The impact of the European Union's ERDF grants on loans to small and medium-size enterprises in the Czech Republic

Accession to the European Union (EU) provided the Czech Republic with financial support from the European Regional Development Fund (ERDF). This program awards grants to small and medium-sized enterprises (SMEs) for development projects located in underperforming regions, defined as those with a GDP lower than 75% of the EU average.; Czech applicant SMEs only receive ERDF funding after implementing their projects as agreed to in these grants. Thus, applicants must finance a given project with bank loans, unless the SMEs are able to cover their costs with their own resources. After the project, or a substantial phase of it, is completed, the eligible costs are reimbursed by the ERDF grant. My hypothesis is that bank lending to SMEs when an ERDF grant is involved as collateral will boost the monetary value of loans awarded to the SME sector and outweigh lending to SMEs that do not have ERDF grants.; To test this hypothesis, I identified the beneficiaries of grants and the regions where the awarded SME projects were located. A case study was also conducted of the Komercni Bank (in Czech Komercni banka), the leading lender to SMEs in the Czech Republic, to assess whether the additional collateral provided by the ERDF grant contributed to a greater willingness to lend to SMEs. The theoretical framework of this analysis draws on financial risk management and asymmetric information theories. The ERDF program should have increased the willingness of banks to lend to SMEs because of the requirement that they provide greater information on their creditworthiness when applying for a bank loan and because of the loan guarantee of the ERDF grant.; However, when I compared the monetary value and number of loans granted by the Komercni bank to SMEs with, and without, an ERDF grant, I found no difference. I conclude by addressing the factors that might explain this lack of a relationship and making suggestions for improvements in the application process and use of ERDF grants.