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The Impact of Civil Law on the Growth and Debt Capital Accessibility of Southern European Micro, Small and Medium Enterprises
September 26, 2022
By Andréa Sanfilippo
In November of 2021, SFNet announced its first Cross-Border Finance Essay Contest, sponsored by Goldberg Kohn Ltd. Members of SFNet’s International Finance and Development Committee judged the essay submissions on content, originality, clarity, structure and overall contribution to furthering and expanding understanding and discourse within the field of cross-border finance. This essay tied for third place.
The authors of the winning essays have been invited to participate on a panel at SFNet’s 78th Annual Convention in Austin, TX, Nov. 9-11. The second place and first place winners will be published in the October and November issues of The Secured Lender, respectively.
In May 2013, the Secured Finance Network (at the time Commercial Finance Association) held its seventh Annual International Lending Conference. While reflecting upon the European Debt Crisis at that time, Jeremy Harrison, then conference sponsor and Regional Group Head for Bank of America Business Capital, predicted:
“We expect to see increased ABL demand as the Eurozone begins to recover and, in fact, are already seeing greater deal activity…there are a variety of lending structures which can be used successfully in most Western European countries.”1
Nearly a decade ago, 80% of European corporate financing came from banks.2 Almost 10 years later, direct lending has evolved into the fastest growing lending asset class in Europe.3 Additionally, the number of non-bank lenders, who are more apt to lend to Micro, Small and Medium Enterprises (MSMEs) than traditional banks, has increased, yet banks continue to dominate European secured lending.4
As a result, only 50% of German MSMEs, collectively contributing over 18 million annual jobs to the German economy, have access to financing.5 Italy, where nearly 67% of economic value is derived from MSME activity, currently suffers from stagnation and contracting loan supply.6 MSMEs contribute over nine million jobs to the French economy annually, yet regulatory pressures constrain their ability to secure funding.7 Asset-based lending (ABL), a flexible financing solution in providing credit, could be helpful for many MSMEs, but stringent regulation hinders lenders’ abilities to extend capital cross- border.8 Given ABL’s reputation to maximize working capital efficiency, one must question whether European countries inhibit their own economic growth with their legal systems.
Debt Capital Access - Northern Europe vs Southern Europe
Regardless of size, all businesses require capital. Large enterprises, especially those that are investment-grade (IG), have access to various sources of credit. MSMEs often cannot raise public debt capital and usually do not generate enough EBITDA to qualify for cash-flow loans. As a result, MSMEs mainly rely on banks for funding, and are thereby at the mercy of changing credit conditions and higher premiums.9 In the United States (US) and United Kingdom (UK), MSMEs are common ABL borrowers. Once known as a last resort solution, ABL, which is secured by borrowers’ collateral, has gained traction across businesses of all sizes due to its less punitive features than cash-flow loans, including lower interest rates (IR) and the absence of covenants.10 ABLs also require regular reporting for liquidity monitoring in preventing financial strains and allowing for a closer rapport between borrowers and lenders.11
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