Victoria Stupak on why banking resources may stimulate the growth of small companies

Head of SME Product Development Department at CREDIT AGRICOLE BANK

One of the most promising sectors of Ukrainian economy is small and medium business. In European countries a significant share of GDP and tax contributions to the budget comes from not very large companies. The trend that we observe is different – business models are changing through acquisition of smaller companies by larger market participants.  Becoming a cog in the machine of a large corporation is sometimes the most acceptable way for the small company owners to preserve their business despite loss of financial independence. In many respects the situation can be blamed on the economic downturn of 2008, when many sectors of economy faced stagnation and small and medium business companies, which were previously actively financed by the banks, were forced to slow down their development considerably. Besides, sharp hryvnia devaluation caused problems with servicing loans in foreign currency and, respectively, created tensions in relations between the borrowers and crediting banks. 

The situation for small and medium business remains challenging. Even companies with stable operations but without sufficient financial flexibility are quite susceptible to sector risks and are much more sensitive to competition and any changes in the country’s economy. Managers of such businesses are not always able to promptly react to changes due to the absence of past experience in finding solutions for unconventional issues or lack of information about all the instruments that might be used. One of the key factors underpinning growth of small and medium business is resources of the banks. The majority of financial institutions have already refused from the policy of “pawn shop financing” (based only on the cost of collateral), having replaced it with more profound analysis of both financial standing of the company, its business environment and development strategy. Approach to each customer becomes more individualized: one should sell not banking products, but complex solutions, meeting specific requirements of a particular business. To be able to assess the customer’s potential adequately, the banks should, first and foremost, understand the peculiarities of the field and its prospects and be ready, together with the business owner, to make a simulation of his company’s development in the future. Being not only a creditor, but a business partner for the customer, the bank has every opportunity to recommend different financial instruments, products or solutions to the company’s manager that will eventually boost up business efficiency. Documentary transactions, which were previously of high demand with mostly corporate segment customers, are now used more and more actively in SME segment. For the customers it is a perfect way to receive, first, a deferment of payment for goods and services under more favorable conditions in comparison with the standard lending, and second – to expand business relations with the existing partners and build them with new ones. 

Having well-coordinated operating and financial cycles, a lot of small and medium companies will be interested in short-term financing of working assets, as the rate for such resource is lower than the average market price of “long money”. New prospects for SME business development are provided by partner relations between the manufacturers of main products and materials and banks – regional customer network of these manufacturers receives an opportunity to benefit from a specialized financial product with good pricing conditions through information support from both the bank and the supplier. The synergy of efforts made by small and medium business and the banks may be strengthened due to active assistance from the state. Presence of effective mechanisms for protection of rights and interests of small and medium business will make it more transparent, thus enabling banks to expand cooperation with smaller companies without additional concerns. Programs for target or field-specific financing on the part of the state brought to life through commercial banks would grant small and medium companies access to much cheaper lending resources. And more efficient systems of tax benefits and donations designed specifically for developing companies would become a source of self-financing for business at the stage of its establishment. But, of course, there are no universal recommendations. But flexible approaches and readiness to understand the needs of this segment expressed by all economic market participants will lay a solid foundation for successful development of small and medium business.
 

Print version (in Russian)