The financial crisis has resulted in the French government nurturing its SMEs like few other countries. Melodie Michel takes a look at what France is doing differently.


Like all European countries, France suffered a massive hit to its financial system during the 2008/09 crisis. And like many others, it is still struggling to get back on its feet, with unemployment still above 10% and GDP growth stalling to say the least.

But l’Hexagone understands something many others don’t: in order to boost growth, massive structural changes are needed around SME financing. It started as early as 2008, when then-President Nicolas Sarkozy took advantage of his country’s banks’ need for state help to strike a deal with them. He gave them the financial assistance they required, in exchange for their guarantee that they would keep lending to support the economy. And that marked the creation of the Médiation du Crédit (credit mediation), a body that can be called upon in case of a dispute between a company and its bank.

“A company of any size or legal status which is experiencing financing difficulties – a bank loan refusal, a withdrawal of overdraft facilities, or a downgrading of their credit insurance rating – can turn to the credit mediation scheme,” says Fabrice Pesin, the national credit mediator.

Initially meant to be a short-term measure, the Médiation du Crédit has already been extended three times through the renewal of its charter – the latest in April 2015. One of the things that make this organisation unique is the fact that its signatories – the finance and economy ministries, the Banque de France, the French Banking Federation (FBF), the French association of financial institutions (ASF) and the IEDOM-IEOM (which performs central bank duties in France’s overseas territories) commit to it voluntarily. There is nothing in the country’s law books about the Médiation du Crédit, and in a symbolic move, the government placed its headquarters in the centre of Paris – far from any ministry. But once signatories commit to it, they (and more importantly, their members) have to participate in mediation every time they are called for it.

“The initial idea was for banks to co-operate with the credit mediation scheme in a constructive manner, as they were being bailed out with public money. Today, many economic players want the credit mediation scheme to continue, even after 2017. The banks have accepted it and see its benefits, so there is a desire to perpetuate it, without necessarily making it law. The fact that it isn’t law means that it is better accepted,” Pesin adds.

Another crucial differentiator is that, unlike most other mediation devices, this one isn’t based on legal principles, but on economic logic. It is not about interpreting the law – after all, banks have no duty to finance companies, and companies don’t have a right to get financing – but about convincing banks of the economic benefits of financing corporates, even when they are facing difficulties themselves.

This argument is helped by the fact that in France, banks are far from priority creditor in the case of liquidation – they fall behind tax authorities and the URSSAF, the administrative body responsible for social security funds. This means that they are much more likely to get any money back if they help a company avoid bankruptcy. “If a bank is owed a certain amount by a company, they can either get 60% of their money back within, say, five years, or just 5% of it now if the company goes into liquidation,” Pesin explains.

Over the past seven years, the Médiation du Crédit has found financial solutions for about 20,000 companies – mostly SMEs – with over €6bn of debt secured and 380,000 jobs saved. Its success rate stands at around 66%, with the remaining percentage of cases “too damaged” to be saved.


Structural issues

In an October 2015 study, the Observatoire du Financement des Entreprises (an SME financing watchdog whose director is also the national credit mediator, currently Pesin) found that two of the things that 25% of the best-performing SMEs and midcaps had in common was that they did not hesitate to use debt to fund their working capital needs, and that they exported internationally. This shouldn’t come as a surprise: a good utilisation of working capital financing means more cash to invest into business expansion, and the diversification of sales markets means less vulnerability to single-market downturns. But supporting assumptions with statistics is partly what is helping France move forward.

While upon its creation the Médiation du Crédit’s focus was mainly on large SMEs and midcaps that were suffering from the crisis, particularly in the auto parts sector, today it has shifted its attention to micro-SMEs of fewer than 10 employees, mostly in construction, retail and hospitality. This is symptomatic of the composition of the French economy, which is formed of 3 million companies, of which 95% are micro-SMEs of fewer than 10 employees. The problem is that these companies are much less likely to adopt the two winning behaviours uncovered in the Observatoire’s research.

“The make-up of potential exporters is very different in France from what it is in Germany or Italy. France suffers from a lack of midcaps. It’s much harder to export as a small SME than as a midcap so we have a structural issue. This is why one of our strategic approaches is to help SMEs grow to midcap level to get the capacity to export on a large scale,” explains Pascal Lagarde, managing director of strategy at Bpifrance.

In order to do that, the country has managed something that many – including the UK – unsuccessfully aspire to. It has created a single, user-friendly platform to help SMEs understand and find solutions for their financing needs – in the form of Bpifrance.

Founded in 2013, it aims to provide a single, simplified access to all forms of public financing available, including debt and equity financing, bank guarantees and, importantly, export finance solutions. In fact, Bpifrance is in the process of integrating the export credit agency business of Coface to further simplify the system for SMEs – a transition that should be completed by Q2 2016. It also works alongside the private sector to bolster its involvement with SMEs: for example, no equity investment is made by Bpifrance without the participation of a private player.

One of the organisation’s most interesting products is its export loan, which gives SMEs and midcaps access to a seven-year credit facility with a two-year grace period to allow it to prepare everything that relates to its internationalisation: product adaptation, new production lines, advanced market research, hiring of salespeople, etc. Importantly, this is a no-collateral, no-guarantee loan.

“We have a strong desire to grow the internationalisation side of our portfolio, because we understand that one of our major downfalls is that we are lacking exporting SMEs and midcaps. Our large companies are very present on export markets. One of the issues was to find financing, so we hope our products will make it easier for SMEs to access
the export sector,” Lagarde explains.

And it has indeed been successful: between 2013 and 2014 Bpifrance grew its debt and equity portfolios by 30% and 37% respectively, and in 2014 it supported (directly or indirectly) around 86,000 companies. The organisation is also targeting €500mn of annual export loans by 2018.


Local reach

One of the problems with trying to help companies grow from a very small base is to make them aware of the services available to them. Both the Médiation du Crédit and Bpifrance (which also work together to identify SMEs that could need the other organisation’s services) have a regional presence, but admit that reaching the smallest SMEs is a challenge.
“We’re aware that we’re not very well-known to many micro-SMEs,” says Pesin. “We do a lot of marketing, for example carrying out poster and flyer campaigns with the help of professional federations and local tax offices, and we’re launching a Facebook page early next year. We also use local and national media a great deal. SMEs are also regularly invited to conferences at the regional chambers of commerce, but how many entrepreneurs have a day or even an evening to spare to attend such events?”

This is where Bpifrance’s 42 regional offices (each of them due to soon include an export manager) are so important: “The entrepreneur has one business manager who, knowing the company and its development needs, can suggest financing solutions. It shouldn’t be the entrepreneur’s job to go from service to service.

“Yet they will never be aware enough of our services. We are doing continuous work to tell them, gather them, talk to them – it’s a huge and fascinating task,” says Lagarde.
Bpifrance also has a “best in class” club and an SME and midcap accelerator, where all its services are concentrated in an even more streamlined way, and offers face-to-face and online export training. “We’re trying to knead the dough of these companies to make them grow,” he adds.

So is it working? According to the latest Coface figures, these initiatives are starting to pay off: GDP growth will reach 1.1% for 2015 and 1.4% for 2016. Insolvencies are down, and investment is starting to resume, though the insurer points out that the French transport and construction sectors remain at higher risk of insolvency than in the rest of Europe. Furthermore, business confidence is returning: a Bpifrance survey from June 2015 found that 43% of midcaps anticipated a turnover increase for 2015 (mostly based on export demand), while 15% forecast a decrease – an improvement from 2014’s 39% and 16%, respectively.


Remaining challenges

That’s not to say the struggle is over. According to the Observatoire du Financement, a lot of work is still needed. On the back of its October 2015 report on best-performing SMEs, the watchdog came up with a list of recommendations, including the consideration of family-owned enterprises’ concerns over ownership when creating solutions for capital raising; the increase of large innovation capital funds to provide larger investment tickets; the promotion of private placement (a transaction half-way between a bond and a bank loan, allowing SMEs listed and unlisted to negotiate funding of up to €10mn with institutional investors, with tenors of up to 15 years and no guarantees) as a suitable funding solution for growing SMEs; and the more detailed study of SME’s specific export financing needs.

And the best way to ensure these recommendations are taken into account is to produce a follow-up report to check the progress – something the Observatoire does regularly to make sure all participants in the initiatives are held accountable.

For instance, it published in November 2015 an assessment of the implementation of five measures adopted by the FBF to improve banks’ relationships with SMEs. The decision was made in 2014 to implement some of the recommendations included in a previous report by the Observatoire, and as soon as the banking federation signed up to them, the finance minister ordered a follow-up assessment.

Of course the results aren’t perfect, but it appears that knowing they will be assessed on their commitments is motivating banks to make necessary changes: most banks improved on the time it takes them to treat loan requests, as well as explanations in the case of a denied request. They have also included a mention to the Médiation du Crédit in their denial letters (though not all of them send those letters), and set a minimal target of three years of service for account managers, to avoid too much turnover and inconvenience for small companies.

One might call these baby steps, but in many ways this is exactly what SMEs need: not big, largely-publicised commitments that are never met, but small, realistic changes for which players are held accountable every step of the way.