Finnvera’s domestic financing under study at Turku School of Economics and Business Administration

Finnvera has a clear role in facilitating overall financing for small and medium-sized enterprises

According to a recent study conducted by the Small Business Institute of Turku School of Economics and Business Administration, Finnvera has been successful both in its industrial policy role and in offsetting deficiencies existing on the SME financing market. Financing provided by Finnvera plays a crucial role especially at the onset of enterprise activities, during changes of generation and ownership, and in growth and internationalisation projects.

The goal of the study was to determine how deficiencies in the operation of the financial markets are seen in SME projects financed by Finnvera and what industrial policy results have been achieved in domestic financing in terms of new enterprise activities, new jobs and regional development. The sample comprised 600 Finnvera clients in all sectors. Responses were received from 302 enterprises. Respondents were placed in three categories: starting, growing and other SMEs. In addition, 14 representatives of banks were interviewed.

A sufficient number enterprises and banks in the Helsinki area, in growth centres, in rural areas and in areas eligible for national support were included in the study to enable determination of the effectiveness of Finnvera’s activities in terms of regional policy.

Finnvera reaches starting and growing enterprises

Finnvera’s role is important, especially at the start of enterprise activities, during changes of generation and ownership, and in growth and internationalisation projects. As many as one out of four respondents said that the enterprise would not have been established without Finnvera’s financial contribution or that the enterprise would no longer be in operation without Finnvera.

The primary reason for a starting enterprise to become a Finnvera client is usually a suitable financing product offered at convenient terms. Enterprises at the start of their operations see Finnvera as their first financing option more often than enterprises already in operation. One reason for this may be that organisations giving advice to starting entrepreneurs have recommended contacting Finnvera.

The main reasons given by growth enterprises for being a Finnvera client were the lack of collateral and getting a bank loan with the help of a Finnvera guarantee. Finnvera has been the only financing alternative for growth enterprises more often than for other enterprises. Growth-seeking enterprises, more often than others, needed Finnvera’s financing to supplement their working capital or to obtain sufficient overall financing.

Finnvera’s financing had made it possible for more than one-third of growth enterprises to keep jobs or to hire new workforce. In terms of keeping jobs, Finnvera’s financing played a more important role in rural areas than in the Helsinki area, in growth centres or in areas eligible for support.

Well over half of respondents innovative enterprises

Altogether 45 per cent of Finnvera’s clients interviewed for this study were active innovators and developers of their own operations. In the study, respondents were asked to indicate their agreement with certain claims about their operations. Enterprises that said that they strove to invent new ideas, to follow the market and to train their personnel, and that had actively developed their products and services were classified as innovative enterprises. These enterprises also were prepared to take risks and reported being committed to their innovations ('innovators').

Of the enterprises interviewed, 20 per cent preferred developing new products or services to developing enterprise activities. These enterprises also follow the market and develop their personnel, but try to avoid taking excessive risks ('product developers'). Another 10 per cent of enterprises sought innovations but were content with developing their activities along traditional lines ('facilitators').

Most innovators were located in the Helsinki area, where every second enterprise characterised itself as an innovator. Most product developers were located in urban areas and most facilitators in rural areas. Among enterprises that shared a more positive attitude to growth, innovators were more common than any other types.

This study found Finnvera’s clientele to be clearly more innovative than has been observed in other studies. For instance, according to a study conducted among Finnish growth enterprises by Pasi Malinen and Jouko Toivonen in 2005, only six per cent of Finnish enterprises could be termed as dynamic innovators.

On the basis of the current study, it can be assumed that Finnvera has been able to identify potential and innovative projects and enterprises among its clientele.

Lack of collateral the reason for Finnvera’s participation

The greatest need for Finnvera’s presence in enterprises’ financing arrangements stems from lack of collateral among enterprises and entrepreneurs. When financing relatively small projects, it is difficult for banks to get sufficiently extensive or reliable information about the enterprise and its markets; alternatively, getting this information would require resources beyond their possibilities.

Lack of collateral exists particularly in growth enterprises, innovative enterprises and in enterprises working in the service sector. Lack of collateral seems to be slightly more common in enterprises in the Helsinki area than elsewhere. The reason for this may be that Finnvera’s clientele in the Helsinki area includes more service enterprises and innovative enterprises than elsewhere.

The study seems to indicate that the main problem in rural areas is not the unavailability of funding; instead, the main problem seems to be failure to recognise the ideas and the potential existing on the market. Finnvera’s role as a body providing advice and focusing projects is clearly more prominent outside the Helsinki area.

In fact, Finnvera’s added value compared against other financing options is largely based on Finnvera’s expertise and risk-taking capacity, on the security provided or on loan products meeting the enterprise’s needs.

Sharing the risk with Finnvera important for banks

The researchers also wanted to determine the impact of Finnvera’s activities, the mutual division of labour, and the existence of market deficiencies from the perspective of banks.

The bank representatives interviewed saw Finnvera as an important partner in financing and risk-sharing.

The effectiveness of Finnvera’s activities is seen concretely in the area of collateral, because banks cannot normally provide financing for projects without sufficient collateral. Finnvera can participate in the financing of an enterprise deemed to be profitable even if the enterprise has insufficient or non-existent collateral. The lack of collateral is accentuated at the start of an enterprise’s operations, during company acquisitions and during growth and internationalisation. Banks pointed out that by sharing the risk, Finnvera makes it possible for enterprises to engage in these activities. Against this background, it can be assessed that Finnvera has an important role as a provider of financing for enterprises and as a body sharing risks with banks.

In their interviews, bank representatives stressed Finnvera’s ability to take risks. Finnvera was seen as a welcome player whose effect is felt at the right place in terms of banks’ risk-taking. It was considered that Finnvera’s understanding of business sectors and the corporate analyses conducted in connection with projects help improve the quality of projects. It was also considered that Finnvera is able to identify new potential projects and to evaluate business trend changes.

According to banks, the smallest enterprises need Finnvera the most, since banks have few opportunities to finance small enterprises because of the associated financial risks. Finnvera’s importance is emphasised in rural areas because banks feel that they cannot offer the same know-how to their entrepreneur and enterprise clients as Finnvera does.

Regional perspective

According to the study, the effect of Finnvera’s financing - i.e. enabling or promoting enterprise activities and their development - is not necessarily linked with regional aspects. In other words, lack of collateral among enterprises depends more on the phase of activities (start or revision) or on the basic character of activities (service/industrial enterprise, innovation) than on the location.

From the industrial policy perspective, the leverage effect of government financing is clearly smaller in rural areas than in urban areas or in the Helsinki region. The financing needs of enterprises are not so dependent on the location of the enterprise as has been assumed. In rural areas, there may be some degree of competition between Finnvera’s loan products and the product slates of banks.

Finnvera has a major effect on the content of activities in regions; similarly, financing has a considerable impact on the growth of enterprises and on the number of jobs in them. It is therefore important to maintain regional activities.

Effectiveness targets achieved

The findings of the evaluation study corroborate that Finnvera has acted in keeping with its objectives in domestic financing. It is clear that maintaining the quality of current activities is an important point of departure for future activities.

On the whole, Finnvera’s interaction with banks is clear and functions well. Through its risk-sharing, Finnvera has also been able to promote the participation of banks in the building of comprehensive financing solutions for enterprises. However, the study revealed that the focus of co-operation between banks and Finnvera becomes slightly blurred during normal development and growth of enterprise activities.

More than at present, Finnvera should concentrate on more difficult and more risky projects, where banks cannot act alone. These projects include change of generation or ownership or other development projects that meet some of the basic requirements for obtaining financing. In the same area, banks should assume more of the actual business risks in 'normal' enterprise development projects. Since financing operations already have a positive effect on enterprise, this division of emphasis would help increase the effectiveness of these operations even more.

Further information about the study:

Director Jarna Heinonen, Small Business Institute, tel. +358 50-5631 713
Pekka Stenholm, Specialist Researcher, Small Business Institute, tel. +358 2-4814 513
Veijo Ojala, Executive Vice President, tel. +358 400-672 401