More Brexit blues – growth businesses that borrow from EU perform better

Companies that use European Union loans outperform privately funded peers

As if British business didn’t have enough reasons to feel gloomy about Brexit, researchers have found that SMEs which receive EU funding perform better.

France’s Emlyon Business School and the Politecnico di Milano School of Management (MIP) found that SMEs receiving EU-guaranteed loans significantly outperform those that don’t, in areas including sales, additional staffing and, crucially, productivity.

Researchers found that on average EU-backed small businesses experienced:

  • More than 2.5% additional productivity growth
  • 7% additional sales growth
  • 8% additional employment growth
  • 9% additional asset growth

The business schools analysed 85,000 loans awarded to 57,000 French small businesses between 2002 and 2016, totalling €4.65 billion.

During the study, SMEs which received EU loans were matched with a “twin” firm which had not accessed European funding. The twin firms were almost identical in terms of industry, location, current and predicted, employment growth, size and age. These twin firms had used either traditional bank loans or other forms of external investment such as venture capital.

Given that 85 per cent of new jobs in the EU come from small businesses, the researchers suggest that it is no surprise if schemes such as these run by the European Investment Fund (EIF) are beneficial to Europe in terms of job creation.

Professor Massimo Colombo of MIP said: “Most banks act very conservatively. If they think a venture has any possibility of failing or being too risky, it is likely they will be very cautious in giving a loan. This means that many SMEs which are perhaps riskier ventures, but have the capacity to be successful, are unlikely to receive funding.

“These EU-guaranteed loans step in as a security buffer to banks, ensuring potentially profitable SMEs receive the funding they deserve.”

Professor Fabio Bertoni of Emylon added: “The results are consistent with the fact that one of the biggest blocks to SMEs’ growth is a lack-of financing and experiencing financial constraints. In fact, 30-40 per cent of EU SMEs cited limited funding as a very significant reason for lack of growth in an EIF survey. These loans alleviate SMEs financial constraints, easing the pressure on firms and allowing them to invest in what they deem the most important areas for growth.”

As to what will replace these EU-guaranteed loans in Britain and Northern Ireland, the government has talked vaguely about a UK Shared Prosperity Fund but with little detail.

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