“Virtue of thrift” sets Finnish SMEs’ financing apart from the eurozone and Sweden

Finnish SMEs try to fund operations and growth with their own money. Meanwhile, the most common obstacle to SME lending in Finland is a lack of collateral – unlike in many other eurozone countries.

Finland’s divergence from the rest of the eurozone and from Sweden emerges from a wide-ranging European Central Bank (ECB) business survey. Anni Koskinen, an economist at the state-owned specialist financier Finnvera, says that Finnish SMEs have long shown modest appetite for growth, and that businesses’ caution towards debt financing is eroding SME growth figures and competitiveness as economic growth picks up.

Access to finance for Finnish SMEs has narrowed in recent years, but the spring SME barometer suggests the trend has levelled off.

“A comparison with eurozone countries shows that Finnish businesses choose to apply for a loan less often because they feel they can manage on their own financing. This is in spite of Finnish businesses’ particularly strong confidence in bank lending,” Koskinen says in a press release.

“A degree of caution towards debt is understandable when the economic outlook has been uncertain, but Finnish businesses appear to have made a virtue of thrift. The number of completely debt-free businesses has grown in recent years. This suggests that investments needed for growth mightn’t have been made, or that businesses have funded more modest growth with internal cash reserves,” Koskinen says.

Obstacle: lack of collateral

The ECB survey found that in Sweden, Denmark and Germany, insufficient collateral was the main reason for difficulties accessing external finance for around seven per cent of businesses. In Finland the share was more than three times higher.

“It’s surprising that the level of the collateral barrier to finance varies so much within the EU, despite the uniform regulatory framework. It might be explained by national differences in risk culture or collateral practices. Finnish businesses report that collateral requirements have tightened faster than in almost all comparison groups, even though many companies are financially sound and therefore very creditworthy,” Koskinen says.

“It’s also interesting that Finnish businesses consider grants, subsidized loans or guarantees necessary twice as often as Swedish businesses do.”

Finnish businesses use external finance for investments just as often as their eurozone counterparts, but there is a clear difference when it comes to working capital needs. Around 41% of Finnish businesses used debt financing for working capital related to the company’s operations, compared with an average of around 34% across the eurozone.

“A Finnish business may have ambitious growth targets, yet still find itself having to use a larger share of financing for day-to-day operations rather than investment. The flip side of thrift and deferred growth measures may be that competitiveness suffers because closing the gap on competitors requires ever greater effort,” Koskinen says.

Read Finnvera’s financing and growth review

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