Citadele has issued 40% more loans to small businesses in the first four months of this year than last year, and the growing optimism of entrepreneurs, together with market activity, allows us to conclude that the volume of issued loans will continue to grow.
The pandemic has not had a significant impact on companies’ ability to borrow – about half of small and medium-sized enterprises have a good credit rating, while for the rest, raising funds from banks would be limited or even impossible. According to Citadele statistics, the amount of late payments of companies has not increased during the pandemic, it has even slightly decreased. The share of refusals of financing has not increased either, however, the company’s liquidity still remains the main obstacle to obtaining a loan.
“We are often asked – has the pandemic reduced the ability of companies to borrow, or does the bank lend more prudently? No, our job is to be a reliable financial partner, and we are interested in supporting companies that want to grow. It should be emphasized that banks always evaluate the company’s ability to repay the loan, both before the pandemic and now. The business model, the ownership structure, the management team and the company’s risk profile are important so that the turnover does not fall to zero, as well as the company’s ability to adapt to the situation. The fact that the pandemic created short-term challenges does not mean that the loan will not be available. If a company is unable to cover its existing financial obligations, such as credit and tax arrears, a new loan will only create an additional burden that we, as a responsible financing provider, do not recommend to our customers. Timely planning, response, orderly financial flow and critically evaluated development opportunities help both companies to feel comfortable and increase opportunities to receive financing. Creditworthiness can be improved. Unfortunately, there are not many companies that consult before applying for a loan, ”says Jānis Kopeika, Head of Small Business Services at Citadele Bank.
What are the most common mistakes and how to improve creditworthiness?
Company ‘s financial situation, stable and growing turnover, as well as orderly financial flow are important indicators. If the turnover decreases from year to year or there is a sharp decrease, the reasons must be assessed first, because the loan will not be an alternative to the decrease in turnover. By arranging the company’s financial flow and critically evaluating the company’s potential, development opportunities, both the entrepreneur himself will feel more comfortable and lenders will be more responsive.
Debts and payment discipline. Unfortunately, this is the most common mistake in situations where cash flow is declining, and the first thing that is done is deferred tax payment, late credit payments, unpaid bills. However, this is not a solution, but the creation of new problems. There are no insignificant payments – timely payment of credit payments, taxes and bills is important. Regular late payments or large debts indicate a company’s inability, often unwillingness to meet liabilities. Short-term but timely problems will not be an obstacle to obtaining a loan.
Company profile. Banks evaluate the business model, development plans and trends in the industry in which the company operates. No less important are the owners, whether the composition of the owners is constant, and also their payment discipline as individuals. If the owner is late in paying, for example, to credit institutions, this will worsen the company’s creditworthiness.
Credit history. If the company or its owners have already borrowed, it is important whether the obligations are fulfilled in good faith and the loan is repaid. Also, a pandemic is not an excuse for long-term non-payment, the main thing is to agree with the lender on the most appropriate solution – credit holidays, defer payment if it is not possible to pay interest on the loan, restructure loans, for example, in sectors that cannot work properly, etc.
Liquidity buffer indicates the company’s ability to meet its short-term liabilities at any time. Simply put, care must be taken not to create a situation where the account is always zero at the end of the month. Experience shows that the more sensibly designed or larger the liquidity buffer, the easier it is for a company to survive stressful situations, as well as a better springboard and a more successful recovery from shocks.
Timeliness, planning and response. Expenses need to be planned and a loan must be requested in a timely manner for the development of the company, not for problem solving. Timely problem solving is also well illustrated during the pandemic – in the first wave, banks and entrepreneurs worked very closely together, proactively offering support to companies affected by Covid-19. There are few companies that turn to the second wave for help.
Relationship with a financial partner. Relationships with your financial partner must be established in a timely manner – mutually successful experience will help to find the most suitable solution. If you need a loan as an airbag, you can also think about it in time. There are types of loans that do not require collateral, can be spent when needed, and do not have to account for what is spent, and you only have to pay interest on what you spend. We remind you that the bank always invites you to contact them to seek common solutions if you need advice or temporary challenges.
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