“From 2015 till now, small and medium businesses have been experiencing a real “golden age”: companies haven’t looked so financially strong even before the global financial crisis of 2008″ – says Vytis Žegužauskas, Head of SMEs at Luminor (Lithuania), in an interview with Delfi. “…On the other hand, the current Russian invasion of Ukraine, which poses various risks to small and medium enterprises and models different lending behavior, remains the most important issue in business”.
– The last few years have not been easy for small and medium businesses: the protracted pandemic and the invasion of Ukraine have necessitated a shift in operational strategies. How did the business deal with these challenges in Lithuania?
Before the pandemic wave, we had a growing turnover, generated profits, investments, and certainly quite a few ambitious, adaptable, innovative entrepreneurs. The first wave of the pandemic only highlighted all the good features of business – it’s just amazing how quickly many reoriented their business models and adapted to a new reality: they started offering new services, for example, trade. Some businesses were able to take advantage of the opportunities that emerged, such as earning a vacuum from the resulting supply of medical supplies, while helping people get masks and disinfectants more quickly. Of course, it was a very stressful, loss-making, and grim time for restaurants, hotels, and small traders. Although state aid measures, implemented quickly enough, helped the most problematic businesses survive, the entrepreneurs’ anxiety and suspension of investment plans were also felt in banks. At the beginning of the first pandemic, we recorded a significant decline in lending.
On the other hand, the business adapted to the new reality, both practically and emotionally, in just a couple of months: trade volumes and investment had been rising faster than before the pandemic. The second wave of the pandemic went without major changes, as everyone already knew what to do, and some of the changes that took place during the first wave of the pandemic were permanent, such as the increased habit of buying online, signing contracts remotely, distance working, and so on. Today, among other possible pandemic waves, inflation and rising energy prices have contributed to the threat posed by the invasion: disrupted supply chains, the risk of settlement with Russia, Belarus, and Ukraine, the risk of losing investment in those countries, and problems with workers from affected countries. For the time being, we can only consider the most likely options for the impact on the economy, rather than drawing a clear model for the future, especially as we have very few companies that depend entirely on the markets affected by the invasion. In addition, if the global economic and financial situation started to deteriorate, it would undoubtedly affect everyone without exception, so decisions must now be taken in a measured manner.
– What are the main problems of small and medium businesses in Lithuania?
Of course, entrepreneurs always have suggestions on what could be improved. They would like to reduce bureaucratic burdens and taxes, liberalize the entry and employment of foreigners, and increase access to finance. Although the lack of access to funding sources in Lithuania is mentioned as one of the biggest problems for small and medium businesses, in my opinion, this is partially a myth – in our society, it is still believed that banks must finance companies or projects of all maturity levels and risk scales. This is usually nowhere in the world. Traditional banks finance a business with at least 1-2 years of successful experience and a collateralized or state-guaranteed loan. From my perspective, I would like to see even higher value-added small and medium enterprises, and high-tech and innovative global IT businesses. We have good examples in the fields of optics, lasers, biotechnology, and IT, but more companies need to attract international talent and become an even stronger economy with a higher standard of living and greater opportunities.
– In the face of the crisis, businesses are choosing different strategies. Some are borrowing to survive the crisis, others are adapting, regenerating, and streamlining. Which model do Lithuanian businesses choose more often and what are the reasons for this?
Both strategies are noticeable, and I would add a third: borrowing to achieve ambitious, non-crisis goals or seizing the crisis as an opportunity to achieve new goals. For example, pandemic-restricted businesses borrowed to develop trade, and adapt. Businesses not affected by the crisis or those that benefited from the pandemic in business terms borrowed money for growth: various parcel delivery businesses, manufacturing, the sale of electronic equipment, the manufacture of furniture, and so on. However, in the wake of the first wave of the pandemic, businesses from the most affected sectors had been quite active in asking the bank for relief from existing financial obligations, i.e. the suspension of lending or leasing payments for 3-6 months, to survive or build up a financial “buffer” period.
– Which SME sectors are more likely to borrow and which are more successful in meeting their financial obligations?
Among small and medium enterprises, I would single out agriculture, transport, manufacturing, and wholesale trade as the most actively borrowing sectors of the economy this year. The vast majority of companies meet their obligations on time, and those who do not comply with financial discipline can be divided into two groups. The former owns fundamentally successful businesses with an “amateur” approach to financial management and their responsibilities, leading to persistent payment delays. The second group would include failed businesses that are facing serious solvency problems or even bankruptcy. Often, such businesses fail not for objective reasons, but due to unreasonable or untimely decisions of entrepreneurs, stagnation, and disagreements between shareholders.
– Small and medium businesses make up the majority of companies operating in Lithuania and generate significant GDP in the country. How has access to external financing for businesses been changing in recent years?
Access to finance for small and medium enterprises in Lithuania has been improving during the last three years. Excess money and excess liquidity in the market have been evident, making borrowing have been becoming not only more affordable but also relatively very cheap. I can say that Luminor Bank has increased its new lending (including leasing) for the SME segment over the last few years by several times. Lenders tended to take on more risk, and the segment of alternative lenders has developed, which I welcome, as they increase access to finance for businesses that are currently unable to get a loan in the bank, but they are more than 5 times more expensive than banks.
– You’ve mentioned that companies have access to finance from both banks and alternative lenders, but they do not have equal terms. How do properly evaluate the proposed financing terms?
The traditional bank employs a large team of professionals with streamlined processes, so it is clear that borrowing here is both the clearest and cheapest. Non-banking lenders, crowdfunding, and other alternative lenders are certainly much more expensive but focus on riskier lending, so it can be a solution at the very beginning, and as a business grows and has at least one year of experience, it’s a good idea to check out a traditional bank. When choosing a lender, it’s worth considering which partners they work with and whether they can offer preferential programs. Luminor provides loans and leasing to SMEs with the support of the European Investment Bank (EIB). This means that the bank’s interest rates on such lending are at least 0.25 percentage points lower than normal lending without EIB support.
Attention should be paid not only to the bank’s credit margin or the loan administration fee but also to the additional conditions that may significantly inflate the borrowing burden. In some cases, there is a very high probability that the lender will unilaterally raise the interest rate (e.g., due to failure to complete the construction of a building on time, borrowing from another lender without the consent of the first lender, etc.). Fixing interest rates is now becoming more popular, but not all lenders can offer this. The lender should also tell the customer how the loan administration fee is applied (whether it is only one payment or still paid periodically, e.g. monthly or annually), whether there is an obligation fee for the unutilized part of the loan, what penalties are foreseen and in which cases the lender can ask for early repayment.
After considering the proposed agreement terms, I would suggest not forgetting the human factor. The lender becomes an indirect partner of a business customer, so his high level of competence can be very important in the further development of the business itself.
Source: Article by delfi.lt from April 04, 2022
