For the first time since the issue of financing small and medium enterprises (SMEs) has been addressed on an annual basis in the series of CBA Analyses, financial data issued by FINA point to the beginning of a recovery in the small enterprise sector. However, considerable financial constraints, primarily associated with low capitalisation of enterprises, are still present and limit growth and development.

This is a permanent condition. The problem of higher risk and lack of capital in the SMEs sector is a normal phenomenon that does not depend on the business cycle. This is why the overcoming of risks and encouraging growth of enterprises largely depends on activities of specialised financial intermediaries that supply capital. Banks are not such financial intermediaries. As a rule, a risk profile adjusted to banks implies solid capitalisation of a solvent and stable debtor with a long history of operations or valuable collateral that small enterprises lack. Private equity and venture capital funds represent a key link between a growing small or medium enterprise and a serious medium enterprise with further growth potential.

The position of PE/VC funds and funds for economic cooperation in Croatia is such that they cover potential investments exceeding HRK 20m. Between investments averaging around HRK 2m, which cover self-financing of small enterprises and business angels, and around HRK 20m, where PE/VC begins to play its role, there is an investment gap – a serious difficulty in access to capital even for the best small enterprises. The investment gap should be closed, while operations of venture capital funds should be strengthened to remove barriers to growth and development of the Croatian economy as a whole. The analysis points to five measures that could be used to achieve these objectives.