Small businesses in Europe work together to access finance and share risk – why shouldn’t those in the UK?

Too often, small and medium-sized enterprises (SMEs) struggle to access the finance they need to grow. But in Europe, mutual guarantee societies provide a solution we can learn from.

Virginia Doherty


If we want to create a fair and inclusive economy, then every individual, household and business must have the chance to participate on fair terms.

Access to credit and sound financial advice are the lifeblood of small and medium-sized businesses and enterprises (known as SMEs). A willingness by banks to lend can be the difference between their success or failure, and critical to the ability of startups to innovate with new products and services or to expand. So much so that small business lending is considered a key indicator of the health of the wider economy.

But lending to SMEs can be risky. Traditional banks can often be reluctant to lend, particularly in times of economic uncertainty. Others, such as those in areas under-served by banks, or business owners from non-traditional backgrounds can also struggle to access business finance, meaning that businesses that might otherwise be successful may struggle to ever gain a foothold.

Outside of the UK, groups of small businesses working together to provide a solution.  Mutual guarantee societies (MGS) are non-profit financial establishments formed by groups of SMEs, often representing businesses in a particular region or sectors of the economy. These MGS provide guarantees on behalf of SMEs to serve as a promise to the bank that the loan will be paid. This promise is a commitment by the MGS to repay a percentage of the loan if the SME is not able to fulfil their payments.

But these organisations go far beyond securing their member’s bank loans. When one of its member businesses apply for a loan, the mutual guarantee society will be support them through the application process, providing counselling which, over time, contributes to financial literacy and strength of the Society as a whole. The MGS can also act as an intermediary between the banks and the SMEs, providing information that reduces miscommunication between parties, and contributes to a transparent and effective relationship.

MGS provide the banks with qualitative information about their SME which, paired with the promise to repay the loan, reduce the level of risk from the bank’s perspective. This reduction of risk enables the banks to issue loans at a lower cost, and MGS are often to negotiate better financial conditions for their member businesses.

Difference in means of bank debt availability and cost with and without MGS

Credit availability is the proportion of bank debt over total assets, and Cost is the ratio of financing costs over bank debt

PANEL A:TOTAL SAMPLE
VARIABLES Firms guaranteed by MGS (n=264) Firms not guaranteed by MGS (n=3474) t statistic (p-value)
Credit availability 0,356 0,247 -8,81*** (0,000)
Cost 0,055 0,064 2,15** (0,031)
PANEL B:PAIRED SAMPLE 50%-50%
VARIABLES Firms guaranteed by MGS
(n=264)
Firms not guaranteed by MGS (n=264) t statistic (p-value)
Credit availability 0,356 0,253 -6,198*** (0,000)
Cost 0,055 0,054 -0,2138 (0,831)

Level of significance in brackets. (***): Significant at 1%; (**): significant at 5%; (*): significant at 10%.

Guarantee societies have seen significant success throughout Europe, each of these countries approaching the mutual guarantee scheme model in different ways.

Spain is one place where MGS play an incredibly effective role. Through the Confederation of Spanish Mutual Guarantee Societies (CESGAR), twenty MGSs coordinate their efforts to facilitate access to credit and improve the conditions of financing partner companies. They provide their members with guarantees, information and financial advice, and financial training, all of which contribute towards the long term success of SMEs who are part of the scheme.

To receive funding, the SME must be a participating member of the MGS and hold at least one share in the company. After receiving membership, the SME must present the project, providing all necessary risk analysis. This allows for the MGS to evaluate the hard and soft facts of the company and the feasibility of the project. Finally, the guarantee is approved, and the repayment and percentages are established. In general, Spanish MGS provide a guarantee for 100% of the requested loan amount, and the premium for the guarantee is paid in annual instalments directly to the MGS.

Spanish MGS encourage support and co-operation, providing better rates and higher levels of financial literacy to their members. When Spanish SMEs who receive bank debt with the support of MGS are compared to those who did not, those firms with the MGSs support received higher access to funds, at better rates which otherwise would not be available to SMEs.

In Germany, guarantee banks have experienced similar success. The Verband Deutscher Burghaftsbanken is the association of German guarantee banks which are organised on a federal basis as a financial institution. These organisations support the creation of new enterprise. In order to do this, these guarantee banks cover 80% of credit risk over the course of fifteen years for the institutions.

Through federal support, the State counter-guarantees in the range of 65-80% of the guarantee bank’s guarantee. In Germany, private banks provide a smaller number of loans to SMEs due to perceived risk, which have become a major burden on SMEs. Through guarantees, savings banks and co-operatives are able to provide more loans to smaller firms with higher probability of default.

This investment has been massively beneficial to the German economy. According to a study conducted by the University of Trier in 2006 which analyzed Germany through 1996 to 2002, guarantee banks resulted in an increase of GDP by 3.2 billion euros. Further, MGS were responsible for the creation of 12,900 new jobs, reduction of unemployment by 9,100 per year, and an increase of fiscal receipts by 720 million euros from taxes on goods, income, and capital.

We must break the current cycle of funding for SMEs. As the financial market becomes less accessible for our new and growing businesses, this poses a clear challenge to SMEs success. Reform must come quickly ensuring that our businesses have fair access to the necessary financial tools to succeed.