Commentary by Lukas Baškys, Chief Business Banking Officer at SME Bank

Small and medium-sized enterprises (SMEs) often identify the lack of suitable real estate (RE) collateral as one of the primary obstacles to securing bank financing. Indeed, for traditional loans, banks usually require the pledging of real estate or other eligible assets. However, by choosing the right existing financial instruments, a company can secure financing even without real estate. In such cases, the most important factor is that the business generates revenue and maintains sufficient cash flow.

Although the Lithuanian financial market is becoming increasingly mature, SMEs still face a fundamental challenge – limited options for pledging assets. It is often this lack of collateral that prevents young or rapidly growing companies from receiving the necessary financing, forcing them to postpone expansion.

We notice that there is still a lack of awareness within the business community regarding the fact that collateral is no longer the only way to secure financing. The InvestEU program, operating in partnership with the European Investment Fund (EIF), has allowed us for some time now to lend based on an SME’s business model, growth prospects, and operational potential, rather than physical assets. In other words, a company does not need to have buildings or land plots on its balance sheet to receive financing.

The guarantee provided by the Fund acts as a sort of “virtual collateral” for the company. This enables SMEs that would not qualify under standard conditions or would receive significantly less to borrow. Furthermore, under this program, it is possible to borrow for a longer term – up to 10 years. Typically, business loans are granted for 3–5 years. When loan repayment is spread over a longer period, it results in lower monthly installments, leaving more free funds for the company’s daily operations.

Who is eligible for this type of financing?

To receive financing with a guarantee without pledging assets, a company must meet certain criteria. SME Bank provides financing through targeted baskets:

1. Innovation and Digitalization. Financing is aimed at increasing SME competitiveness, implementing innovations, digitalizing business, strengthening cybersecurity, training, and upskilling employees, as well as supporting rapidly growing businesses or those involved in research and experimental development (R&D).
2. Sustainability and Climate Change Mitigation. Financing is provided for projects related to climate change mitigation and adaptation, building renovation, transitioning to renewable energy sources, waste reduction, and the sustainable development of agriculture and forestry.
3. Financing for the Cultural and Creative Sectors. This sector is included as a separate basket because these companies often face financing difficulties due to the specific nature of their business, associated risks, and a lack of suitable collateral. Guarantees help bridge this market gap, allowing loans to be granted to SMEs involved in book and press publishing, visual arts, architecture, performing arts, audiovisual media, and educational activities.
4. Microfinancing. This basket is dedicated to micro-enterprises, including the self-employed and social enterprises, which may be unable to expand or even start operations due to a lack of collateral or credit history, and are often considered too risky by traditional banks. Companies can borrow up to €50,000.

Projects successfully financed in recent years have shown that there is a significant demand for this type of financing among SMEs. However, many small business owners either know little about this instrument or fear potential bureaucracy and the administrative burden associated with implementing the program’s conditions. In this regard, the bank performs an educational role and acts as a financial advisor for small businesses. When working with existing or potential clients, we inform them about these measures and the availability of financing. We help clients understand the instrument and explain that most of the process takes place internally within the bank, meaning the company itself usually does not require additional administrative steps.

In total, SME Bank has already utilized more than €20 million in guarantees for SME financing under this program. Throughout this and the coming year, the bank has the capacity to finance SMEs with nearly €34 million more in additional guarantees.