SME financing in the Netherlands: an increasingly diverse landscape
- Improvement in economic outlook and willingness to investment
- Rise in all forms of credit supply in 2015
- Increasing role for SME funds
- Diversity in financing options is creating new opportunities and challenges
Dutch small and medium enterprises (SMEs) have traditionally used bank loans as a source of finance. However, business risks increased during the recession and companies found it more difficult to meet banks’ credit standards. As a result, there has been an increased interest in alternative forms of financing. In this publication, we discuss our forecasts for economic growth, investment growth and credit demand. The improved outlook has led to an increase in the demand for credit for investments and working capital.
Bank financing is still the main source of debt capital for SMEs, but the financing landscape has become increasingly diverse in recent years. Both traditional alternatives to bank loans – such as leasing and factoring – and relatively new alternatives – crowdfunding and credit unions – enjoyed strong growth in 2015. SME funds are also playing a more important role.
Economic outlook and investment plans
The years of recession are behind us now. We expect the Dutch economy to grow by 2% both this year and next, as it did in 2015 (see also our latest Economic Quarterly Report). This forecast is however subject to geopolitical uncertainties, such as the migrant crisis and a possible Brexit (see our new publication Political developments in Europe: Multiple challenges put EU’s future to the test). Investments have also started to rise again since 2014. However, much of the growth in investments in fixed assets is accounted for by investments in housing (figure 1). We get a clearer picture of the growth in business investment if we exclude housing investments, transfer costs for land and investments in infrastructure. This shows that there was also a reasonable increase — of 5.4% — in business investment.
Only very limited information is available on the investment behaviour of companies broken down by sector or company size. However, since 2012 the business climate survey produced by Statistics Netherlands has contained information on the investment plans of companies broken down by the number of employees. All categories of companies (with more than four employees) see investments increasing again on balance, but large companies are more optimistic than SMEs. Larger companies (with more than 100 employees) have on balance been optimistic about increasing investments ever since 2013. For smaller companies this only happened in the course of 2014 and 2015 (figure 2). Because the data do not go back further than 2012, we cannot say whether this is a normal state of affairs or an unusual development at this stage of economic recovery.
The head start of large companies is confirmed by the bank lending survey by the Dutch central bank (DNB). On balance, banks saw demand for credit from large enterprises start to rise again in 2014 but it was not until the end of 2015 that demand from SMEs rose as well (figure 3).
This increased credit demand does not necessarily imply a greater willingness to invest. In 2014 credit demand increased mainly because of debt restructuring, mergers and acquisitions, and balance sheet restructuring (figure 4). In only one quarter did the majority of the banks state that the demand for credit for fixed investments was increasing. Conversely, investment growth does not necessarily lead to a rise in credit demand either. Large companies and certain categories of SME may well have sufficient internal funds to finance this first phase of increased investment themselves, or they could call on private equity (figure 5). If the increase in business investment continues, which we expect, then there will probably be a greater call for bank loans to finance the further growth in investment.
Strong growth in traditional and new alternatives to bank lending
In 2015, annual bank lending to Dutch non-financial companies, including renegotiations, reached its highest level since the crisis. Since 2010, bank lending has been broken down by loan size (figure 6). This shows that the increase was primarily in loans of over €1 million, while annual provisions of smaller loans fell slightly.
As of 2015, DNB also distinguishes between renegotiated loans and completely new lending. Of the loans up to €250,000, 16% involved completely new loans (totalling €943 million), while the share for larger loans was over one third (totalling €3.8 billion for loans between €250,000 and €1 million, and €49.6 billion for loans of more than €1 million).
Traditional alternatives to bank lending grew strongly in 2015. Annual equipment leasing production increased from €4.3 billion to €5.2 billion and factoring funds in use rose from €3.1 billion to €3.8 billion (see figure 7). This strong growth reflects not only an increase in investment growth but also the entry of new market participants and businesses’ increasing familiarity with these forms of financing.
In absolute terms, the major banks are by far the most important providers of loan capital to the Dutch private sector, with total outstanding loans of €285 billion, of which €130 billion to SMEs. Of this total, €14.4 billion concerns loans smaller than €250,000 (DNB figures for year-end 2015). Leasing and factoring also make a significant contribution.
New forms of financing such as crowdfunding and credit unions are still a very minor factor relatively speaking but they are growing fast. In 2015, €128 million was raised via crowdfunding, of which €108.8 million by companies — double the amount raised in 2014 (figure 8). A striking feature is the increase in crowdfunding for the hospitality and property sectors. Both sectors have been under more pressure than other sectors to look for alternative sources of finance, according to a report by crowdfunding consultancy Douw & Koren (2016). Businesses in the hospitality sector also see crowdfunding as a means of engaging current and prospective customers.
There are dozens of operational crowdfunding platforms in the Netherlands; twelve of them have a licence from the Netherlands Authority for the Financial Markets (AFM) to operate as an investment firm or financial service provider and another 28 have dispensation to mediate in repayable funds (AFM Register). While some platforms focus on processing transactions between a small group of investors and entrepreneurs who already know one another, other platforms are geared to raising money from a larger ‘crowd’ and providing advice about credit risks. As of 2016, the investment limits for consumers have been increased; there is now a maximum of €40,000 per consumer per platform for equity-based crowdfunding and €80,000 per platform for loan-based crowdfunding. On the other hand, platforms are required to perform a crowdfunding investor test for every new consumer planning to make an investment. Platforms must also ask consumers to actively confirm or cancel their decision on the first business day after a new investment (AFM, 2015). A maximum also applies for the businesses: the total amount that is raised or made available over a period of twelve months must not exceed €2.5 million (Ministry of Finance, 2016).
Qredits has also experienced growth in its portfolio (figure 9). This non-profit organisation provides microcredit (loans up to €50,000) and SME loans (up to €250,000) for businesses and the self-employed. As of 1 June 2016, Qredits also provides working capital in amounts up to €25,000 ((Qredits, 2016). A condition for the SME loans is that the loan application must have been refused first by a bank. Entrepreneurs can also obtain help in the form of coaching from volunteers. Qredits in turn borrows money from the major Dutch banks and the European Investment Bank (EIB).
At present, the Netherlands also has several dozen credit unions, some of which are still being set up. Ten credit unions have already actually provided loans; a total of around €4 million has been provided, of which about €1 million through loan brokering, according to the associations Vereniging Samenwerkende Kredietunies (VSK) and Kredietunie Nederland (VKN).
The Credit Unions (Supervision) Act came into effect on 1 January 2016 (Ministry of Finance, 2015). This means that in addition to issuing perpetual membership certificates, credit unions can now raise money by issuing ordinary bonds or by taking deposits from members. This eliminates an important obstacle to further growth. According to an earlier estimate by Panteia (2014), all credit unions combined could account for a total outstanding amount of €200-300 million in the medium term.
Private individuals and institutional investors in search of higher yields
The low interest rates for savings and safe investments such as government bonds are pushing private individuals and institutional investors (pension funds and life insurers) to look for alternatives offering a higher rate of return. This could in theory make them more interested in providing SMEs with equity or loan capital, but the possibility of higher returns on investment does come with a higher risk of losses and limited tradability due to lack of a secondary market. Therefore SME businesses wanting to obtain financing directly from private individuals or institutional investors are having to compete with other investments such as listed funds and the housing market.
Furthermore, institutional investors generally have a minimum investment threshold and therefore often prefer to invest in SMEs via a fund. A number of new SME funds have appeared in the past few years. Two examples are the MKB-Impulsfonds (‘SME impulse fund’) and the Bedrijfsleningenfonds (‘Business loans fund’, BLF). The MKB-Impulsfonds provides loans for businesses that want to expand. The fund was established in December 2014; to date, it has provided 80 new loans with a total value of €48 million. The BLF was established in September 2015 (NLII, 2015). To date, institutional investors have provided €70 million in loans via this fund. The Achtergestelde Leningenfonds (‘subordinated loans fund’, ALF) is still in the process of being set up and expects to be able to start providing loans soon.
A relatively small number of SMEs issue their own shares or bonds. Some stock exchanges focus specifically on SMEs. One such is NPEX, which was established in 2009. Ten Dutch companies have shares or bonds listed on NPEX. There are also fourteen investment funds with a listing. The new exchange Nxchange was launched in April 2016. So far, one company has a listing on this exchange (Fastned, previously listed on NPEX). This exchange lets private individuals make investments directly rather than through a broker or bank. The exchange does not apply a lower limit for issues, which makes it possible for SMEs to have direct access to the capital market. ABP, the largest Dutch pension fund, has announced that it will be investing in subordinated bonds offered on the NPEX exchange (via the ‘NPEX Ondernemersfonds’). As more investors show an interest in SMEs, so a secondary market will develop.
In practice, the costs involved in preparing for the launch of an issue (drawing up the prospectus and approaching potential investors) mean that this will only really be an attractive option for the larger SMEs.
Finding a financing solution: labyrinth or one-stop shop?
SMEs now have more choice thanks to the increasing diversity in forms of financing. Whereas large companies have the manpower and expertise internally to determine the optimum combination of different kinds of financing, it is almost impossible for smaller companies to work out what the options and conditions are for all the available forms of financing. Some businesses therefore engage external financial advisers.
There are also various online guides that are supposed to simplify the orientation process, including Fundipal (for crowdfunding) and the Nationale Financieringswijzer (‘national financing guide’, formerly the Ondernemerskredietdesk or ‘business credit desk’).
The major banks have traditionally also offered leasing and factoring. What is more, they all have their own private equity division. In addition, banks are increasingly entering into strategic alliances with other parties so that they can offer as comprehensive a package as possible of financial services. Thus the loans from the Achtergestelde Leningenfonds and BLF are made through the major banks. Banks are also increasingly collaborating with selected crowdfunding platforms or starting their own platform. The idea behind this is that in some cases more funding can be obtained by combining or ‘stacking’ different forms of financing than by just a bank loan.
 The parties providing equity include private individuals and former entrepreneurs (informal investors/business angels) as well as venture capital companies and regional development companies; see also the section ‘Private equity’ in our previous Special (in Dutch).
 Equipment leasing excludes car leases.
 Because of the short-term nature of factoring, the total amount outstanding – ‘funds in use’ – is reported more commonly than the annual turnover. In other forms of financing, the amount outstanding is many times greater than the turnover.
 Since 1 April 2016, peer-to-peer platforms have been subject to specific statutory requirements regarding ethical and controlled business operations. This reduces the gap in the regulatory burden between holders of a dispensation and platforms with a licence.
 The European Investment Bank provides funds to the banks and Qredits with the aim of enabling additional loans to SMEs under favourable conditions. The EIB also provides funding directly via the European Investment Fund, but this involves amounts of €25 million or more.
 Including six via a common fund. The other four have only provided loans via brokerage so far.
 See Treur & Smid (2015) for a more extensive discussion.
 Private individuals are holding an increasing proportion of their capital in ‘bricks and mortar’ by paying off their mortgages, and institutional investors have increasingly been providing mortgages in recent years.
 The secondary market is in trading existing shares or bonds (i.e. that have been issued previously). This does not result in additional financing but it does make it possible for investors to cash in on their investments.
 Rabobank has signed a framework agreement with two crowdfunding platforms — Collin Crowdfund and Oneplanetcrowd — and has also started a trial with its own peer-to-peer platform (Rabobank, 2016). Knab has started its own crowdfunding platform in collaboration with Collin Crowdfund. Triodos is investing in the crowdfunding platform Duurzaaminvesteren.nl. ASN has selected a number of Oneplanetcrowd projects for its community ‘For the world of tomorrow’.
AFM (2015), Nieuwsbrief crowdfunding.
Briegel, F. (2016), Political developments in Europe: Multiple challenges put EU’s future to the test.
Douw & Koren (2016), Crowdfunding in Nederland 2015.
Giesbergen, B and T. Legierse (2016), The Netherlands: economy continues to fire on all cylinders.
Ministry of Finance (2015), Kamerbrief inwerkingtreding wettelijk kader kredietunies.
Ministry of Finance (2016) Officiële bekendmakingen, Staatscourant Nr. 16472.
Panteia (2014), Bedrijfsfinanciering: zo kan het ook. Update 2014.
Qredits (2016), Meer financieringsmogelijkheden voor de ondernemer.
Treur, L. (2014), Financiering voor het MKB: opties in kaart.
Treur, L. and T. Smid (2015), Alternatieve financiering voor het MKB: een update.