Grants and financial instruments

Grants are defined as a type of funding typically available to beneficiaries after successfully submitting an application related to a “call for proposals” managed by the EU, national or regional authorities. Grants can take various forms, e.g. as a reimbursement of eligible costs, of unit costs, as lump sums, flat-rate financing, or also a combination of these. Most EU grants are provided as co-financing so beneficiaries need to come up with at least half the necessary resources themselves.

Financial instruments are defined as funding provided in partnerships involving public and private institutions (e.g. under the EU shared management funds) in the form of loans, guarantees, equity, or quasi-equity. The main benefits of the financial instruments include that the money repaid by final recipients can be reused to support further investments (revolving effect), that additional public and private co-investments are potentially attracted (leverage effect), the nearness to the market, and their implementation by financial intermediaries contributing their own sector expertise (high impact).

A combination of grants and financial instruments can be of major help for the growth of startups, SMEs and other businesses, but also the realisation of policy objectives on a national or EU level, and address market failures related to a project’s viability and access to finance. The potential benefits of such combinations can for example include additional support, overcoming financial shortfalls where investments are unable to make enough profit or too risky for private investors, and a higher impact thanks to economies of scale.

Grant + equity schemes

Research and innovation (R&I) are crucial for the sustainable success and growth of small and medium-sized enterprises (SMEs) in the EU. These make up 99% of all EU businesses, create ca. 100 m jobs, and are an essential source of entrepreneurship and innovation, both of them of crucial importance for the EU’s competitiveness.[1] The definition as an SME or startup is important for the access to finance and EU support programmes intended specifically for them[2]. SMEs and startups operate in a rapidly evolving and challenging environment that calls for investment and adherence to standards and regulations, also in light of their limited skills and financial resources.

Financial markets often fail to provide SMEs and startups with the funding they need. Horizon Europe, the EU’s R&I funding programme scheduled until 2027 involves the European Innovation Council (EIC), which supports game-changing innovations throughout the life cycle of start-ups and SMEs, from early research via the funding through to the scaling up, with a budget of EUR 10.1 bn.

The EIC provides funding by way of grants and investments both. The investments currently take the shape of direct equity or quasi-equity investments and are managed by the EIC Fund, whose main investors include the European Commission and European Investment Bank (EIB). One of the three funding and support options available in the EIC Work Programme 2024 is the EIC Accelerator designed to support SMEs, start-ups, spin-offs, and in exceptional cases also small mid-caps, in the development phase of products or services, in bringing their innovations to market and scaling them up where the risk involved is too high for private investors to provide all the required funding. Up to €2.5 m are available in grants for innovation activities, and up to €15 m in equity investments for the market launch and scale-up, all from the resources of the European Investment Bank (EIB). This new model now offers greater funding diversity and additional flexibility for the timing of investment support, permitting applicants to make separate decisions about the forms of funding in line with their company’s investment needs, market developments, and opportunities for attracting co-investors.

The most popular option is applying for blended finance, a combination of grant money and equity investment that must be defined at the time. Next come grants as initial funding, leaving the option to go for equity investments at a later stage, usually once the technology being developed has reached specific milestones. This blending model involving a mix of subsidies + equity for companies in need of funding is a good example for SME and startup support schemes in the growth and scale-up phase.

Grant + loan schemes, European Investment Fund, loans and micro-loans

The EIF oversees several mandates on behalf of the European Commission as well as national and regional managing authorities. Instead of the EIF providing funding or guarantees to individuals or companies directly, the final funding approval is the sole competence of the financial intermediary on a national level. The loans provided by the EIF can also be combined with funding from other EU sources (e.g. the EU budget), in a process known as blending.

For large companies, the EIF will cover investment costs (typically for a period of up to three years, but possibly longer), e.g. for research and development or the costs of facilities or activities, up to 50% of total project costs. These loans typically start at €25 m, but the EIF will also consider lower amounts in specific cases. This blending model involving a mix of grants + loans for companies in need of funding is a good example for profitable investment support schemes where businesses require liquidity to start investments capable of generating revenues that will enable them to repay their loans.

Combined RDI loans in Spain on a national level

A specific example of grant and loan combinations is provided by Spain’s combined RDI loans, which are overseen by the Spanish Centre for the Development of Industrial Technology (CDTI).

This scheme foreseen a partly repayable loans (long terms loans at fixed interest rate below the market standards which include one part that should not be reimbursed) funded by central state budget resources. The aid intensity is up to 85% of the approved budget and the non-refundable component is between 10% and 33% of the aid. This combination could be implemented with EU funds in the 2021-2027 period, provided all other Common Provision Regulation (Regulation (EU) 2021/1060) rules are respected, (loan financial instrument cannot be used to pre-finance grants and grants cannot be used to repay the loan financial instruments).

[1] Source: European Commission – Internal Market, Industry, Entrepreneurship and SMEs.

[2] Small and medium-sized enterprises (SMEs) are currently defined in EU recommendation (N.2003/361).

Why funding diversity is essential for startups, SMEs and other businesses to grow

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