The SME Financing Act, applicable since 10 January 2014, has the laudable goal of making it easier for small and medium-sized enterprises to access financing. But is the act really a step forward? From the perspective of SMEs, it doesn't change their situation much. Is it time to reassess the legislation?
The act addresses a number of issues regarding the information to be provided by the lender and the potentially prohibitive level of reinvestment fees. In addition to the act, the organisations that represent SMEs (Unizo and USM) and the Belgian Federation for the Financial Sector (Febelfin) have signed a code of conduct, which entered into effect on 1 March 2014, setting out the information lenders must provide to SMEs and the format in which this information should be provided.
The act and the code of conduct reinforce the duty of lenders to provide information not only during negotiations and upon signing a credit facility agreement but also in the event of a refusal to extend credit. For example, the lender must clearly state why the SME was refused so that the SME can amend its application or apply to another lender.
These two tools also limit reinvestment fees or the so-called funding loss. The funding loss is the compensation a company must pay if it wishes to reimburse its loan prematurely, i.e. before the initially agreed date. Before the entry into force of the act, the funding loss could be considerable but is now limited to 6 months for loans of less than one million euros. The potential funding loss should thus no longer pose an obstacle to investment. The drawback is that the funding loss can still exceed this limit if the loan is in excess of one million euros or if the borrower is not an entrepreneur.
Assessment of the act
In order to enable the legislature to determine whether the act and the code of conduct have achieved their objectives, they are subject to a biannual assessment. The act will soon be subject to its first review, which will be comprised of two parts.
The first part consists of a survey of a sample of individuals and companies, with the latter differentiated by size (number of employees), sector and years of experience (more or less than 4 years).
For the second part of the review, the Office for SME Policy will gather a wide range of information based on which it will establish conclusions about the act's effectiveness.
Finding the (best) solutions to SME financing problems
Unfortunately, while the act has the commendable objective of making it easier for SMEs to access credit, it is highly unlikely that it achieves this goal.
Indeed, the obligation for lenders to provide detailed information is in reality nothing new. SMEs seeking financing did not have to wait for the act in order to know how to best prepare their credit applications. Such companies are accustomed to taking matters into their own hands and asking the bank, if necessary, what information is required. Similarly, since banks wish to receive clear and complete applications, it stands to reason that they already provided comprehensive information to SMEs.
Likewise, when a loan application is refused, SMEs usually ask the bank why they were refused, and banks provided this information even before the act entered into force.
It is also clear that limiting reinvestment fees to 6 months has led to an increase in the cost of lending which, in one way or another, is passed on to SMEs. Moreover, the six-month limitation does not apply to loans in excess of one million euros or to non-entrepreneurs.
Finally, while the act heavy-handedly attempts to simplify access to credit for SMEs, it is obvious that nothing appears to have been done to tackle some very real problems facing (young) SMEs, such as recurring under-capitalisation and a lack of professional support. It is therefore more important than ever that SMEs be coached and surrounded by professionals with the relevant knowledge and contacts.
Large numbers of SMEs will surely respond to the survey in order to make their voices heard. Let's hope that the Office for SME Policy manages to draw the appropriate conclusions from the results.