Types of financial instruments
There are various types of financial instruments
- equity and debt
- loan guarantees and venture capital
- capacity building and risk sharing facilities
For example, the EU provides loans to businesses of all types for investment in research and innovation. It also provides guarantees to help beneficiaries to obtain loans more easily or at better conditions from banks and other lenders. The EU may also financially participate in a project by owning parts of it. Financial instruments can also be combined with grants.
Financial instruments are implemented in partnership with public and private institutions such as banks, venture capitalists or angel investors. These financial institutions determine the exact financing conditions – the amount, duration, interest rates and fees.
The applicant receiving funds through EU financial instruments must allow the intermediary financial institution to conduct their due diligence, including on-the-spot checks and inspections.Failure to comply will result in financing being delayed or denied.
Funding under shared management with Member States
Financial instruments can be provided by the EU through financial intermediaries in Member States (shared management) to support its policies and programmes. Start-ups, micro companies, and larger businesses can all benefit from this type of funding.
Access to finance supported by the EU
Funding under partnership with the European Investment Bank
The European Investment Bank (EIB) offers loans, guarantees, equity investments and advisory services. Also called the “lending arm” of the European Union, it works closely with other EU institutions to support EU policies in over 140 countries around the world.
The EIB Group is also in charge of implementing 75% of the InvestEU programme, which builds on the successful model of the Investment Plan for Europe (the Juncker Plan). It will bring together, under one roof, the European Fund for Strategic Investments and 13 EU financial instruments currently available. By using guarantees from the EU budget to crowd-in other investors, the InvestEU Fund further increases the EU’s potential to support investment.
The European Investment Fund (EIF), which is part of the EIB Group, support Europe's small and medium-sized enterprises (SMEs) by helping them to access finance. Through the EIF, SMEs carry out their activities using either their own resources or those provided by the European Investment Bank, the European Commission, EU Member States or other third parties.
Funding opportunities with European Investment Bank
Where to access finance - EIF financial intermediaries
More information about the InvestEU Programme
Funding under NextGenerationEU
Under NextGenerationEU – the temporary recovery instrument of €806.9 billion (in current prices) and a novelty in the 2021-2027 EU budget – funds are managed directly by the European Commission, but implemented through Member States. To raise the necessary funds for NextGenerationEU, the Commission will borrow on the capital markets on behalf of the EU.
The majority of funds from NextGenerationEU will be spent through theRecovery and Resilience Facility (RRF)programme. €723.8 billion in loans and grants (in current prices) will be available for Member States to mitigate the economic and social impact of the coronavirus pandemic and make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions. Member States are working on their recovery and resilience plans to access the funds under the Recovery and Resilience Facility. Due to its exceptional nature, implementation of the RRF will follow specific procedures. Funds will be disbursed directly to the Member States based on the progress in the implementation of national recovery and resilience plans.
The plans should effectively address challenges identified in theEuropean Semester, particularly thecountry-specific recommendationsadopted by the Council. Information about the implementation of the Recovery and Resilience Facility(RRF) by Member States is available for reference.
FAQs
A financial guarantee is an agreement that guarantees a debt will be repaid to a lender by another party if the borrower defaults. Essentially, a third party acting as a guarantor promises to assume responsibility for a debt should the borrower be unable to keep up on its payments to the creditor.
Which financial instruments are equity instruments? ›
Equity-based financial instruments are categorized as mechanisms that serve as legal ownership of an entity. Examples include common stock, convertible debentures, preferred stock, and transferable subscription rights.
What is the difference between equity and financial instrument? ›
A financial instrument will be a financial liability, as opposed to being an equity instrument, where it contains an obligation to repay. Financial liabilities are then classified and accounted for as either fair value through profit or loss (FVTPL) or at amortised cost.
What are included in financial instruments? ›
Common examples of financial instruments include stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs), bank deposits, and loans.
What are the three 3 types of guarantees? ›
Traditionally, a distinction is made between:
- Real guarantees relating to assets having an intrinsic value.
- Personal guarantees involving a debt obligation for one or more people.
- Moral guarantees that do not provide the lender with any real legal security.
An Equity Guarantee is an 'equity replacement' insurance product, that is used by Property Investors, Property Developers and Infrastructure Developers (governments or private companies), to secure 'own equity' for property purchases or developments, without using own cash resources.
What are examples of equity instruments? ›
Common Equity Instruments
- Common Stock. The most universal instrument is common stock or ordinary shares giving the holder the right to vote on company policy matters.
- Preferred Stock. ...
- Equity Options. ...
- Equity Warrants. ...
- Equity Hybrids. ...
- Exchange Traded Funds – ETFs. ...
- Equity Swaps.
Common equity based investment products include stocks, convertible debentures, warrants, and options. There are both benefits and risks to investing in an equity instrument. Equities generate more gains than any other kind of investment, and they are easy to transfer to another person.
Is a loan a financial instrument? ›
Financial instruments: equity, guarantees, and loans.
What is a preferred equity instrument? ›
Preferred equity allows sponsors to place additional leverage on a portfolio company without increasing the cash interest burden as a result of the favour- able payment-in-kind feature. It is also designed to receive full or partial equi- ty credit from the rating agencies and opco lenders.
Loans belong to the debt asset class. The risk and return profile is lower than that of an equity investment as debt investors sit 'ahead' of equity investors when investment is being returned. Loan notes can be attractive ways of raising capital for companies as they do not dilute ownership.
Which is not classified as a financial instrument? ›
The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9.
What is a financial instrument in simple terms? ›
A financial instrument refers to any type of asset that can be traded by investors, whether it's a tangible entity like property or a debt contract. Financial instruments can also involve packages of capital used in investment, rather than a single asset.
What is an equity instrument? ›
Meaning of equity instrument in English
a share in a company, rather than another form of investment such as a bond: The transaction can be settled in cash or by issuing equity instruments. Compare. financial instrument.
What is the difference between a financial asset and a financial instrument? ›
Financial instruments are classified as financial assets or as other financial instruments. Financial assets are financial claims (e.g., currency, deposits, and securities) that have demonstrable value.
What are the four different types of guarantees? ›
Different types of guarantees include a performance bond guarantee, an advance payment guarantee, a warrantee bond guarantee, and a rental guarantee.
Is financial guarantee a financial instrument? ›
IFRS 9 Financial Instruments defines the financial guarantee as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument.
What are guarantees in accounting? ›
What is a Guarantee? A guarantee occurs when an entity accepts responsibility for an obligation if the party with primary responsibility is unable to settle the obligation. It is most commonly given to a related party, where the guarantor has an interest in the financial success of the related party.
