The chapter discusses policies that can improve access to finance in OECD regions, emphasising the role of credit guarantee schemes and public development banks.
Boosting Business in Regions
Easing Administrative Burdens and Financing Constraints
Abstract
Boosting business in regions by improving access to finance for firms
Public credit guarantee schemes are the most prevalent policy tool to improve access to finance at the regional level. All 38 OECD member countries provide some form of public credit guarantee, which can be set at the national or subnational level. Even when set at the national level, public credit guarantees can have specific targets that influence the prevalence of credit guarantees in regions. These targets can be based on firms’ location, size or sector, which differ across regions within a country and can thereby lead to varying support by region. Public credit guarantees in Portuguese and Italian regions amount to 3-6% of regional GDP. Both countries exhibit the most extensive use of public credit guarantees and the largest regional differences within countries, among the countries where this information is available.
Public development banks, which often have a specific geographical target, provide public credit guarantees and deliver other finance policies. They typically address financing gaps by backing projects with broad social returns, such as sustainability, regional development or inclusivity. In some cases, public development banks focus on particular types of SMEs, such as innovative start-ups or female- or minority-led businesses. Public development banks provide financial and non-financial services, from public credit guarantee schemes to equity finance or business advice. Two-thirds of policies related to access to finance for SMEs are provided by public development banks, particularly those related to equity finance.
Equity investment has become more important but most policies remain focused on debt financing. In the Netherlands, Regional Development Agencies provide a range of support options, including equity funding for businesses. This funding is substantial, representing 15% of Dutch venture capital investments between 2016 and 2020. Generally, in 34 of 38 OECD countries, one in five policies focused on improving business access to finance uses equity instruments, such as private equity, venture capital, business angels, specialised platforms for publicly listing SMEs and equity crowdfunding. Equity financing, including government-supported venture capital funds or angel investor networks, is especially beneficial for tech-driven, innovative and young firms, as well as certain high‑growth companies. Hybrid instruments such as mezzanine finance combine features of both debt and equity, offering flexible solutions that fill financing gaps for businesses with limited collateral or strong growth prospects.
Non-financial policies can strengthen the ecosystem for SME financing. Non-financial policies, such as capacity-building initiatives, financial literacy programs and establishing regional investment platforms, complement financial instruments by improving the overall ecosystem for access to finance. While public expenditure on these instruments remains lower than on credit guarantee schemes, their strategic use can help diversify financing sources, stimulate entrepreneurial activity and drive regional economic development, particularly in underserved areas.
Governments use “finance policies” to shape firms' access to finance in different regions. These policies might address specific financing needs and support strategic objectives.1 Finance policies aim to mitigate the risks associated with SME lending, which is considered riskier than lending to large firms. This is reflected in the higher2 interest rates SMEs usually pay (Figure 3.1) and the higher risk ratings assigned to small business loans under global banking standards like Basel III.3
Interest rate spread between SMEs and large companies in percentage points, 2021
Note: The interest rate spread is calculated as the difference between the average interest rate applied to SMEs and large companies.
Source: OECD Scoreboard on SME and Entrepreneurship Financing, subnational data collection process.
The chapter focuses on two finance policies and considers how they can improve access to finance in regions. The first is public credit guarantees, the most prevalent finance policy (OECD, 2022[1]). The second is public development banks, which are ubiquitous and central in the policy provision. The final part of the chapter discusses an array of other finance policies with the potential to improve access to finance and credit conditions for firms in regions, including i) grants and policies involving debt-based finance other than credit guarantees, ii) policies involving equity-based finance, and iii) non-financial policies, such as credit mediation or policies to improve financial literacy and skills. If properly targeted, these can yield significant benefits for firms in regions with constrained access to finance.
Credit guarantees are financial commitments that protect the lender if a borrower defaults on a loan. Typically, a guarantor – such as a government agency or financial institution – insures the lender (often a bank) against potential losses. If the borrower, a firm that may have difficulty securing financing without the guarantee, fails to repay the loan, the guarantor steps in to cover the lender's losses. Credit guarantees are provided within schemes that administer and facilitate the provision of credit guarantees to eligible borrowers by screening the credit demand first. Credit guarantee schemes can support strategic policy objectives, for example, by targeting specific groups, like SMEs, start-ups or disadvantaged entrepreneurs such as youth and women, or longer-term goals, such as business innovation and the green transition. Credit guarantee schemes implicitly rely on the quality of the local financing system for their effectiveness.
Public credit guarantee schemes represent 17% of all finance policies provided by national governments and are used by all 38 OECD member countries (OECD, 2022[2]; OECD, 2023[3]). The volumes of loans backed by a public guarantee represent at least 4% of regional income in half of the regions in Portugal and Italy, evidencing the extended use of this instrument to support firms in both countries and at least 2% in half of the regions of Hungary. In all other countries for which data are available, the use of credit guarantees is less prevalent, with loans backed by credit guarantees representing less than 1% of regional income (Figure 3.2).
Regional differences in public-guaranteed credits as a percentage of regional GDP, 2021 (%)
Notes: Public-guaranteed credits are referred to as government-guaranteed loans in the original source.
Source: OECD Scoreboard on SME and Entrepreneurship Financing, subnational data collection process.
The benefits of credit guarantee schemes
Credit guarantee schemes facilitate lending and foster financial additionality by attracting additional lending resources. By mitigating risk for lenders, credit guarantee schemes stimulate economic additionality and encourage firm and economic performance, i.e. increased sales, profitability, employment, and productivity, at a lower fiscal cost than alternative public policies (BROWN and EARLE, 2017[4]).4 Overall, evidence suggests that credit guarantee schemes can help regions harness the economic benefits of improved access to finance.
Improved access to credit
Credit guarantee schemes broaden access to credit by reducing the need for firms to pledge collateral and improving other terms of credit, such as interest rates and maturity periods (Box 3.1). The effects on access to credit can be long-lasting, as credit guarantees can help develop long-term borrowing relationships between credit institutions and SMEs that have proven reliable borrowers. Evidence from Canada and the United Kingdom suggests that between 49% and 79% of firms would not have received a loan without the guarantee (Cowling, 2010[5]; OECD, 2017[6]; Government of Canada, 2024[7]). On average, loan volumes increased by 6% for new recipient firms (Gazaniol, Hombert and Vinas, 2021[8]) and by 7-8% for all firms (Ciani, Gallo and Rotondi, 2020[9]) thanks to credit guarantees in France and Italy, respectively. Furthermore, credit guarantee schemes reduce the cost of financing. Interest rates were found to be 0.5 percentage points (50 basis points) lower than what they would have been in the absence of the credit guarantee in Italy (Ciani, Gallo and Rotondi, 2020[9]).
Cowling (2010[5]) found a positive effect of credit guarantee schemes on access to credit over the period 2006-08 for British firms by assessing the impact of the United Kingdom Small Firms Loan Guarantee using information from a survey including both recipient and non-recipient firms. More than three-quarters (76%) of recipients reported that they had no alternative sources of finance available and 79% reported that the bank would probably not have given them a loan without the programme. These shares were even larger among micro-enterprises employing fewer than ten workers and disadvantaged groups, such as ethnic-minority businesses and women-owned businesses, confirming that these groups are among the most credit-rationed (OECD/European Commission, 2023[10]). In the context of Canada, Rivard (2018[11]) assessed the financial additionality of the Canada Small Business Financing Program (CSBFP), finding that the program improved firms' access to finance. The programme is a longstanding initiative of the Federal Government of Canada (OECD, 2017[6]). The positive results identified in the study aligned with past evaluations, which indicated that almost half (49%) of debt financing requests from programme recipients would have been denied without the programme's existence (Government of Canada, 2024[7]).
Ciani, Gallo and Rotondi (2020[9]) analysed the impact of SME loans issued by a major Italian commercial bank with guarantee support from the National Guarantee Fund on the quantity and cost of credit received by SMEs. They found that the scheme operated by the National Guarantee Fund allowed SMEs to obtain an increase of between 7% and 8% on average in total bank funding and a reduction of approximately 50 basis points in the loan interest rate. Similarly, Gazaniol, Hombert and Vinas (2021[8]) found that a relaxation in the rules governing guarantees for loans between EUR 100 000 and 200 000 in 2015, which they used as a natural experiment, led to a 6% increase in lending volumes to new firms in France.
The evidence also shows that the effects on access and terms of credit are heterogeneous across the distribution of the borrower’s probability of default. Ciani, Gallo and Rotondi (2020[9]) using an instrumental variable approach based on the difference between the internal rating assessment of the lender and the eligibility rule of the Fund, found that the effect on credit volumes was concentrated among solvent firms in the middle of the risk distribution. Conversely, interest rate effects were present across all firms except for the least risky firms, which already benefited from low interest rates. Finally, the authors observed a stronger impact of the guarantee for solvent firms with a longer relationship with the bank, suggesting that encouraging the involvement of a large number of banks might broaden the benefits for a larger share of firms.
Better firm performance
Credit guarantees support firm survival, growth and productivity by improving access to finance, especially for micro-enterprises employing less than ten employees and younger firms (Box 3.2). For example, default rates for firms receiving guarantees were 5% lower compared to firms that did not receive a credit guarantee during 2012-16 in France (Bertoni, Colombo and Quas, 2018[12]). Credit guarantees have also been associated with greater firm growth, both in terms of sales and employment, in 12 countries in Central, Eastern and South-Eastern Europe during 2005-12 (Asdrubali and Signore, 2015[13]) and in France during 2012-16 (Bertoni, Colombo and Quas, 2018[12]), leading to an increase in turnover between 7-19% and a similar increase in employment (between 8-17%) when comparing recipient firms with a group of otherwise similar companies. Similar positive effects on turnover were found for firms in the region of Madrid, Spain (Martín-García and Morán Santor, 2019[14]).
The study on the United Kingdom Small Firms Loan Guarantee programme found that guarantee-backed businesses grew in terms of employment at a similar rate compared to conventional borrowing businesses, but at a faster rate compared to non-borrowing businesses, with 1.45 times more jobs in guarantee-backed businesses compared to non-borrowing businesses. In addition, the same study found that close to half (49%) of businesses say they would not have proceeded with their project without the programme support (Cowling, 2010[5]).
Using propensity score matching and difference-in-differences techniques, two other studies considered the effect of loans backed by the European Investment Fund (EIF) Guarantee Facility. The first, covering more than 16 000 guaranteed loans granted to 14 400 SMEs in 12 countries from Central, Eastern and South-eastern Europe, found that SMEs receiving an EIF-backed loan were able to increase employment by 17% and turnover by 19% five years after the issuance of the loan, compared to a control group of similar companies. The effects on productivity were mixed and negative in the short term but positive in the medium term. These differences were due to short-term allocative inefficiencies following the guarantee-induced increase of production factors, which were eventually absorbed with time. Finally, stronger positive effects were found for micro and young enterprises, the main targets of guarantees (Asdrubali and Signore, 2015[13]).
The second study, covering France during the period 2002-16, found that beneficiary firms experienced an additional 9% asset growth, 7% sales growth, and 8% employment growth compared to the control group. In addition, beneficiary firms experienced lower default rates in the range of 5% compared to the control group. In line with the previous EIF-based study, effects were stronger for smaller and younger firms, while the impact of EIF-backed loans on multifactor productivity was negative in the short term but slightly positive in the long term (Bertoni, Colombo and Quas, 2018[12]).
Involvement of mutual guarantee societies in the lending and guarantee process had smaller positive effects on the survival and profitability of SMEs but more limited negative effects on the financial structure of recipient firms than public credit guarantees. In the medium term, obtaining a public credit guarantee improved SME survival and profitability. In the short term, however, the financial structure of recipient firms deteriorated due to increased indebtedness, yet this dissipated in the medium term. Larger negative effects were found among micro-enterprises and companies in the services sector. When local mutual guarantee societies intervened in the guarantee process, the positive effects on business profitability were lower but so were the negative effects on the financial structure of the recipient companies. These mixed effects suggest that mutual guarantee societies were more risk‑averse than national guarantee institutions in selecting the loans they backed or were more inclined to support smaller SMEs, which were less likely to show rapid business growth. This research relied on difference-in-differences regressions and propensity-score matching estimators applied to a sample of approximately 40 000 SMEs over the 2010-18 period to compare companies that had received a guarantee from Italy’s National Guarantee Fund with similar ones that had not (Gai, Arcuri and Ielasi, 2023[15]).
In Madrid (Spain), loans backed by the main mutual guarantee society positively affected turnover and asset growth at the firm level during 2009-11 and 2012-15. Based on propensity score matching techniques, the study found that turnover (sales) and assets (investment) grew more in companies that received the loan guarantee than in similar companies that did not. Both effects were stronger during the recession when the credit guarantee acted as a countercyclical instrument. In addition, effects were stronger for turnover than for assets and in the first year of the treatment, i.e. when companies received the loan guarantee.1 This suggests that companies use loan guarantees especially to meet working capital requirements and, only after, for investment. Similar to other evaluation studies, the authors found positive effects for all SMEs and the strongest effects for micro-enterprises employing fewer than ten employees (Martín-García and Morán Santor, 2019[14]).
1 Performance among companies that benefitted from guarantees was, on average, 4.71% higher than among those that did not, while the difference was 3.44% in the case of assets. Positive effects on asset growth were only observed during the recession phase, but not during the recovery phase.
Credit guarantees have been linked to higher firm investment, profitability, productivity levels and medium‑term productivity growth. Credit guarantees have increased firm profitability in Italy (Gai, Arcuri and Ielasi, 2023[15]), likely driven by an uplift in their productivity level. Investment, a key driver of productivity, has been found to increase, too, thanks to credit guarantees. Guarantee-beneficiary firms experienced an additional 9% asset growth compared to non-beneficiaries in France (Bertoni, Colombo and Quas, 2018[12]) and findings for Madrid point to qualitatively similar effects (Martín-García and Morán Santor, 2019[14]). However, the effect of credit guarantees is mixed regarding productivity growth. They seem to have a positive effect in the medium term in France and Central, Eastern and Southern-Eastern Europe but at the expense of lower productivity growth in the short term (Bertoni, Colombo and Quas, 2018[12]; Asdrubali and Signore, 2015[13]). The positive medium-term impact of credit guarantees is larger during economic slumps, confirming the countercyclical role of credit guarantees. It is also larger for smaller and younger firms that struggle most to access external finance.
Further aggregate economic benefits
Credit guarantees increase employment, economic production and firm creation in regions and their countries (Box 3.3). For example, credit guarantees led to the creation of 460 to 920 new firms and 920 to 1 840 new jobs per year during 2012-16 in France by increasing the lending volumes to new firms by 6% (Gazaniol, Hombert and Vinas, 2021[8]). At the US county level, each USD 1 million of guarantee-backed loans translated into the creation of close to 3.5 new jobs during the first three years after the loan receipt (BROWN and EARLE, 2017[4]). Similarly, in five German federal states, credit guarantees were estimated to add between 6 000 employees (in Berlin) and 8 200 employees (in Thuringia) during 2008-14. Furthermore, greater aggregate employment translated into greater real output. For each Euro guaranteed, real GDP increased between EUR 1.15 and EUR 1.22, on average, across the five German federal states during 2008-14 (Hennecke, Neuberger and Ulbricht, 2018[16]).
Some studies consider the impact of loan guarantees at a macro rather than micro (firm) level. Germany’s regional guarantee banks have been found to lead to higher employment and output, with negligible economic costs (Hennecke, Neuberger and Ulbricht, 2018[16]) in five eastern Länder (Berlin, Brandenburg, Mecklenburg-Western Pomerania, Saxony-Anhalt and Thuringia). Combining data from guarantee banks, enterprise and bank surveys, and multipliers from macroeconomic simulation models to quantify overall macroeconomic and fiscal net benefits, the authors found an average increase of real GDP of EUR 1.15-1.22 per euro guaranteed in the regions. Given an average guarantee volume between EUR 100 000 and EUR 166 000, depending on region, real GDP increased between EUR 117 000 and EUR 191 000 per guaranteed loan during the 2008-14 period. Employment effects were also positive, ranging between 6 000 to 8 200 more employees in Berlin and Thuringia, respectively.
In France, a relaxation in the rules governing guarantees for loans between EUR 100 000 and EUR 200 000 led to an increase in lending volumes to new firms by 6%. In turn, this resulted in the establishment of between 460 and 920 new firms per year and the creation of between 920 and 1 840 jobs per year, thus showing that credit guarantees can also support new business creation when designed more flexibly (Gazaniol, Hombert and Vinas, 2021[8]).
An analysis by the Small Business Administration (SBA) found that SBA-guaranteed loans had a positive impact on job creation at the local level. Each USD 1 million of SBA-backed loans led to 3 to 3.5 more jobs in the first three years after the loan receipt at the US county level. The authors also estimated the taxpayer’s costs per job created in the range of USD 21 000-25 000, a low fiscal cost compared to alternative policies to increase employment, such as hiring tax credits (BROWN and EARLE, 2017[4]).
The design of credit guarantee schemes
Regional and national governments establish, fund and manage public credit guarantee schemes. Credit guarantee schemes can have public, private or mixed (public-private) ownership (Cusmano, 2018[17]; OECD, 2013[18]). Table 3.1 provides examples of national and subnational schemes. National guarantee funds or other public financial institutions may operate targeted public credit guarantee schemes for specific regions, such as regions with relatively low-income levels, or offer a higher coverage rate or lower guarantee fees to such regions. Geographical targeting is rare, however, with only 4% of national public credit guarantee schemes having a defined geographical target across OECD countries (OECD, 2022[2]). Governments can administer public credit guarantee schemes directly through a government branch (a ministerial department, for example, like the Fondo Nacional de Garantías in Colombia), via a specialised agency (such as an SME agency, like the US SBA Loan Guarantee Program) or a public financial institution such as a public development bank. Germany’s regional guarantee banks are one example of a public guarantee scheme managed by a public financial institution at the subnational level (Box 3.4).
Note: The examples are chosen for illustrative purposes and do not intend to represent an exhaustive list of existing credit guarantee schemes.
The Regional Guarantee Bank of Baden-Württemberg (BBW), founded in 1954 by different local business associations, is one of the 17 regional guarantee banks in Germany.1 The mission of the regional guarantee bank is to provide services as a mid-sized universal bank to companies, retail and institutional customers, as well as savings banks. As an institution under public law, the regional guarantee bank is owned by the Federal State of Baden-Württemberg, the Savings Bank Association of Baden-Württemberg and the City of Stuttgart. Among its shareholders, however, there are local business associations, chambers of trade and commerce, credit institutions and insurers. Furthermore, the institution is strongly integrated into the system of the federal and state government agencies, promoting economic development. The regional guarantee bank works in close cooperation with the federal public development bank Kreditanstalt für Wiederaufbau (KfW), which is active in all regions of Germany, and the regional promotional institute of the Länder (L-Bank), which, unlike the regional guarantee bank, can offer guarantees above EUR 1.25 million.
The guarantees of the regional guarantee bank cover up to 80% of the credit, 65% of which is backed by the federal and regional governments. For example, when the guarantee is set at 70%, in case of default (i.e. risk distribution), the lending institution absorbs 30% of the losses, the regional guarantee bank 25% and the federal/regional government the remaining 45%. The duration of the guarantee is up to 10 years for working capital, 15 years for investment and 23 years for real estate. Besides standard guarantees to established SMEs, the BBW also offers guarantees for start-ups, mezzanine loans and loans meant to finance business transfers, and it is also active in equity guarantees.
The volume of guarantees issued by the BBW rose during the COVID-19 crisis, rising from EUR 505 million in 2019 to EUR 702 million in 2020 and EUR 665 million in 2021. At the peak of the pandemic, the maximum coverage ratio of bank guarantees also exceptionally rose to 90%. In response to the recent energy crisis and to support the green transition of the business sector, the regional guarantee bank plans to offer cheaper guarantee fees for SMEs that assess their carbon emissions and establish a roadmap to reduce them.
1 There is a regional guarantee bank in each Länder except in Bavaria, where there are two.
Source: Based on a presentation by the Regional Guarantee Bank of Baden-Württemberg (BBW) at the OECD-EC workshop “Improving SMEs’ access to finance at the regional level: The role of credit guarantees”, 12 December 2022.
In EU countries and the United Kingdom, public guarantees are often issued by government entities in a decentralised manner through the financial system, with little involvement by the government in selecting which credit applications receive the public guarantee.5 For example, in the Enterprise Finance Guarantee (EFG) Programme of the British Business Bank (BBB), the development bank of the United Kingdom, interested businesses need to approach one of the accredited lenders (i.e. nationwide banks, regional banks, asset-based lenders), which have the final say on whether the small business is eligible for guarantee support. In Italy, the National Guarantee Fund (NGF), offers guarantees and counter-guarantees6 to loan applications filed by entrepreneurs at commercial banks or regional mutual guarantee societies. In this case, the decision-making process is also delegated to the financial sector.
Mixed (public and private) credit guarantee schemes are joint initiatives involving the public and private sectors. One example is the Hungarian Garantiqa, which is owned by the government through the Hungarian Development Bank (Magyar Fejlesztési Bank, or MFB), as well as by commercial banks, savings associations and business associations as minority stakeholders. Garantiqa delegates the decision-making process of the public guarantee to domestic banks, which can use three different procedures: simplified process, standard (retail) process and portfolio (automated) process. An example of a mixed credit guarantee scheme at the subnational level is the Fondo de Garantías Buenos Aires (FOGABA), in Argentina.
Credit guarantee schemes can also be entirely privately owned. Also known as mutual guarantee societies, groups of independent business owners, business associations and chambers of commerce typically own these. Mutual guarantee societies provide credit counter-guarantees i.e. credit guarantees for credits already guaranteed by other, usually public, sources. Mutual guarantee societies often have a close link with their territory, making them an important player in regional finance initiatives. Thanks to their local embeddedness, private guarantee societies have an information advantage that they use to screen membership and loan applications. As a result, they play an active role in the guarantee decision-making process and the follow-up of loans, as loan defaults directly affect their financial sustainability and the possibility of receiving counter-guarantees from public institutions. It follows that private guarantee societies often work in close collaboration with local banks and first-tier schemes. Examples of mutual guarantee societies include Spain’s Sociedades de Garantia Recíproca such as ELKARGI in Spain’s Basque Country (Box 3.5), Italy’s Confidi or France’s SIAGI, founded by the Chamber of Handicraft at the national level.
ELKARGI is the mutual guarantee society of the Basque Country (Spain). Established in 1980, ELKARGI supports SMEs and entrepreneurs by improving their access to finance (both debt and equity), and financial and business development training. It works as a cooperative business model, where companies that receive a guarantee also become cooperative members, allowing them to access all services offered by the institution. As of 2023, ELKARGI counted 5 600 members. Like other guarantee institutions, ELKARGI is not only supported by its members but also by private credit institutions and government organisations at national and regional levels. Despite its strong regional focus, government support is not limited to the regional government of the Basque Country and ELKARGI also receives support from other regional governments, such as that of Navarra (a neighbouring region) and Madrid.
ELKARGI takes a leading role in the Spanish credit guarantee market, accounting for one-quarter of the total credit guarantees at the national level. Micro- and small enterprises are the main recipients of guarantees, accounting for 31% and 38% of the recipients, respectively, while mid-sized firms account for a nontrivial 22% and large companies for 8%. A peculiarity of ELKARGI is that the largest share of guarantees is absorbed by manufacturing (37%), partly reflecting the industrial focus of the region’s economy. The guarantee activity of ELKARGI increased dramatically during the COVID-19 pandemic, with the volume of guarantees moving from EUR 800 million in 2019 to EUR 1.73 billion in 2022.
In addition to credit guarantees, ELKARGI provides a wide range of other financial services, such as private loans, participative loans and venture capital, as well as consulting services in risk management, corporate finance and family business management.
Source: Based on a presentation by ELKARGI at the OECD-EC workshop “Improving SMEs’ access to finance at the regional level: The role of credit guarantees”, 12 December 2022.
Risk management
Whether set at the national or subnational level, credit guarantee schemes should be designed in line with best practices (Cusmano, 2018[17]; World Bank-FIRST Initiative, 2015[19]; IFC, 2011[20]) to reach the intended target group without compromising the stability of the guarantee and financial systems. Risk management encompasses different aspects, such as the coverage rate (the share of the credit covered by the guarantee), the pricing of the scheme (application and annual fees), the terms of the guarantee (duration and maximum loan size), the surveillance and the consequences in case of default.
The coverage rate refers to the share of the credit the guarantee covers. A coverage rate between 50% and 80% is the norm, as it provides a balance between offering a safety net to lenders while ensuring that lenders take on part of the credit risk and have an incentive to ensure careful selection and monitoring of guarantee-backed credits (Goffe, Hammersley and Rustom, 2021[21]). Across the median regions in 2021, the coverage rate ranged from 49% in Kazakhstan to 85% in the United Kingdom (Figure 3.3). In general, coverage rates are on the lower end of the 50-80% usual range in emerging and developing economies and on the higher end in high-income economies.7 In OECD countries, Belgium, Australia and Chile are on the lower end of coverage rates, at 54%, 58% and 59%, respectively, in their median regions, and Italy, Austria and Türkiye are on the higher end (with 74%, 77% and 82% in the median region, respectively).
Coverage rate of public guarantees measured as the volume of public guarantees over public-guaranteed credits, 2021 (%)
Note: Coverage rates are defined by the public guarantees over the public-guaranteed credits.
Source: OECD Scoreboard on SME and Entrepreneurship Financing, subnational data collection process.
Within countries, the coverage rate might be lower in higher-income regions, where a given credit guarantee volume can mobilise private lending to SMEs in larger amounts than in regions with lower income levels, where a higher coverage ratio can be required to achieve the same credit volume. For example, in Belgium, the coverage rate is the lowest in Flanders, a region with historically higher income levels compared to Wallonia, where the coverage rate is the highest. Likewise, in Italy, the coverage rate is the lowest in two of the regions with relatively high levels of income in the country (Emilia-Romagna and Lombardy) and the highest in Lazio (Rome), followed by two regions with relatively lower income levels (Campania and Apulia). In Australia, Austria and Chile, however, public credit guarantees have lower coverage rates in the regions with relatively lower income levels. Similarly, in the United Kingdom and Türkiye, although differences in the coverage rate are small between the regions with the lowest and highest coverage, the coverage rates are the lowest in the regions with lower incomes.
Existing credit guarantee schemes are a useful tool for governments to intervene in times of economic crisis, as they can draw on existing links between public bodies, banks and firms (Box 3.6). During the recent COVID-19 crisis or the 2008/2009 Global Financial Crisis, many governments increased the coverage rate of public credit guarantee schemes to 90% or even 100% (OECD, 2021[22]; OECD, 2013[18]). In those cases, the objective was to inject liquidity into the economy quickly by relying on lending institutions. Still, credit guarantee schemes with coverage rates of 90% or above are not self-sustainable in the long term, as they provide banks with a strong incentive to lend but little incentive to carefully select borrowers due to the very low credit risk.
In times of crisis, public credit guarantees can ensure firms continue to have access to finance. In Europe, the members of the European Association of Mutual Guarantee Societies (AECM) scaled up the range and scope of their policies in the COVID-19 crisis in 2020 and 2021 and the energy crisis in 2022 and 2023. This last crisis had a narrower geographical focus, as it primarily impacted European countries heavily relying on Russian gas to produce electricity and to fuel industrial production (AECM, 2022[23]; AECM, 2022[24]).1
During the COVID-19 crisis, credit guarantees have been one of the most common policy instruments used to help SMEs.2 Between 2020 and 2021, credit guarantees have offered more generous terms than usual to help companies stay afloat during the extended lockdowns of the pandemic period. For instance, in Germany, regional guarantee banks increased the coverage ratio to 90% and the maximum credit guarantee to EUR 2.5 million. In contrast, Italy and the Netherlands increased the budget allocation to their respective national guarantee funds. Administrative simplification of the guarantee process was also common during the COVID-19 pandemic. For example, the Austria Wirtschaftsservice (aws), besides waiving application fees, introduced a fast-track procedure and lifted the need for entrepreneurs to submit business plans and to have collateral to receive a guarantee. In general, examples of lenient terms include coverage ratios above 80%, highly subsidised guarantee fees, longer grace and guarantee periods and larger guaranteed volumes (OECD, 2021[22]).
Together with other emergency measures of the COVID-19 period, generous credit guarantee schemes have helped businesses avoid shutdowns and prevented a rapid surge in the number of business failures and business bankruptcies. Such policies were beneficial for SMEs with small liquidity buffers, which lacked resources to compensate for such a large shock. Thanks to government policies, the rate of bankruptcies saw record lows across many OECD countries in the aftermath of the COVID-19 crisis. However, these same policies have also led to increased levels of SME indebtedness, which could pose a threat to the sustainability of both the business and financial sectors in the future (OECD, 2023[25]), particularly after the rise in interest rates.
In contrast with the COVID-19 crisis, credit guarantees have been used less during the more recent energy crisis, where governments prioritised price-support measures such as energy price caps and tax rebates on electricity and gas bills. In the European Union, credit guarantees have been used in compliance with the European Commission’s State Aid Temporary Crisis Framework (TCF), governing the use of different types of government support during the temporary derogation of European Union state-aid rules. Under this crisis-specific framework, energy-related public-guaranteed credits could not exceed specific thresholds linked to past turnover (i.e. 15% of the average annual sales over the last three years) or energy costs (i.e. 50% of the energy costs in the previous 12 months). Nonetheless, the framework also provided enough flexibility for governments to adapt their policies to specific national conditions, including eligibility conditions, maximum or minimum interest rates and coverage ratios. For example, some policies have allowed refinancing existing debt, including loans that originated during the COVID-19 crisis. In contrast, others only offered guarantees for new loans related to the energy crisis (e.g. Latvia and Estonia). In addition, the guarantee level has sometimes changed depending on the sector, with manufacturing companies typically receiving higher guarantee levels (e.g. Estonia). Finally, in some countries (e.g. Estonia and Chile), public guarantees have been made available only for bank loans whose interest rates would not exceed a certain threshold, effectively imposing an interest-rate ceiling on those loans (Marchese, 2023[26]).3
1 The members of the European Association of Mutual Guarantee Societies (AECM) also scaled up the range and scope of their policies during the Global Financial Crisis of 2008/2009 (AECM, 2009[27]).
2 Wage subsidies, furlough schemes and tax deferrals have been other common policy measures used during the pandemic.
3 In principle, interest-rate ceilings should keep the cost of debt lower for SMEs, but they also come with possible side-effects which governments should consider, such as increases in non-interest fees and commissions, reduced price transparency, lower credit supply and loan approval rates for small and risky borrowers and negative effects for bank profitability.
Higher coverage rates can partly be compensated through the credit guarantee scheme fees. Credit guarantee schemes involve application and annual fees, which contribute to reducing the risk and increasing the scheme's financial sustainability. These fees can be applied to borrowers, like in the case of mutual guarantee societies, or to lenders, like in national policies such as the Canada Small Business Financing Program (CSBFP). Even when that is the case, banks can still transfer fees to customers when they finance the loan, which is why public institutions sometimes subsidise guarantee fees, undermining the value of fees in compensating for higher coverage rates.
Public development banks are public financial institutions which aim to mobilise resources towards projects with broad social benefits but limited financial returns, such as green investments and initiatives that promote regional development and social cohesion.8 Public development banks can deliver finance policies either directly or indirectly, i.e. through the intermediation of a third party, such as a commercial bank or a private equity fund. While commercial banks are generally unwilling to lend without the pledge of collateral, public development banks are willing to take more risks and fund strong but uncollateralised projects owing to their public mission. Furthermore, public development banks often support specific target groups, such as innovative start-ups and entrepreneurs from groups underserved in external finance markets, such as women, youth and ethnic minorities. An example is the Black Entrepreneurship Loan Fund, a partnership between the Government of Canada, Black-led business organisations, and financial institutions. The Fund was started in 2021 by the Business Development Bank of Canada (BDC) and aims to provide loans to Black entrepreneurs and business owners across Canada.
Addressing regional disparities in firms’ access to finance is also an objective of public development banks, particularly in mid-sized and large OECD countries, where regional differences tend to be more pronounced. In practice, public development banks address regional inequalities from a wide network of regional offices, such as Germany’s federal public development bank or Kreditanstalt für Wiederaufbau (KfW), the Brazilian public development bank or Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Bpifrance in France or the Business Development Bank of Canada (BDC) (Box 3.7), from their national headquarters, such as Italy’s Cassa Depositi e Prestiti and the British Business Bank (BBB) and from subnational development banks, typically present in federal countries like Germany, with the Länder‑level promotional banks (L-Banks) focusing on their jurisdictions.
Bpifrance
Bpifrance, created in 2012, was formed through the merger of two entities: OSEO, a public financing and development institution, and CDC Entreprises, the private equity arm of Caisse des Dépôts et Consignations (CDC). The main mission of Bpifrance is to support public policies conducted by the state and the regions to encourage enterprise development. Bpifrance is locally present through a network of 50 regional offices, which offer business development support in key areas such as the green transition, innovation and internationalisation to companies of different sizes. Within Bpifrance, 95% of the financing decisions are taken in regional offices. More than two-thirds of recipients of Bpifrance policies are located outside metropolitan areas, 38% in industrial areas and 10% in deprived urban areas (Bpifrance, 2023[28]).
Business Development Bank of Canada
The Business Development Bank of Canada (BDC) defines itself as the “financial institution devoted to Canadian entrepreneurs” and considers its main mission to “create and develop strong Canadian businesses through financing, advisory services and capital, with a focus on SMEs”. It has existed under different names and mandates since 1944. While some of its programmes are nationwide, such as the Canada Small Business Financing Program, others have a stronger regional focus and are tailored to the development needs of specific provinces and regions such as the Atlantic Provinces or the Northern Territories. For example, one of the regional policies which the BDC has developed in Atlantic Canada, i.e. the four eastern provinces of New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island, include the Atlantic Growth Envelope, which focuses on higher-risk growth projects.
Source: Presentation by the Business Development Bank of Canada at a workshop on “National and subnational approaches to enhance SME financing at the regional level” (21 February 2023) and https://www.bdc.ca/en/.
The products offered by public development banks vary based on the size, policy goals and technical capabilities of the institution, yet they typically involve financial and non-financial products. Financial products primarily consist of debt-based options like government loans and public credit guarantees, as debt finance is the most common form of business funding. Development banks in OECD countries are increasingly providing equity finance, such as venture capital, to support sectors with high potential for productivity growth like knowledge-based sectors. Across OECD countries, 65% of national finance policies delivered by public development banks involve equity instruments (OECD, 2022[2]). Frequently, public development banks also offer grants or hybrid financial instruments with both debt and equity features. Public development banks are also involved in nonfinancial support, such as business advice and training, with some evidence suggesting that support from development banks is most effective when the two components (financial and non-financial) are combined (OECD, 2017[6]).
The benefits of public development banks
Public development banks improve access to finance and the performance of beneficiary firms, i.e. economic additionality. Public development banks also foster financial additionality by attracting additional resources to support firms. Available evidence from Europe, Canada and Latin America suggests that public development banks can help regions harness the economic benefits of improved access to finance, including during economic crises (Box 3.8) if the government ownership in the banking system is limited.9 Public development banks, in addition, may contribute to the national financial infrastructure, for example, through the establishment of credit bureaus or collateral registries, which can contribute to reducing information asymmetries in credit markets.
In addition to addressing structural problems in credit and equity markets, public development banks can play an important countercyclical role, shoring up the economy during downturns when private lenders and investors are less inclined to lend. Having a well-established development bank in place can facilitate the recovery by channelling resources quickly to viable companies. The OECD Recommendation on SME Financing suggests that in times of crisis when firms often struggle with liquidity, governments should work to ensure the rapid delivery of SME financing support, including through the simplification of eligibility requirements and procedures, while safeguarding accountability (OECD, 2023[29]).
The countercyclical role of public development banks was evident during the COVID-19 crisis, when development banks were among the government institutions that enabled the swift implementation of liquidity emergency policies. In the United Kingdom, for example, the British Business Bank delivered two major rescue loan policies: the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme. Together with policies already in place, these two policies were behind an upsurge of new SME loans by 70% between 2019 and 2020. Subsequently, in 2021, the British Business Bank also managed the Recovery Loan Scheme, with slightly tighter lending conditions than the two emergency schemes delivered at the onset of the pandemic (OECD, 2023[25]). In Ireland, the Strategic Banking Corporation of Ireland (SBCI) more than doubled the size of the Irish Liquidity Scheme, bringing it from EUR 200 million to EUR 450 million, to provide immediate relief to SMEs impacted by the pandemic. Loans, which partner private banks issued, could go up to EUR 1.5 million and did not require collateral up to EUR 500 000. In Eastern Europe, both Poland and Lithuania used their respective development banks (Bank Gospodarstwa Krajowego and JSC Development Finance Institution Altum, respectively) to introduce working-capital loans, micro-loans and credit guarantees for SMEs affected by the pandemic (OECD, 2020[30]).
Outside Europe, the Business Development Bank of Canada delivered the Business Credit Availability Programme and the Highly Affected Sectors Credit Availability Programme, which allowed local businesses to access term loans of up to CAD 60 million for operational cash flow requirements. Additionally, the Business Development Bank of Canada extended new working capital loans, expanded its online financing platform and launched the Business Development Bank of Canada Venture Capital Bridge Financing Programme to support existing clients and increase the availability of capital in the domestic market (OECD, 2022[1]).
Improved credit access
Evidence from France, the United Kingdom and Colombia suggests public development banks helped to improve access to finance for firms, partly by leveraging additional private financing resources (Box 3.9). Estimates from the French public development bank Bpifrance, suggest that for each EUR 1 funded, another EUR 3-10 euros of private funds were invested in its first ten years, with differences depending on the financial product. For example, loans leveraged EUR 3-4, venture capital funds leveraged EUR 5-6 and credit guarantees leveraged EUR 10, on average (Bpifrance, 2023[28]). In the United Kingdom, estimates from a subsidiary of the public development bank targeting small firms find it leveraged GBP 3.6 for each GBP 1 invested in venture capital funds. Overall, this British bank supported 61 funds that invested in more than 1 000 companies, managed GBP 3 billion in assets and attracted total commitments of GBP 10.7 billion (British Business Bank, 2023[31]).
Through all its financing policies, involving debt, equity and hybrid finance, in its first ten years of existence (2012-22) Bpifrance has supported 40% of French small and medium-sized firms with 10‑249 employees and 60% of French 250-499 employee-firms at least once, amounting to 70 000 companies each year on average (Bpifrance, 2023[28]). Each EUR 1 of Bpifrance guarantee leveraged, on average, EUR 10 of private credit, while EUR 1 of Bpifrance loans was matched with EUR 3-4 of lending from commercial banks. Similarly, EUR 1 of Bpifrance investment in the venture capital market was matched by EUR 5-6 from private funds. Bpifrance has contributed to strengthening the overall domestic equity finance ecosystem, with the average size of domestic venture capital funds increasing by more than 50% in the last ten years. Beneficiary companies, thanks to the support received, have increased turnover by 6% and employment by 5% over the three years after receiving support. In the case of internationalisation policies, the average increase in export turnover has been 12%. For a cohort of companies supported each year, over the three-year horizon, this meant an additional EUR 17 billion of turnover and 51 000 additional jobs.
A similar report by British Business Bank (BBB) included a qualitative evaluation1 of the first five years of operation of its subsidiary British Patient Capital (BPC), which invests in young innovative businesses and business scale-ups alongside private investors (British Business Bank, 2023[31]). As of March 2023, the British Patient Capital had supported 61 funds investing in more than 1 000 companies and was managing assets with a total value of GBP 3 billion that had attracted total commitments of GBP 10.7 billion, thus showing strong leverage (financial additionality). The evaluation found that overall recipients of British Patient Capital-backed funds had grown their employment and turnover by 55%, equivalent to about 4 600-5 000 additional jobs and an additional turnover of GBP 4.7-5.4 million per year. Furthermore, a quarter of British Patient Capital-backed companies were identified as “growth stage”, compared to 9% across all equity-backed companies. Backed companies saw GBP 60 million higher valuations on average compared to other equity-funded businesses. Finally, 25% of portfolio companies reported that growth would not have been achieved without British Patient Capital support, while a further 50% reported that it would have taken longer to achieve.
The Business Development Bank of Canada (BDC) undertook a comprehensive evaluation of its financing and consulting services, in which Statistics Canada measured the impact of the services of the public development bank on its clients between 2001 and 2010 against similar non-client firms. The analysis revealed that the Business Development Bank of Canada had a positive impact on sales growth, employment growth, productivity growth and the business survival rate. Results on profit growth were mixed and depended on the time since the support was provided and the type of support (financial or non-financial), leading to inconclusive evidence.2 However, when both financial and non-financial support were provided, profit growth among clients did not differ significantly from that of non-clients. Furthermore, impacts were stronger right after receiving support and faded between 3 and 6 years after, depending on the outcome variable and the type of support received. For example, in the case of employment, the Business Development Bank of Canada financing clients showed a 1-4% higher growth rate compared to nonclients for the first six years after receiving financing; clients receiving consulting outpaced nonclients by 2-6% higher growth rates in the first three years after; and clients who used both financing and consulting experienced between 8-14% higher growth rate than nonclients in the first six years (BDC, 2013[32]). Newer evidence, which measured the impact of the BDC’s services on its clients between 2014 and 2018, found that clients that received both financing and advisory services had a revenue growth that was 7 percentage points above non-clients after one year (BDC, 2022[33]).
1 The evaluation was based on surveys and interviews with recipient companies.
2 Profits grew 3% more among BDC financing clients than nonclients in the second, third and sixth years after they received financing. In other years, there was no difference between the two groups. In the first year after receiving consulting services, BDC clients had 5% lower profit growth than nonclients. For the following years, there was no difference in profit growth between the study and comparison groups.
Better firm performance
Evidence suggests that public development banks support faster firm growth in turnover, exports and employment, as well as greater firm survival. Evidence from Canada suggests that the survival rate of recipient firms was higher than that of non-recipients during the 2001-13 period, ranging from 0.8% to 5.9% higher survival rates for financing recipients and from 0.5% to 5.4% higher survival rates for consulting recipients (BDC, 2013[32]). Starting with turnover, in the United Kingdom, companies that received funds backed by the public development bank had grown their turnover between GBP 4.7 million and GBP 5.4 million per year on aggregate (British Business Bank, 2023[31]). Evidence from Canada points to similar effects (BDC, 2013[32]), and there is suggestive evidence from Colombia, too. Colombian firms receiving loans from the public development bank saw increases in production of 24% (Eslava, Maffioli and Melendez Arjona, 2012[34]), likely driven by greater turnover. Similarly, in France, from 2012-22, the turnover of recipient firms rose by 6%, leading to an additional EUR 17 billion of turnover. Furthermore, the exports of recipient firms also increased by 12% following the interventions of the French public development bank (Bpifrance, 2023[28]). Evidence from Brazil suggests the rise in exports was driven by already exporting firms further increasing their exports, rather than by new exporters (De Negri et al., 2011[35]). When it comes to employment, the positive effect of public development banks on employment is present in all countries, although the magnitudes differ. In France, across beneficiary firms, employment grew by 5%, adding 51 000 additional jobs (Bpifrance, 2023[28]). In the United Kingdom, companies with investments backed by the public development bank increased their employment levels by 55%, leading to 4 600-5 000 additional jobs in aggregate (British Business Bank, 2023[31]). In Colombia, across manufacturing firms, loans from the public development bank led to an increase in employment of 11% (Eslava, Maffioli and Melendez Arjona, 2012[34]).
The experience of Latin America differs from other countries as development banks have traditionally played an important role by supporting citizens in addition to SMEs (De Olloqui, 2013[36]).
A review of the impact evaluation evidence from some of the major public development banks in the region found positive financial and economic effects of public development banks (Maffioli and Rodriguez, 2013[37]). Through a difference-in-difference strategy, De Negri et al. (2011[35]) found that direct credit lines by the Brazilian Banco Nacional de Desenvolvimento Econômico e Social (BNDES) had a positive impact on employment growth and export growth at the firm level but not on productivity growth. The positive impact on exports was explained by existing exporters exporting more, rather than by more companies becoming new exporters.
In Colombia, the loans provided by Bancóldex, the national public development bank, had a positive impact on investment (70%), production (24%), employment (11%) and productivity (10%) over the four years following the first loan on manufacturing establishments with 10 or more employees.1 The positive impact, however, was mainly due to long-term loans. Drawing on a database of all domestic business loans in Colombia, including fully commercial and (partly) financed by Bancóldex, the authors also find suggestive evidence that Bancóldex loans had lower interest rates, larger sizes and longer maturity than the national average. Furthermore, companies that receive Bancóldex credit expanded the number of financial intermediaries with which they had relationships (Eslava, Maffioli and Melendez Arjona, 2012[34]).
1 The authors use a combination of matching techniques and fixed effects panel regressions in the analysis.
Public development banks also have a positive effect on investment, leading in some cases to increased productivity while having no clear effect on firm profits. Evidence from Colombia suggests that long term loans backed by the public development bank led to higher investment (70%) and higher productivity (11%) over the four years following the first loan (Eslava, Maffioli and Melendez Arjona, 2012[34]). The effect on productivity, however, is not replicated in every other country. For example, the intervention of the Brazilian Banco Nacional de Desenvolvimento Econômico e Social (BNDES) did not lead to a rise in productivity (De Negri et al., 2011[35]), and in Canada, the effects on productivity are mixed. In turn, further evidence from Canada suggests that profits of firms who received funding backed by the public development bank during the second, third and sixth years after receiving financing grew 3% more than profits of nonclient firms, with no difference in the first and fourth years. After receiving consulting services, however, client firms had 5% lower profit growth than nonclients, with no difference in profit growth in the following years. When both financing and consulting services were provided, however, no difference was found between clients’ and nonclients’ profits (BDC, 2013[32]).
Direct government loans
Direct government loans are loans issued directly by governments to businesses, which might be offered at better terms (loan maturity and interest rate) than those from commercial banks. In OECD countries, direct government loans are generally small, although, in the context of emerging economies, they might include loans given to large companies. Direct government loans may be issued directly by government agencies, e.g. public financial institutions, such as public development banks, or through the intermediation of commercial banks, which receive a fee for their role in programme delivery.
Direct government loans are used less than other policies, like public credit guarantees. Direct government loans represent less than 0.5% of regional GDP in most regions with available data (Figure 3.4), while public-guaranteed credit can be more than ten times that (as seen in Figure 3.2, for the North region in Portugal or Umbria in Italy). Generally, direct government loans are an expensive policy instrument, which can be captured by vested interests, e.g. given to business owners with political influence or personal relationships with programme administrators, and crowd out commercial lending. Direct government loans can, however, fill a gap in credit markets, for example, when they serve disadvantaged groups in the entrepreneurial population, when they finance business profiles that have difficulties receiving credit (small innovative businesses), when they are targeted towards specific industries or when they are used to retain the local population in rural regions. For example, the regional development agency of Abruzzo implemented a direct microcredit programme without the active involvement of commercial banks, which has helped retain young people in the mountain areas of this small region in the centre of Italy.
Direct government loans as a percentage of regional GDP, 2021
Note: Direct government loans are loans issued directly by governments to businesses, which might be offered at better credit conditions (interest rates and loan maturity) than those available from commercial banks.
Source: OECD Scoreboard on SME and Entrepreneurship Financing, subnational data collection process.
The regional distribution of direct government loans can reflect national policy or industrial priorities if there is a strong industrial specialisation at the regional level. In practice, there are significant regional differences in how direct government loans are used within the countries with available data. Strong regional variation, as measured by the standard deviation, is also observed in Belgium, where Brussels (the capital region and region with the highest income level) displays the lowest share of direct government loans disbursed (Figure 3.4).
For regions and smaller areas, direct government loans have been found to affect firm and job creation positively. Evidence shows that business loans below USD 100 000 contribute to business creation and employment locally. In the United States, doubling the volume of these business loans in counties would lead to a 19% greater employment growth in businesses employing fewer than 20 workers at the county level (Rupasingha and Wang, 2017[38]). Across the broader range of firms, in a metropolitan area with 100 000 employees, an increase in business loans below USD 100 000 of 22% would translate into 7 new firms and 1 600 more jobs (or a 16% increase in employment) (Emrehan, Ikizler and Hulagu, 2020[39]).
Evidence from the United States showed that small business loans (below USD 100 000) were associated with increased employment in Metropolitan Statistical Areas, whereas that was not the case for larger disbursements. The actual study, commissioned by the Small Business Administration’s Office of Advocacy, found that a one standard deviation increase in the small loan growth rate (i.e. about a 22-percentage point increase) is associated with a 1.6 percentage point increase in the employment growth rate and a 0.72 percentage point increase in firm births at the local level. For example, in a Metropolitan Statistical Area with an initial employment of 100 000 people, an increase in small business loans of 22% would lead to 1 600 more jobs and 7 new firms (Emrehan, Ikizler and Hulagu, 2020[39]).
The effect of small business loans on small business growth is confirmed by another study for the United States, which finds a causal relationship between an increase in the rate of small business loans and a positive effect on the growth rate of small businesses during the 1996–2010 period. In particular, a doubling in Community Reinvestment Act (CRA) small business loans leads to an increase in the growth rate of small businesses (i.e. employing fewer than 20 workers) by 19% at the county level.1 This positive relationship also holds when counties are classified into urban vs. rural and low vs. moderate income (Rupasingha and Wang, 2017[38]).2
1 The Community Reinvestment Act (CRA) encourages commercial banks and savings institutions to meet the credit needs of their local communities, including low- and moderate-income areas in a manner consistent with safe and sound banking practices. Small business support is an important aspect of the Community Reinvestment Act.
2 The outcome variable in this study is an indicator of business dynamism rather than business growth, as the authors lack firm-level information on the recipients of Community Reinvestment Act loans. In particular, an increase in the rate of small businesses at the local level does not necessarily imply an increase in local employment, since this could also be the outcome of a contraction of larger companies.
Subsidised (soft) loans
Subsidised or soft loans are a specific type of direct government loan with low or no interest rates due to public subsidies. Such loans decrease the cost of borrowing below the rates offered by commercial banks, making credit more attractive.
Subsidised loans tend to be used to finance specific groups of entrepreneurs. For example, in France and Italy, “honour loans” have provided many generations of young and female entrepreneurs with interest‑free loans with flexible repayment terms, without collateral requirements or other forms of guarantee, which led to their name. Subsidised loans are also used as a policy tool to promote economic development and social inclusion in areas facing economic challenges by encouraging investment and entrepreneurship or supporting business growth.
Microcredit
Microcredits are small direct loans by the government to small enterprises that serve a market segment too small to be attractive to commercial banks. In the European Union, microcredits refer to loans of less than EUR 25 000 for the self-employed and micro-enterprises that employ less than ten workers. Governments, including regional ones, can run microcredit policies directly through development banks or agencies such as regional development agencies and national SME agencies. However, they can also support microcredit institutions, such as the European Programme for Employment and Social Innovation (EASI).10 This institution enables selected microcredit providers in the European Union to increase lending by issuing guarantees, thereby sharing the providers' potential risk of loss. In addition, the European Commission provides support for building the capacity of selected microcredit providers.
Government-supported equity finance
Equity finance provides capital to a firm in return for an ownership stake. While private equity finance targets SMEs with high growth potential, scalability and the ability to generate substantial returns on investment, government-supported equity finance supports broader economic objectives, including in less developed regions that might not attract private investment due to perceived risks or insufficient returns.11 Governments are more willing to take risks in geographically diverse regions, as profitability is not the only objective and might support start‑ups in rural or less-developed areas, considering long-term socio-economic benefits. Government-supported equity finance often targets emerging technologies or industries that might not yet be profitable but have strategic value, like clean energy or biotechnology, resulting in investments in areas where these industries are developing independently of how close these firms are from the main equity finance hubs. Government-supported equity finance is thus more geographically dispersed than private venture capital due to its broader economic objectives than just maximising return on investment.
In 34 out of 38 OECD countries, one in five policies to improve access to finance for firms uses equity instruments (OECD, 2022[2]), including private equity, venture capital, business angels, specialised platforms for publicly listing SMEs, and (equity) crowdfunding.12 Even when provided at the national level, government-supported equity finance can have a strong regional focus. A notable example is that of the British Business Bank, which not only tailors national finance policies to regional conditions but also provides region-specific finance policies targeting regions with lower incomes to help close regional gaps (Box 3.12).
The British Business Bank (BBB) is the public development bank of the United Kingdom. Established in November 2014, it aims to drive sustainable growth and prosperity across the country and to enable the transition to a net-zero economy by supporting access to finance for smaller businesses (British Business Bank, 2021[40]).
The British Business Bank operates two major equity finance policies at the regional level, which showcase the work of development banks not only through national policies tailored to regional conditions but also through region-specific policies.
Regional Venture Capital Policies
Working together with Local Enterprise Partnerships (LEPs), the British Business Bank manages three regional investment funds aimed at local SMEs in regions with lower incomes. All three funds have also received support from the European Regional Development Fund (ERDF).
Northern Powerhouse Investment Fund (NPIF): This Fund was established in 2017. It involves ten Local Enterprise Partnerships (LEPs) and channels GBP 500 million of public investment for SME growth in the North of England. According to a report by the British Business Bank to the Parliament, as of 2020, the Northern Powerhouse Investment Fund had directly invested GBP 172.4 million in 659 North-based SMEs in deals that had attracted an additional GBP 192.1 million from private investors.
Midlands Engine Investment Fund (MEIF): This Fund was launched in March 2018 as a collaboration between the British Business Bank and the Local Enterprise Partnerships (LEPs) of the West Midlands and East and Southeast Midlands to provide GBP 300 million to local SMEs. According to the same report by the British Business Bank to the Parliament, as of 2020, the Midlands Engine Investment Fund had invested GBP 74.9 million in over 290 small businesses and had leveraged an additional GBP 51.4 million in private investments.
Cornwall & Isles of Scilly Investment Fund: This Fund was launched in June 2018 as a collaboration between the British Business Bank and the Local Enterprise Partnership (LEP) of Cornwall & Isles of Scilly. It started with GBP 40 million of investment for SMEs in the region. As of 2020, it had invested GBP 5.16 million in 22 businesses across the region, with an additional GBP 3.8 million from private investors.
Regional Angels Programme
The Regional Angels Programme of the British Business Bank has GBP 100 million in funding commitment. The programme has the objective of reducing regional imbalances in access to early-stage equity finance for small businesses by raising the profile and professionalising angel investment activity and attracting third-party capital alongside business angels. The programme works through a network of regional funds. By matching the investment made by angel investors, the programme seeks to encourage more individuals to become business angels. The size of publicly matched funding depends on the region. The programme targets high-growth potential businesses that have a viable business model and can show scalability. As of April 2023, GBP 85 million had been committed and channelled through 12 delivery partners.
Source: https://www.british-business-bank.co.uk/what-the-british-business-bank-does/; https://committees.parliament.uk/writtenevidence/11275/pdf/; https://www.bbinv.co.uk/regional-angels-programme/. Information gathered through the workshop “National and subnational approaches to enhance SME financing at the regional level” organised in the framework of the project “What Helps Firms Grow in Regions” (21 February 2023).
Dutch regional development agencies (RDAs) provide direct equity investment to innovative SMEs, start‑ups and scale-ups, in contrast to many other RDAs (Box 3.13). The Dutch RDAs aim to promote innovation and competitiveness in Dutch regions by helping innovative companies access private and public financing and relevant knowledge, experience, and networks. Most of the RDAs' investments are equity-based, and the volume they provide is substantial. Between 2016 and 2020, RDAs had a 15% share of the total investment volume in the Dutch venture capital market.
The Regional Development Agencies (RDAs, or in Dutch Regionale Ontwikkelingsmaatschappijen ROMs) aim to promote innovation and competitiveness in Dutch regions by helping innovative companies access private and public financing and relevant knowledge, experience and networks.
RDAs engage national and regional governments as well as other regional partners. The national and provincial governments are shareholders in RDAs and provide subsidies to them. In several regions, municipalities and knowledge institutions provide them with supplementary funding.
Originally, RDAs were established in regions with relatively lower incomes, such as the northern provinces (1974), Limburg (1975) and North Brabant (1983), however, since 2021 all provinces are covered with 9 RDAs serving in some instances more than 1 of the 12 provinces (or Dutch TL2 regions).
The Dutch RDAs focus on three core tasks. First, and unlike some counterparts in other OECD member countries, which only mediate to secure private investments, Dutch RDAs directly invest in innovative SMEs, start-ups and scale-ups. Second, they support innovation and help firms from the idea development phase onwards (Figure 3.5). Third, RDAs support the internationalisation of Dutch companies with international ambitions, attract foreign investments, and help manage the relationships of local firms with international companies.
Source: BCI 2022, o.b.v. Debreed.
Although RDAs may use equity financing, hybrid finance (convertible subordinated debt), and other forms of debt to support companies, most investments are still equity-based. One example is the venture capital RDAs provide, which fills the gap between the early stage [(pre)seed] financing and the private equity or private debt financing. Between 2016 and 2020, RDAs had a 15% share of the total investment volume in the Dutch venture capital market. In 2022, RDAs invested €194 million from their funds in 309 start-ups, scale-ups and innovative SMEs. The RDAs mainly focus on small tickets (<1 million), a segment which private venture funds find more challenging.
RDAs have recently shifted towards debt finance, following their growing role in supporting innovative companies to shape major transitions (climate, energy, food, safety, circular economy). Furthermore, debt finance is a better instrument than equity finance when investment in production facilities is needed, especially in combination with private co-financing.
Overall, RDAs invest via their funds and funds that have been placed under their management. These funds are replenished as credits are repaid or as investments generate returns and are sustainable to continue operating over time. RDAs are obliged to obtain at least 50% of the intended investment from the market, and as a result, they manage to create a leverage ratio of 3 to 6 times their initial investment. Participation lasts a maximum term of 10 years. The terms have recently been increased from 8 to 10 years due to the long time-to-market for new technologies (including deep tech and life sciences) and the long time horizon of investments in the field of transitions (including sustainability). Investments are focused on national and provincial forefront sectors.
Source: Evaluation ROM’s 2016-2020: https://rom-nederland.nl/en/ (accessed on 2 April 2024).
Venture capital is the most prominent type of equity finance and is meant to fuel the expansion of innovative start-ups and growth-oriented SMEs. In OECD countries, government-backed venture capital policies mostly take the form of funds-of-funds through which governments invest in venture capital funds led by the private sector, leaving the final investment choice with private venture capital managers. Nonetheless, the investment must comply with the eligibility requirements of the government-backed venture capital programme, which relate to factors such as industry, firm age, technology, or location.
Government-backed venture capital has been associated with positive economic effects. Existing evidence across 25 (mainly OECD) countries suggests that government-supported venture capital complements private venture capital, with firms funded by mixed government-private venture capital obtaining more investment (financial additionality) than firms funded with only one of them. Also, markets with more government-supported venture capital had more investment per enterprise and more enterprises, suggesting that government venture capital largely augments rather than displaces private venture capital finance (Brander, Du and Hellmann, 2014[41]).13 Further evidence suggests that government-supported venture capital positively impacts firm performance (economic additionality). Although government-supported venture capital did not have an impact on employment in Sweden, it boosted firm sales, due to efficiency gains and increased physical capital investments 2–3 years after the investment (Engberg, Tingvall and Halvarsson, 2019[42]).
Governments provide indirect support for equity investment by through tax incentives and facilitating the match between investors and start-ups for business angel networks. Business angel networks are groups of wealthy individuals investing at the very early stage of the business lifecycle, i.e. providing seed finance. In line with a growing recognition that firms and government support policies should shift away from a debt‑dependent culture (OECD, 2015[43]), to strengthen their capital structure and reduce vulnerability to financial shocks. Even more so after the COVID-19 crisis, which has caused a further increase in the average indebtedness of SMEs across most OECD countries (OECD, 2021[44]). Most countries, however, still have thin venture capital markets, with the exceptions of Israel and the United States, and following the rise in interest rates since 2022, the investors’ appetite for equity finance has decreased, highlighting even more the importance of government intervention. In Europe, for example, there is a need to incentivise more private long-term investors to stay in the market, even in economic downturns, to improve exit markets and to strengthen the availability of funds for venture capital-backed companies that aim to scale up. In other geographies like the United States, challenges include limited exit opportunities with the rising inability of companies to go public, high geographic concentration of venture capital activities in the country, as well as a gradual drop in angel and seed rounds provoked by an uncertain market environment (OECD, 2024[45]).
Hybrid (mezzanine) finance
Hybrid or mezzanine finance has characteristics of both equity and debt finance. Common forms of this type of finance include subordinated loans, participating loans, convertible bonds and bonds with warrants. Hybrid or mezzanine finance is often used to expand capital, but its diffusion is still relatively limited. Across OECD member countries, currently, 3% of finance policies seek to leverage hybrid finance instruments (OECD, 2022[2]). Examples of these policies include Investment Capital (debt with equity) from the United States Small Business Administration (SBA), which provides funding to qualified Small Business Investment Companies with expertise in certain sectors or industries, to invest in small businesses in the form of debt with equity.14 Another example is the Convertible Loans programme in Belgium, which offers loans that provide the possibility of converting outstanding debt into shares during a specified period and subject to conditions. One of the many conversion terms is the use of a percentage discount on the valuation of the company at the time of conversion.15
Even more so than equity finance, this type of finance can be particularly suited for growth-oriented companies in regions with lower income levels since investors take a bigger risk (and higher possible returns) than senior lenders but a smaller risk than equity investors.
Government grants
Government grants are a transfer of resources from the government to the business owner, which can come with conditionality attached to the use of the resources, like specific types of investments or working capital requirements. Grants, usually of small size, are not expected to be repaid. Government grants are disbursed by public financial institutions or public development banks and are mostly used to support socially inclusive entrepreneurship, e.g. youth, women and ethnic minorities16 or knowledge-based SMEs, to incentivise R&D and innovation. During the COVID-19 crisis, grants have been widely used in high-income economies to prevent massive business closures.
Policies beyond financial instruments
Financial literacy and skills play a key role in helping entrepreneurs understand the implications of a debt or equity finance contract, thus supporting both firm access to finance and the overall stability of the financial sector. At the firm level, financial literacy includes skills related to accounting, finance and risk planning, financial and non-financial disclosure requirements and communication with investors.
Across OECD member countries, 10% of national finance policies seek to enhance SME financial skills and strategic vision (OECD, 2022[2]). Although programmes that target these skills are generally place-neutral (features do not change depending on the place), they can be tailored to specific regional industrial specialisation (disclosure requirements regarding Environmental, Social and Governance issues) and may prove especially important in less developed regions where financial literacy is likely to be comparatively lower. For example, the Greek government has an online portal informing SMEs about financial instruments currently available.17 Its objective is to increase SME awareness of available financing instruments and help SMEs access the most suitable type of finance. The webpage is client-oriented, providing information on each financial instrument and guiding SMEs to accredited organisations that offer these instruments in the country. In New Zealand, the InvestEd programme provides a free learning resource for businesses looking to raise capital.18 The 13 courses feature practical information, essential tips and advice from the actual experiences of thousands of New Zealand businesses. Each InvestEd course tackles a key stage in the capital raising process. Similarly, in the United Kingdom, the Help to Grow is a 12-week programme to help SMEs improve their performance, resilience, and long-term growth by building capacity in financial management, innovation, responsible business, and leadership.19
Another example of a non-financial policy to improve access to finance is credit mediation. Credit mediation, also known as credit counselling, is a new policy instrument offering expert guidance and negotiation support to SMEs whose credit application has been fully or partly rejected by financial institutions. The main goal of credit mediation is to reduce information asymmetries between borrowing SMEs and lending institutions. The first credit mediation schemes were introduced in the aftermath of the 2008/2009 Global Financial Crisis, when many SMEs faced a major credit crunch. Still, the scheme is now available in several EU countries such as Belgium, France, Germany, Ireland and Spain.
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← 1. Along the chapter, the percentages refer to the unweighted count of current and recent (in place until 2022) access to scale up finance national policies of the OECD Access to scale up finance policy database containing information for 844 different policies for the 38 OECD member countries (Unleashing SME potential to scale up - OECD). The total sum of the percentages across different objectives may be higher than 100% when policies have several objectives. For further information, refer to the report (OECD, 2022[2]).
← 2. Explaining the negative interest rates in Guria (Georgia) or Maluku (Indonesia) might be features related to firm size, such as the industry a firm operates in, as some industries where firms are on average larger might be riskier than industries concentrating smaller firms. Furthermore, interest rate spreads alone do not provide the full picture of the risks of SME lending. In Italy and Portugal, the regions with lower levels of income within the country have interest rate spreads close to zero, while capital regions (Lazio and Lisbon, respectively) display the largest interest rate spreads in the country. This is explained by low interest rates applied to large companies in capital regions rather than exceptionally high interest rates charged to SMEs.
← 3. Basel III is a comprehensive set of global standards for banking regulations developed by the Basel Committee on Banking Supervision (BCBS) in response to the Global Financial Crisis of 2008/2009, aiming to strengthen the supervision, and risk management of banks worldwide. It is the third set of regulations issued, following Basel I and Basel II, each developed to address specific weaknesses in the global banking system and to enhance financial stability. Basel III made banks more resilient by improving capital adequacy, reducing leverage, and enhancing liquidity management. Basel III aims to strengthen the requirements in the Basel II regulatory standards for banks. In addition to increasing capital requirements, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank. A high-level summary of the reform by Basel III is provided in https://www.bis.org/bcbs/publ/d424_hlsummary.pdf.
← 4. Other streams of research have also looked into other aspects outside of the scope of this report, such as how credit guarantee schemes can shape the behaviour of banks, for example making them more risk-prone (Gropp R., Gruendl C. and Guettler, 2010[47]).
← 5. In emerging economies, public credit guarantee schemes tend to keep a tighter control on the guarantee process. For example, both in Vietnam (OECD, 2021[49]) and Indonesia (OECD, 2018[51]), governments make the final decision on the use of a public guarantee.
← 6. Credit counter-guarantees are a financial instrument used to manage lending risk in the context of credit guarantee schemes. Credit counter-guarantees are provided to the guarantor to mitigate its risk exposure in guaranteeing credits. Examples of credit counter-guarantees are guarantees offered by mutual guarantee (private) societies to public guarantees societies.
← 7. For example, the European Union State Aid Framework sets 80% as the upper threshold for guarantee coverage through public funding.
← 8. In emerging economies development banks have also traditionally been tasked with industrial development, including through subsidised financing of large companies, including state-owned companies. This is generally not observed in OECD economies, where governments are more concerned with public banks not crowding out private lenders.
← 9. Government ownership goes beyond public development banks to include other types of public financial institutions, such as public commercial banks or thematic banks (e.g. export banks). A related strand of literature considers the broader consequences of government ownership in the banking sector on private lending. In this literature, findings are mixed, although the prevailing evidence is that strong government ownership of the banking sector (in terms of total bank assets) has negative consequences both for private lending and output growth. The main channel through which this happens is if public banks weaken the emergence of a strong private financial sector, by crowding out private capital. If this happens, their net impact on the economy is negative even if they have a positive impact on direct recipients, which are more likely to be larger companies than small businesses due to their stronger political connections. For example, Beck, Demirguirç-Kunt and Maksimovic (2004[46]) find that a larger share of government-owned banks accentuates the negative effects of lack of competition in the banking sector on SME financing conditions. Similarly, in a study covering 123 countries, researchers from the International Monetary Fund (IMF) found that a larger presence of state-owned banks in the banking system is associated with more credit to the public sector, larger fiscal deficits, higher public debt and the crowding out of credit to the private sector. In particular, an increase in the share of assets of banks owned by the government of one percentage point is associated with a decrease in the share of credit to the private sector (relative to the share devoted to the public sector) of slightly more than 0.5 percentage points (Gonzalez-Garcia and Grigoli, 2013[48]). This literature mostly covers countries where the incidence of state-owned banks is large, such as in emerging economies, making these findings less relevant to OECD member countries.
← 10. Previously called European Progress Microfinance.
← 11. There might also be other explanations why private equity overlooks certain regions such as lack of knowledge, as evidence shows that in most countries, regions that are strong financial centres have larger venture capital investments in absolute and relative terms yet the spread of firms with high-growth potential is more dispersed across the geography, including in regions with lower income levels (OECD, 2021[50]).
← 12. The public sector's support includes forgone taxes and preferential regulation too for this type of finance.
← 13. This study also finds a positive association between mixed government-private venture capital funding and successful exits, as measured by initial public offerings (IPOs) and acquisitions, attributable largely to the additional investment.
← 14. Further information on the website of the programme: https://www.sba.gov/funding-programs/investment-capital.
← 15. Further information on the website of the programme: https://www.finance.brussels/produits/nos-solutions-de-financement-pret-convertible-note/
← 16. Disadvantaged entrepreneurs can also be supported through income subsidies, which are similar to grants but offer entrepreneurs a small monthly salary to help them launch a business without the fear of losing another government benefit (e.g. Germany’s Start-up subsidy programme for the unemployed).
← 17. Further information on the website of the programme: https://www.ggb.gr/en/Finance_SMEs_instruments
← 18. Further information on the website of the programme: https://my.nzte.govt.nz/article/your-capital-raising-journey-discover-whats-ahead-with-invested
← 19. Further information on the website of the programme: https://www.gov.uk/government/news/chancellor-marks-help-to-grow-scheme-launch-with-teach-in-alongside-business-owners