copy the linklink copied!12. Denmark
copy the linklink copied!Key facts on SME financing
In 2016, not counting non-employer enterprises, SMEs accounted for 98.2% of all enterprises in Denmark1.
The share of new business lending directed towards SMEs has decreased since 2015 and stood at 8.6% in 2018, which is low by international standards. However, this is mainly the result of an increase in loans to large businesses, as new lending to SMEs remained stable between 2016 and 2018.
Survey data illustrates that credit conditions in Denmark have become much more favourable since 2011, when almost 40% of SMEs described their financial conditions as poor. Between December 2017 and December 2018, the share of SMEs describing their financial conditions as poor decreased from 17.2% to 16.3%. For new small enterprises, the demand for loans increased and credit standards were relaxed between the first quarter of 2015 and the third quarter of 2018. However, in the last quarter of 2018 and the first quarter of 2019, demand has decreased and credit standards have tightened.
SME interest rates have decreased from an average of 6.6% in 2008, to 2.3% in 2018. Since interest rates for large enterprises declined even more during this period, the interest rate spread between small and large firms widened from 0.9% in 2008 to 2% in 2013. Since then, however, the spread has consistently decreased, reaching 1.3% in 2018.
Due to an increase in the venture capital investments of Danish private equity firms, total venture and growth capital investments increased by 29% between 2017 and 2018, reaching their highest level to date. This is the net effect of a sharp increase in venture capital investments in the later stages but a decrease in growth capital investments compared to 2017.
Average payment delays remained at an all-time low of 2 days in 2018, after a decline from 4 to 2 days in 2017, continuing their downward trend since 2012.
Vækstfonden (The Danish Growth Fund) is a government backed investment fund created in 1992. Vækstfonden offers guarantees and loans to established SMEs and entrepreneurs, invests equity in young companies with growth potential, and engages in fund-of-funds activities by investing in venture and small/mid-cap funds.
The amount of government loan guarantees and government-guaranteed loans developed in opposite directions between 2012 and 2017. The issuance of government loan guarantees in most years decreased while a continuously higher proportion was accounted for by government-guaranteed loans. However, the trend reversed between 2017 and 2018. Government loan guarantees issued to SMEs increased from a total loan amount of DKK 514 million in 2017 to DKK 529 million in 2018, while the amount of government guaranteed loans on the other hand decreased from DKK 1 377 million in 2017 to DKK 1 225 million 2018.
copy the linklink copied!SMEs in the national economy
In 2017, SMEs accounted for 98.7% of all enterprises in Denmark, not counting non-employer enterprises. This finding is similar to that of the 2015 business demography conducted by Danmarks Statistik (Statistics Denmark). SMEs accounted for 38.8 % of all full time employees in Denmark in 2017.
copy the linklink copied!SME lending
Lending to SMEs (approximated by loans amounting to less than EUR 1 million) suffered disproportionately in the aftermath of the financial crisis, declining by 30% between 2007 and 2009. It has since recovered, and in 2018 SME lending amounted to a total of DKK 49 billion compared to the 2007 level of DKK 41 billion. However, these figures are not fully comparable due to a data break that occurred in September 2013. New SME loans remained stable between 2016 and 2018.
Short-term SME loans decreased by 7% in 2018. The share of short-term loans to long-term loans peaked at 78.8% in 2009, and then fell to lows of 51.5% in 2012 and 48.5% in 2015. The trend in the share of short-term SME loans has historically been volatile, and we should thus be careful when looking at year-to-year developments, but the level remained stable between 2017 and 2018.
copy the linklink copied!Credit conditions
Interest rates for SMEs as well as for large firms have steadily declined since 2008, the former decreasing from an average of 6.6% in 2008 to 2.3% in 2018. Interest rates for large firms decreased even more over this period, resulting in a widening interest rate spread, which increased from an average of 0.9% in 2008 to a peak of 2% in 2011, and then decreasing to 1.3% in 2018.
The quarterly credit condition survey of Danmarks Nationalbank (the Central Bank of Denmark) concerning corporate lending to SMEs (from banks) shows that credit standards tightened between the first quarter of 2009 and the first quarter of 2014 but relaxed from the first quarter of 2014 until the third quarter of 2018. However, the fourth quarter of 2018 as well as the first quarter of 2019 saw tightened credit standards for SMEs. Similarly, SME demand for new loans increased from the first quarter of 2015 to the third quarter of 2018, while the last quarter of 2018 and the first quarter of 2019 have seen decreasing demand for new loans.
A survey conducted by Dansk Industri (the Confederation of Danish Industry) indicated a small decrease in the share of SMEs that consider their financing situation as difficult, from 17.2% in December 2017 to 16.3% in December 2018. This proportion is far below its peak of almost 40% in December 2011. The survey also indicated that 58.3% of Dansk Industri’s members consider the current financing situation as good or very good, a moderate increase from the 54.7% observed in the previous year.
copy the linklink copied!Alternative sources of SME financing
According to the European Venture Capital Association database (published by Invest Europe), venture and growth capital financing from Danish private equity firms increased by almost 29% between 2017 and 2018 to EUR 604.4 million, more than three times the low of EUR 179.2 million from 2009. The increase was caused exclusively by a sharp increase in the amount of venture financing in the later stages, bringing total venture financing to an all-time high of EUR 604 million in 2018, while growth capital financing decreased by 70% to EUR 80 million in 2018. It must be noted that a large proportion of the venture capital investments by Danish private equity firms is invested abroad.
copy the linklink copied!Other indicators
According to Intrum, B2B (business-to-business) payment delays more than doubled between 2008 and their peak in 2011 (from 6.1 to 13 days), but have since declined to an all-time low of 2 days in both 2017 and 2018. Between 2017 and 2018, average payment terms remained at 21 days, while the average time taken by B2B customers to pay obligations increased from 23 to 24 days.
The number of bankruptcies among SMEs increased from 1 584 in 2015 to 2 013 in 2018.
copy the linklink copied!Government policy response
Vækstfonden (The Danish Growth Fund) is a government backed investment fund that was created in 1992. Vækstfonden offers guarantees and loans to established SMEs and entrepreneurs, invests equity in young companies with growth potential and engages in fund of funds activities by investing in venture and small to mid-cap funds. In September 2009, the government introduced a programme to improve SME financing and export opportunities by strengthening loan guarantees, loans targeted to entrepreneurs, export guarantees, and access to risk capital for new businesses. In late 2012, the government introduced another policy package to further improve SMEs’ access to financing. According to the new initiative, Vækstfonden provides new direct loans for SMEs. In 2018, the government introduced a policy package regarding the new business promotion system. In regards to this initiative, Vækstfonden introduced a variety of new initiatives targeted at start-ups at an even earlier stage than before.
Government guaranteed loans: Growth loans (Vækstlån)
Growth loans are issued by Vækstfonden directly to SMEs seeking capital for business development or a change of ownership. The financial assessment is based on the company’s current and past performance, its potential for growth and profitability, as well as its management capabilities. All loans are granted as part of a funding package that is provided by other financial partners, such as banks and mortgage institutions. Only loans above DKK 1 million are issued. The interest rate is set at least 30% above the comparable market rate to ensure minimal market distortions, avoid a crowding out of the private sector, and hedge against collections/defaults in which banks and other creditors have preferred claims on pledged collateral.
The amount of government guaranteed loans increased from DKK 61 million in 2012 to DKK 1 225 million in 2018.
Government loan guarantees: Growth loan guarantees (Vækstkautioner) and growth guarantees (Vækstgarantier)
Growth loan guarantees (Vækstkautioner) are provided to SMEs and cover up to 75% of a bank’s loss in the event of a default. Capped at DKK 2 million, growth loan guarantees can be granted to finance business development, changes in ownership, capital investments, or the development of new and improved products. Vækstfonden has a political mandate to generate aggregate losses up to DKK 23.6 million per year under this scheme.
Compared to growth loan guarantees, growth guarantees (Vækstgarantier) are targeted at more established companies that need to make larger investments or expand their businesses. A growth guarantee covers the risk associated with insufficient collateral as a basis for achieving a pre-payment warranty or lease, for example. A company can obtain a growth guarantee as part of a growth plan that has sound economic perspectives. Only guarantees above DKK 1 million are issued, either alone or in combination with a growth loan. Growth guarantees cover 100% of loan risk (typically for 50% of the project costs) and companies must provide collateral to obtain them. Unlike for Vækstkautioner, Vækstfonden has no political mandate to generate aggregate losses under this scheme.
Government loan guarantees issued to SMEs decreased from DKK 1 222 million in 2012 to DKK 529 million in 2018. However, considering the development of government guaranteed loans, there has been an overall increase in government loans and guarantees.
Growth loans for entrepreneurs (Vækstlån for iværksættere)
In 2014, a new programme was introduced to provide debt finance to entrepreneurs lacking sufficient collateral to finance start-up plans, expansion and growth. Government funding for loss coverage of this scheme expired in 2017, but Vækstfonden continues to supply the programme, although with lower associated risk levels. There still exists a loss guarantee from the European Investment Fund, which partially covers losses.
Guarantees apply to loan amounts of a minimum of DKK 1 million. Vækstfonden charges a fixed fee of EUR 5 000 plus 0.5% of the principal. The loans are junior secured, which means that in the event of a default, collateral is collected by other creditors (i.e. the commercial bank) first. The expected loan volume is DKK 350 million annually.
Subordinated loans
Subordinated loans target companies with insufficient equity and are a hybrid of debt and equity. The loan is subordinate to other loans and debt, and is therefore comparable to equity on the company’s balance sheet.
The minimum amount of a subordinated loan is DKK 2 million and must be part of a complete financing solution that includes financing from banks or other lenders. Contrary to a regular bank loan, a subordinated loan does not require collateral. However, the accumulated interest rate is generally higher. The risk of a subordinated loan is the same as that for equity.
Danish Growth Capital, DGC (Dansk Vækstkapital)
The aim of this programme is to improve access to risk capital for entrepreneurs and SMEs by creating a fund-of-funds that invests in small-cap, mid-cap, venture and mezzanine funds. The aim is to create more growth companies and deliver competitive double-digit returns to the investors.
DGC has raised two funds. DGC I was raised in 2011 with a total commitment of DKK 4.8 billion and a 4-year investment period, ending in December 2015. The capital base was sourced entirely from Danish pension funds. One-quarter of the funds were invested directly in DGC by the pension funds, and three-quarters were provided as a loan to Vækstfonden which subsequently invested it for equity in DGC. This scheme essentially created two asset classes and alleviated the risk-based funding requirements of the pension funds. The interest rate on the loan was the government bond rate plus an illiquidity premium. Accordingly, Vækstfonden bears the risk of three-quarters of the fund-of-funds’ investments.
DGC II raised DKK 2.6 billion in a first closing in late 2015, and has a 4-year investment period. The capital in DGC II, like DGC I, was sourced primarily from Danish pension funds. Investors in DGC II chose between two fund structures, one in which all capital was invested directly in DGC II or a model, where one third was invested directly in DGC II and two-thirds were provided as a loan to the Growth Fund, which subsequently invested it for equity in DGC II.
Danish Agri Fund (Dansk Landbrugskapital)
Danish Agri Fund is a loan fund that provides subordinated loans to farmers. The loans cater to efficient and well-managed farms that are held back by relatively high debt and who need financing for new investments, and in special cases, refinancing. Danish Agri Fund has received DKK 500 million from the state and DKK 500 million from four pension funds. Vækstfonden is responsible for the management of Danish Agri Fund.
Working capital guarantee
The working capital guarantee was first established as a temporary guarantee scheme to provide operating and development credit up to DKK 2 billion, for Danish export firms. EKF (Denmark’s Export Credit Agency) can guarantee up to 80% of operating and development credit extended by banks to Danish export firms and their sub-suppliers. The scheme became permanent on 1 January 2012.
In July 2016, EKF entered into an agreement with EIF/InnovFin to provide working capital guarantees in order to reduce the cost (premium) for exporters eligible under the scheme.
The export loan facility
The export loan facility was established to support the international competitiveness of Danish enterprises and benefit Danish exports affected by the financial and economic crisis. The credit scheme supports Danish exports with long credit periods, i.e. more than two years.
Originally, the deadline to apply for an export loan was the end of 2011, but a political agreement was concluded to extend the export loan scheme until the end of 2020. The total credit limit for the export loan scheme is DKK 25 billion. On 1 January 2016, the export loan scheme was merged with EKF. It will continue under the name EKF Loans, with EKF assuming all rights and obligations associated with the scheme.
The export loan facility has been supplemented with two agreements reached by EKF, PensionDanmark and PFA Pension. According tor the agreement, the pension funds are to provide up to DKK 10 billion for export financing with EKF serving as a guarantor. Additionally, EKF presents relevant projects to the pension funds. The pension funds then assess whether the presented investments are attractive and prepare investment offers. Buyers are free to accept or reject the offers.
References
Danmarks Nationalbank (2019): ”DNRNUM: New domestic loans excl. revolving loans, etc. from MFI sector excl. Danmarks Nationalbank.” https://www.statistikbanken.dk/statbank5a/SelectVarVal/Define.asp?Maintable=DNRNUM&PLanguage=1
Danmarks Nationalbank (2019): ”DNRUUM: Outstanding domestic loans from the MFI sector excl. Danmarks Nationalbank.” https://www.statistikbanken.dk/statbank5a/SelectVarVal/Define.asp?Maintable=DNRUUM&PLanguage=1
Danmarks Nationalbank (2019): “DNUDERHV: Credit condition survey, corporate lending (net figures).” https://www.statistikbanken.dk/statbank5a/SelectVarVal/Define.asp?Maintable=DNUDPRIV&PLanguage=1
Danmarks Statistik (2019): “KONK7: Bankruptcies by employed.” http://www.statbank.dk/KONK7
Danmarks Statistik (2019): ”GF3: General enterprise statistics.” https://www.statistikbanken.dk/statbank5a/SelectVarVal/Define.asp?Maintable=GF3&PLanguage=1
Dansk Industri (2019): “Virksomhederne har gode muligheder for at låne penge.” https://www.danskindustri.dk/arkiv/analyser/2018/1/virksomhederne-har-gode-muligheder-for-at-lane-penge/
Dansk Vækstkapital I (2019): ”Årsrapport 2018: Dansk Vækstkapitals Investeringer.” http://rapport2017.danskvaekstkapital.dk/dvk1/#7391
Dansk Vækstkapital II (2019): ”Årsrapport 2018: Dansk Vækstkapital II’s Investeringer.” http://rapport2017.danskvaekstkapital.dk/dvk2/#7552
Intrum (2019): “European Payment Report 2018.” https://www.intrum.com/media/2772/epr-2018.pdf
Invest Europe Research (2019): “European Private Equity Activity Data 2018.” https://www.investeurope.eu/research/activity-data/annual-activity-statistics/
Vækstfonden (2019): “Årsrapport 2018: Resultatopgørelse.” http://www.rapport2017.vf.dk/#7157
Note
← 1. Figures and texts in red will be updated in September
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