What does the lending market for small and medium-sized enterprises (SMEs) look like today? Is this sector inclined to borrow, and if not, what are the reasons? Marius Bačianskas, Head of the Baltic markets at the digital business bank SME Bank, answers these and other questions relevant to SMEs.
Reviewing the SME loan market in the Baltics, M. Bačianskas, who has amassed years of experience in the financial sector, notes that there is always a need to borrow, and the loan portfolio is constantly growing. According to him, the growing number of businesses looking to borrow creates conditions for a larger share of financial service institutions to engage in this activity.
Competing for business financing
“Lithuanian entrepreneurs are active, constantly seeking to improve and grow their business. Compared to the older European Union countries, Lithuanian SMEs stand out with higher borrowing rates even after the European Central Bank raised interest rates,” shares the Head of the Baltic States at “SME Bank.” “SMEs most often seek classic financing and turn to banks. However, competition for SME financing has grown; not only we, but also other financial institutions like small banks and credit unions, are increasingly active in seeking to finance representatives of this business sector. This situation is favorable for businesses because, if they do their homework properly, getting financing becomes easier.”
Although traditional borrowing from banks remains one of the primary methods, M. Bačianskas notes that some companies also use other financial instruments, such as bonds. However, this and other financing alternatives are still more frequently used by large companies that have the necessary human resources to manage them.
He points out that as the European Central Bank raises interest rates, money becomes more expensive for companies, but credit institutions are reacting to this as well. To support and retain their clients, they compensate for the rising interest rates by reducing their own margins and profitability.
“According to data from the Bank of Lithuania, the currently prevailing interest rate is about 4.3–5%. However, this number depends heavily on various circumstances, such as the business sector and size, collateral, and potential credit risk,” says M. Bačianskas.
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Loan analysis shows that businesses mostly—in about 60% of cases—borrow for working capital. The other portion is related to the implementation of long-term investment projects, where equipment, transport, or real estate (RE) are purchased for company operations.
“A company should start thinking about a loan from the very first thoughts of expansion. When planning human resources, the acquisition of necessary raw materials, and evaluating existing and potentially needed new equipment and technologies for the planned expansion, they must also assess the financial resources they currently have and what they realistically need to implement their plans,” advises the Head of Baltic markets at SME Bank.
“We advise clients to contact their financial partner regarding resources and consult as early as possible to find out if they will secure financing to implement a new project. It still happens that companies plan their expansion tasks and only then turn to credit institutions. Doing so can prolong the project’s implementation time, and time is very valuable in business and has its price.”
According to him, banks understand the market and have accumulated extensive financial, lending, and customer experience to consult business representatives and, if necessary, advise on finding specific financing solutions.
“Based on market analysis, accumulated information, and the experience of other clients, we can advise and consult on very specific issues, for example, regarding financial indicators and their calculation, potential returns, and investment payback,” the financial expert elaborates. “By the way, our long-term practice shows that SME representatives highly value help with various calculations and the advice based on them. It is important to know that SME Bank specialists provide such consultations for free, even if the potential client decides to hold off on the loan after the consultation. Consultations are necessary so that entrepreneurs can increase their financial literacy and make the most realistic decisions.”
He reminds applicants that before seeking a consultation, it is essential to do your homework:
“Credit institutions first evaluate the financial flows of the applying companies, as this is one of the main indicators of whether the company will be able to fulfill its financial obligations, service the loan, and repay it. This is shown by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). In other words, how much cash the company generates that can be allocated for investments and servicing financial obligations. If these flows are sufficient, banks are inclined to finance the company’s plans,” M. Bačianskas reveals. “Therefore, company managers and financiers coming to the bank must be prepared with the most important indicators illustrating the company’s operations and be able to explain them.”
Since some businesses are cyclical—experiencing times of high revenue and times when it is minimal—banks also evaluate the history of a company’s financial indicators and the forecasts based on them.
“By evaluating forecasts and strategically justified plans, banks may dare to finance even a currently unprofitable business or one without real estate collateral. SME Bank has financed many such SME companies. In such cases, state aid is utilized: ILTE individual or EIF guarantees, or EU structural fund support, which encourage corporate innovations in creating new products, digitizing, modernizing, and operating more sustainably,” points out the Head of Baltic markets at SME Bank. “Thus, not having real estate is not an obstacle to securing financing with a guarantee and developing a business, provided the company meets certain requirements, such as not having financial difficulties.”
He estimates that about 70% of businesses applying for credit do not have real estate collateral.
How to Satisfy the Bank
According to M. Bačianskas, they often encounter situations where, due to a lack of qualified financial accounting specialists, a company’s financial documents are handled improperly, without the necessary explanations and justifications. This complicates communication with financial institutions and the process of obtaining credit.
“When clear, specific, and reasoned answers to the bank’s questions are not received, and when the company manager cannot explain and justify the numbers, additional questions arise, which ultimately complicates the possibility of getting the credit itself,” the financial expert points out.
He notes that banks view comprehensive financial statements very positively, especially those with explanations for the causes of changes (particularly negative ones), such as detailing what will be done and how those changes will be rectified.
“These explanations do not necessarily have to be submitted in writing; they can be disclosed during a meeting. Therefore, the company manager should be well-versed in the company’s financial management and the meaning behind the numbers,” says the Head of Baltic markets at SME Bank.
You Can Borrow More
According to him, although the state’s priority in recent years has been to provide support to the energy and defense sectors, where large businesses often operate, “small and medium-sized enterprises are, as a rule, a component of them, because large businesses cannot implement projects relying on their resources alone.”
“For example, over the last half-year, we have seen an increase in the activity of SMEs operating in the construction, defense, and infrastructure sectors. They apply for financing because they participate in the implementation of tenders won by major companies. By the way, we provide loans to such companies even without collateral,” assures the Head of Baltic markets at SME Bank.
He notes that with a state guarantee, SME Bank can lend up to €10 million, and without guarantees – up to €3.5 million. However, SMEs usually borrow smaller amounts—from €50,000 to €2.5 million—and mostly direct these investments toward expansion, equipment upgrades, and real estate development.
“We invite SME representatives to treat the credit institution as their business partner, to seek a consultation as soon as they start planning expansion, and to trust us. We are always ready to react as promptly as possible and answer whether we can participate in the client’s project or offer other solutions to best meet their expectations,” urges the Head of Baltic markets at SME Bank. “By the way, you should not rely on just one financial partner—I advise contacting at least a few right away so that you receive alternative offers and can choose the one most favorable to you.”
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