Introduction to ERDF loan financial instruments
Definition of loan financial instruments
‘An agreement which obliges the lender to make available to the borrower an agreed sum of money for an agreed period of time and under which the borrower is obliged to repay that amount within the agreed time.’
Loan finance can include credit lines, overdraft and credit card facilities, leasing or hire purchase and bank loans. Typically, loans are commonly used by businesses to finance investment in new equipment or other assets and working capital, meeting ongoing liquidity needs as well as supporting the development and modernisation of businesses.
In addition to business financing, loan finance underpins investment by both public and private building owners (including individuals) in property, infrastructure and urban development. Investment in the EU’s green transition, including energy efficiency and renewable energy projects, is predominantly financed through loan instruments.
How do ERDF loan financial instruments work?
ERDF resources are committed to a financial intermediary by the managing authority, either directly or through a holding fund.
Co-investment is secured either from the financial intermediary or other investors and the resources are then used to finance loans to eligible final recipients.
Figure 1 Structure of a loan financial instrument
The flexibility of loan financial instruments has resulted in their use in a wide range of different settings including:
Access to finance for SMEs
Energy efficiency in public and private buildings
Microfinance
Renewable energy
Urban development
Benefits offered by ERDF loan instruments
- Lower interest rates: ERDF programme resources can be committed at zero cost and this benefit is then passed to final recipients. As result, the interest rate payable on the loan will reflect only the interest payable in respect of the co-investment contributed by other investors, providing a significant discount when compared with the interest rates available on the market.
- Reduced collateral requirements: Typically lenders require the final recipient to pledge assets such as property, receivables or investments as security for the loan. This can be a significant barrier for some borrowers who may not have suitable assets to satisfy a market-based lender.
- Longer loan duration: In order to make low cost loans affordable, lenders can offer loans with a long duration. This reduces the monthly payments, thereby making the loan attractive to potential borrowers.
- Extended grace periods: An extended grace period delays the date on which the principal (and in some cases principal and interest) starts to be repaid.
- Combination with grant: This allows additional support to be provided to final recipients alongside the loan including technical support, interest rate subsidies, capital grant and capital rebates.
Slovak Investment Holding
Multi-sector financial instruments in Slovakia
The holding fund set up in Slovakia managed more than EUR 1 billion of resources through financial instruments in the 2014-2020 programming period.
Loan financial instruments were implemented in various sectors, including energy efficiency, waste management, transport and the cultural and social economy.
The product offering of the holding fund included both standard instruments (such as portfolio risk sharing loan instruments, complemented by interest rate subsidy) as well as tailored solutions for specific market needs (such as a direct loan investment model to support the development of the ESCO sector to undertake energy efficiency retrofitting works to public buildings and SMEs).
The growth of ERDF debt financing
Loan financial instruments were the most common product type adopted by Member States in the 2014-2020 programming period.
Approximately 45% of all ERDF/CF programme resources committed to financial instruments were made to loan financial instruments, representing a total of approximately EUR 13.4 billion of EU resources.
Loan financial instruments achieved a median leverage rate of 1.3 meaning that for every euro of ERDF committed to a financial instrument a total of EUR 1.30 was paid to the final recipient.
Figure 5 Programme amounts committed to FIs by product, as of end 2022
Case study - loan financial instrument support for green Start-up in France
Based in Toulouse, the start-up Hector le collector offers a waste recycling service whereby urban food waste is collected and used to create bio-energy.
The company was set up using loan finance contributed by Créalia, a specialised seed loan fund based in the Occitanie region of France. Créalia helps entrepreneurs launch innovative businesses with a high local impact in the whole Occitanie region, using ERDF resources contributed through the FOSTER TPE-PME Holding Fund set up by the region.