Content Section

The options available to SMEs for financing growth range from loans to listing

Growth in a company requires financing and, potentially, new kinds of competence as well. Public listing may be a feasible way to obtain both. At the beginning of the year, the Federation of Finnish Enterprises and Finnvera launched a coaching programme named “Listing in 365 days“ for SMEs, preparing them for public listing. There are also other alternatives for funding growth leaps.

The “Listing in 365 days” coaching programme offers companies good prerequisites for public listing when the time is right. In other words, participating in the programme does not mean that the company would certainly be listing. The coaching programme lasts one year and covers, for example, the work of the company’s board of directors, financing, investor communications as well as the roles of the CEO and chairman of the board in a listed company.

“SMEs are particularly important for the Finnish national economy, since they generate the majority of new jobs. Finnvera’s important task is to encourage SMEs to grow, which may well be achieved through public listing,” says Titta Mantila, Vice President at Finnvera.

Public listing expands the company’s shareholder base. In order to convince these new shareholders, who are investing in the company, the company must have solid management and a clear direction.

Thus, listing provides the company with an opportunity to collect funds in order to finance investments and development work required for growth. The potential investor base of a listed company is clearly broader than that of an unlisted company, and this also makes it easier for the listed company to collect capital later on.

For shareholders, it is important that a marketplace is created for company shares and market value is defined for the company. Listing increases the recognition of the company, and this will also help find new investors. In addition, as the company’s equity ratio grows, the cost of liabilities decreases.

Petri Roininen, chairman of the growth entrepreneur network of the Federation of Finnish Enterprises, estimates that there may be hundreds, if not thousands, of companies that are eligible for public listing in Finland.

However, if the company’s shareholders do not find listing to be the most suitable option, the financing needed for growth can also be acquired as debt-based financing, which most typically means a bank loan in Finland. There are also other options.

Bonds diversify the financing basis

When the magnitude of the financing need is comparable to public listing, the company may also consider bond financing.

It means that a group of investors subscribe for a bond issued by the company that needs a loan. The arranger of the bond issuance is typically a bank, which charges the company the costs incurred by the issuance arrangements.

“Bond financing diversifies financing for companies, which is a good thing. Finland could follow Sweden’s example: there bond financing is more common, also with SMEs,” says Finance Manager Kalle Åström at Finnvera.

Finnvera’s bond financing suits companies’ general financing needs, such as investments, expansion and development of operations, or reorganisation of the financing structure.

Finnvera may also subscribe for the bond, and the maximum share of the implemented subscriptions is 50 per cent. The company issuing a bond is not required to make its own contribution in the financing of the project. Finnvera is a complementary provider of financing on the financial markets. If the number of investors is sufficient, Finnvera reduces its share or may completely withdraw from the financing project.

Mostly, the investors are institutional investors, such as pension or insurance companies. The minimum amount to be invested is approximately EUR 1 million per investor.

Finnvera’s Growth Loan for tailored financing needs

Mezzanine financing may be a good solution if the company needs funding with more tailored terms and conditions. As the name indicates, the mezzanine financing is a product between shareholders’ equity and liabilities.

Finnvera’s Growth Loan is a way to meet the financing needs of companies that experience powerful growth. Finnvera can grant a Growth Loan to SMEs and midcap enterprises that have been in operation for three years or more, for financing significant growth and internationalisation projects and corporate reorganisation.

Generally, the price of mezzanine financing is higher than that of regular bank loans but lower than in purely equity-based financing. The Growth Loan is an unsecured loan subordinated to bank loans, in the same way as subordinated loans are.

“The terms and conditions of the Growth Loan make it easier for banks to get involved in projects. Since the Growth Loan falls under mezzanine financing, it can be considered to be an item equivalent to shareholders' equity. A higher shareholders' equity increases the company’s equity ratio and thus improves the company’s financial standing,” Åström explains.

In projects for which Finnvera grants a Growth Loan, the company’s own contribution to financing must be approximately 20 per cent, and the other providers of financing that participate in the financing package in addition to Finnvera must account for approximately 50 per cent of financing. The profitability and eligibility for financing of projects is assessed on a case-by-case basis with the other providers of financing.

More on the topic:

Read more about Finnvera’s bond financing.

Examples of how the Growth Loan has been used as part of financing projects:

Entrepreneur-story: More brains than luck - Aidon Oy