What are Guarantee Institutions?
Very often, SMEs that have economically sound investment projects, but do not dispose of sufficient collateral, cannot get access to credit finance, or only insufficient funding.
A guarantee provided by a guarantee society on behalf of the SME to the bank replaces this missing collateral and enables the bank to grant the loan. In essence, the guarantee is a financial commitment by the guarantee society to repay up to a certain percentage of the loan to the financial institution in case the SME customer should not be able to honour his payments.
The guarantee usually does not cover more than 80% of the bank loan, leaving 20% of the risk with the lender. The SME remains liable for the loan.
The SME customer usually pays a once-off processing fee and an annual guarantee fee, which are variable from guarantee institution to guarantee institution.
For more information on the terms and conditions of the guarantee institutions in the different countries, please consult the section of the AECM member organisations
Given the importance of SMEs in the European economy and their difficulties in accessing loan finance, guarantee organisations have been set up in nearly all EU Member States as well as Turkey. They are active as non-profit organisations at national, regional or local level. Four main typologies exist: Mutual Guarantee Societies, other types of Private Guarantee Societies, Public guarantee institutions and Public-Private Partnership initiatives. The specific choice for one or the other model reflects the economic and legal frameworks of the respective countries.
Mutual Guarantee Societies are private guarantee institutions created by beneficiary SMEs. They typically have a cooperative or mutual statute. This means that the MGS’ capital is provided directly by the SMEs that apply for a loan guarantee in form of cooperative or mutual shares. Each members has an equal voting right and participates in electing the General Assembly and Board of Directors. The Mutual Guarantee Societies are usually run by entrepreneurs, bringing an SME perspective to the risk asessment process.
Other types of Private Guarantee Societies are founded as initiatives by representative organisations of the private sector (Chambers of Commerce or Crafts, Business Federations, Banking organisations, etc.). They have a joint-stock company statute, foundation statute or other. The capital is provided by the private shareholders.
Public Guarantee Institutions have been set up by public authorities in a number of countries. They are legally independent entities and can chose from a variety of statutes, e.g. development bank, development fund, etc. They are entirely funded and run by public shareholders. They implement public SME support policy and either guarantee SMEs directly or provide counter-guarantees to private Guarantee Societies.
In some cases, Guarantee societies have chosen a Public-private partnership model, where the public shareholder usually holds a minority stake.
Independent from their legal statutes, a great majority of AECM members have a statute of financial intermediary or a mono-line banking lisense. They are thus subject to financial supervision by their national authorities.
Added value of Guarantee schemes for SMEs and Banks
Guarantee schemes provide benefits both to beneficiary SMEs and their banks
Added value for SME
- They provide companies with access to finance, encouraging their creation or expansion; by so doing, they promote entrepreneurship and job creation
- They provide a proper assessment of the company’s intangible and qualitative elements (experience, training, skills, business and technical value of the project, ability to fulfil the business plan etc.) in the risk assessment of loan applications.
- They enrich the risk assessment with field information about the sector, its technological and market development, competition etc.
- They bring together the language of the enterprise with financial jargon, so that there is a better understanding between parties.
- They seek out the appropriate financial structure for the company and attractive loan terms
- They provide the enterprise with advice and supervision in terms of financial management
Added value for the bank
- Guarantee schemes share to a large extent in the banks risk, reducing its overall exposure
- They provide additional qualitative information which completes the more financially-oriented analysis of the bank, allowing the latter to further improve its risk assessment at no cost
- They are supervised and reliable financial intermediaries
- The guarantee is a high quality collateral, usually available upon demand
- The loan amount guaranteed / counterguaranteed by the public authorities benefits from a 0-risk weighting under the Capital Requirements Directive (CRD). This means that banks can issue SME loans at lower cost and provides leverage for the expansion of the bank’s business
Public support and counter-guarantees for guarantee schemes
Aside from the public guarantee schemes, that are 100% owned by the public authorities, private and mutual guarantee schemes also usually benefit from support measures.
They received either direct funding for their own funds, allowing it to issue more guarantees, or their guarantees are counter-guaranteed by the state or the regions, which means that the losses from a credit default are split between the bank, the guarantee scheme and the public authorities. The public support for guarantees has the following rationales:
1. Multiplier effect / Cost efficiency
The guarantee instrument is characterised by a high leverage effect (guarantee volume over own funds), resulting in a high volume of guarantees and even higher volume of credits accessed. As a consequence, the instrument is not only very cost effective from a promotional point of view, but also allows addressing a larger population of SMEs for the same amount of support funds.
As an example, € 1 of own funds with a leverage of 10 and e.g. a 50% coverage ratio, results in € 10 of guarantees, € 20 of bank loans and an even higher amount of final investment.
2. Added value of guarantees for public authorities
Aside from the micro-economic impact for the final beneficiaries, i.e. the SMEs, guarantees also provide public authorities with budgetary benefits that exceed the costs of the support measures.
As an example, these benefits have been analysed for Germany over the period from 1996 2002 by a study conducted by the University of Trier in 2006: http://www.inmit.de/download/studie_buergschaftsbanken_engl.pdf
The study found that for Germany, the activity of the guarantee banks had resulted on average in:
- An increase of GDP by € 3,2 billion
- Employment creation of 12.900 new jobs p.a
- Reduction of unemployed by 9.100 per year
- Increase of fiscal receipts by € 720 million (from taxes on goods, income and capital). After deducting default payments, the net balance for the German state came out € 670 million higher than without guarantees.
The above-mentioned overall positive benefits from an economic and social development policy perspective have lead Member States in Europe as well as the European Institutions to recognise the added value of guarantees and to support guarantee schemes of differing typologies.