20. Israel
As of 2022, there were 660 thousand businesses in Israel, 99.5% of which were SMEs (i.e., companies employing up to 100 workers). In an average year, 55 000-60 000 businesses are created and about 40 000 closed down formally with other 5,000-10,000 which became 'silent' businesses, waiting for economic or personal development. In 2021, 64 825 new companies were established and 40 192 were closed. Removal of government support measures might result in many enterprises shutting down in the post-crisis period. In 2022 the record was broken with 71 006 new businesses according to the CBS.1
The data of bankruptcy and asset receiverships is not available yet.
SME and entrepreneurship policies in Israel are primarily designed by the Ministry of Economy and Industry and implemented by the Israel Innovation Authority (IIA) and the Small and Medium Business Agency (SMBA). While the IIA (formerly known as the Chief Science Office) focuses on leading technology-based start-ups and SMEs, the SMBA caters to all SMEs in Israel’s main economic sectors through business management training and coaching, subsidized access to finance (for example, through the national loan guarantee program) and the work of the business development centres (MAOF centres).
Before the current war with Gaza, the main impact was the political instability in Israel which amounted to 2.8% - 3% growth rate, with hopes that if the political system will be stabilized as it seems in the last month, the economy may show some rapid growth although the world economy suffered from some negative impacts. The main growth factors were due to some estimation of changing the course of high-tech business cycle and expanding natural gas exports. The unemployment rate was relatively law, but the expectation of most analysts was that the interest rate may go down due to permanent decreasing rate of inflation.
In October 2023 the dollar was 13% higher against the NIS in comparison to December 2022, but the impact of inflation was mostly absorbed in the price index and the depreciation of the NIS against the USD, has stopped and even change the direction.
As of 2022, there were 660,078 businesses in Israel (see Table 22.2) and 99.5% of them were SMEs by definition, with up to 100 employees each. Independent workers (without employees) accounted for 56.1% of all businesses. Micro-enterprises (1-4 employees) accounted for 30.6% of all businesses, and 11.4% of total employment, 10.2% and 17.9% respectively for small businesses (5-19 employees), and 2.7% and 20.7% for medium size businesses (20-99 employees). The rest of 0.5% of the Israeli companies are employing more than 100 workers.2
Bank credit is the main funding mechanism for SMEs, while other suppliers of finance, such as funds, private credit companies, angel investors and others, are the secondary suppliers. Most of the banks' credit to SMEs in Israel is provided by its five major banking groups with the rest accounting for a small proportion of the market share. The Central Bank of Israel regulates banks to sort credit data according to business types. However, until 2016, each bank had its own unique definitions regarding business types and sizes. This situation was solved in 2016, as the Central Bank of Israel defined a set of unified business sizes.
Banks
In 2022, Israeli banks provided NIS 344.6 billion in credit to SMEs, an increase of 9.67% compared to 2021 (NIS 314.2 billion). The share of SMEs in the credit given by the banks was 49.4% of the total business credit, a relative decrease comparing to the previous year when the share of the SME's was 53.1% and further relative decline comparing to 2020 when the share of SMEs was 54.7%. Since 2015, SMEs represents a higher share in the bank's credit portfolio, compared to large firms. In total, from 2010 to 2022, nominal bank credit to SMEs increased by 96% compared to 16% increase on the nominal bank credit to big firms. In 2009, the Israeli banks were required to keep more sources of equity against loans which, of course, limited their ability to provide credit.
In 2022, the sharp changes in the interest rate contributed to volatility in the prices of financial assets and made it harder for households and businesses to adjust their credit and asset portfolios. The influence of inflation and interest rates was more of the same in Israel as it was in many Western economies, with some nuances due to the fact that the energy prices in Israel, did not rise as in most European countries3.
Interest rate data is not officially published but is rather extracted and calculated from the financial statements of the main banking groups in the country, which are required to publish a breakdown of credit distributed according to specific business group sizes. In these statements, there is no reference to the average duration or the guarantees of the credit that was given.
The estimated interest rate for small, medium, and large enterprises was obtained by dividing the interest income received from businesses4 by the average credit extended to those business segments. From 2021 to 2022, interest rates for SMEs and large firms increased. The average interest rate for SMEs increased from 3.67% to 4.8%, while the interest rates for large firms raised from 2.54% to 3.86%. Furthermore, the interest rate spread narrowed from 1.13% to 0.94%.
Handling fees in Israel are charges for handling credit and collateral and apply to loans that are not housing-related. Each major bank has an upper limit on the fees chargeable (see Table 22.5). Until 2012, loan fees applied to loans above NIS 50 000. Since 2013, the base loan amount has been increased to NIS 100 000, but loan fees charged on operations above that amount have remained largely unchanged. In general, the fees charged by each bank are different, but they have remained stable in the last seven years. All business loans below NIS 100 000 are exempt from fees by all banks. The figures in the Table 22.5 and 22.6 below are the maximum fees each bank can charge. In principle, however, fees are negotiated on a case-by-case basis.
Apart from those charged by Bank Mizrahi, credit allocation fees for SMEs were the lowest for all banks in 2022 since 2008 and remained the same for the last nine years, thus providing a stable credit environment for SMEs.
Venture capital
In 2022, total venture capital investment in Israel is USD 15.75 billion, a 39.1% decrease over the USD 25.88 billion raised in 2021. Nevertheless, the total capital raised by Israeli high-tech companies has grown since 2015. The annual figures for 2022 are above those of 2020, with USD 15.7 billion raised in 701 deals. However, most of these figures are attributed to the first half of 2022, while in the second half, capital and deals shrank.
Early Round Investments (Seed + A Rounds) increased during Q1-Q2 of 2022 due to the mega-deal in Q2 (Ultima Genomics raised USD 600 million in A round). however, in-line with the current downtrend in invested amounts and deal numbers Q3 and Q4 were respectably lower. The early round investments in Q1 and Q2 in 2022 were USD 1.285 billion and USD 1.688 billion respectively (compared to USD 843 million and 1.015 billion in Q1 and Q2 2021). Also, in 2022 Q3 early round investments decreased to USD 897 million and further decreased to USD 543 million in Q4. A regime shift was noted in the number of investors who took part in seed deals during the last quarters. The number of local investors, usually more active in seed deals, dropped significantly, narrowing the gap with the number of foreign investors. The last time this gap was so slim was in Q1/2021.
As for investors’ geographic origin, foreign investors are still much more active in Israel than Israeli investors in 2022.
As companies continue to grow, compared to 2021, the size of late-stage rounds decreased by 48.1% as opposed to early stage, which grew by 7%. For the first time since 2019, the number of early-stage deals has surpassed the growth stage figure, another indicator of the change over this year. The following figure shows the trend:
Source: Information courtesy of IVC Research Centre
The high-tech exit activity in 2022 saw its lowest point since 2014, with only 120 exits completed. Capital proceeds from the exits were still impressive and reached USD 20.6 billion. In 2020, VC funds continued to be the major source of capital for the Israeli tech sector. The special characteristics of 2020 contributed to the increase in VCs’ involvement during this year, with their share increasing to 88% of the annual amount from 84% in 2019.
In 2022, VC funds continued to be the major source of capital for the Israeli tech sector. The general downward trend in investing led to the reduction in VC's involvement during this year, with their share decreasing to 72% of the annual amount from 75% in 2021. Although it's bigger than the 2020 figure which is 65%.
In 2022, 4 companies completed their IPO on the TASE5, this number is in sharp contrast to the tide of 48 IPOs in 2021. Last year USD 86 million was raised, compared to USD 1.1 billion in 2021. The slowdown in companies completing their IPOs in 2022 can be ascribed to the slowdown in global public markets, which influenced Israeli companies' activity as well. In contrast, last year, 9 companies completed their IPO in the US, raising an aggregate of USD 1 billion compared to 23 companies in 2021 raising USD 8.7 billion.
Source: Information courtesy of IVC Research Centre, Home (ivc-online.com)
Non-bank financial institutions
Due to the context mentioned above, there was a significant growth of non-bank financial institutions on the one hand and the refinement of the capital market in such a way that the issuance of bonds became more and more common even for the high part of the SME's. Those created three classes in the market:
1. Large companies with access to the capital market. These companies can manipulate the banks and the capital market, both based on prices and based on collateral, and enjoy competitive prices even compared to the world market.
2. The medium-sized companies have financial strength, are encouraged by the banks, and mostly don’t use the services of non-bank financial institutions, except in special cases, because of the higher advantage of the banks in access to relatively low-interest sources.
3. Small companies, which pay higher interest rates than the big ones (sometimes more than double), have difficulties with the collaterals and need an owners' guarantee. The non-bank financial institutions contribute mainly to the lower tier and partly in the medium tier, in transactions with a high-risk profile while compensating themselves with higher interest fees for the extra risk they bear.
The governmental decision to separate the credit card companies from the banks increased the flexibility of the businesses to a certain extent, as credit companies opened another door for credit transactions, in particular short-term (up to one year) and short-medium term (up to two years) that allowed business owners to bridge the financing gap in procurement or working capital transactions. Although in the years 2021-2018 there is an average decrease in the volume of transactions with credit cards, we see a big jump in 2022 that shows that the credit card companies are back to being an important source of additional financing.
Non-performing loans
After coming out of the pandemic we see non-performing loans6 as a share of total credit volume decrease in all company sizes, mostly for small companies. Non-performing loans receded to levels lower than they were in 2018, signalling an overall improvement.
Payment delays
Since 2017, Israel has a law for ethical (late) payment for suppliers. The law stipulates that governmental entities and public entities should pay their suppliers within 30 days (counting from the end of the month). Local authorities should pay their suppliers within 45 days (counting from the end of the month), and business sector entities should pay their suppliers within 45 days (counting from the end of the month).
According to the SMBA survey, in 2019, the percentage of late payments was: 51% for G2B, 61% for local authorities, and 17% for B2B. According to the SMBA survey, in 2022, the percentage of late payments was: 33% for G2B, 36% for local authorities, and 6% for B2B.
Bankruptcies
Since 2017, the figure for bankruptcy orders was not published in the Official Receiver's report. “Receiving orders” are a demand from the court to officially close a bankrupt company. In the last ten years, they increased by 39%, reaching 14,406. Data for dissolution requests is available from 2013 and displays that there's a slow increase till 2017, with a 32% rise spike in 2018, reaching 1,207, which stays stable up to 2021 (see Table 22.9).
Government loan guarantees for SMEs
Since 2003, the government has begun issuing loan guarantees to help established and expanding SMEs across all sectors of the economy. Funding from private banks and institutional organs are partly guaranteed by the governmental Loan Guarantee Fund. Under this fund, the Accountant General at the Ministry of Finance and the SMBA operate two coordination companies that assess the business plans for credit applications, conduct due diligence with SMEs and estimate the risk of the loans. According to recommendations from this risk estimation, the fund sets up a dialogue with the bank to determine the loan’s applicable interest rate, define specific loan conditions and approve the loan. The scheme is open to SMEs with annual turnovers of up to NIS 100 million.
There are several loans tracks that a business can inquire about. The general scheme provides a maximum of NIS 500,000 or 8% of the annual turnover, whichever is higher. For new businesses, they offer loans of up to NIS 500,000 that will be granted under favourable terms, with reduced collateral of only 5% for the loan up to NIS 300,000 and 15% for the rest. For exporters with an annual turnover of over USD 250,000, loans in this track will be granted in shekels or dollars maximum of NIS 500,000 or 12% of the sales turnover, whichever is higher. For industrial businesses, loan provision extends up to 15% of turnover or 90% of the required investment amount. The loan period is up to 12 years for industrial capital investments. A grace period of six months can be granted for principal payments. The interest rate is determined by the banks for each loan, taking into consideration the government guarantee and the risk of the loan. In addition, the business owner is required to provide his/her personal guarantee. The total loan portfolio is limited to the leveraging ratio agreed upon with each bank.
The program requires a ratio no lower than 70:30 of outstanding loans for small businesses to outstanding loans for medium businesses.
The SME fund is based on recommending loans with a guarantee to banks that lend money for small and medium-sized businesses by leveraging the amount that the state has provided as collateral, in case of insolvency, the banks activate the guarantee, and thus the government participates in some of the credit risks. As of March 2016, a new state-guaranteed small and medium-sized business fund was established, replacing the previous fund. Unlike in previous funds, this fund’s source of finance includes institutional funding (for example, from insurance companies and pension funds) in addition to bank funding, to expand available credit for businesses. In addition, various improvements have been introduced in favour of businesses, including an increase of the maximum credit limit for exporters and the opening of a designated loan option for industrial capital investments in which long-term 12-year loans can be issued, as already mentioned.
The Central Bank of Israel launched monetary plans for credit supply expansion, such as intervention in the bond market, lowering capital requirements in the banking system, creating an infrastructure for broadening the variety of assets that banks could put as securities for credit, postponements of loan payments and more.
The government has developed programs to improve employment among targeted populations, notably in the peripheries, by assisting SMEs in the hiring and training of new employees. Additional programs, also sponsored by the government, encourage SMEs to invest in new equipment to increase productivity, such as the "MaofTech" project, which promotes technological entrepreneurship in a national priority goal.
Funds for ethnic groups
SMBA operates different support programs for population groups to encourage entrepreneurship among them.
SAWA Direct Non-Bank Micro Loan Fund
This programme was launched in 2006 by KIEDF, who has been collaborating with the SMBA since 2011. SAWA loans are designated for micro businesses owned by Arabic females. Most of the loans in SAWA are group-guaranteed loans, wherein a group of five Arab women who know one another provide each other with a mutual guarantee and receive micro-loans and business training from the fund.
An additional loan with a group guarantee can be submitted after the previous outstanding loans of all group members are completely cleared. Women who receive a few successful rounds of group loans in this manner may then apply for a personal loan. SMBA provides the resources for the fund alongside KIEDF, an Israeli NGO that provides loans, guarantees, training and business advice for small businesses.
Personal loans are about 14% of the number of loans in the fund and account for about 29% of total loan volume. These loans are offered to new businesses in amounts up to NIS 10 000, with an optional loan of up to NIS 30 000 for entrepreneurs who already have a business activity. One guarantee is required, and the payback period should be no longer than three years. There is no grace period, and the interest rate on personal loans is limited to 9% per year. All participants in the group guarantee loans are charged a NIS 500 fee each year for participating in the programme.
Over the 2011-18 period, SAWA distributed 8 261 loans totalling more than NIS 65 million, out of which 1458 loans totalling NIS 11.6 million in 2018. Only 1.6% of all loans defaulted, and the programme supported the creation and development of 4 600 micro-enterprises.7
In 2019-2020 SAWA distributed approximately 3 000 entrepreneurs totalling NIS 24.2 million.
Ethiopian emigrants fund
This program was launched in 2017 by KIEDF and SMBA. This fund is designated for entrepreneurs and business owners from the Ethiopian emigrant community.
The fund offers loans up to NIS 50 000, for period of maximum four years, with interest rate of 5%. The entrepreneur must have a single guarantor with income of minimum wage or more.
Over the 2017-2020 period the fund distributed 71 loans totalling approximately NIS 5 million.
Source: See Table 20.11
References
Financial statement of Israeli banks and credit cards companies:
http://www.boi.org.il/he/BankingSupervision/FinancialReports/Pages/Default.aspx
Accountant general, Israeli ministry of finance:
http://mof.gov.il/AG/FinancingAndCredit/StateGuarantees/Documents/BusinessLoansFound.pdf
Credit allocation fees in Israel available under:
https://www.leumi.co.il/home01/commissions_and_fees/9046/
https://www.bankhapoalim.co.il/wps/portal/PoalimPrivate/taarifone
https://www.mizrahi-tefahot.co.il/he/Bank/Pages/interest-list.aspx
https://www.discountbank.co.il/DB/private/general-information/price-list-and-hiking-fees
https://online.fibi.co.il/wps/portal/FibiMenu/Marketing/AnNote/AnInformation/AnCommissionsRate
Venture capital investments in Israel:
IVC Research Centre - Home (ivc-online.com)
Summary of Israeli High-Tech Company Capital Raising 2022, IVC Research Center
Ministry of Justice, the Official Receiver report
https://www.gov.il/he/Departments/publications/reports/attorney_list_2021
Notes
← 1. Central Bureau of Statistic, Business demography, 2023, table 4.
← 2. There are also other definitions of sizes of SMEs by turnover and sales, but mostly both definitions are compatible.
← 3. Bank of Israel Annual Report 2022 | בנק ישראל - הבנק המרכזי של מדינת ישראל (boi.org.il)
← 4. Interest income from external sources
← 5. The TASE is the “home market” for Israeli companies interested in raising capital from the public through the issue of securities, bonds and convertible securities. For more information visit: https://info.tase.co.il/Eng/listings_ipo/listing_securities/Pages/first_ipo.aspx
← 6. Non-performing loans are damaged debts which had been defined by the Bank of Israel as debts expected not being able to collect by the bank.
← 7. According to data received from the Ministry of Economy and Industry