Public funding for SMEs and start-ups

On 26 October 2018 the Council of Ministers authorised the signing of three agreements between the Ministry of Industry, Trade and Tourism and the National Innovation Company (ENISA) to develop in 2018 three financing lines through participating loans: one for SMEs, one for technology-based companies and one for young entrepreneurs. The Ministry will devote 98.5 million euros to it.

The three lines are estimated to cover some 500 innovative business projects driven by SMEs and entrepreneurs. ENISA is a public company under the Ministry that has taken part since 1982 in financing viable, innovative projects, and it is one of the best-known instruments for companies that need to grow and do not easily find bank credit.

The three lines

The SME line grants between 25,000 euros and 1.5 million to projects that improve competitiveness and create jobs, with a maximum maturity of nine years and up to seven of grace. The line for technology-based companies, with the same amounts, is for projects whose result is a technological advance in products, processes or services, with a maximum maturity of seven years and up to five of grace.

The young entrepreneurs line offers between 25,000 and 75,000 euros for projects driven by people up to the age of 40, with a maximum maturity of seven years and up to five of grace. In all three lines no guarantees are required and the interest rate is set according to the results of the beneficiary company, with a minimum and a maximum.

What a participating loan is

A participating loan is an intermediate instrument between debt and equity. It is repaid like a loan, but its remuneration has a part linked to the company’s results, which reduces the pressure on cash in the early years. It is usually subordinated, so that in liquidation it is paid after ordinary creditors.

Its accounting advantage is that, for capital reduction and for grounds for dissolution due to losses, it counts as net equity, so it strengthens the financial structure without diluting the partners. That feature explains why ENISA uses it as its main instrument for financing the creation and expansion of new scalable business models.

Why it matters to SMEs

Spanish business is made up 99.8% of SMEs, which generate 65% of employment, and 95% of them have fewer than ten workers. That small size makes it harder to access credit and to invest in innovation, which is why the Government regards ENISA as a fundamental instrument, both in creating companies and in expanding them.

For a Catalan SME or a Barcelona start-up, this funding adds to other routes, such as the lines of the ACCIÓ agency, bank credit or venture capital funds. Each has different requirements, and the choice depends on the company’s stage, its business plan and how much own capital the partners can contribute.

What to review

Before applying for a participating loan, it is worth having a solid business plan, clear financial statements and a realistic cash forecast. ENISA analyses the viability of the project, the team, the technology and the market, and the partners must be able to explain clearly what they contribute. Putting the documentation in order in good time speeds up processing.

It is also useful to compare the total cost against other alternatives, including the effect on the balance sheet, and to review shareholder agreements and the clauses of financing contracts. A company with several options can combine them to balance debt, equity and grants, with the help of its financial adviser.

Public funding does not replace a good business plan, but it can be the lever to put it into action.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.