Scottish business groups have welcomed the publication of the European Commission's long-awaited blueprint for a capital markets union which could dramatically improve small companies' access to finance beyond traditional bank loans.
The Commission wants to follow the example of the United States where more than 70 per cent of business finance comes from capital markets and less than 30 per cent comes from bank lending. In Europe the ratio is almost the exact opposite.
Jonathan Hill, the new EU finance commissioner, said on Wednesday that a single market for capital would be in place by 2019 and would remove barriers to cross-border investment, making it easier for firms to raise funds in other countries across Europe.
If the Commission succeeds in its aim of increasing the flow of capital around the EU it would allow the corporate debt of a paper clip manufacturer in Ayrshire, for example, to be sold to a pension company in Schleswig-Holstein.
The Commission's overall goal is to beef up all non-bank sources of finance, from pension funds to venture capital and stock markets and expand alternative sources such as crowd-funding. It also wants to shield Europe's economy from future credit crunches like the one that hit the region during the financial crisis.
Since the crash of 2008, small firms have become increasingly frustrated at the difficulty of obtaining bank finance. According to the Commission, over a third of SMEs in the eurozone failed to get the full financing they asked for from banks in 2013.
But, with just 2 per cent of SME lending in Europe coming from venture capital - compared with 14 per cent in the US - small firms often have few alternatives.
The Commission calculates that as much as €90 billion (£67bn) of funds would have been available to finance companies between 2008 and 2013 if the EU's venture capital markets were as developed as they are in the US. If SME loan securitisations recover to just half their pre crash levels a further €20bn (£15bn) of additional funding could be unlocked.
David Watt, the director of the Institute of Directors Scotland, told the Sunday Herald that small to medium sized companies in Scotland would welcome any proposal that increases access to capital and equity and reduces reliance on bank loans.
"Not that many businesses have positive relationships with banks and a significant number of firms are disenchanted," he said. "Despite today's low interest rates some companies are reluctant to apply for loans because of their bad experiences with the banks since the financial crisis started. Instead they have been trying to self-finance."
A particular problem for Scotland, Watt says, is that, while archangel finance is often available for start-ups, finance is much harder to obtain for more established companies looking for equity or loans in the £500,000 to £3 million bracket, which is a sector of the market that the banks have shown little interest in serving.
Another problem for many SMEs in Scotland, according to Watt, is the fact that there are currently no venture capital companies based in the country.
Colin Borland of the Federation of Small Businesses Scotland said that the capital or equity funding solutions available to large corporations were mostly not available to SMEs - even the most stable, solvent and promising ones.
"Access to finance is not as bad as it was in 2010 but we are not going to move back to the pre-2008 days when everything was funded through the banks," he said.
"There are still serious issues around the affordability and availability of finance so anything that broadens the range of funding solutions for businesses is good news."
Owen Kelly, the chief executive of the trade body Scottish Financial Enterprise, said he hoped the proposals would open up markets and broaden the opportunities for business investment in Scotland and throughout the EU.
"Supporting the Commission to get the detail right must now be a priority for governments and financial institutions as this is an opportunity to drive economic growth and ultimately secure better financial deals and security for customers," he said.
Meanwhile, CBI Scotland's new director Hugh Aitken told the Sunday Herald that the green paper was a welcome sign that the European Commission has decided to put growth and competitiveness at the heart of its financial services policy.
"Against a backdrop of eurozone economic and political uncertainty, it's right that the Commission focuses on making quick, concrete progress on some of the biggest barriers to capital markets for businesses."
Liz Cameron, director of the Scottish Chambers of Commerce, said that the EU's plans would be supported if they succeed in opening up a wider range of financing options for businesses and at lower cost.
Recent research by the Scottish Chambers of Commerce has shown that applications for finance from SMEs remain very low.
"Feedback has indicated to us that some SMEs no longer even consider approaching banks to obtain finance," Cameron said.
"It highlights that SMEs having access to alternative sources of credit in the form of crowd-funding, angel investors and a choice of equity and loan funding options, is crucial if we want to continue the recent positive trends in investment."
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