulate after-tax earnings for reinvestment and expansion, and the way they build their equity base in order to be attractive to external investors.

Moreover, the recent Basel II agreements will put more pressure on small business entrepreneurs who ask for a bank loans to carry their project. They will have to demonstrate a stronger own equity base , which is being made difficult or impossible by high tax rates on profits.

ESBA encourages EU Member States to take SME financing seriously and direct their effort at improving retention of earnings as one of the pillars of the National Reforms Programmes (guidelines A 1), in addition to other forms of SME financing.

ESBA also put great hopes in the study on the “impact of tax systems on the retention of earnings and the increase of own equity”, which should be launched by the Commission in late 2006/2007.

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Note to the editor: On 29 June, the European Commission presented a new initiative on SME financing. It seeks to generate more risk capital investment, boost innovation financing, and make the whole system more SME friendly. The initiative also announces an increase of EU financial support to early stage investment in innovative firms and encourages an internal market of venture capital. The text "Financing SME Growth: Adding European Value" is available here

ESBA is a non-party political European group, which gathers member organisations from 22 European countries. It is the only organisation in Europe to focus its representation on the needs of (fully) independent small business organisation (vs. statutory or compulsory membership groups). ESBA currently represents almost 2 million small business entrepreneurs and represents them through targeted EU advocacy activities. ESBA also works towards thedevelopment of strong independent lobby and benefits groups in European countries. For more information, please contact: secretariat@esba-europe.org

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Page last updated: 02/02/2007 16:58:51