A financial expert encourages small business owners to become more transparent. Then the chances of obtaining credit will significantly increase.
It is widely believed that small and medium-sized enterprises find it extremely difficult to attract financing because commercial banks and non-bank financial institutions are reluctant to issue loans. Is it because banks lack funds?
Financial expert and chairman of the board of the company JSC “West Credit”, Sergejs Maļikovs, states: “No, there is plenty of money - both for banks and non-bank lenders, as well as for the financial institution “Altum”.
One of the main problems lies not in the lack of money, but in the improper and passive use of it. Commercial banks have forgotten about mutual competition, including a recent trend towards a zero-risk policy. Banks deliberately avoid any kind of risk-taking, limiting themselves to serving well-capitalized companies, most of which focus on exports. Small and medium-sized enterprises, aiming to start local businesses, are practically without financial support, and they also lack understanding of the necessary steps to approach banks in the initial stages.”
“Today’s entrepreneur, who aims to develop their business and obtain financing from a bank, encounters a significant bureaucratic apparatus, resulting in them being practically rejected without receiving comprehensive information,” acknowledges Sergejs Maļikovs. “In the past, when banks competed and fought for each client, bank specialists were experts in a wide range of fields, capable of providing professional advice to any entrepreneur regardless of their needs. Today’s consultation is limited to a series of emails with questions from the bank’s side, ultimately resulting in the client receiving a refusal without explanation. In the Latvian banking market, there is a tendency that risk-based business cannot pass through the internal control system filter for preventing the laundering of criminally obtained funds and the financing of terrorism, known as the AML internal control system. Moreover, each bank has its own understanding of AML, so the safest decision is often rejection - hence the zero-risk policy! Multiple departments within banks make decisions, but the final decision is often made, for example, in another country, and at each stage, there will be someone who simply does not want or cannot take responsibility.
It is clear that banks have a responsibility towards depositors and regulators, but is the current outcome in the Latvian market the best we can achieve? One could delve into numerous examples and discussions, but the paradox remains - there is money, but the proper utilization of it has been forgotten.
Of course, we cannot solely blame banks for all the problems; there is a whole host of issues that remain unaddressed. As an example, we can discuss the clients themselves. Often, clients, whether they are entrepreneurs or consumers, are to blame for financing rejections, and the most common problem is the concealment of their true assets, hiding of expenses unrelated to business, or providing incomplete or false information.
My recommendation is - if you are seeking financing from a bank or alternative financier, do not hide anything and explain in simple terms the purpose for which the loan is needed! The more precisely you explain, the more precise and better offer you will receive!” advises the financial expert.
He believes that for small and medium-sized entrepreneurs, the only way to obtain credit is to become “more transparent”.
At the moment, the deadline (by May 31st) is approaching for small and medium-sized enterprises to submit annual reports to the State Revenue Service. The first thing analyzed by financial institutions – commercial banks, non-bank lenders, “Altum”, etc. is the balance sheet from the previous year.
In the era of modern technology, there is no point in hiding anything from the State Revenue Service (SRS), which has its own databases and access to databases of other institutions. The SRS has a complete overview of entrepreneurs' affairs. Similarly, potential creditors have access to extensive information about the entrepreneur, their and their relatives’ savings, properties, and liabilities. There is no point in hiding anything,” urges Sergejs Maļikovs.
